<PAGE>
ANNUAL REPORT -- December 31, 1999
SKYLINE SMALL CAP
CONTRARIAN
-----------------------
SKYLINE SPECIAL EQUITIES PORTFOLIO
SKYLINE SMALL CAP VALUE PLUS
SKYLINE SMALL CAP CONTRARIAN
[SKYLINE LOGO]
<PAGE>
LETTER FROM DAREN C. HEITMAN, PORTFOLIO MANAGER:(1)
- ------------------------------------------------------------------------
December 31, 1999
Dear Shareholder:
OVERVIEW
The Fund gained 10.06% during 1999. These results compare well to other small
cap value funds and the Russell 2000 Value Index, but unfortunately small cap
value was one of the worst performing segments during the year. This was
especially true in the fourth quarter when the Fund declined 1.38%. 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.
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.
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.
ANNUAL REPORT - DECEMBER 31, 1999 1
<PAGE>
PORTFOLIO REVIEW
The Fund gained 10.06% during a year when small cap value stocks were one of the
worst performing segments of the market. The Fund was down 1.38% during the
fourth quarter due to an investment style that was very out-of-favor and limited
exposure to the technology and utilities sectors of the market. Also, there were
slightly more earnings disappointments during the fourth quarter compared to the
first three quarters of the year. In my last three quarterly letters to you, I
cited the ratio of companies in the Fund meeting or exceeding estimates. During
the fourth quarter, this ratio dipped slightly to about 70%. The two to three
additional disappointments partially explain the underperformance of the Fund
during the fourth quarter.
Compared to a year ago, we believe the companies in the Fund are of higher
quality as measured by profitability, financial strength and competitive
position. Additionally, a strong majority of them have improving fundamental
trends. Despite these positive characteristics, the Fund's valuation remains
extremely low at just 1.0x book value and 0.4x revenue, both more than 50%
discounts to the Russell 2000 Index.
OUTLOOK
Before addressing the outlook, it is important to step back and look at the past
two years. Our small cap value style 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 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 appreciations. 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 14 times current earnings. This valuation makes
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 our small cap value style of investing will show extremely strong
results. With such a compelling valuation advantage, we believe small cap value
is set up to provide superior relative returns over the next several years.
As you know, Skyline's trustees have decided that they believe it is in the
shareholder's best interest to concentrate all of Skyline Asset Management's
resources on a single fund, Skyline Special Equities Portfolio. Assuming that
shareholders approve the
2 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
proposed merger of Skyline Small Cap Contrarian into Special Equities Portfolio,
this is my last letter to you. Thank you for supporting Small Cap Contrarian
during its existence. I believe that your confidence in small cap value
investing is not misplaced, and encourage you to maintain exposure to the
category.
/s/ DAREN HEITMAN
PORTFOLIO CHARACTERISTICS(1)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP RUSSELL 2000
CONTRARIAN VALUE RUSSELL 2000 S&P 500
<S> <C> <C> <C> <C>
PRICE/BOOK 0.96 1.52 2.72 5.54
PRICE/SALES 0.49 0.86 1.39 2.44
P/E RATIO (MEDIAN) 14.4 15.6 20.0 23.0
- --------------------------------------------------------------------------------------------------------------------------
EPS GROWTH--5 YRS 6.1% 10.8% 14.5% 16.6%
(HISTORICAL)
EPS GROWTH--1 YR 8.4% 16.9% 24.5% 21.1%
(FORECASTED)
- --------------------------------------------------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $210 million $660 million $880 million $87 billion
PORTFOLIO VALUE $3.7 million $378 billion $944 billion $12,285 billion
NUMBER OF HOLDINGS 46 1,221 1,857 500
- --------------------------------------------------------------------------------------------------------------------------
TICKER SYMBOL: -
CUSIP #: 830833604
INITIAL INVESTMENT: $1,000
SUBSEQUENT INVESTMENT: $100
NET ASSET VALUE (PER SHARE): $7.88
</TABLE>
ANNUAL REPORT - DECEMBER 31, 1999 3
<PAGE>
- - PERFORMANCE (%)(1)
- ---------------------------------------------
<TABLE>
<CAPTION>
Calendar Years
4Q Since -------------------------------
1999 1999 Inception(2) 1999 1998 1997(2)
<S> <C> <C> <C> <C> <C> <C>
SMALL CAP CONTRARIAN -1.38 10.06 -10.99 10.1 -28.4 0.00
RUSSELL 2000 VALUE 1.53 -1.49 -2.46 -1.5 -6.5 -2.5
RUSSELL 2000 18.44 21.26 10.55 21.3 -2.6 3.91
S&P 500 15.05 21.14 24.75 21.1 28.8 0.80
</TABLE>
- - SECTOR WEIGHTINGS (AS OF DECEMBER 31, 1999)
- -----------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Consumer Discretionary 16.8%
Energy 3.5%
Financial Services 5.6%
Health Care 10.5%
Materials & Processing 17.9%
Other 1.5%
Producer Durables 10.9%
Technology 11.3%
Cash 13.2%
Autos & Transportation 8.8%
</TABLE>
4 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
- - TOP TEN HOLDINGS(3)
<TABLE>
<CAPTION>
% OF NET ASSETS
- ----------------------------------------------------------------------------
<S> <C>
ARROW ELECTRONICS, INC.
