<PAGE>
ANNUAL REPORT -- December 31, 1999
SKYLINE SPECIAL EQUITIES PORTFOLIO
SKYLINE SPECIAL EQUITIES PORTFOLIO
SKYLINE SMALL CAP VALUE PLUS
SKYLINE SMALL CAP CONTRARIAN
[LOGO]
<PAGE>
LETTER FROM WILLIAM M. DUTTON, PORTFOLIO MANAGER:(1)
- ------------------------------------------------------------------------
December 31, 1999
Dear Shareholder:
OVERVIEW
The Fund showed a decline of 2.43% in the fourth quarter and 13.28% for the
year. The Russell 2000 Index showed a gain of 18.44% for the quarter and 21.26%
for the year. The Russell 2000 Value Index, an index that may be a more
appropriate benchmark for the Fund, showed a gain of 1.53% for the quarter and a
decline of 1.49% for the year.
It was clearly a very disappointing year, the most difficult year since we began
managing small cap portfolios in the mid-1980s. As described more fully below,
our performance was negatively impacted by a number of issues, the most
important of which was a stock market environment that was very unfriendly to
our investment style.
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 most important investment story of the year was the performance of
technology stocks and their impact on portfolio performance. Because technology
stocks soared in value, growth stock investing dominated investment returns for
both the 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.
ANNUAL REPORT - DECEMBER 31, 1999 1
<PAGE>
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
As noted previously, the Fund declined by 2.43% in the fourth quarter and 13.28%
for the year. The disappointing results can be attributed to a variety of
factors including unfavorable sector weightings, a number of individual stock
problems, and an investment style that was very out-of-favor.
The most important factor impacting performance for the quarter and year was
investment style. We have a low P/E value-oriented investment approach that has
served us well over the years. However, this approach did not help investment
returns in 1999. In fact, within the small cap universe, low P/E stocks as a
group provided negative returns for the year. The best performing stocks were
those with very high P/E ratios and those that are not earning any money.
Our low P/E investment approach has been successful over the years partly
because it limits the risk in individual stocks. Since we buy stocks that are
very inexpensive relative to others in the market, they usually do not decline
much when problems are encountered. Unfortunately, this "downside protection"
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.
The Fund also struggled because of its sector weightings. Three of the best
performing sectors in the market, technology, utilities, and energy, are areas
where the Fund is not heavily invested. At the same time, areas where the Fund
has more exposure, such as the financial and manufacturing sectors, did not
perform as well.
Finally, the Fund had a number of individual stocks that hurt overall
performance. Many of the problems occurred in the manufacturing sector, which
has been the weakest part of the economy. As noted previously, these problems
were magnified by negative sentiment that caused large P/E compression.
OUTLOOK
Before addressing the outlook, it is important to step back and look at the past
two years. The Fund has suffered from two very unusual years in 1998 and 1999.
In 1998, large cap stocks outperformed small cap stocks by nearly the widest
margin of all
2 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
time. In 1999, growth stocks outperformed value-oriented stocks by the widest
margin of all time. Since our strategy is small cap and value-oriented, we have
clearly been facing a strong head wind during this period.
In terms of economic fundamentals, two significant negative developments have
occurred over the past two years. Starting in 1998, the Asian financial crisis
caused problems for many companies. This was followed by the Federal Reserve
raising interest rates in 1999. In our opinion, these are the primary reasons
that most stocks have declined over the past two years.
Though the majority of stocks have declined since early 1998, large cap and
growth styles have had large appreciation. This has created a situation where
small cap value-oriented stocks represent compelling values, 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. Meanwhile, the
Fund's holdings trade at roughly 13 times current earnings with realistic growth
rates of 10-15%. These valuations make sense in the current interest rate
environment.
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 the Fund will show extremely strong results. With such a compelling
valuation advantage, we believe the Fund is set up to provide superior relative
returns over the next several years.
