<PAGE> 1
[Logo] Heartland Funds
----------------------
AMERICA'S VALUE INVESTOR
VALUE REPORT
December 31, 1996
Notes on value investing
for investors in the Heartland
Wisconsin Tax Free Fund
ANNUAL REPORT
TO SHAREHOLDERS
<PAGE> 2
VALUE REPORT
Dear Fellow Shareholders
[Photo of
Pat Retzer]
After a standout year in 1995, both the bond market and Heartland Wisconsin Tax
Free Fund realized more moderate returns in 1996. While our Fund saw its share
price slip from $10.30 to $10.16, it paid dividends of $.51 per share, for a
total return of 3.8%. Dividends were 100% exempt from Wisconsin and federal
income tax.*
We believe the Fund continues to be an excellent investment...
- - MONTHLY INCOME, DOUBLE TAX-FREE. Our January yield of 5.1% equals a 9.3%
taxable yield in the maximum tax bracket.** (Of course, monthly yields will
fluctuate.) The Fund's average annual total returns were 3.81% and 6.29%,
respectively, for the 1-year and since-inception (4/3/92) periods ended
12-31-96.
- - WISCONSIN'S LARGEST DOUBLE TAX-FREE FUND. We feel our size lets us take
advantage of economies of scale and keep the expense ratio relatively low.
- - A 100% NO-LOAD INVESTMENT. We are the only Wisconsin double tax-free fund
without sales charges or 12b-1 fees. Our yield and returns reflect this
advantage. Compare them to the other Wisconsin funds.
We believe these features make the Fund a compelling investment opportunity in
this period of high tax rates and volatile financial markets. If you have a
question, please call us at 1-800-432-7856.
Sincerely,
Patrick J. Retzer
Senior Vice President
Portfolio Manager
February, 1997
*For 1996, 8.23% of the Fund's income was an item of tax preference
for purposes of computing the federal alternative minimum tax.
**SEC yield for the 30 days commencing 1-1-97.
<PAGE> 3
VALUE REPORT
Heartland Wisconsin Tax Free Fund
BIGGER CAN BE BETTER
We've long talked about our advantageous position as the largest Wisconsin
tax-free fund. Right now, in fact, we're more than four times the size of the
second largest. We believe our size enables us to be major investors in
attractive new issues, and to pass on those that fail to meet our standards.
RECENTLY, THE APPLETON HOUSING AUTHORITY issued a security with features that
we found especially attractive. The project was a 74-unit rental facility
designed for independent senior living and scheduled for completion in May '97.
Along with yields as high as 6.75%, there were other factors that gave us
confidence the project would perform. For example, while the facility would
require $5.7 million, only $4.1 million was being borrowed. The other 28% was
being financed by the project owner and the Appleton Housing Authority. We
value that significant a level of equity participation.
In addition, the management company was highly focused and experienced. Its
portfolio included over 3,500 units, 1,240 of which were senior rental
apartments.
Because this issue was so attractive, we wanted a significant portion, and our
presence in the Wisconsin marketplace enabled us to invest $1.3 million -- for
nearly one-third of the offering.
On 12-31-96, the Fund's Appleton Housing Authority bonds -- 6.5% due
10-1-16 and 6.75% due 10-1-26 -- were valued at $1.3 million, or 1.0% of the
Fund's net assets.
1
<PAGE> 4
VALUE REPORT
PORTFOLIO PROFILE
OBJECTIVE
The Heartland Wisconsin Tax Free Fund seeks a high level of current income that
is exempt from Wisconsin and federal personal income taxes.
AVERAGE ANNUAL RETURNS
Since inception
1-year 3-year 4/3/92
------ ------ ------
Heartland
Wisconsin Tax Free Fund 3.8% 4.6% 6.3%
Lehman 20-Year
Municipal Bond Index 4.5 5.4 8.3
The Lehman 20-Year Municipal Bond Index is an unmanaged index of certain
investment grade municipal securities with maturities between 17 and 22 years.
GENERAL INFORMATION
Inception .................... 4/3/92 Weighted average duration.....11.4 YRS.
Net assets ..................$125 MIL January yield ................... 5.14%
Share price ...................$10.16 SEC yield annualized for the
Number of issues .................223 30 days commencing 1/1/97.
Weighted average maturity...19.2 YRS. Sales commission ................. NONE
TOP 5 HOLDINGS COUPON MATURITY % OF NET ASSETS
Wisconsin Center Revenue Bond......... 5.7% 12/15/2020 9.0%
Milwaukee, WI Redevelopment Auth. .... 5.5 09/01/2012 8.9
Guam Power Authority - Series A....... 6.3 10/01/2012 2.8
Brown County, WI HSG Authority ....... 6.5 06/01/2019 2.7
Green Bay, WI Housing Authority....... 6.5 09/01/2019 2.5
PORTFOLIO COMPOSITION BY REGION
[graphic - A pie chart displays categories of the Heartland Wisconsin Tax Free
Fund's portfolio by region as of 12/31/96: Wisconsin at 84.8%; Guam at 7.7%;
Puerto Rico at 6.6%; cash & equivalents at 0.9%]
All statistics are as of December 31, 1996.
2
<PAGE> 5
VALUE REPORT
HEARTLAND WISCONSIN TAX FREE FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
After a superb 1995, investors in tax-free bonds experienced more moderate
returns in 1996. Consistent with this trend, the Heartland Wisconsin Tax Free
Fund's total return for '96 was 3.8% versus 17.8% the year before.
Our '96 return trailed the 4.5% return of our benchmark, the Lehman 20-year
Municipal Bond Index. Keep in mind, however, that a fund's return reflects the
expenses of running its portfolio, while an index has absolutely no expenses.
In addition, because Wisconsin's income tax is among the nation's highest, our
tax-free bonds typically yield slightly less than those of other states.
During '96, the negative interest rate environment presented a particular
challenge. From 6.0% in January, the yield on the 30-year Treasury bond rose to
7.2% in June, closing the year at 6.6%. This rise in rates reflected both a
stronger than expected economy and fears that the Federal Reserve would raise
short-term rates.
