<PAGE>
ANNUAL REPORT -- DECEMBER 31, 1999
SKYLINE SMALL CAP
VALUE PLUS
- -----------------
SKYLINE SPECIAL EQUITIES PORTFOLIO
SKYLINE SMALL CAP VALUE PLUS
SKYLINE SMALL CAP CONTRARIAN
[LOGO]
<PAGE>
LETTER FROM KENNETH S. KAILIN, PORTFOLIO MANAGER:(1)
- ------------------------------------------------------------------------
December 31, 1999
Dear Shareholder:
OVERVIEW
Skyline Small Cap Value Plus experienced a significantly improved operating
environment during the fourth quarter as a strong economy fueled solid stock
market returns. The Fund rose 10.66% for the quarter and 4.84% for the year. The
Russell 2000 Index, a small company stock benchmark, rose 18.44% in the quarter
and 21.26% for the year. According to Morningstar, the average small value
mutual fund rose 5.79% in the quarter and 4.87% for the year.
It is important to note that in general, small company growth stocks performed
remarkably better than small company value stocks for both the quarter and the
year. This is demonstrated by the Russell 2000 Value Index, which rose a meager
1.53% in the fourth quarter and actually fell 1.49% for the year. This compares
to the Russell 2000 Growth Index, which rose a powerful 33.39% in the quarter
and an incredible 43.09% return for the year. The key driver of growth stocks in
1999 was the phenomenal performance generated by richly valued technology
stocks.
MARKET REVIEW
This past year will be remembered as one of the strangest stock market periods
of all time. It was a year when interest rates showed a very large percentage
increase yet every major stock market average showed a large gain. Though major
stock market averages showed large gains, only 32% of the stocks on the New York
Stock Exchange increased in value during the year. This trend was magnified on
the NASDAQ, where half of the stocks declined while the index rose an
unprecedented 86%. It was perhaps the narrowest stock market advance of all
time, where a small group of sectors and stocks provided gigantic returns while
everything else was flat to down. It was, in fact, a bear market for most stocks
for the second consecutive year. The NYSE advance/ decline line, perhaps the
best measure of general stock market activity, peaked in the spring of 1998 and
has been consistently hitting new lows since.
The stock market was emotionally charged and focused on finding stocks showing
very fast revenue growth. Valuation considerations typically appeared to only be
a second thought at best. This environment severely impacted our value-oriented
investment style. According to data from Prudential Securities, Inc., contrary
to prudent investment principles, if investors would have bought stock in all
the companies expected to lose money in the Russell 2000 Index during 1999 they
would have generated top tier performance results in 1999.
The most important investment story of the year was the performance of
technology stocks and their impact on your Fund's performance. Because
technology stocks soared in value, growth stock investing dominated investment
returns for both the
ANNUAL REPORT - DECEMBER 31, 1999 1
<PAGE>
quarter and the year. In fact, there has never been such a large discrepancy in
returns between growth and value-oriented portfolios. For the quarter, the
Russell 2000 Growth Index beat the Russell 2000 Value Index by 32 percentage
points. For the year, the gap between these two indexes was nearly 45 percentage
points, with the Growth Index gaining 43.09% and the Value Index declining by
1.49%.
In our opinion, there are two key reasons for this large difference in returns
among investment styles. First, returns among economic sectors varied widely,
greatly benefiting growth stock investors. With the Federal Reserve raising
interest rates, investors shunned financial stocks and economically sensitive
stocks, groups that many value-oriented investors own. Instead, investors
aggressively moved to the technology sector, a favorite of growth stock
investors.
The second key reason for such major return differences is a psychological one
that affected P/E ratios. In favored sectors such as technology, stocks took on
extremely high P/E multiples that seemed to make little economic sense. At the
same time, many value-oriented stocks saw their P/E ratios go down to
extraordinarily low levels. It was a period when investors seemed to ignore
valuation levels when making investment decisions. No price was too high to pay
for rapid growth and no price was too low to sell a stock with disappointing
earnings.
PORTFOLIO REVIEW
The year 1999 also proved to be extremely difficult due to unusually wild stock
price volatility experienced throughout the year. In the first quarter, the Fund
fell 12.65%, but recovered by rising 19.14% in the second quarter before
dropping 8.97% in the third quarter. As previously mentioned, the fourth quarter
results produced a 10.66% return, bringing the annual return for 1999 to 4.84%.
The fourth quarter performance for the Fund was quite good relative to most
small company value funds, but lagged the Russell 2000 Index. These results can
be largely explained by the performance of technology stocks. The Fund had
approximately 20% of its assets invested in technology stocks at quarter's end.
