<PAGE>
- - LETTER from Kenneth S. Kailin, Portfolio Manager:(1) September 30, 1998
- --------------------------------------------------------------------------------
Dear Shareholder:
The U.S. stock market fell sharply in the third quarter, as signs of slowing
profit growth, international economic turbulence, and presidential problems
heavily influenced investors. Small company stocks were significantly impacted
by the volatile downdraft. The Russell 2000 Index, a small company stock
benchmark, fell 20.15% in the third quarter, while the average small company
fund dropped 21.52%. Skyline Small Cap Value Plus did not escape unscathed,
but did outperform many small company funds despite declining 18.70% in the
quarter. For the nine-month period ending September 30, 1998, the Fund is down
13.73% as compared to the Russell 2000 Index decline of 16.21%.
During the third quarter, as growth trends became more uncertain, stock prices
began to decline with increased volatility. Large company stocks, as
represented by the S&P 500 Index, fell 9.86% in the quarter and, while still
negative, clearly performed much better than small company stocks. In fact,
for the nine-month period, the S&P 500 Index has outperformed the Russell 2000
Index by an incredible 22.22%. The reason generally given for this
outperformance has been an investor preference for liquidity and perceived
safe and secure companies. To many market analysts this does not make much
sense as small companies now sell at very attractive valuation levels and the
profit growth outlook for small companies is at least as good as large
companies. However, in turbulent periods, investors tend to act emotionally
instead of rationally.
The Fund was down in the third quarter mainly due to the general market
conditions as previously reported. However, reasonably good stock selection
and the lack of exposure to the weakest industry sectors allowed the Fund to
outperform on a relative basis. In fact, the Fund had over a dozen stocks that
reported positive returns in the quarter, with three of these holdings up over
30%. The median stock for the Fund was down about 12% in the quarter versus
the Russell 2000 Index decline of over 20%. Unfortunately, the Fund suffered
with a number of poor performing stocks. Eight stocks dropped 40% or more in
the quarter. Five of these companies pre-announced that profits would
disappoint investors, while the three others simply operate in businesses that
fell sharply out of favor with Wall Street. Negative investor psychology
pushed down these stocks well beyond reason, as minor shortfalls in
expectations often led to stock price declines in excess of 30%.
Typically, the Fund is able to find undervalued stocks with strong growth
outlooks in a limited number of industry sectors. However, because of the
sharp sell-off in stock prices, there are many small company stocks that are
selling at unusually low valuations. In fact, there are very few industries
where low valuation stocks cannot be found. The fundamentals of many of these
companies in these industries have not materially changed enough to justify
this sell-off, and these industries are being unfairly punished, in our
opinion, by a hypersensitive market. This has allowed the Fund to purchase ten
new stock holdings in companies with strong brand franchises, solid cash flow
characteristics, and fine growth outlooks. In order to make room for these new
holdings, over a dozen stocks were sold in the quarter. In addition, we have
recently reduced the Fund's exposure to heavily economically sensitive areas,
and increased exposure to health care and consumer discretionary stocks. This
should position the Fund well for the next bullish period in the stock market
and allow the Fund to be tax efficient by using the losses we realized to
offset future gains.
[KENNETH S. KAILIN SIGNATURE]
- - PORTFOLIO Characteristics(1)
- ---------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP
VALUE PLUS RUSSELL 2000
<S> <C> <C>
P/E RATIO (MEDIAN) 14.6 17.5
PRICE/BOOK 1.96 2.17
PRICE/SALES 0.82 1.15
- -------------------------------------------------------------------------------
EPS GROWTH CURRENT 13.5% 17.4%
FISCAL YEAR AVERAGE
- -------------------------------------------------------------------------------
MARKET CAP $ WGHTD. MED. $780 million $630 million
PORTFOLIO VALUE $126 million $748 billion
NUMBER OF HOLDINGS 48 1,965
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
TICKER SYMBOL: SPEQX INITIAL INVESTMENT: $1,000
CUSIP #: 830833406 SUBSEQUENT INVESTMENT: $100
</TABLE>
<PAGE>
- - PERFORMANCE (%)(1)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
3Q YTD
1998 1998 1 yr. 3 yrs. 5 yrs.