Nonetheless, we kept the Fund's maturity rather long throughout the year --
between 15.6 and 21.8 years. We chose to do so because of our favorable outlook
for tax-free bonds and the substantially
[line chart illustrating performance of an assumed investment of $10,000 in the
Heartland Wisconsin Tax Free Fund and the Lehman 20 Year Municipal Bond Index
beginning on April 3, 1992 as follows:
Heartland Wisconsin
Tax Free Fund Lehman Index
12/31/92 $10,546 $10,901
12/31/93 11,686 12,468
12/31/94 10,927 11,553
12/31/95 12,868 13,971
12/31/96 13,359 14,591
Legend in graph states that Past Performance is not predictive of future
results.
A box below the graph states
Average Annual Total Returns as of 12/31/96 as follows:
one year 3.8%
three year 4.6%
since inception 6.3%]
higher yields available from longer-term issues. We continued to add attractive
Wisconsin issues to the portfolio, while cutting our Puerto Rican holdings from
20.2% to 6.6%.
Because we believe that '97 will be a much better year for investors in
tax-free bonds, we have positioned the Fund to start the year with an average
portfolio maturity of 19.2 years.
3
<PAGE> 6
THE VALUE OF DOUBLE TAX-FREE INCOME
As you can see below, the Heartland Wisconsin Tax Free Fund is designed
to produce income you can keep. And the higher your federal income tax bracket,
the more benefit you realize from double tax-free investing.
<TABLE>
<S> <C> <C> <C> <C>
Federal Tax Brackets 28.0% 31.0% 36.0% 39.6%
Effective Federal Tax Rates 29.4%(1) 32.6%(1) 37.8%(1) 40.8%(2)
Wisconsin Rate 6.9% 6.9% 6.9% 6.9%
Combined Rates 34.3% 37.2% 42.1% 44.9%
DOUBLE TAX-FREE YIELD* EQUIVALENT TAXABLE YIELDS
5.0% 7.6% 8.0% 8.6% 9.1%
</TABLE>
This chart is for illustrative purposes only and is not intended to predict
actual yields.
* Up to 20% of the Fund's assets may be invested with income subject to the
alternative minimum tax.
(1) Based on 28%, 31% and 36% federal rates, adjusted for the phase-out of
itemized deductions and personal exemptions.
(2) Based on 36% federal rate, 10% surcharge and phase-out of itemized
deductions.
To make an additional investment, use the reinvestment slip and
postage-paid envelope we have enclosed for your convenience.
4
<PAGE> 7
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS o December 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS - 99.1% COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WISCONSIN - 84.8%
$ 20,000 Amery, WI Housing Authority - Revenue Bonds ............... 7.375% 05/01/2005 $ 21,175
300,000 Appleton, WI Housing Authority - Industrial Park .......... 6.500 10/01/2016 299,625
1,000,000 Appleton, WI Housing Authority - Industrial Park .......... 6.750 10/01/2026 998,750
125,000 Barron, WI Housing Authority - Maplecroft Project ......... 0.000 10/01/2004 81,250
130,000 Barron, WI Housing Authority - Maplecroft Project ......... 0.000 10/01/2008 65,488
35,000 Barron, WI Housing Authority - Maplecroft Project ......... 0.000 10/01/2005 21,394
520,000 Barron, WI Housing Authority - Maplecroft Project ......... 5.375 10/01/2011 503,750
130,000 Barron, WI Housing Authority - Maplecroft Project ......... 0.000 10/01/2006 74,425
85,000 Barron, WI Housing Authority - Maplecroft Project ......... 0.000 10/01/2007 45,687
1,000,000 Bristol, WI Community Development Authority ............... 6.125 03/01/2012 1,012,500
3,220,000 Brown County, WI Housing Authority - R. P. Terrace ........ 6.500 06/01/2019 3,320,625
75,000 Dane County, WI Housing Authority - Forest Harbor Apts. ... 5.950 07/01/2013 75,000
25,000 Dane County, WI Housing Authority - Forest Harbor Apts. ... 6.000 07/01/2014 25,062
435,000 Deforest, WI Redev. Auth. - Lease Revenue Bonds .......... 6.250 02/01/2018 450,225
265,000 Deforest, WI Redev. Auth. - Lease Revenue Bonds .......... 6.200 02/01/2014 275,269
685,000 Eau Claire, WI Housing Auth. - London Hill ................ 6.250 05/01/2015 694,419
550,000 Elkhart Lake, WI Community Development Authority .......... 6.000 04/01/2015 552,062
205,000 Evansville, WI Housing Authority - Baker Block Project .... 5.750 12/01/2016 202,950
250,000 Franklin, WI Community Development Authority .............. 6.150 04/01/2012 253,437
890,000 Franklin, WI Community Development Authority .............. 6.100 04/01/2010 906,687
1,000,000 Franklin, WI Community Development Authority .............. 6.050 04/01/2008 1,026,250
250,000 Franklin, WI Community Development Authority .............. 5.850 04/01/2006 256,562
10,000 Franklin, WI Community Development Authority .............. 5.400 04/01/2003 10,000
3,000,000 Green Bay, WI Housing Authority - Pheasant Run Project .... 6.500 09/01/2019 3,067,500
200,000 Hartford, WI Community Development Authority .............. 5.800 12/01/2005 209,250
100,000 Hartford, WI Community Development Authority .............. 5.450 12/01/2002 103,625
210,000 Hartford, WI Community Development Authority .............. 6.000 12/01/2007 220,237
225,000 Hartford, WI Community Development Authority .............. 6.100 12/01/2008 235,969
10,000 Hudson, WI Christian Community Home ....................... 8.000 07/01/2005 10,000
75,000 Hudson, WI Christian Community Home ....................... 6.800 05/01/2009 75,844
65,000 Hudson, WI Christian Community Home ....................... 6.900 05/01/2010 65,894
250,000 Hudson, WI Christian Community Home ....................... 7.000 05/01/2023 252,500
55,000 Hudson, WI Christian Community Home ....................... 6.700 05/01/2008 55,619
390,000 Jackson, WI Community Development Authority ............... 7.000 12/01/2013 421,200
500,000 Jackson, WI Community Development Authority ............... 7.000 12/01/2017 541,875
515,000 Jackson, WI Community Development Authority ............... 7.000 12/01/2016 554,269
430,000 Jackson, WI Community Development Authority ............... 7.000 12/01/2014 466,012
345,000 Jackson, WI Community Development Authority ............... 7.000 12/01/2015 373,894