Technology stocks were the single best sector by far for both the Fund and
indexes for the quarter and year. The Fund's technology stocks rose an amazing
42% for the quarter and 62% for the year. The combination of strong technology
returns and large weightings helped the Fund's performance relative to the small
value benchmarks. However, relative to small growth investors, the Fund's
technology weightings were small and the returns more modest. This primarily
explains the performance lag versus the Russell 2000 Index for the quarter and
the year.
The high returns found in the technology sector were broad-based. Investors
became mesmerized with the Internet and anything relating to its growth. We were
able to identify a number of attractive technology names during the course of
the year that had solid growth prospects and below average valuations. These
companies generally performed well fundamentally and the valuations typically
rose sharply.
2 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
Another sector producing a nice return in the quarter was consumer discretionary
stocks. This sector represented about 27% of the Fund's assets and produced a
solid 18% return in the quarter. Here business service stocks and
retail-oriented stocks performed well. A strong economy fueled by healthy
consumer spending helped these stocks.
The remaining sectors of the Fund were either up modestly or down modestly in
the quarter. The weakest sectors proved to be consumer staples and energy, which
were both down about 8% and are smaller weighted positions within the Fund.
Stock selection was reasonably good for the quarter, but was disappointing for
the year. Simply stated, we had too many stocks drop by large percentages. Our
"downside protection" of buying stocks that are very inexpensive relative to the
market, and that do not go down as much when problems are encountered, did not
work in 1999. One of the major surprises of the year was how far stocks declined
even when they started with low valuations. In many instances, stocks that were
already very inexpensive declined by 30% or more on the slightest negative news
announcement. This P/E compression was very surprising in view of the P/E
expansion that was taking place in other parts of the market.
In summary, we had a good final quarter and an average year relative to our
small cap value peers. However, the Fund's performance lagged the small company
stock market averages due primarily to the unusual performance of technology
stocks.
OUTLOOK
The headline story for the 1998 stock market concerned the remarkable
outperformance of large company stocks over small company stocks. The major
story describing 1999 was the wide outperformance of growth stocks over value
stocks thanks largely to technology shares. As small company value investors,
the past two years have been a very trying period for Skyline Funds. We have
watched from the sidelines as the majority of the companies we have owned
reported record sales and profits, announced that business condition were
healthy and the outlook solid. Yet the stock prices of these companies seem to
languish because they have been viewed as dull businesses or operating in mature
industries relative to the opportunities involving the Internet.
This has created a situation where small cap value-oriented stocks represent
compelling value, because their relative valuations have never been so low. In
our opinion, the discrepancy in valuation is not justified by the fundamentals.
Many large cap stocks are trading at 35-50 times earnings despite growth rates
of only 10-15%. Many small cap growth stocks are trading at over 100 times
earnings and at valuations that will never make sense.
The near term could continue to be difficult due to possible interest rate hikes
by the Federal Reserve. However, once this interest rate move is over, we
believe our value
ANNUAL REPORT - DECEMBER 31, 1999 3
<PAGE>
style of investing will show extremely strong results. With such a compelling
valuation advantage, we believe our value style of investing is set up to
provide superior relative returns over the next several years.
It is with bittersweet emotion that I am probably writing my final letter to
Skyline Small Cap Value Plus shareholders. After careful consideration our
trustees have determined that shareholders will be best served by focusing all
efforts and resources on a single fund. I fully expect the new decade to bring
about enormous positive changes in many respects, including small company,
value-based investing.
/s/ Kenneth S. Kailin
4 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
- - PORTFOLIO CHARACTERISTICS(1)
- ---------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP RUSSELL 2000
VALUE PLUS VALUE RUSSELL 2000 S&P 500
<S> <C> <C> <C> <C>
P/E RATIO (MEDIAN) 17.6 15.6 20.0 23.0
PRICE/BOOK 2.65 1.52 2.72 5.54
PRICE/SALES 0.88 0.86 1.39 2.44
- --------------------------------------------------------------------------------------------------------------
EPS GROWTH--5 YRS (HISTORICAL) 18.4% 10.8% 14.5% 16.6%
EPS GROWTH--1 YR (FORECASTED) 23.0% 16.9% 24.5% 21.1%
- --------------------------------------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $660 million $660 million $880 million $87 billion
PORTFOLIO VALUE $67 million $378 billion $944 billion $12,285 billion
NUMBER OF HOLDINGS 51 1,221 1,857 500
- --------------------------------------------------------------------------------------------------------------
TICKER SYMBOL: SPEQX
CUSIP #: 830833406
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
NET ASSET VALUE (PER SHARE): $12.35
</TABLE>
- - TOP TEN HOLDINGS(3)
<TABLE>
<CAPTION>
% OF NET ASSETS
- ----------------------------------------------------------------------------
<S> <C>
UNITED STATIONERS INC.