/s/ William M. Dutton
ANNUAL REPORT - DECEMBER 31, 1999 3
<PAGE>
PORTFOLIO CHARACTERISTICS(1)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL RUSSELL 2000
EQUITIES VALUE RUSSELL 2000 S&P 500
<S> <C> <C> <C> <C>
P/E RATIO (MEDIAN) 13.6 15.6 20.0 23.0
PRICE/BOOK 1.84 1.52 2.72 5.54
PRICE/SALES 0.66 0.86 1.39 2.44
- --------------------------------------------------------------------------------------------
EPS GROWTH--5 YRS (HISTORICAL) 8.5% 10.8% 14.5% 16.6%
EPS GROWTH--1 YR (FORECASTED) 15.8% 16.9% 24.5% 21.1%
- --------------------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $570 million $660 million $880 million $87 billion
PORTFOLIO VALUE $220 million $378 billion $944 billion $12,285 billion
NUMBER OF HOLDINGS 66 1,221 1,857 500
- --------------------------------------------------------------------------------------------
TICKER SYMBOL: SKSEX 1999 DISTRIBUTIONS (PER
SHARE):
CUSIP #: 830833208 LONG-TERM CAPITAL GAIN $1.05
INITIAL INVESTMENT: $1,000 SHORT-TERM CAPITAL GAIN $0.18
SUBSEQUENT INVESTMENT: $100
NET ASSET VALUE (PER SHARE): $15.90
- --------------------------------------------------------------------------------------------
</TABLE>
- - STOCK HIGHLIGHTS(3)
- ------------------------------------------------------------------------
EAST WEST BANCORP, INC. (EWBC)
East West Bancorp is a Southern California based commercial bank focused on the
Chinese-American market, a market with strong demographics that is growing
faster than the national average. EWBC provides a broad array of products and
services for small importers, which previously were only available from large,
multi-national banks. EWBC is also benefiting from the ongoing consolidation of
the California banking market, which is allowing the company to hire seasoned
commercial bankers that prefer to work for small, more entrepreneurial banks. As
the largest bank catering to the Chinese-American market, EWBC is a natural
buyer for smaller banks and focusing on that market has allowed EWBC to complete
several highly accretive acquisitions. EWBC is selling at only 8.7x trailing
12-month earnings per share despite having very attractive growth prospects.
4 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
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RUBY TUESDAY, INC. (RI)
Ruby Tuesday owns and operates more than 400 casual dining restaurants under the
Ruby Tuesday, American Cafe, and Tia's names, and franchises an additional 100
units. Management has fostered an achievement-oriented culture among its
employees through extensive training programs and a Manager Partner Program
where store managers invest their own money in order to share in a percentage of
the profits. This has resulted in a very low level of employee turnover and a
high level of customer satisfaction, which in turn has contributed to strong
company financial results. Future growth will come from two sources. In existing
markets, RI will continue to expand company-owned units at a 10% rate. For
expansion outside the company's core markets, inherently more risky, 15
experienced operating franchise partners with local market expertise have been
selected to develop various markets, thereby mitigating the risk somewhat.
Despite the strong prospects and a more favorable supply environment for
restaurants in general (i.e. a slowing in the rate of new unit growth in the
restaurant industry in recent years), RI trades at a substantial discount to its
growth rate and the market.
- - TOP TEN HOLDINGS(3)
<TABLE>
<CAPTION>
% OF NET ASSETS
- --------------------------------------------------------------------------
<S> <C>
IDEX CORP.
Specialty pump products 3.1%
GALLAGHER & CO. (ARTHUR J.)
Insurance broker 2.9%
ARROW ELECTRONICS, INC.
Distributes electronic components 2.8%
LANDSTAR SYSTEM, INC.
Truckload carrier 2.7%
KELLWOOD CO.
Apparel manufacturer 2.6%
ADVO, INC.
Direct mail marketer 2.5%
KAYDON CORP.
Custom engineered parts 2.4%
HELLER FINANCIAL, INC.
Commercial finance 2.4%
BELDEN INC.
Wire & cable manufacturer 2.4%
POLARIS INDUSTRIES INC.