<S> <C> <C> <C> <C> <C>
SMALL CAP VALUE PLUS -18.70 -13.73 -16.66 11.82 11.67
RUSSELL 2000 -20.15 -16.21 -19.02 6.86 9.10
</TABLE>
- - SECTOR Weightings (as of September 30, 1998)
- -----------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Consumer
Discretionary 21.7%
Consumer Staples 2.2%
Energy 2.4%
Financial Services 27.4%
Health Care 18.1%
Materials &
Processing 1.8%
Producer Durables 8.0%
Technology 11.2%
Cash 4.7%
Autos &
Transportation 2.5%
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Calendar Years
Since ----------------------------------------------------------------------
Inception(2) 1997 1996 1995 1994 1993(2)
<S> <C> <C> <C> <C> <C> <C>
SMALL CAP VALUE PLUS 11.06 26.2 26.6 21.0 -1.5 10.1
RUSSELL 2000 10.02 22.4 16.5 28.4 -1.8 13.8
</TABLE>
- - SECTOR Performance (as of September 30, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3Q 1998 YTD 1998
- --------------------------------------------------------------- ---------------------------------------------------------------
SMALL CAP RUSSELL SMALL CAP RUSSELL
VALUE PLUS 2000 VALUE PLUS 2000
<S> <C> <C> <C> <C> <C>
HEALTH CARE -10.7 % -16.9% HEALTH CARE 2.9% -18.7%
- --------------------------------------------------------------- ---------------------------------------------------------------
FINANCIAL SERVICES -11.6 -14.9 FINANCIAL SERVICES -7.7 -12.7
- --------------------------------------------------------------- ---------------------------------------------------------------
ENERGY -14.4 -30.8 CONSUMER DISCRETIONARY -10.6 -14.5
- --------------------------------------------------------------- ---------------------------------------------------------------
CONSUMER DISCRETIONARY -22.0 -24.7 AUTOS & TRANSPORTATION -16.7 -18.4
- --------------------------------------------------------------- ---------------------------------------------------------------
CONSUMER STAPLES -24.5 -13.3 ENERGY -23.4 -40.4
- --------------------------------------------------------------- ---------------------------------------------------------------
TECHNOLOGY -25.4 -20.7 PRODUCER DURABLES -24.5 -22.6
- --------------------------------------------------------------- ---------------------------------------------------------------
PRODUCER DURABLES -27.0 -24.5 CONSUMER STAPLES -25.0 -11.8
- --------------------------------------------------------------- ---------------------------------------------------------------
AUTOS & TRANSPORTATION -31.0 -27.5 TECHNOLOGY -30.2 -15.2
- --------------------------------------------------------------- ---------------------------------------------------------------
MATERIALS & PROCESSING -44.3 -24.4 MATERIALS & PROCESSING -34.3 -20.4
- --------------------------------------------------------------- ---------------------------------------------------------------
OTHER N/A* -25.2 OTHER N/A* -26.8
- --------------------------------------------------------------- ---------------------------------------------------------------
UTILITIES N/A* -10.0 UTILITIES N/A* -0.4
- --------------------------------------------------------------- ---------------------------------------------------------------
* Not Applicable
</TABLE>
<PAGE>
- - STOCK Highlights(3)
- ---------------------------------------------
COLUMBIA SPORTSWEAR COMPANY (COLM)
Columbia Sportswear Company is a designer and distributor of a leading brand of
active outdoor apparel. COLM is growing its revenues and profits both by
increasing its product lines and utilizing the store within the store concept
that has been so successful for Polo/Ralph Lauren, Tommy Hilfiger, and Liz
Claiborne. Unlike most apparel manufacturers, COLM utilizes a low risk technique
of only manufacturing goods to firm orders, thereby reducing the likelihood of
having to cut prices to clear inventory. COLM's shares have fallen dramatically
since it came public in May of 1998, despite beating earnings expectations.
COLM's shares have recovered somewhat but still represent a value, trading at a
discount to the market with the expectations for double-digit earnings growth.
MIDAS, INC. (MDS)
MDS is a leading auto service center chain with 2,700 locations throughout the
world. MDS primarily acts as a franchisor, receiving a royalty and providing
support services and parts. Prior to this year, MDS was owned by Whitman
Corporation and was badly neglected. Wendell Province, who became CEO of MDS in
January of 1998, is invigorating MDS by selling non-strategic assets, expanding
service offerings beyond mufflers, and improving advertising effectiveness. MDS
is virtually unknown by Wall Street as few brokerage firms follow it. MDS has a
leading brand name and generates lots of free cash flow. Currently, MDS trades
at a significant discount to the market, its peers, and its growth rate.
- - TOP Ten Holdings(3)
<TABLE>
<CAPTION>
% OF NET ASSETS
- -----------------------------------------------------------------------------
<S> <C>
MARQUETTE MEDICAL SYSTEMS, INC.
Monitoring equipment 4.5%
ENHANCE FINANCIAL SERVICES GROUP
Specialty reinsurance 3.4%
CMAC INVESTMENT CORP.
Mortgage insurance 3.2%
HCC INSURANCE HOLDINGS, INC.
Property & casualty insurance 2.9%
TRIGON HEALTHCARE, INC.
Health maintenance organization 2.8%
CNA SURETY CORP.
Surety insurance 2.7%
WESLEY JESSEN VISIONCARE, INC.
Contact lenses 2.7%
FREMONT GENERAL CORP.
Workers' compensation insurance 2.6%
MIDAS, INC.
Auto service centers franchiser 2.5%
CLAIRE'S STORES, INC.
Fashion accessories stores 2.5%
TOP TEN HOLDINGS 29.8%
</TABLE>
<PAGE>
(1) The performance for the one, three, and five years ended September 30, 1998,
and for the period February 9, 1993 (inception) through September 30, 1998,
is an average annual total return calculation which is described in the
Fund's prospectus. Of course, 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 Russell 2000 Index is an unmanaged, market value weighted index
comprised of small-sized companies. All figures take into account reinvested
dividends. All indexes and portfolio characteristics are compiled by Frank
Russell Company.
Sources: Lipper Analytical Services & Frank Russell Company.
(2) Return is calculated from the Fund's inception on February 9, 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 companies, which tend to be more volatile and less liquid than stocks of
large companies.
Distributor: Funds Distributor Inc.
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.
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