350,000 Jackson, WI Community Development Authority ............... 7.000 12/01/2012 379,312
285,000 Jackson, WI Community Development Authority ............... 6.900 12/01/2010 308,869
180,000 Jackson, WI Community Development Authority ............... 6.700 12/01/2008 195,075
105,000 Jackson, WI Community Development Authority ............... 6.600 12/01/2007 113,794
160,000 Jackson, WI Community Development Authority ............... 6.500 12/01/2006 173,600
260,000 Jackson, WI Community Development Authority ............... 6.800 12/01/2009 281,775
1,760,000 La Crosse, WI Housing Authority - Forest Park Project ..... 6.375 12/01/2018 1,777,600
1,100,000 La Crosse, WI Housing Authority - Ping Manor Project ...... 6.375 04/01/2012 1,122,000
880,000 La Crosse, WI Housing Authority - Ping Manor Project ...... 6.000 04/01/2005 886,600
350,000 La Crosse, WI Housing Authority - Washburn ................ 6.500 10/01/2026 352,625
100,000 Little Chute, WI Community Development Authority ......... 5.625 03/01/2019 100,750
305,000 Madison, WI CDA - Dempsey Manor Project ................... 6.400 10/01/2018 309,575
160,000 Madison, WI CDA - Dempsey Manor Project ................... 6.650 10/01/2025 160,800
1,435,000 Madison, WI CDA - Edgewood College ........................ 6.250 04/01/2014 1,454,731
95,000 Madison, WI CDA - Greentree Project - Series A ............ 7.300 09/01/2032 97,019
1,000,000 Madison, WI CDA - Meriter Retirement Project .............. 6.125 12/01/2019 1,043,750
45,000 Madison, WI CDA - Monticello Apartments Project ........... 7.125 04/01/2009 46,406
200,000 Madison, WI CDA - Second Mortgage - Revenue Bonds ......... 5.875 07/01/2016 203,750
100,000 Marinette, WI Housing Authority - Multifamily - Series A .. 6.750 02/01/2024 103,625
165,000 Markesan, WI CDA - Elderly Housing Revenue Bonds .......... 6.750 10/01/2009 166,856
190,000 Markesan, WI CDA - Elderly Housing Revenue Bonds .......... 6.900 10/01/2011 193,088
100,000 Menomonee Falls, WI CDA - Village Square Project .......... 5.200 09/01/2009 93,875
</TABLE>
5
<PAGE> 8
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS [cont'd] - December 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS - 99.1% [cont'd] COUPON MATURITY VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WISCONSIN - 84.8% [cont'd]
$ 950,000 Menomonee Falls, WI CDA - Village Square Project ......... 5.350% 09/01/2016 $ 871,625
215,000 Milwaukee, WI Housing Authority - Blatz Apartments ....... 7.500 12/01/2028 222,794
50,000 Milwaukee, WI New Public Housing Authority ............... 5.000 09/01/2010 48,813
100,000 Milwaukee, WI Redevelopment Auth. - Campus Town .......... 5.550 11/01/2012 100,250
3,000,000 Milwaukee, WI Redevelopment Auth. - Campus Town .......... 5.700 11/01/2018 3,033,750
55,000 Milwaukee, WI Redevelopment Auth. - Dynapro, Inc. ........ 5.300 12/01/2007 55,344
65,000 Milwaukee, WI Redevelopment Auth. - Dynapro, Inc. ........ 5.350 12/01/2008 65,163
55,000 Milwaukee, WI Redevelopment Auth. - Dynapro, Inc. ........ 5.400 12/01/2010 54,313
225,000 Milwaukee, WI Redevelopment Auth. - Dynapro, Inc ......... 5.500 12/01/2013 220,219
1,955,000 Milwaukee, WI Redevelopment Authority - MSOE ............. 6.000 10/01/2017 1,976,994
1,385,000 Milwaukee, WI Redevelopment Authority - MSOE ............. 6.000 10/01/2017 1,400,581
500,000 Milwaukee, WI Redevelopment Authority - Schlitz Park II .. 5.000 01/01/2015 505,625
10,000 Milwaukee, WI Redevelopment Auth. - School Improve. ...... 0.000 03/01/2004 6,538
1,755,000 Milwaukee, WI Re. Auth. - Wisc. Ave./M.L. King, Jr. Dr. .. 5.600 09/01/2009 1,781,325
11,000,000 Milwaukee, WI Re. Auth. - Wisc. Ave./M.L. King, Jr. Dr. ... 5.500 09/01/2012 10,972,500
1,705,000 Milwaukee, WI Re. Auth. - Wisc. Ave./M.L. King, Jr. Dr. .. 5.600 03/01/2009 1,730,575
1,300,000 Milwaukee, WI Re. Auth. - Wisc. Ave./M.L. King, Jr. Dr. .. 5.500 03/01/2008 1,319,500
650,000 New Berlin, WI Housing Authority - Apple Glen ............ 6.700 11/01/2020 684,125
1,210,000 New Berlin, WI Housing Authority - Apple Glen ............ 6.700 11/01/2017 1,273,525
65,000 New Berlin, WI Housing Authority - Apple Glen ............ 0.000 11/01/2007 34,775
70,000 New Berlin, WI Housing Authority - Apple Glen ............ 0.000 05/01/2010 31,763
65,000 New Berlin, WI Housing Authority - Apple Glen ............ 0.000 11/01/2009 30,550
70,000 New Berlin, WI Housing Authority - Apple Glen ............ 0.000 05/01/2009 33,950
70,000 New Berlin, WI Housing Authority - Apple Glen ............ 0.000 05/01/2005 43,750
70,000 New Berlin, WI Housing Authority - Apple Glen ............ 0.000 05/01/2007 38,500
65,000 New Berlin, WI Housing Authority - Apple Glen ............ 0.000 11/01/2004 42,169
65,000 New Berlin, WI Housing Authority - Apple Glen ............ 0.000 11/01/2006 36,969
65,000 New Berlin, WI Housing Authority - Apple Glen ............ 0.000 11/01/2003 44,850
65,000 New Berlin, WI Housing Authority - Apple Glen ............ 0.000 11/01/2005 39,488
70,000 New Berlin, WI Housing Authority - Apple Glen ............ 0.000 05/01/2006 41,038
165,000 New Berlin, WI Housing Authority - Pinewood Creek ........ 6.800 11/01/2012 166,856
190,000 New Berlin, WI Housing Authority - Pinewood Creek ........ 6.900 11/01/2014 198,075
135,000 New Berlin, WI Housing Authority - Pinewood Creek ........ 6.900 05/01/2014 136,519
165,000 New Berlin, WI Housing Authority - Pinewood Creek ........ 6.850 11/01/2013 175,313
160,000 New Berlin, WI Housing Authority - Pinewood Creek ........ 6.850 05/01/2013 161,800
105,000 New Berlin, WI Housing Authority - Pinewood Creek ........ 6.500 05/01/2009 105,131
155,000 New Berlin, WI Housing Authority - Pinewood Creek ........ 6.700 11/01/2011 156,356
150,000 New Berlin, WI Housing Authority - Pinewood Creek ........ 6.700 05/01/2011 151,313
125,000 New Berlin, WI Housing Authority - Pinewood Creek ........ 6.600 05/01/2010 131,563
125,000 New Berlin, WI Housing Authority - Pinewood Creek ........ 6.400 11/01/2008 125,156