Office products distributor
3.3%
HEIDRICK & STRUGGLES INT'L, INC.
Executive recruiting 3.2%
COVENANT TRANSPORT, INC.
Specialty truckload carrier 3.0%
APPLIED POWER INC.
Industrial products manufacturer 3.0%
WESLEY JESSEN VISIONCARE, INC.
Contact lense manufacturer 2.9%
REMEDYTEMP, INC.
Staffing services 2.8%
GILDAN ACTIVEWEAR INC.
Shirt manufacturer 2.8%
WHITEHALL JEWELLERS, INC.
Jewelry store chain 2.8%
C&D TECHNOLOGIES, INC.
Special purpose batteries 2.6%
BELDEN INC.
Wire & cable manufacturer 2.5%
TOP TEN HOLDINGS 28.9%
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1999 5
<PAGE>
- - PERFORMANCE (%)(1)
- -------------------------------------------------
<TABLE>
<CAPTION>
4Q
1999 1999 3 yrs. 5 yrs.
<S> <C> <C> <C> <C>
SMALL CAP VALUE PLUS 10.66 4.84 7.29 13.59
RUSSELL 2000 VALUE 1.53 -1.49 6.69 13.14
RUSSELL 2000 18.44 21.26 13.08 16.69
S&P 500 15.05 21.14 27.66 28.66
</TABLE>
- - SECTOR WEIGHTINGS (AS OF DECEMBER 31, 1999)
- -----------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Consumer Discretionary 26.7%
Consumer Staples 4.0%
Energy 3.7%
Financial Services 17.3%
Health Care 7.9%
Producer Durables 13.5%
Technology 19.9%
Cash 3.9%
Autos & Transportation 3.1%
</TABLE>
6 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Calendar Years
Since -------------------------------------
Inception(2) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
SMALL CAP VALUE PLUS 10.98 4.8 -6.7 26.2 26.6 21.0
RUSSELL 2000 VALUE 11.76 -1.5 -6.5 31.8 21.4 25.8
RUSSELL 2000 13.65 21.3 -2.6 22.4 16.5 28.4
S&P 500 21.53 21.1 28.8 33.4 23.3 37.5
<CAPTION>
Calendar Years
---------------
1994 1993(2)
<S> <C> <C>
SMALL CAP VALUE PLUS -1.5 10.1
RUSSELL 2000 VALUE -1.6 17.1
RUSSELL 2000 -1.8 13.8
S&P 500 1.3 10.0
</TABLE>
- - SECTOR PERFORMANCE(1) (AS OF DECEMBER 31, 1999)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4Q 1999 YTD 1999
- ------------------------------------------------------------ ------------------------------------------------------------
RUSSELL RUSSELL
SMALL CAP 2000 RUSSELL SMALL CAP 2000 RUSSELL
VALUE PLUS VALUE 2000 VALUE PLUS VALUE 2000
<S> <C> <C> <C> <C> <C> <C> <C>
Technology 42.7% 31.4% 64.8% Technology 62.2% 65.2% 101.3%
- ------------------------------------------------------------ ------------------------------------------------------------
Consumer Discretionary 18.4 -0.1 12.2 Energy 35.8 25.2 26.9
- ------------------------------------------------------------ ------------------------------------------------------------
Materials & Processing 7.0 -0.2 3.3 Consumer Discretionary 22.8 -3.8 10.6
- ------------------------------------------------------------ ------------------------------------------------------------
Producer Durables 4.8 9.3 27.8 Consumer Staples -12.7 -22.1 -20.8
- ------------------------------------------------------------ ------------------------------------------------------------
Financial Services 2.8 -2.9 -0.6 Materials & Processing -14.9 -5.3 -3.9
- ------------------------------------------------------------ ------------------------------------------------------------
Autos & Transportation -4.0 -2.4 0.9 Health Care -15.2 1.9 18.1
- ------------------------------------------------------------ ------------------------------------------------------------
Health Care -5.2 26.2 25.0 Financial Services -16.5 -11.2 -5.9
- ------------------------------------------------------------ ------------------------------------------------------------
Energy -7.5 -6.7 -8.6 Producer Durables -16.9 14.9 36.8
- ------------------------------------------------------------ ------------------------------------------------------------
Consumer Staples -7.7 -7.6 -5.9 Autos & Transportation -28.6 -8.4 -5.4
- ------------------------------------------------------------ ------------------------------------------------------------
Utilities N/A* -3.5 16.6 Utilities N/A* 2.1 40.9
- ------------------------------------------------------------ ------------------------------------------------------------
Other N/A* -2.3 -3.1 Other N/A* -14.8 -16.3
- ------------------------------------------------------------ ------------------------------------------------------------
</TABLE>
* Not applicable
ANNUAL REPORT - DECEMBER 31, 1999 7
<PAGE>
STOCK HIGHLIGHTS(3)
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ARROW ELECTRONICS, INC. (ARW)
Arrow Electronics is the leading global distributor of electronic components and
computer products. ARW distributes the parts that are required to produce
electronic appliances and is benefiting by the ever-increasing number of
computers, cell phones, and DVD players in our lives. ARW's earnings should
continue to recover sharply after being negatively impacted by the Asian crisis.