Distributes electronic components 3.6%
DISCOUNT AUTO PARTS, INC.
Auto parts stores 3.1%
KENNAMETAL INC.
Metal-cutting tools 2.7%
MANOR CARE, INC.
Nursing home operator 2.7%
WABASH NATIONAL CORP.
Makes truck trailers 2.6%
OFFSHORE LOGISTICS, INC.
Offshore transportation services 2.6%
CLEVELAND-CLIFFS INC.
Produces iron ore pellets 2.5%
TECH DATA CORPORATION
Distributor of PCs and peripherals 2.5%
OMNICARE, INC.
Pharmaceutical services 2.4%
LESCO, INC.
Lawn care products 2.3%
TOP TEN HOLDINGS 27.0%
</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
CONTRARIAN VALUE 2000 CONTRARIAN VALUE 2000
<S> <C> <C> <C> <C> <C> <C> <C>
Technology 14.8% 31.4% 64.8% Technology 53.9% 65.2% 101.3%
- ------------------------------------------------------- -------------------------------------------------------
Other 9.9 -2.3 -3.1 Producer Durables 24.2 14.9 36.8
- ------------------------------------------------------- -------------------------------------------------------
Health Care 6.2 26.2 25.0 Health Care 17.7 1.9 18.1
- ------------------------------------------------------- -------------------------------------------------------
Producer Durables 6.2 9.3 27.8 Materials & Processing 17.7 -5.3 -3.9
- ------------------------------------------------------- -------------------------------------------------------
Consumer Discretionary -3.9 -0.1 12.2 Consumer Discretionary 5.4 -3.8 10.6
- ------------------------------------------------------- -------------------------------------------------------
Materials & Processing -4.6 -0.2 3.3 Energy -5.1 25.2 26.9
- ------------------------------------------------------- -------------------------------------------------------
Financial Services -14.3 -2.9 -0.6 Financial Services -17.1 -11.2 -5.9
- ------------------------------------------------------- -------------------------------------------------------
Autos & Transportation -15.8 -2.4 0.9 Autos & Transportation -21.5 -8.4 -5.4
- ------------------------------------------------------- -------------------------------------------------------
Energy -20.5 -6.7 -8.6 Other -48.8 -14.8 -16.3
- ------------------------------------------------------- -------------------------------------------------------
Consumer Staples N/A* -7.6 -5.9 Consumer Staples N/A* -22.1 -20.8
- ------------------------------------------------------- -------------------------------------------------------
Utilities N/A* -3.5 16.6 Utilities N/A* 2.1 40.9
- ------------------------------------------------------- -------------------------------------------------------
</TABLE>
* Not Applicable
ANNUAL REPORT - DECEMBER 31, 1999 5
<PAGE>
STOCK HIGHLIGHTS(3)
- ------------------------------------------------------------------------
INTERPOOL, INC. (IPX)
Interpool's core business is the long-term leasing of shipping containers. An
important dynamic for IPX's business is the direction of prices for shipping
containers. The Asian crisis, concurrent with manufacturing capacity expansion,
sparked a steep decline in container prices during 1998 and 1999, which caused
IPX's EPS growth to stall at around $1.00. However, it appears prices are
recovering which should enable IPX to resume EPS growth. At $8 per share, IPX's
shares are at a steep discount to their $11 per share book value and do not
reflect its ability to generate $2.00 in EPS once container prices recover to
historical levels.
TECH DATA CORPORATION (TECD)
Tech Data is one of the world's leading distributors of computers and related
products. It has delivered very strong growth and financial returns for the past
ten years, but experienced a disappointing 1999 due to margin pressures and a
Y2K-related slowdown in demand. This provided the opportunity to purchase the
stock at $23 per share, near book value and a very low multiple of next year's
EPS estimate of $2.80.