Snowmobiles, ATVs, motorcycles 2.4%
TOP TEN HOLDINGS 26.2%
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1999 5
<PAGE>
- - PERFORMANCE (%)(1)
- -------------------------------------------------
<TABLE>
<CAPTION>
4Q
1999 1999 3 yrs.
<S> <C> <C> <C>
SPECIAL EQUITIES -2.43 -13.28 2.92
RUSSELL 2000 VALUE 1.53 -1.49 6.69
RUSSELL 2000 18.44 21.26 13.08
S&P 500 15.05 21.14 27.66
</TABLE>
<TABLE>
<CAPTION>
Calendar Years
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
SPECIAL EQUITIES -13.3 -7.2 35.4 30.4 13.8 -1.2
RUSSELL 2000 VALUE -1.5 -6.5 31.8 21.4 25.8 -1.6
RUSSELL 2000 21.3 -2.6 22.4 16.5 28.4 -1.8
S&P 500 21.1 28.8 33.4 23.3 37.5 1.3
</TABLE>
- - SECTOR WEIGHTINGS (AS OF DECEMBER 31, 1999)
- ------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Autos & Transportation 4.9%
Consumer Discretionary 30.7%
Consumer Staples 2.4%
Financial Services 22.7%
Health Care 6.3%
Materials & Processing 10.0%
Producer Durables 14.9%
Technology 6.5%
Cash 1.6%
</TABLE>
6 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since
5 yrs. 10 yrs. Inception(2)
<S> <C> <C> <C> <C>
SPECIAL EQUITIES 10.10 14.10 13.53
RUSSELL 2000 VALUE 13.14 12.46 10.88
RUSSELL 2000 16.69 13.40 11.23
S&P 500 28.66 18.25 16.83
</TABLE>
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988 1987(2)
<S> <C> <C> <C> <C> <C> <C> <C>
SPECIAL EQUITIES 22.9 42.5 47.4 -9.3 24.0 29.7 -16.9
RUSSELL 2000 VALUE 23.8 29.1 41.7 -21.8 12.4 29.5 -21.5
RUSSELL 2000 18.9 18.4 46.1 -19.5 16.2 24.9 -24.3
S&P 500 10.0 7.7 30.6 -3.2 31.4 16.5 -12.0
</TABLE>
- - SECTOR PERFORMANCE(1) (AS OF DECEMBER 31, 1999)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4Q 1999 YTD 1999
------------------------------------------------------------- --------------------------------------------------------------
RUSSELL RUSSELL
SPECIAL 2000 RUSSELL SPECIAL 2000 RUSSELL
EQUITIES VALUE 2000 EQUITIES VALUE 2000
<S> <C> <C> <C> <C> <C> <C> <C>
Technology 29.5% 31.4% 64.8% Technology 38.6% 65.2% 101.3%
Autos & Transportation 9.3 -2.4 0.9 Materials & Processing -3.0 -5.3 -3.9
Financial Services 0.1 -2.9 -0.6 Energy -4.8 25.2 26.9
Producer Durables -3.8 9.3 27.8 Consumer Discretionary -14.6 -3.8 10.6
Materials & Processing -4.7 -0.2 3.3 Financial Services -20.1 -11.2 -5.9
Consumer Discretionary -6.4 -0.1 12.2 Producer Durables -24.1 14.9 36.8
Health Care -14.1 26.2 25.0 Autos & Transportation -27.6 -8.4 -5.4
Consumer Staples -39.9 -7.6 -5.9 Health Care -29.0 1.9 18.1
Energy N/A* -6.7 -8.6 Consumer Staples -45.0 -22.1 -20.8
Other N/A* -2.3 -3.1 Other N/A* -14.8 -16.3
Utilities N/A* -3.5 16.6 Utilities N/A* 2.1 40.9
</TABLE>
* Not applicable
ANNUAL REPORT - DECEMBER 31, 1999 7
<PAGE>
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>
SPECIAL RUSSELL RUSSELL 2000 S&P
EQUITIES 2000 VALUE 500
<S> <C> <C> <C> <C>
Initial Investment $10,000 $10,000 $10,000 $10,000
1987 $8,314 $7,567 $9,289 $8,794
1988 $10,787 $9,449 $12,026 $10,247
1989 $13,377 $10,986 $13,521 $13,469
1990 $12,135 $8,843 $10,578 $13,037
1991 $17,885 $12,914 $14,989 $17,018
1992 $25,470 $15,294 $19,356 $18,325
1993 $31,289 $18,184 $23,971 $20,158
1994 $30,929 $17,582 $23,599 $20,424
1995 $35,206 $22,932 $29,676 $28,087
1996 $45,897 $26,715 $36,018 $34,617
1997 $62,161 $32,663 $47,465 $46,172
1998 $57,703 $31,849 $44,403 $59,513
1999 $50,038 $38,620 $43,742 $72,011
</TABLE>
Note: Past performance is no guarantee of future results. See "Notes to
Performance" below.