125,000 New Berlin, WI Housing Authority - Pinewood Creek ........ 6.400 05/01/2008 125,156
1,015,000 New Berlin, WI Housing Authority - Pinewood Creek ........ 7.125 05/01/2024 1,083,513
80,000 Oak Creek, WI Housing Authority - Country Oaks II ........ 6.000 08/01/2010 80,200
2,980,000 Oak Creek, WI Housing Authority - Country Oaks II ........ 6.300 08/01/2028 3,058,225
1,440,000 Oak Creek, WI Housing Authority - Country Oaks II ........ 6.200 08/01/2017 1,443,600
10,000 Oak Creek, WI Housing Authority - Multifamily ............ 7.750 03/01/2031 10,400
125,000 Oak Creek, WI Housing Authority - Wood Creek ............. 0.000 01/20/2013 47,500
2,130,000 Oak Creek, WI Housing Authority - Wood Creek ............. 5.625 07/20/2029 2,047,463
1,000,000 Oak Creek, WI Housing Authority - Wood Creek ............. 5.500 07/20/2019 965,000
60,000 Oak Creek, WI Housing Authority - Wood Creek ............. 0.000 01/20/2014 21,300
125,000 Oak Creek, WI Housing Authority - Wood Creek ............. 0.000 07/20/2013 45,781
65,000 Oak Creek, WI Housing Authority - Wood Creek ............. 0.000 01/20/2012 26,244
125,000 Oak Creek, WI Housing Authority - Wood Creek ............. 0.000 07/20/2011 52,344
125,000 Oak Creek, WI Housing Authority - Wood Creek ............. 0.000 01/20/2011 54,063
35,000 Oak Creek, WI Housing Authority - Wood Creek ............. 0.000 01/20/2010 16,144
50,000 Oak Creek, WI Housing Authority - Wood Creek ............. 0.000 07/20/2007 27,187
100,000 Oak Creek, WI Housing Authority - Wood Creek ............. 27.750 07/20/1998 133,500
335,000 Omro, WI CDA - Revenue Bonds ............................. 5.875 12/01/2011 348,819
50,000 Omro, WI CDA - Revenue Bonds ............................. 5.750 12/01/2006 52,937
200,000 Outagamie, WI Housing Authority - First Mortgage ......... 5.000 11/15/2003 195,750
</TABLE>
6
<PAGE> 9
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS [cont'd] - December 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS - 99.1% [cont'd] COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WISCONSIN - 84.8% [cont'd]
$ 10,000 Racine, WI Elderly Housing Authority - Lincoln Lutheran .. 7.150% 10/01/2005 $ 10,000
5,000 Racine, WI Elderly Housing Authority - Lincoln Lutheran .. 7.100 10/01/2004 5,000
50,000 Reedsville, WI - New Public Housing Authority ............ 5.125 04/01/2011 49,125
170,000 Schofield, WI CDA - Lease Revenue ........................ 6.000 10/01/2012 172,550
500,000 Schofield, WI CDA - Lease Revenue ........................ 6.200 10/01/2017 507,500
315,000 Sheboygan, WI Housing Authority - Multifamily Housing .... 6.900 02/01/2024 324,056
125,000 Sheboygan, WI Housing Authority - Rocky Knoll Project .... 5.300 12/01/2016 117,031
175,000 Sheboygan, WI Housing Authority - Rocky Knoll Project .... 5.250 12/01/2013 163,188
35,000 Slinger, WI Redevelopment Auth. - Lease Revenue .......... 5.800 09/01/2007 35,612
95,000 Slinger, WI Redevelopment Auth. - Lease Revenue .......... 5.850 09/01/2008 96,425
540,000 Slinger, WI Redevelopment Auth. - Lease Revenue .......... 6.250 09/01/2017 552,150
560,000 Stevens Point, WI CDA - Mrtge. Refunding - Edgewater ..... 6.625 09/01/2009 586,600
100,000 Stevens Point, WI CDA - Mrtge. Refunding - Edgewater ..... 6.500 09/01/2006 105,625
435,000 Sturtevant, WI CDA - Redevelopment Lease ................. 5.700 12/01/2009 438,262
375,000 Sturtevant, WI CDA - Redevelopment Lease ................. 5.800 12/01/2010 378,750
200,000 Sturtevant, WI CDA - Redevelopment Lease ................. 5.900 12/01/2011 202,750
1,000,000 Sturtevant, WI CDA - Redevelopment Lease ................. 6.000 12/01/2015 1,017,500
200,000 Sturtevant, WI CDA - Redevelopment Lease ................. 6.500 12/01/2015 210,500
1,190,000 St. Croix Falls, WI CDA Lease Revenue .................... 6.400 12/01/2014 1,218,262
115,000 St. Croix Falls, WI CDA Lease Revenue .................... 6.000 12/01/2007 118,162
105,000 St. Croix Falls, WI CDA Lease Revenue .................... 5.900 12/01/2006 107,625
310,000 Superior, WI Housing Authority - St. Francis Project .... 6.000 01/20/2022 315,037
305,000 Superior, WI RA - Superior Memorial Hospital Mortgage ... 5.700 05/01/2009 311,862
195,000 Sussex, WI CDA - Revenue Bond ........................... 5.700 04/01/2007 196,706
1,900,000 Sussex, WI CDA - Revenue Bond ........................... 6.100 04/01/2015 1,928,500
270,000 Two Rivers, WI CDA - Arch Forest Project ................. 6.350 12/15/2012 280,800
500,000 Waukesha, WI HA - Multifamily Brookfield Woods ........... 6.750 12/01/2034 506,250
5,000 Waukesha, WI HA - Multifamily Summit Woods ............... 7.375 12/01/2024 5,000
405,000 Waukesha, WI HA - Multifamily - Court Apartments ......... 5.800 04/01/2025 400,444
10,000 Waukesha, WI HA - Multifamily - Court Apartments ......... 6.300 12/01/2013 10,000
1,000,000 Waukesha, WI HA - Multifamily - Court Apartments ......... 6.000 04/01/2036 918,750
1,000,000 Waukesha, WI HA - Westgrove Woods - A .................... 6.000 12/01/2031 998,750
715,000 Waukesha, WI HA - Westgrove Woods - C .................... 6.750 02/01/2027 714,106
5,000 Waukesha, WI RA - Barstow Associates ..................... 4.875 08/01/2010 5,000
95,000 Waupaca, WI CDA - Series A ............................... 6.100 10/01/2008 97,731
100,000 Waupaca, WI CDA - Series A ............................... 6.200 10/01/2010 102,625
110,000 Waupaca, WI CDA - Series A ............................... 6.200 10/01/2011 112,750
120,000 Waupaca, WI CDA - Series A ............................... 6.200 10/01/2012 122,400
100,000 Waupaca, WI CDA - Series A ............................... 6.100 10/01/2009 102,500
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 05/01/2010 47,644
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 05/01/2009 50,925
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 11/01/2009 47,000
1,060,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 6.700 11/01/2019 1,081,200