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
CONTRARIAN 2000 2000 VALUE 500
<S> <C> <C> <C> <C>
Initial Investment $10,000 $10,000 $10,000 $10,000
1997 $10,000 $10,391 $13,178 $10,080
1998 $7,180 $10,126 $12,328 $12,979
1999 $7,880 $12,279 $12,144 $15,723
</TABLE>
Note: Past performance is no guarantee of future results. See "Notes to
Performance" at the end of this section.
6 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 year ended
December 31, 1999, and for period December 15, 1997 (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 and Morningstar Inc.
(2) Return is calculated from the Fund's inception on December 15, 1997.
(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 7
<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 - 8.8%
AIRLINE - 1.3%
Mesa Air Group, Inc.(a) Regional airline 10,100 $ 47,975
OTHER TRANSPORTATION - 4.1%
Interpool, Inc. Container leasing firm 11,500 85,531
Kitty Hawk, Inc.(a) Air freight services 6,600 45,375
Trailer Bridge, Inc.(a) Marine transportation 15,300 19,125
------------
150,031
RAILROAD - 2.0%
Wisconsin Central Transportation Railroad operator 5,500 73,906
Corporation(a)
TRUCKING - 1.4%
U.S. Xpress Enterprises(a) Truckload carrier 7,100 52,363
------------
TOTAL AUTOS & TRANSPORTATION 324,275
CONSUMER DISCRETIONARY - 16.8%
COMMERCIAL SERVICES - 8.0%
Angelica Corp. Textile rental services 6,900 67,275
Insurance Auto Auctions(a) Auto salvage 4,000 63,000
LESCO, Inc. Lawn care products 5,100 86,700
Right Mgmt Consultants(a) Outplacement & HR services 6,700 77,050
------------
294,025
CONSUMER PRODUCTS/SERVICES - 0.9%
Drypers Corp.(a) Makes disposable diapers 14,500 34,890
PRINTING/PUBLISHING - 1.1%
Cadmus Communications Corp. Commercial printer 4,800 40,800
RETAIL - 6.8%
Discount Auto Parts, Inc.(a) Auto parts stores 6,300 113,794
Jo-Ann Stores, Inc.(a) Fabric/craft stores 7,300 82,125
Tractor Supply Co.(a) Farm-related products 3,500 56,000
------------
251,919
------------
TOTAL CONSUMER DISCRETIONARY 621,634
ENERGY - 3.5%
OTHER ENERGY - 3.5%
Offshore Logistics, Inc(a) Offshore transportation services 10,200 95,625
Willbros Group, Inc.(a) Engineering/construction firm 7,500 34,688
------------
130,313
</TABLE>
8 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company Number Market
Description Of Shares Value
----------------------------------- --------- ------------
<S> <C> <C> <C>
FINANCIAL SERVICES - 5.6%
INSURANCE - 2.6%
Highlands Insurance Group, Inc.(a) Property & casualty insurance 5,400 $ 51,300
Navigators Group, Inc. (The)(a) Property & casualty insurance 4,600 44,850
------------
96,150
OTHER FINANCIAL SERVICES - 3.0%
American Capital Strategies, Ltd. Commercial finance 2,000 45,500
Credit Acceptance Corp.(a) Automobile finance services 17,400 64,162
------------
109,662
------------
TOTAL FINANCIAL SERVICES 205,812
HEALTH CARE - 10.5%
HEALTH CARE SERVICES - 10.5%
AmeriPath, Inc.(a) Physician practice management 6,600 54,037
ClinTrials Research Inc.(a) Contract research firm 14,500 59,813
Manor Care, Inc.(a) Nursing home operator 6,300 100,800
Omnicare, Inc. Pharmaceutical services 7,400 88,800
Quest Diagnostics Inc.(a) Diagnostic testing services 2,800 85,575
------------
389,025
MATERIALS & PROCESSING - 17.9%
BUILDING/CONSTRUCTION PRODUCTS - 3.8%
Chicago Bridge & Iron Co. Maker of steel tanks 6,200 85,250
Interface, Inc. Carpet producer 9,900 56,925
------------
142,175
INDUSTRIAL PRODUCTS - 1.5%
The Timken Company Manufactures bearings 2,800 57,225
METAL FABRICATIONS - 4.1%
Atchison Casting Corp.(a) Steel & iron castings 7,300 66,613
Brush Wellman Inc. Engineered materials 5,000 84,062