ARW's valuation is compelling--trading at almost a 50% discount to the market
and has a very bright future.
MSC INDUSTRIAL DIRECT, CO., INC. (MSM)
MSC Industrial Direct, Co., is a leading distributor of maintenance and repair
items for industrial customers. MSM serves a large market with almost unlimited
growth prospects. MSM is focused on being the service leader by providing
next-day delivery of 400,000 different items so its customers can reduce
inventory and ordering costs by consolidating vendors. MSM's customers can order
products over the Internet or by telephone. MSM's marketing strategy utilizes a
low cost direct mail campaign to prospect for customers. MSM has a solid balance
sheet, strong track record, and trades at a discount to the market.
CHANGE IN VALUE OF A $10,000 INVESTMENT(1)
- ------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT SINCE INCEPTION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SMALL CAP RUSSELL RUSSELL S&P
VALUE PLUS 2000 2000 VALUE 500
<S> <C> <C> <C> <C>
Initial Investment $10,000 $10,000 $10,000 $10,000
1993 $11,008 $11,376 $12,384 $10,732
1994 $10,841 $11,169 $12,192 $10,874
1995 $13,112 $14,346 $15,332 $14,953
1996 $16,599 $16,712 $18,608 $18,431
1997 $20,950 $20,448 $24,521 $24,582
1998 $19,555 $19,928 $22,940 $31,652
1999 $20,501 $24,164 $22,598 $38,343
</TABLE>
Note: Past performance is no guarantee of future results. See "Notes to
Performance" at end of this section.
8 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
NOTES TO PERFORMANCE
(1) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THE PRINCIPAL VALUE AND
RETURN ON YOUR INVESTMENT WILL FLUCTUATE AND ON REDEMPTION MAY BE WORTH MORE
OR LESS THAN YOUR ORIGINAL COST. The performance for the one, three, and
five years ended December 31, 1999, and for the period February 9, 1993
(inception) through December 31, 1999, is an average annual total return
calculation which is described in the Fund's prospectus.
The Russell 2000 Value Index is an unmanaged, value-oriented index comprised
of small stocks that have relatively low price-to-book ratios. The Russell
2000 Index is an unmanaged, market value weighted index comprised of
small-sized companies. The S&P 500 Index, a widely quoted stock market
index, includes 500 of the largest companies publicly traded in America. All
figures take into account reinvested dividends. All indexes and portfolio
characteristics are compiled by Frank Russell Company.
Sources: Frank Russell Company & Morningstar, Inc.
(2) Return is calculated from the Fund's inception on February 9, 1993. The
Russell 2000 Value performance reflects an inception date of March 1, 1993.
(3) Fund holdings are subject to change and should not be considered a
recommendation to buy individual securities.
This report is not authorized for distribution unless accompanied or preceded by
a current prospectus.
There are risks of investing in a fund of this type which invests in stocks of
small sized companies, which tend to be more volatile and less liquid than
stocks of large cap companies.
DISTRIBUTOR: FUNDS DISTRIBUTOR INC.