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, five,
and ten years ended December 31, 1999, and for the period April 23, 1987
(inception) through December 31, 1999, is an average annual 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.
Source: Frank Russell Company.
(2) Return is calculated from the Fund's inception on April 23, 1987. The
Russell 2000 Value performance reflects an inception date of May 1, 1987.
(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.
8 ANNUAL REPORT - DECEMBER 31, 1999
<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 - 4.9%
AUTO RELATED - 0.8%
Delco Remy International, Inc.(a) Starters & alternators 216,200 $ 1,783,650
OTHER TRANSPORTATION - 1.4%
Interpool, Inc. Container leasing firm 418,100 3,109,619
TRUCKING - 2.7%
Landstar System, Inc.(a) Truckload carrier 139,500 5,972,344
------------
TOTAL AUTOS & TRANSPORTATION 10,865,613
CONSUMER DISCRETIONARY - 30.7%
APPAREL/TEXTILES - 3.9%
Kellwood Co. Apparel manufacturer 294,800 5,730,175
Warnaco Group, Inc. (The) Apparel manufacturer 238,900 2,941,456
------------
8,671,631
COMMERCIAL SERVICES - 9.0%
ADVO, Inc.(a) Direct mail marketer 235,400 5,590,750
Burns International Services Security services 243,100 2,628,519
Corp.(a)
Daisytek International Corp.(a) Distributes computer 97,700 2,277,631
supplies
G&K Services, Inc. Uniform rental 71,600 2,318,050
Interim Services Inc.(a) Staffing provider 78,500 1,942,875
New England Business Business forms 206,200 5,039,013
------------
19,796,838
CONSUMER PRODUCTS/SERVICES - 3.4%
Polaris Industries Inc. Snowmobiles, ATVs, 142,900 5,180,125
motorcycles
School Specialty, Inc.(a) Non-textbook school supplies 146,500 2,215,812
------------
7,395,937
RESTAURANTS - 5.1%
Brinker International, Inc.(a) Casual dining 9,200 221,950
IHOP Corp.(a) Casual dining 218,000 3,637,875
NPC International, Inc.(a) Pizza Hut franchisee 199,100 1,567,913
O'Charley's Inc.(a) Casual dining 277,050 3,636,281
Ruby Tuesday, Inc. Casual dining 123,500 2,246,156
------------
11,310,175
RETAIL - 9.3%
Aaron Rents, Inc. Furniture rental chain 233,600 4,146,400
CSK Auto Corp.(a) DIY auto parts chain 191,800 3,356,500
Discount Auto Parts, Inc.(a) Auto parts stores 212,800 3,843,700
Finlay Enterprises, Inc.(a) Leased jewelry departments 183,100 2,654,950
MarineMax, Inc.(a) Recreational boats 167,500 1,591,250
ShopKo Stores, Inc.(a) Specialty discount retailer 97,700 2,247,100
Tractor Supply Co.(a) Farm-related products 163,900 2,622,400
------------
20,462,300
------------
TOTAL CONSUMER DISCRETIONARY 67,636,881
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1999 9
<PAGE>
- - PORTFOLIO HOLDINGS AS OF DECEMBER 31, 1999 (CONTINUED)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description of Shares Value
----------------------------------- --------- ------------
<S> <C> <C> <C>
CONSUMER STAPLES - 2.4%
CONSUMER STAPLES - 2.4%
International Home Foods, Inc.(a) Packaged-foods manufacturer 155,900 $ 2,708,763
International Multifoods Corp. Foodservice distribution 186,700 2,473,775
------------
5,182,538
FINANCIAL SERVICES - 22.7%
BANKS/THRIFTS - 6.6%
BancWest Corp. Commercial bank 258,200 5,034,900
Chittenden Corporation Vermont-based commercial 109,900 3,255,788