------------
150,675
OTHER MATERIALS & PROCESSING - 1.9%
Material Sciences Corp.(a) Specialty coated materials 6,800 69,275
PACKAGING/PAPER - 2.1%
Albany International Corp.(a) Paper machine clothing 4,900 75,950
SPECIALTY CHEMICALS - 2.0%
Wellman, Inc. PET resins and polyester fibers 3,900 72,638
</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>
STEEL/IRON - 2.5%
Cleveland-Cliffs Inc. Produces iron ore pellets 3,000 $ 93,375
------------
TOTAL MATERIALS & PROCESSING 661,313
PRODUCER DURABLES - 10.9%
CAPITAL GOODS - 5.3%
Kennametal Inc. Metal-cutting tools 3,000 100,875
Wabash National Corp. Makes truck trailers 6,400 96,000
------------
196,875
ELECTRICAL EQUIPMENT/PRODUCTS - 1.2%
Sensormatic Electronics Corp.(a) Anti-theft devices 2,600 45,338
MACHINERY - 4.4%
DT Industries, Inc. Packaging equipment 10,600 83,475
Hardinge Inc. Machine tool manufacturer 6,000 78,375
------------
161,850
------------
TOTAL PRODUER DURABLES 404,063
TECHNOLOGY - 11.3%
CONTRACT MANUFACTURING - 1.5%
Merix Corp.(a) Contract manufacturer 5,100 56,100
DISTRIBUTION - 6.1%
Arrow Electronics, Inc.(a) Distributes electronic components 5,200 131,950
Tech Data Corporation(a) Distributor of PCs and peripherals 3,400 92,225
------------
224,175
OTHER TECHNOLOGY - 3.7%
Imation Corp.(a) Data storage products 1,900 63,769
PSC Inc.(a) Bar coding equipment 9,900 73,012
------------
136,781
------------
TOTAL TECHNOLOGY 417,056
OTHER - 1.5%
OTHER - 1.5%
SPACEHAB, Inc.(a) Lab & supply modules 10,500 56,437
------------
TOTAL COMMON STOCKS - 86.8%
(Cost $3,424,427) 3,209,928
</TABLE>
10 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Value
------------
<S> <C> <C> <C>
MONEY MARKET INSTRUMENTS(b)
Yield 6.043% to 6.160%
due February 2000 to April 2000
American Family Financial Services $ 62,520
General Mills, Inc. 154,375
Pitney Bowes Credit Corp. 149,313
Warner Lambert Corp. 69,145
Wisconsin Corp. Credit Union 154,968
Wisconsin Electric 91,883
------------
TOTAL MONEY MARKET INSTRUMENTS - 18.5%
(Cost $682,204) 682,204
------------
TOTAL INVESTMENTS - 105.3%
(Cost $4,106,631) 3,892,132
OTHER LIABILITIES LESS OTHER ASSETS - (5.3%) (196,931)
------------
NET ASSETS - 100.0% $ 3,695,201
============
</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 $4,106,631 on
December 31, 1999, net unrealized depreciation was $214,499, consisting of
gross unrealized appreciation of $362,221 and gross unrealized depreciation of
$576,720
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1999 11
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1999
- ------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (Cost: $4,106,631) $ 3,892,132
Receivable for:
Securities sold $ 88,492
Dividends and interest 7,519
Due from Adviser 1,052 97,063
--------
Organization costs, net of accumulated
amortization of $20,212 27,068
-----------
Total assets 4,016,263
LIABILITIES & NET ASSETS
Payable for:
Securities purchased $289,107
Comprehensive management fee 4,887
Organization costs 27,068 321,062
-------- -----------
Net assets applicable to shares
outstanding $ 3,695,201
===========
Shares outstanding--no par value
(unlimited number of shares
authorized) 468,882
===========
PRICING OF SHARES
Net asset value, offering price and
redemption price per share $ 7.88
===========
ANALYSIS OF NET ASSETS
Paid-in capital $ 5,733,028
Accumulated net realized loss on sales
of investments (1,823,328)
Net unrealized depreciation of
investments (214,499)
-----------
Net assets applicable to shares
outstanding $ 3,695,201
===========
</TABLE>
See accompanying notes to financial statements.