ANNUAL REPORT - DECEMBER 31, 1999 9
<PAGE>
- - PORTFOLIO HOLDINGS AS OF DECEMBER 31, 1999
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
------------------------------- --------- ------------
<S> <C> <C> <C>
COMMON STOCKS
AUTOS & TRANSPORTATION - 3.1%
TRUCKING
Covenant Transport, Inc.(a) Specialty truckload carrier 117,100 $ 2,034,612
CONSUMER DISCRETIONARY - 26.7%
APPAREL/TEXTILES - 2.8%
Gildan Activewear Inc.(a) Shirt manufacturer 102,300 1,854,187
COMMERCIAL SERVICES - 13.3%
G&K Services, Inc. Uniform rental 21,000 679,875
Heidrick & Struggles
Int'l, Inc.(a) Executive recruiting 50,700 2,142,075
Interim Services Inc.(a) Staffing provider 23,300 576,675
RemedyTemp, Inc.(a) Staffing services 100,000 1,900,000
Safety-Kleen Corp.(a) Industrial waste services 117,075 1,324,411
United Stationers Inc.(a) Office products distributor 77,600 2,216,450
------------
8,839,486
CONSUMER PRODUCTS/SERVICES - 2.2%
Regis Corporation Hair care services 78,800 1,487,350
RESTAURANTS - 2.1%
Brinker International, Inc.(a) Casual dining 2,800 67,550
IHOP Corp.(a) Casual dining 40,100 669,169
Ruby Tuesday, Inc. Casual dining 36,500 663,844
------------
1,400,563
RETAIL - 6.3%
CSK Auto Corp.(a) DIY auto parts chain 51,500 901,250
Gadzooks, Inc.(a) Teen apparel retailer 151,300 1,484,631
Whitehall Jewellers, Inc.(a) Jewelry store chain 50,000 1,843,750
------------
4,229,631
------------
TOTAL CONSUMER DISCRETIONARY 17,811,217
CONSUMER STAPLES - 4.0%
CONSUMER STAPLES - 4.0%
Del Monte Foods Co.(a) Canned foods 108,100 1,330,981
International Home
Foods, Inc.(a) Packaged-foods manufacturer 78,700 1,367,412
------------
2,698,393
</TABLE>
10 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
------------------------------- --------- ------------
<S> <C> <C> <C>
ENERGY - 3.7%
EQUIPMENT & SERVICES - 1.9%
Tidewater Inc. Supply boat operator 34,800 $ 1,252,800
EXPLORATION & PRODUCTION - 1.8%
Newfield Exploration Co.(a) Oil & gas producer 45,700 1,222,475
------------
TOTAL ENERGY 2,475,275
FINANCIAL SERVICES - 17.3%
BANKS/THRIFTS - 1.3%
Peoples Heritage Financial Group New England-based thrift 57,900 872,119
INSURANCE - 6.7%
CNA Surety Corp. Surety insurance 56,300 731,900
Gallagher & Co. (Arthur J.) Insurance broker 16,300 1,055,425
Radian Group Inc. Mortgage insurance 30,200 1,442,050
StanCorp Financial Group, Inc. Disability insurance 48,600 1,224,112
------------
4,453,487
OTHER FINANCIAL SERVICES - 7.8%
American Capital Strategies,
Ltd. Commercial finance 71,500 1,626,625
Gabelli Asset Management Inc.(a) Asset management 64,400 1,046,500
Heller Financial, Inc. Commercial finance 73,600 1,476,600
Raymond James Financial, Inc. Investment services 54,200 1,012,863
------------
5,162,588
REAL ESTATE INVESTMENT TRUSTS - 1.5%
Prentiss Properties Trust Office properties 48,500 1,018,500
------------
TOTAL FINANCIAL SERVICES 11,506,694
HEALTH CARE - 7.9%
MEDICAL EQUIPMENT/PRODUCTS
Arrow International, Inc. Disposable catheters producer 44,700 1,296,300
Cooper Companies, Inc. (The) Eyecare products 31,500 948,938
DENTSPLY International Inc. Dental products manufacturer 46,000 1,086,750
Wesley Jessen
VisionCare, Inc.(a) Contact lense manufacturer 50,600 1,916,475
------------
5,248,463
PRODUCER DURABLES - 13.5%
DIVERSIFIED MANUFACTURING - 5.0%
Applied Power Inc. Industrial products
manufacturer 53,900 1,980,825
Pentair, Inc. Diversified manufacturer 35,500 1,366,750
------------
3,347,575
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1999 11
<PAGE>
- - PORTFOLIO HOLDINGS AS OF DECEMBER 31, 1999 (CONTINUED)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
------------------------------- --------- ------------
<S> <C> <C> <C>
ELECTRICAL EQUIPMENT/PRODUCTS - 2.5%
Belden Inc. Wire & cable manufacturer 78,900 $ 1,656,900
OTHER PRODUCER DURABLES - 6.0%
C&D Technologies, Inc. Special purpose batteries 40,600 1,725,500
IDEX Corp. Specialty pump products 7,700 233,888
MSC Industrial Direct Co. Direct marketer of industrial
Inc.(a) products 70,700 936,775
Snap-on Inc. Professional tools 42,100 1,118,281
------------
4,014,444
------------
TOTAL PRODUCER DURABLES 9,018,919
TECHNOLOGY - 19.9%
CONTRACT MANUFACTURING - 1.7%
DII Group, Inc.(a) Electronics manufacturing 15,700 1,114,209
DEFENSE RELATED - 1.6%
Primex Technologies, Inc. Ordinance/aerospace products 51,300 1,064,475
DISTRIBUTION - 3.4%
Arrow Electronics, Inc.(a) Distributes electronic
components 47,900 1,215,462
ScanSource Inc.(a) Specialty technology products 26,200 1,062,738
------------
2,278,200
ELECTRONIC COMPONENTS - 3.5%
Artesyn Technologies, Inc.(a) Power supplies 77,700 1,631,700
Tektronix, Inc. Electronic measurement products 18,100 703,638
------------
2,335,338
OTHER TECHNOLOGY - 4.4%