bank
Colonial BancGroup, Inc. (The) Alabama bank 312,300 3,240,112
East West Bancorp, Inc. Commercial bank 260,900 2,984,044
------------
14,514,844
INSURANCE - 10.3%
CNA Surety Corp. Surety insurance 198,900 2,585,700
Delphi Financial Group, Inc.(a) Accident & health insurance 155,988 4,679,663
Financial Security Assurance Municipal bond insurance 94,200 4,910,175
Holdings
Gallagher & Co. (Arthur J.) Insurance broker 99,400 6,436,150
StanCorp Financial Group, Inc. Disability insurance 164,600 4,145,862
------------
22,757,550
OTHER FINANCIAL SERVICES - 5.8%
Heller Financial, Inc. Commercial finance 259,700 5,210,232
Neuberger Berman Inc.(a) Investment manager 116,800 2,905,400
Raymond James Financial, Inc. Investment services 245,900 4,595,256
------------
12,710,888
------------
TOTAL FINANCIAL SERVICES 49,983,282
HEALTH CARE - 6.3%
HEALTH CARE SERVICES - 2.1%
AmeriPath, Inc.(a) Physician practice 277,400 2,271,212
management
Manor Care, Inc.(a) Nursing home operator 153,600 2,457,600
------------
4,728,812
MEDICAL EQUIPMENT/PRODUCTS - 4.2%
DENTSPLY International Inc. Dental products manufacturer 92,200 2,178,225
Invacare Corp. Home health care products 235,800 4,730,738
Wesley Jessen VisionCare, Inc.(a) Contact lense manufacturer 62,000 2,348,250
------------
9,257,213
------------
TOTAL HEALTH CARE 13,986,025
</TABLE>
10 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description of Shares Value
----------------------------------- --------- ------------
<S> <C> <C> <C>
MATERIALS & PROCESSING - 10.0%
BUILDING/CONSTRUCTION PRODUCTS - 6.3%
Barnett Inc.(a) Hardware products 225,100 $ 2,335,412
Chicago Bridge & Iron Co. Maker of steel tanks 287,700 3,955,875
Dayton Superior Corp.(a) Concrete accessories 169,400 2,752,750
Jacobs Engineering Group Inc.(a) Engineering and construction 151,700 4,930,250
------------
13,974,287
METAL FABRICATIONS - 1.2%
Shaw Group Inc.(a) Pipe fabricator 102,800 2,602,125
PACKAGING/PAPER - 2.5%
Albany International Corp.(a) Paper machine clothing 274,543 4,255,412
BWAY Corp.(a) Metal cans/containers 193,500 1,185,188
------------
5,440,600
------------
TOTAL MATERIALS & PROCESSING 22,017,012
PRODUCER DURABLES - 14.9%
DIVERSIFIED MANUFACTURING - 2.2%
Applied Power Inc. Industrial products manufacturer 72,100 2,649,675
Pentair, Inc. Diversified manufacturer 61,000 2,348,500
------------
4,998,175
ELECTRICAL EQUIPMENT/PRODUCTS - 3.0%
Baldor Electric Company Motor manufacturer 72,600 1,315,875
Belden Inc. Wire & cable manufacturer 247,100 5,189,100
------------
6,504,975
OTHER PRODUCER DURABLES - 9.7%
IDEX Corp. Specialty pump products 223,200 6,779,700
Kaydon Corp. Custom engineered parts 198,800 5,330,325
LSI Industries Inc. Lighting/graphics products 171,800 3,715,175
MSC Industrial Direct Co. Inc.(a) Direct marketer of industrial
products 239,800 3,177,350
Snap-on Inc. Professional tools 85,600 2,273,750
------------
21,276,300
------------
TOTAL PRODUCER DURABLES 32,779,450
TECHNOLOGY - 6.5%
DISTRIBUTION - 2.8%
Arrow Electronics, Inc.(a) Distributes electronic components 245,800 6,237,175
ELECTRONIC COMPONENTS - 1.1%
Tektronix, Inc. Electronic measurement products 60,600 2,355,825