12 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Dividends $ 38,237
Interest 17,318
----------
Total investment income 55,555
Expenses:
Comprehensive management fee 64,117
Fees to unaffiliated trustees 12,122
Amortization of organization costs 9,780
----------
Total expenses 86,019
Expense reimbursement by Adviser (11,374)
----------
Total expenses absorbed by the Fund 74,645
----------
Net investment loss (19,090)
Net realized and unrealized gain (loss) on
investments:
Net realized loss on sales of investments (1,068,720)
Net change in net unrealized appreciation or
depreciation 1,474,811
----------
Net realized and unrealized gain on investments 406,091
----------
Net increase in net assets resulting from
operations $ 387,001
==========
</TABLE>
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1999 13
<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 $ (19,090) $ (68,708)
Net realized loss on sales of
investments (1,068,720) (754,608)
Net change in net unrealized
appreciation or depreciation 1,474,811 (1,700,480)
----------- -----------
Net increase (decrease) in net assets
resulting from operations 387,001 (2,523,796)
From fund share transactions:
Proceeds from fund shares sold 867,860 6,055,498
Payments for fund shares redeemed (2,757,476) (3,086,403)
----------- -----------
Net (decrease) increase in net assets
resulting from share transactions (1,889,616) 2,969,095
----------- -----------
Total (decrease) increase in net assets (1,502,615) 445,299
Net assets at beginning of year 5,197,816 4,752,517
----------- -----------
Net assets at end of year $ 3,695,201 $ 5,197,816
=========== ===========
</TABLE>
See accompanying notes to financial statements.
14 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
Year Ended Year Ended 12/15/97(a) to
12/31/99 12/31/98 12/31/97
<S> <C> <C> <C>
------------------------------------------
Net asset value at beginning of year $ 7.16 $ 10.00 $10.00
-------- ------- ------
Income from investment operations
Net investment loss (.06) (0.09) 0.00
Net realized and unrealized gain
(loss) on investments .78 (2.75) 0.00
-------- ------- ------
Total from investment operations 0.72 (2.84) 0.00
-------- ------- ------
Net asset value at end of year $ 7.88 $ 7.16 $10.00
======== ======= ======
Total Return 10.06% (28.40%) 0.00%(b)
Ratios/Supplemental Data
Ratio of expenses to average net
assets:
Before expense reimbursement 2.01% 1.84% 1.71%(c)
After expense reimbursement 1.75% 1.75% 1.71%(c)
Ratio of net investment loss to
average net assets:
Before expense reimbursement (0.71%) (1.14%) (0.29%)(c)
After expense reimbursement (0.45%) (1.05%) (0.29%)(c)
Portfolio turnover rate 78% 80% 0%(c)
Net assets, end of year
(in thousands) $ 3,695 $ 5,198 $4,753
======== ======= ======
</TABLE>
(a) Commencement of operations.
(b) For the period December 15, 1997 to December 31, 1997.
(c) Ratios have been determined on an annualized basis.
See accompanying notes to financial statements.
ANNUAL REPORT - DECEMBER 31, 1999 15
<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 Contrarian ("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 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.
16 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
- ------------------------------------------------------------------------
As of December 31, 1999, the Fund had capital loss carryforwards of $1,662,198.
This loss may be used to offset future capital gains arising in tax years as
follows:
<TABLE>
<CAPTION>
Year Expires
<S> <C>
2006 $ 754,608
2007 907,590
----------
$1,662,198
</TABLE>
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 $64,117. The Adviser has
agreed to reimburse the Fund to the extent that the aggregate annual expenses of
the Fund, including the advisory fee and fees to unaffiliated trustees, but
excluding extraordinary costs or expenses such as legal, accounting, or other
costs or expenses not incurred in the normal course of the Fund's ongoing
operations, exceed 1.75% of the average daily net assets of the Fund. For the
year ended December 31, 1999 the Adviser reimbursed the Fund $11,374.
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 $12,122 to its
unaffiliated trustees.
ANNUAL REPORT - DECEMBER 31, 1999 17
<PAGE>
- -NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------------------------
In connection with the organization of the Fund, organizational costs of $47,280
were advanced to the Fund by the Adviser. This expense is being amortized on a
straight line basis through December 15, 2002. The Fund will reimburse the
Adviser for such expenses in equal installments without interest over 20
calendar quarters.
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 110,999 657,971
Less shares redeemed (367,987) (407,139)
---------- ----------
Net (decrease) increase in shares outstanding (256,988) 250,832
========== ==========
</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 $3,100,780
Proceeds from sales 5,422,927
</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.
18 ANNUAL REPORT - DECEMBER 31, 1999
<PAGE>
- - REPORT OF INDEPENDENT AUDITORS
- ---------------------------------------------
To the Shareholders of Skyline Small Cap Contrarian
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 Contrarian 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 fiscal years since December 31,
1997. 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 Contrarian 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 fiscal
years since December 31, 1997, 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 19
<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.
20 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