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 11/01/2010 44,000
1,200,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 6.700 11/01/2015 1,228,500
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 05/01/2008 54,206
670,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 6.700 11/01/2022 683,400
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 11/01/2008 50,125
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 11/01/2006 56,875
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 11/01/2007 53,500
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 05/01/2004 69,956
75,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 05/01/2003 53,156
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 11/01/2003 69,000
70,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 05/01/2005 43,662
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 11/01/2004 64,875
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 05/01/2007 57,750
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 11/01/2005 60,750
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project ............. 0.000 05/01/2006 61,556
2,720,000 West Allis, WI CDA - Poblocki Investments Project ........ 6.100 05/01/2007 2,805,000
150,000 Whitewater, WI Multifamily Housing - Revenue Bonds ....... 5.375 11/15/2005 150,750
</TABLE>
7
<PAGE> 10
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS [cont'd] - December 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS - 99.1% [cont'd] COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WISCONSIN - 84.8% [cont'd]
$ 100,000 Winnebago County, WI HA - 1st Mortgage Rev. Bonds ...... 5.625% 05/01/2005 $ 100,125
115,000 Winnebago County, WI HA - 1st Mortgage Rev. Bonds ...... 5.625 05/01/2007 109,394
120,000 Winnebago County, WI HA - 1st Mortgage Rev. Bonds ...... 5.625 05/01/2008 112,800
125,000 Winnebago County, WI HA - 1st Mortgage Rev. Bonds ...... 5.625 05/01/2009 115,937
135,000 Winnebago County, WI HA - 1st Mortgage Rev. Bonds ...... 5.625 05/01/2010 130,275
105,000 Winnebago County, WI HA - 1st Mortgage Rev. Bonds ...... 5.625 05/01/2006 100,931
10,000 Winnebago County, WI Housing Authority - Series A ...... 6.200 03/01/2001 10,362
15,000 Winnebago County, WI Housing Authority - Series A ...... 6.300 03/01/2002 15,619
10,000 Winnebago County, WI Housing Authority - Series A ...... 6.000 03/01/1999 10,213
10,000 Winnebago County, WI Housing Authority - Series A ...... 6.100 03/01/2000 10,288
380,000 Winnebago County, WI Housing Authority - Series A ...... 7.125 03/01/2022 392,350
195,000 Winnebago County, WI Housing Authority - Series A ...... 6.875 03/01/2012 200,606
2,000,000 Wisc. Center Revenue Bond - Public Improvements ........ 0.000 12/15/2020 495,000
2,000,000 Wisc. Center Revenue Bond - Public Improvements ........ 0.000 12/15/2019 525,000
2,750,000 Wisc. Center Revenue Bond - Public Improvements ........ 0.000 12/15/2012 1,127,500
1,325,000 Wisc. Center Revenue Bond - Public Improvements ........ 0.000 12/15/2015 443,875
3,395,000 Wisc. Center Revenue Bond - Public Improvements ........ 0.000 12/15/2013 1,285,856
155,000 Wisc. Center Revenue Bond - Public Improvements ........ 5.400 12/15/2013 150,738
2,000,000 Wisc. Center Revenue Bond - Public Improvements ........ 5.550 12/15/2015 1,965,000
850,000 Wisc. Center Revenue Bond - Public Improvements ........ 5.550 12/15/2016 835,125
11,150,000 Wisc. Center Revenue Bond - Public Improvements ........ 5.700 12/15/2020 11,080,312
15,000 WHEDA - Home Ownership ................................. 7.375 09/01/2017 15,431
120,000 WHEDA - Home Ownership ................................. 0.000 12/01/2007 41,700
365,000 WHEDA - Home Ownership ................................. 6.100 06/01/2021 385,531
60,000 Wittenberg, WI HA Multifamily - Forest Park ............ 7.200 06/20/2030 61,125
------------
105,577,131
------------
PUERTO RICO - 6.6%
420,000 Puerto Rico Commonwealth - Public Improvement .......... 5.500 07/01/2013 410,550
400,000 Puerto Rico Commonwealth - Public Improvement .......... 5.850 07/01/2011 407,000
635,000 Puerto Rico Commonwealth Hwy./Transportation ........... 6.375 07/01/2008 677,069
1,205,000 Puerto Rico Commonwealth Hwy./Transportation ........... 5.500 07/01/2017 1,168,850
2,915,000 Puerto Rico Commonwealth Hwy./Transportation ........... 5.750 07/01/2018 2,911,356
990,000 Puerto Rico Electric Power Authority - Series O ........ 0.000 07/01/2017 303,188
280,000 Puerto Rico Electric Power Authority - Series P ........ 7.000 07/01/2021 314,650
135,000 Puerto Rico Housing Finance Corporation - Multifamily .. 7.500 10/01/2015 141,919
250,000 Puerto Rico Industrial, Medical & Environmental Auth. .. 6.000 06/01/2000 259,375
1,625,000 Puerto Rico Municipal Finance Agency - Series A ........ 5.875 07/01/2007 1,671,719
------------
8,265,676
------------
GOVERNMENT OF GUAM - 7.7%
3,400,000 Guam Power Authority - Series A ........................ 6.300 10/01/2012 3,472,250
250,000 Guam Power Authority - Series A ........................ 7.100 11/15/2009 263,125
250,000 Guam Power Authority - Series A ........................ 5.250 10/01/2013 229,688
1,000,000 Guam Power Authority - Series A ........................ 6.400 10/01/2005 1,048,750
1,000,000 Guam Power Authority - Series A ........................ 5.250 10/01/2023 891,250
1,000,000 Guam Government G.O. - Series A ........................ 5.375 11/15/2013 931,250
3,000,000 Guam Government G.O. - Series A ........................ 5.400 11/15/2018 2,771,250
------------
9,607,563
------------
NEW PUBLIC HOUSING AUTHORITIES - 0.0%
35,000 Burleigh County, ND - New Public Housing Authority ..... 4.875 01/01/2011 33,555
------------
33,555
------------
TOTAL INVESTMENTS (Cost $121,953,207) ... 99.1% $123,483,925
Cash and receivables, less liabilities .. .9% 1,060,838
------ ------------
TOTAL NET ASSETS ........................ 100.0% $124,544,763
====== ============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of