OTHER TECHNOLOGY - 1.3%
Pomeroy Computer Resources, Inc.(a) Computer products reseller 88,900 1,177,925
PSC Inc.(a) Bar coding equipment 221,100 1,630,612
------------
2,808,537
</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>
SERVICES - 1.3%
American Management Systems Inc.(a) Information technology service
provider 61,000 $ 1,913,875
CACI International Inc.(a) Technology services provider 42,700 966,087
------------
2,879,962
------------
TOTAL TECHNOLOGY 14,281,499
------------
TOTAL COMMON STOCKS - 98.4%
(Cost $221,716,334) 216,732,300
MONEY MARKET INSTRUMENTS(b)
Yield 6.043% to 6.160%
due February 2000 to April 2000
American Family Financial Services 870,000
General Mills, Inc. 568,929
Pitney Bowes Credit Corp. 865,663
Sara Lee 561,252
Warner Lambert Corp. 1,829,325
Wisconsin Corp. Credit Union 3,037,716
Wisconsin Electric 46,635
------------
TOTAL MONEY MARKET INSTRUMENTS - 3.5%
(Cost $7,779,520) 7,779,520
------------
TOTAL INVESTMENTS - 101.9%
(Cost $229,495,854) 224,511,820
OTHER LIABILITIES LESS OTHER ASSETS - (1.9%) (4,165,915)
------------
NET ASSETS - 100.0% $220,345,905
============
</TABLE>
(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 $229,495,854 on
December 31, 1999, net unrealized depreciation was $4,984,034, consisting of
gross unrealized appreciation of $21,239,718 and gross unrealized depreciation
of $26,223,752.
See accompanying notes to financial statements.
12 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- ------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Cost: $229,495,854) $224,511,820
Receivable for:
Securities sold $3,077,850
Fund shares sold 127,527
Dividends and interest 266,715 3,472,092
---------- ------------
Total assets 227,983,912
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $4,199,832
Fund shares redeemed 3,149,380
Comprehensive management fee 288,795 7,638,007
---------- ------------
Net assets applicable to shares outstanding $220,345,905
============
Shares outstanding--no par value
(unlimited number of shares authorized) 13,856,364
============
PRICING OF SHARES
Net asset value, offering price and
redemption price per share $ 15.90
============
ANALYSIS OF NET ASSETS
Paid-in capital $258,829,967
Accumulated net realized loss on sales of
investments (33,500,028)
Net unrealized depreciation of investments (4,984,034)
------------
Net assets applicable to shares outstanding $220,345,905
============
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1999 13
<PAGE>
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Dividends $ 2,977,093
Interest 1,167,044
------------
Total investment income 4,144,137
Expenses:
Comprehensive management fee 5,246,839
Fees to unaffiliated trustees 22,911
------------
Total expenses 5,269,750
------------
Net investment loss (1,125,613)
Net realized and unrealized loss on investments:
Net realized loss on sales of investments (33,501,167)
Net change in net unrealized appreciation or depreciation (20,304,001)
------------
Net realized and unrealized loss on investments (53,805,168)
------------
Net decrease in net assets resulting from operations $(54,930,781)
============
</TABLE>
See accompanying notes to financial statements.