Cohu Inc. Manufacturer of capitial
equipment for semiconductor
producers 42,100 1,305,100
FLIR Systems, Inc.(a) Thermal imaging systems 101,300 1,646,125
------------
2,951,225
SERVICES - 3.0%
American Management Systems
Inc.(a)
Information technology service
provider 19,700 618,087
CACI International Inc.(a) Technology services provider 60,500 1,368,813
------------
1,986,900
</TABLE>
12 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
------------------------------- --------- ------------
<S> <C> <C> <C>
SOFTWARE - 2.3%
Symantec Corp.(a) Personal computer software 26,800 $ 1,571,150
------------
TOTAL TECHNOLOGY 13,301,497
------------
TOTAL COMMON STOCKS - 96.1%
(Cost $52,855,973) 64,095,070
MONEY MARKET INSTRUMENTS(B)
Yield 6.095% to 6.160%
due February 2000 to April 2000
General Mills, Inc. 2,205,016
Pitney Bowes Credit Corp. 1,116,854
Wisconsin Corp. Credit Union 774,647
------------
TOTAL MONEY MARKET INSTRUMENTS - 6.1%
(Cost $4,096,517) 4,096,517
------------
TOTAL INVESTMENTS - 102.2%
(Cost $56,952,490) 68,191,587
OTHER LIABILITIES LESS OTHER ASSETS - (2.2%) (1,517,140)
------------
NET ASSETS - 100.0% $ 66,674,447
============
</TABLE>
<TABLE>
<S> <C>
a Non-income producing security.
b Variable rate demand notes. Interest rates are reset every seven days. Rates
disclosed represent rates in effect on December 31, 1999.
Based on cost of investments for federal income tax purposes of $56,952,490 on
December 31, 1999, net unrealized appreciation was $11,239,097, consisting of gross
unrealized appreciation of $12,623,776 and gross unrealized depreciation of
$1,384,679.
See accompanying notes to financial statements.
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1999 13
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- ------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Cost: $56,952,490) $68,191,587
Receivable for:
Dividends and interest $ 67,140
Fund shares sold 252,270 319,410
----------
Total assets 68,510,997
-----------
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $1,174,645
Fund shares redeemed 577,782
Comprehensive management fee 84,123 1,836,550
---------- -----------
Net assets applicable to shares outstanding $66,674,447
===========
Shares outstanding--no par value
(unlimited number of shares authorized) 5,400,292
===========
PRICING OF SHARES
Net asset value, offering price and redemption price
per share $ 12.35
===========
ANALYSIS OF NET ASSETS
Paid-in capital $55,499,964
Accumulated net realized loss on
sales of investments (64,614)
Net unrealized appreciation of investments 11,239,097
-----------
Net assets applicable to shares outstanding $66,674,447
===========
</TABLE>
See accompanying notes to financial statements.
14 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Dividends $ 632,893
Interest 291,708
-----------
Total investment income 924,601
Expenses:
Comprehensive management fee 1,339,353
Fees to unaffiliated trustees 14,532
Amortization of organization costs 2,440
-----------
Total expenses 1,356,325
-----------
Net investment loss (431,724)
Net realized and unrealized gain (loss) on investments:
Net realized gain on sales of investments 1,411,552
Net change in net unrealized appreciation or depreciation (1,258,779)
-----------
Net realized and unrealized gain on investments 152,773
-----------
Net decrease in net assets resulting from operations $ (278,951)
===========
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1999 15
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended Year ended
12/31/99 12/31/98
------------- ------------
<S> <C> <C>
From operations:
Net investment loss $ (431,724) $ (668,879)
Net realized gain (loss) on sales of
investments 1,411,552 (1,476,166)
Net change in net unrealized appreciation or
depreciation (1,258,779) (7,833,754)
------------- ------------
Net (decrease) in net assets resulting from
operations (278,951) (9,978,799)
Distributions to shareholders from:
Net realized gains -- (1,234,409)
Return of capital -- (112,960)
------------- ------------
Decrease in net assets resulting from
distributions from shareholders -- (1,347,369)
From fund share transactions:
Proceeds from fund shares sold 52,055,709 94,550,013
Reinvestments of capital gain distributions -- 1,318,065
Payments for fund shares redeemed (120,003,891) (115,327,102)
------------- ------------
Net decrease in net assets resulting from share
transactions (67,948,182) (19,459,024)
------------- ------------
Total decrease in net assets (68,227,133) (30,785,192)
Net assets at beginning of year 134,901,580 165,686,772
------------- ------------
Net assets at end of year $ 66,674,447 $134,901,580
============= ============
</TABLE>
See accompanying notes to financial statements.