this Schedule.
8
<PAGE> 11
HEARTLAND WISCONSIN TAX FREE FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
- ---------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments in securities, at value (Cost $121,953,207) .......................... $ 123,483,925
Accrued interest ................................................................. 1,610,771
Deferred organization expense .................................................... 1,517
-------------
Total Assets .................................................................... 125,096,213
-------------
LIABILITIES:
Payable for fund shares redeemed ................................................. 28,703
Payable to custodian ............................................................. 428,568
Payable to Advisor for management fee ............................................ 68,914
Payable to Advisor for deferred organization expense ............................. 1,517
Accrued expenses ................................................................. 23,748
-------------
Total Liabilities ............................................................... 551,450
-------------
NET ASSETS APPLICABLE TO OUTSTANDING SHARES
($.001 par value, 100,000,000 shares authorized, 12,257,701 shares outstanding) .. $ 124,544,763
=============
NET ASSET VALUE PER SHARE .......................................................... $ 10.16
=============
</TABLE>
STATEMENT OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
- ---------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest.......................................................................... $ 7,163,550
-------------
Total investment income ......................................................... 7,163,550
-------------
EXPENSES:
Management fees ................................................................. 789,698
Transfer agent fees.............................................................. 91,476
Custodian fees................................................................... 15,783
Postage.......................................................................... 15,117
Audit fees....................................................................... 12,751
Legal fees ...................................................................... 8,981
Printing and communications ..................................................... 5,790
Directors' fees ................................................................. 4,326
Registration fees ............................................................... 3,400
Amortization of organization expense ............................................ 3,033
Other operating expenses ........................................................ 29,905
-------------
Total expenses ................................................................. 980,260
Less: Fees paid indirectly ..................................................... (15,783)
-------------
Net expenses ................................................................... 964,477
-------------
NET INVESTMENT INCOME ........................................................... 6,199,073
-------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on:
Securities...................................................................... 252,287
Futures contracts .............................................................. 118,461
Net increase in unrealized depreciation on investments .......................... (1,867,241)
-------------
TOTAL REALIZED AND UNREALIZED LOSSES ON INVESTMENTS ............................. (1,496,493)
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................ $ 4,702,580
=============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
9
<PAGE> 12
HEARTLAND WISCONSIN TAX FREE FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DEC. 31,
1996 1995
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income ............................................ $ 6,199,073 $ 5,840,227
Net realized gains (losses) on investments ....................... 370,748 (526,526)
Net increase in unrealized appreciation (depreciation) on
investments for the year ......................................... (1,867,241) 12,775,102
-------------- --------------
Net increase in net assets resulting from operations ........... 4,702,580 18,088,803
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................ (6,199,073) (5,840,227)
-------------- --------------
Total distributions to shareholders ............................ (6,199,073) (5,840,227)
-------------- --------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (2,158,376 and 1,676,647 shares,
respectively) .................................................... 21,604,140 16,460,562
Reinvested dividends from net investment income (434,964 and
407,053 shares, respectively) .................................... 4,374,986 4,034,053
Cost of shares redeemed (1,840,299 and 1,621,142 shares,
respectively) .................................................... (18,450,990) (15,978,889)
-------------- --------------
Net increase in net assets derived from Fund share activities .. 7,528,136 4,515,726
-------------- --------------
TOTAL INCREASE IN NET ASSETS ........................................ 6,031,643 16,764,302
NET ASSETS AT THE BEGINNING OF THE YEAR ............................. 118,513,120 101,748,818
-------------- --------------
NET ASSETS AT THE END OF THE YEAR ................................... $124,544,763 $118,513,120
============== ==============
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
APRIL 3, 1992(1)
FOR THE YEAR ENDED DECEMBER 31, THROUGH
1996 1995 1994 1993 Dec. 31, 1992
---- ----- ---- ---- ---------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of period ........................ $10.30 $ 9.21 $10.38 $9.85 $9.70
Income from investment operations:
Net investment income ...................................... .51 .51 .51 .49 .37
Net realized and unrealized gains (losses) on investments .. (.14) 1.09 (1.17) .55 .15