14 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
STATEMENTS 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 $ (1,125,613) $(2,391,833)
Net realized (loss) gain on sales of
investments (33,501,167) 23,823,435
Net change in net unrealized appreciation or
depreciation (20,304,001) (58,687,760)
------------- ------------
Net decrease in net assets resulting from
operations (54,930,781) (37,256,158)
Distributions to shareholders from net
realized gains (17,030,328) (7,028,589)
From fund share transactions:
Proceeds from fund shares sold 95,398,045 144,759,773
Reinvestment of capital gain distribution 16,679,785 6,858,335
Payments for fund shares redeemed (264,794,438) (129,379,429)
------------- ------------
Net (decrease) increase in net assets
resulting from share transactions (152,716,608) 22,238,679
------------- ------------
Total decrease in net assets (224,677,717) (22,046,068)
Net assets at beginning of year 445,023,622 467,069,690
------------- ------------
Net assets at end of year $ 220,345,905 $445,023,622
============= ============
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1999 15
<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 $ 19.78 $ 21.66 $ 18.16 $ 16.79 $ 15.64
-------- -------- -------- -------- --------
Income from Investment Operations
Net investment loss (0.14) (0.11) (0.07) (0.04) (0.06)
Net realized and unrealized gain
(loss) on investments (2.51) (1.45) 6.46 5.02 2.21
-------- -------- -------- -------- --------
Total from investment
operations (2.65) (1.56) 6.39 4.98 2.15
-------- -------- -------- -------- --------
Less distributions from net realized
gains on investments (1.23) (0.32) (2.89) (3.61) (1.00)
-------- -------- -------- -------- --------
Net asset value at end of year $ 15.90 $ 19.78 $ 21.66 $ 18.16 $ 16.79
======== ======== ======== ======== ========
Total Return (13.28%) (7.17%) 35.43% 30.37% 13.83%
Ratios/Supplemental Data
Ratio of expenses to average
net assets 1.48% 1.47% 1.48% 1.51% 1.51%
Ratio of net investment loss to
average net assets (0.32%) (0.50%) (0.41%) (0.32%) (0.35%)
Portfolio turnover rate 81% 68% 62% 130% 71%
Net assets, end
of year (in thousands) $220,346 $445,024 $467,070 $219,480 $174,899
======== ======== ======== ======== ========
</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.
16 ANNUAL REPORT - DECEMBER 31, 1999
<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
Special Equities Portfolio ("Fund"). Skyline Special Equities Portfolio closed
to new investors on January 30, 1997 and opened to new investors on October 27,
1999.
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 premium and discount on money
market instruments. Realized gains and losses from security transactions are
reported on an identified cost basis.
/ / FUND SHARE VALUATION - Fund shares are sold 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 $16,805,761.
This loss may be used to offset future capital gains arising in tax years
through 2007.
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.
ANNUAL REPORT - DECEMBER 31, 1999 17
<PAGE>
- -NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------------------------
/ / 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 $5,246,839.
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, the Fund paid fees of $22,911 to its
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 5,235,896 6,883,008
Shares issued for reinvestment of dividends 1,065,801 354,028
------------ ------------
6,301,697 7,237,036
Less shares redeemed (14,941,529) (6,307,941)
------------ ------------
Net (decrease) increase in shares
outstanding (8,639,832) 929,095
============ ============
</TABLE>
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 $271,171,871
Proceeds from sales 413,554,957
</TABLE>
18 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
- ------------------------------------------------------------------------
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.
ANNUAL REPORT - DECEMBER 31, 1999 19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- ------------------------------------------------------------------------
To the Shareholders of Skyline Special Equities Portfolio
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 Special Equities Portfolio 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 Special Equities Portfolio 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
20 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
FEDERAL TAX STATUS OF 1999 DIVIDENDS
- ------------------------------------------------------------------------
Capital gain dividends paid to you, whether received in cash or reinvested in
shares, must be included in your federal income tax return and must be reported
by the Fund to the Internal Revenue Service in accordance with U.S. Treasury
Department regulations. Short-term capital gain dividends paid to you are
taxable as ordinary income. Long-term capital gain dividends paid to you are
taxable as long-term capital gain income regardless of how long you have held
Fund shares. Distributions as a return of capital are not taxable, but reduce
the cost basis of shares held.
- - 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.
ANNUAL REPORT - DECEMBER 31, 1999 21
<PAGE>
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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