16 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------
Net asset value at
beginning of year $ 11.78 $ 12.75 $ 11.94 $ 11.29 $ 10.14
------- -------- -------- -------- -------
Income from investment operations
Net investment (loss) income (0.15) (0.06) (0.03) (0.02) 0.06
Net realized and unrealized gain
(loss) on investments 0.72 (0.79) 3.13 2.94 2.06
------- -------- -------- -------- -------
Total from investment
operations 0.57 (0.85) 3.10 2.92 2.12
------- -------- -------- -------- -------
Less distributions from:
Dividends from net investment
income -- -- -- (0.01) (0.06)
Dividends from net realized gains
on investments -- (0.11) (2.29) (2.26) (0.91)
Dividends from return of capital -- (0.01) -- -- --
------- -------- -------- -------- -------
Total distributions -- (0.12) (2.29) (2.27) (0.97)
------- -------- -------- -------- -------
Net asset value at end of year $ 12.35 $ 11.78 $ 12.75 $ 11.94 $ 11.29
======= ======== ======== ======== =======
Total Return 4.84% (6.66%) 26.21% 26.60% 20.95%
Ratios/Supplemental Data
Ratio of expenses to average net
assets 1.52% 1.51% 1.51% 1.53% 1.52%
Ratio of net investment (loss)
income to average net assets (0.48%) (0.43%) (0.30%) (0.24%) 0.50%
Portfolio turnover rate 92% 106% 104% 145% 102%
Net assets, end of year
(in thousands) $66,674 $134,902 $165,687 $105,333 $89,203
======= ======== ======== ======== =======
</TABLE>
Effective August 31, 1995, the Fund's Investment Adviser changed from Mesirow
Asset Management, Inc., to Skyline Asset Management, L.P.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1999 17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
Skyline Funds is an open-end, diversified investment management company which
consists of Special Equities Portfolio, Small Cap Value Plus (formerly Special
Equities II), and Small Cap Contrarian. The Funds commenced public offering of
their shares as follows: Special Equities Portfolio on April 23, 1987, Small Cap
Value Plus on February 9, 1993, and Small Cap Contrarian on December 15, 1997.
The following notes relate solely to the accompanying financial statements of
Small Cap Value Plus ("Fund").
1
SIGNIFICANT ACCOUNTING POLICIES
/ / SECURITY VALUATION - Investments are stated at value. Securities listed or
admitted to trading on any national securities exchange or the Nasdaq National
Market are valued at the last sales price on the principal exchange or market on
which they are traded or listed or, if there has been no sale that day, at the
most recent bid price. For certain fixed-income securities, Skyline Funds' Board
of Trustees has authorized the use of market valuations provided by an
independent pricing service. Variable rate demand notes with sixty days or less
to maturity are valued at amortized cost which approximates market value.
Securities or other assets for which market quotations are not readily
available, which may include certain restricted securities, are valued at a fair
value as determined in good faith by the Skyline Funds' Board of Trustees.
/ / SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the trade date (date the order to buy or sell is executed), and
dividend income is recorded on the ex-dividend date. Interest income is recorded
on an accrual basis and includes amortization of money market instrument premium
and discount. Realized gains and losses from security transactions are reported
on an identified cost basis.
/ / FUND SHARE VALUATION - Fund shares are sold on a continuous basis and
redeemed on a continuous basis at net asset value. Net asset value per share is
determined as of the close of regular session trading on the New York Stock
Exchange (normally 3:00 p.m. Central time) each day that the Exchange is open
for trading. The net asset value per share is determined by dividing the value
of all securities and other assets, less liabilities, by the number of shares of
the Fund outstanding.
/ / FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS - It is the Fund's policy
to comply with the special provisions of the Internal Revenue Code applicable to
regulated investment companies and, in the manner provided therein, to
distribute all of its taxable income to shareholders. Such provisions were
complied with and, therefore, no federal income taxes have been accrued.