------- ------- ------ ----- ------
Total income from investment operations .................. .37 1.60 (.66) 1.04 .52
Less distributions from:
Net investment income ...................................... (.51) (.51) (.51) (.49) (.37)
Net realized gains on investments -- -- -- (.02) --
------- ------- ------ ----- ------
Total distributions ...................................... (.51) (.51) (.51) (.51) (.37)
Net asset value, end of period .............................. $10.16 $ 10.30 $9.21 $10.38 $9.85
======= ======= ====== ====== ======
TOTAL RETURN(2) ............................................. 3.8% 17.8% (6.5)% 10.8% 7.3%(3)
RATIO AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) ................... $124,545 $118,513 $101,749 $99,350 $36,304
Ratio of net expenses to average net assets ................ 0.80%(4) 0.84% 0.85 % 0.84% 0.82%(3)
Ratio of net investment income to average net assets ....... 5.12% 5.23% 5.28 % 4.81% 4.87%(3)
Portfolio turnover rate .................................... 14% 11% 22 % 6% 7%
</TABLE>
(1) Commencement of operations.
(2) The front-end sales charge in effect for the Fund prior to June 1, 1994 is
not reflected in Total Return as set forth in the table.
(3) Annualized.
(4) The ratio does not include "fees paid indirectly," described in Note 2(f)
in Notes to Financial Statements. If the Fund did not have fees paid
indirectly, the expense ratio would have been 0.81% for 1996. Disclosure of
fees paid indirectly was not required prior to December 31, 1995.
The accompanying Notes to Financial Statements are an integral part of
these Statements.
10
<PAGE> 13
HEARTLAND WISCONSIN TAX FREE FUND
NOTES TO FINANCIAL STATEMENTS - December 31, 1996
- -------------------------------------------------------------------------------
(1) ORGANIZATION
The Heartland Group, Inc. (the "Corporation") is registered as a
diversified open-end management company under the Investment Company Act
of 1940. The Wisconsin Tax Free Fund (the "Fund") is one of the seven
series of funds issued by the Corporation as of December 31, 1996. Two
additional series commenced operations on January 2, 1997.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of the financial statements:
(a) Debt securities are stated at fair value as furnished by
independent pricing services based primarily upon information
concerning market transactions and dealer quotations for similar
securities or by dealers who make markets in such securities. Debt
securities having maturities of 60 days or less may be valued at
acquisition cost, plus or minus any amortized discount or premium.
Securities and other assets for which quotations are not readily
available are valued at their fair value using methods determined by
the Board of Directors.
(b) The Fund's policy is to comply with the requirements of the
Internal Revenue Code which are applicable to regulated investment
companies and to distribute substantially all of its taxable income to
their shareholders. The Fund accordingly paid no Federal income taxes,
and no Federal income tax provision is required.
At December 31, 1996, the Fund has a Federal income tax capital loss
carry forward of $8,153 expiring in 2002 and $526,525 expiring in 2003.
During the year ended December 31, 1996, $370,748 of capital loss carry
forward was utilized by the Fund. The Fund does not intend to make a
distribution of any future realized capital gains until its Federal
income tax capital loss carry forward is completely utilized.
(c) Net investment income is distributed to each shareholder as a
dividend. Dividends are declared daily and distributed monthly and are
recorded by the Fund on the ex-dividend date. Net realized gains on
investments, if any, are distributed annually.
(d) The Fund records security and shareholder transactions no later
than the first business day after the trade date. Net realized gains
and losses on investments are computed on the identified cost basis.
Interest income is recognized on an accrual basis. The Fund amortizes
premium and accretes original issue discount on investments utilizing
the effective interest method.
(e) The Fund may enter into futures contracts for hedging purposes,
such as to protect against anticipated declines in the market value of
its portfolio securities or to manage exposure to changing interest
rates. Upon entering into futures contracts, the Fund pledges to the
broker securities equal to the minimum "initial margin" requirements
of the exchange. Additionally, the Fund receives from or pays to the
broker an amount of cash equal to the daily fluctuation in value of
the contract. Such receipts or payments are known as "variation
margin," and are recorded by the Fund as unrealized gains or losses.
When the futures contract is closed, the Fund records a realized gain
or loss equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed.
The use of futures contracts involves, to varying degrees, elements of
market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The predominant risk is that the movement of
the futures contracts price may result in a loss which could render a
portfolio's hedging strategy unsuccessful. The Fund had no open futures
contracts at December 31, 1996.
(f) The Fund has entered into a fee arrangement with its custodian
bank which provides for a reduction in custody fees based upon net
amounts of uninvested cash balances. This reduction of expenses is
shown on the Statement of Operations as "Fees Paid Indirectly."
(g) The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from the estimates.
11
<PAGE> 14
(3) INVESTMENT MANAGEMENT FEES AND TRANSACTIONS WITH RELATED PARTIES
The Fund has a management agreement with Heartland Advisors, Inc. (the
"Advisor") to serve as investment advisor and manager. Under the terms of
the agreement, the Fund pays the Advisor a monthly management fee at the
annual rate of .65% of the daily net asset value of the Fund.