As of December 31, 1999, the Fund had capital loss carryforwards of $64,614.
This loss may be used to offset future capital gains arising in tax years
through 2006.
18 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
- ------------------------------------------------------------------------
Dividends payable to its shareholders are recorded by the Fund on the
ex-dividend date. Dividends are determined in accordance with tax principles
which may treat certain transactions differently from generally accepted
accounting principles.
/ / EXPENSES - Expenses arising in connection with a particular fund are
allocated to that fund. Other expenses of the Skyline Funds, such as trustees'
fees, are allocated proportionately among the three funds comprising Skyline
Funds.
/ / LINE OF CREDIT - The Funds share in a $10 million ($3 million committed)
revolving credit facility for temporary or emergency purposes, including the
meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Adviser pays a commitment fee of 10 basis points
per annum of the average daily unutilized portion of the committed line of
credit. Under the terms of the credit agreement, interest on each loan would be
fixed at the prime rate less 150 basis points. There were no borrowings under
this agreement during the year ended December 31, 1999.
2
TRANSACTIONS WITH AFFILIATES
The Fund's Investment Adviser is Skyline Asset Management, L.P. ("Adviser"). For
the Adviser's management and advisory services and the assumption of most of the
Fund's ordinary operating expenses, the Fund pays a monthly comprehensive fee
based on its average daily net assets at the annual rate of 1.50% of the first
$200 million, 1.45% of the next $200 million, 1.40% of the next $200 million,
and 1.35% of any excess over $600 million. The total comprehensive management
fee charged for the year ended December 31, 1999 was $1,339,353.
Certain officers and trustees of the Skyline Funds are also officers, limited
partners or shareholders of limited partners of the Adviser. The Fund makes no
direct payments to the officers or trustees who are affiliated with the Adviser.
For the year ended December 31, 1999, fees of $14,532 were paid by the Fund to
the unaffiliated trustees.
3
FUND SHARE TRANSACTIONS
Shares sold and redeemed as shown in the statements of changes in net assets
were as follows:
<TABLE>
<CAPTION>
Year Ended Year ended
12/31/99 12/31/98
----------------------------
<S> <C> <C>
Shares sold 4,600,697 7,559,639
Shares issued in reinvestment of
dividends -- 113,150
------------- ------------
4,600,697 7,672,789
Less shares redeemed (10,654,966) (9,216,532)
------------- ------------
Net decrease in shares outstanding (6,054,269) (1,543,743)
============= ============
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1999 19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------------------------
4
INVESTMENT TRANSACTIONS
Investment transactions (exclusive of money market instruments) for the year
ended December 31, 1999 were as follows:
<TABLE>
<S> <C>
Cost of purchases $79,620,967
Proceeds from sales 145,701,014
</TABLE>
5
SUBSEQUENT EVENT
A special meeting of Shareholders of Skyline Small Cap Value Plus and Skyline
Small Cap Contrarian is scheduled to be held on Tuesday, February 29, 2000. The
purpose of the special meeting is to approve the Plan of Reorganization (the
"Plan"), which was previously approved by Skyline Funds' Board of Trustees. The
proposed Plan provides for the acquisition of the assets and assumption of the
liabilities of Skyline Small Cap Value Plus and Skyline Small Cap Contrarian by
Skyline Special Equities, in exchange solely for shares of Skyline Special
Equities.
20 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- ------------------------------------------------------------------------
To the Shareholders of Skyline Small Cap Value Plus
and the Board of Trustees of Skyline Funds
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Skyline Small Cap Value Plus as of
December 31, 1999, the related statements of operations for the year then ended
and changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of December 31, 1999, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Skyline Small Cap Value Plus at December 31, 1999, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Chicago, Illinois
January 31, 2000
ANNUAL REPORT - DECEMBER 31, 1999 21
<PAGE>
REPORT FOR THE YEAR ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------------
This report, including the audited financial statements contained herein, is
submitted for the general information of the shareholders of the Fund.
Funds Distributor Inc. is the principal underwriter of Skyline Funds.
22 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
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ANNUAL REPORT - DECEMBER 31, 1999 23
<PAGE>
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24 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
FOR 24-HOUR ACCOUNT INFORMATION CALL: 1.800.828.2SKY
(1.800.828.2759)
TO SPEAK WITH A SKYLINE FUNDS REPRESENTATIVE DURING
NORMAL BUSINESS HOURS CALL: 1.800.828.2SKY AND PRESS 0 WHEN PROMPTED.
- ------------------------------------------------
[SKYLINE FUNDS LOGO]
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