Officers and certain directors of the Fund are also officers and/or
directors of Heartland Advisors, Inc.; however, they receive no
compensation from the Funds.
As permitted under Rule 10f-3 of the Investment Company Act of 1940, the
Board of Directors of the Funds has adopted a plan which will allow the
Fund, under certain conditions described in the Rule, to acquire
newly-issued securities from syndicates in which the Distributor is a
member.
(4) DEFERRED ORGANIZATION EXPENSES
Organization expenses have been deferred and are being amortized on a
straight-line basis over sixty months. Payments for these expenses were
advanced by the Advisor, who will be reimbursed by the Fund over the same
period. The proceeds of any redemption of the initial shares by the
original shareholders will be reduced by a pro-rata portion of any then
unamortized expenses. Unamortized deferred organization expenses and the
related payable to the Advisor at December 31, 1996, were $1,517.
(5) INVESTMENT TRANSACTIONS
During the year ended December 31, 1996, purchases and sales of securities,
other than short-term securities, were $24,179,084 and $16,317,224,
respectively.
At December 31, 1996, the gross unrealized appreciation and depreciation on
investments were $2,509,425 and $978,707, respectively, netting to
$1,530,718.
Cost of investments is the same for financial reporting purposes and
federal income tax purposes.
(6) SOURCES OF NET ASSETS
At December 31, 1996, the Funds sources of net assets were as follows:
Paid-in capital ................................... $123,548,723
Net unrealized appreciation on investments ........ 1,530,718
Accumulated net realized losses on investments .... (534,678)
------------
$124,544,763
============
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Shareholders and Board of Directors of Heartland Wisconsin Tax Free
Fund:
We have audited the accompanying schedule of investments, including the
statement of assets and liabilities, of Heartland Wisconsin Tax Free Fund (the
"Fund," one of the series comprising Heartland Group, Inc., a Maryland
corporation) as of December 31, 1996 and the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the two years in the period then ended, and the financial highlights for the
periods presented. 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 generally accepted auditing
standards. 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 securities owned as of
December 31, 1996 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 the
Fund as of December 31, 1996, the results of operations for the periods
presented, the changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods presented in
conformity with generally accepted accounting principles.
Milwaukee, Wisconsin ARTHUR ANDERSEN LLP
February 7, 1997
12
<PAGE> 15
VALUE REPORT
Dear Investor
We are here to help you meet
your investment needs.
If you have a question, please
call Heartland Shareholder
Services. We're confident you'll
find our representatives to be
knowledgeable and responsive.
1-800-432-7856
[Photo of Heartland
Shareholder
Services
Representative]
[LOGO] HEARTLAND FUNDS
AMERICA'S VALUE INVESTOR
<PAGE> 16
THE HEARTLAND FAMILY OF FUNDS
SMALL CAP CONTRARIAN FUND
VALUE FUND
(closed to new investors 7/1/95)
MID CAP VALUE FUND NEW
LARGE CAP VALUE FUND NEW
VALUE PLUS FUND
U.S. GOVERNMENT SECURITIES FUND
WISCONSIN TAX FREE FUND
SHORT DURATION HIGH-YIELD
MUNICIPAL FUND NEW
HIGH-YIELD MUNICIPAL
BOND FUND NEW
PORTICO MONEY MARKET FUND
[Logo] Heartland Funds
----------------------
AMERICA'S VALUE INVESTOR
1-800-432-7856
These are not recommendations to buy or sell the securities discussed, but
rather illustrations of our value investment strategy. Statements regarding
particular securities represent the portfolio manager's views when made and are
subject to change at any time based on market and other considerations.
The performance data quoted represents past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
This material may only be used when preceded or accompanied by the Fund's
prospectus. Heartland Advisors, Inc., distributor. Member SIPC/NASD.
<PAGE> 17
[Logo] Heartland Funds
----------------------
AMERICA'S VALUE INVESTOR
VALUE REPORT
December 31, 1996
NOTES ON VALUE INVESTING
FOR INVESTORS IN
HEARTLAND FUNDS
ANNUAL REPORT
TO SHAREHOLDERS
<PAGE> 18
VALUE REPORT
Dear Investor
[Photo of Bill Nasgovitz]
We just finished the sixth year in a row -- an all-time record -- that the S&P
500 Index has finished higher. This juggernaut, plus the extent and intensity
of the market's rise, lead us to embrace Federal Reserve Chairman Greenspan's
warning of "irrational exuberance."
They also impel me to repeat our mantra of tempered expectations. This has been
a growth investor's stock market...momentum driven and rife with speculation.
When the tide turns -- and in our view it will -- we believe value investing
will make more sense than ever.
Not that it didn't make sense in '96. As you'll see in this Report, we did very
well indeed.
Value, in other words, never goes out of style. Which is one reason we weren't
reluctant to introduce two new equity funds last quarter -- Heartland Mid Cap
Value Fund and Large Cap Value Fund. We're pleased to present their performance
summary and financial information, along with that of our other value-based
Funds.
With "rational prudence," we look forward to 1997, and we thank you for your
continued confidence in Heartland.
Sincerely,
William J. Nasgovitz
President
February 1997
<PAGE> 19
VALUE REPORT
WHY HEARTLAND FUNDS IS AMERICA'S VALUE INVESTOR
- - We are fully committed to the concept of value-based investing in the belief
that, over time, it will produce higher returns with lower risk for our
investors.
- - While many fund families offer a value-based product, every fund in the
Heartland Family is managed according to strict value criteria. You can find
these criteria explained in the Funds' prospectuses.
- - Our value discipline focuses our thinking, guides our research and frames our
decision-making. We believe it has proven its merit under all market
conditions.
- - Research is essential to us. Along with research on individual securities, we
are heavily engaged in research on value investing itself. We are determined
to explore and define the frontiers of this body of knowledge, and to share
our findings through ongoing publication.
- - Given our experience and the nature of securities markets, we believe that
value-based investments should serve as the foundation for every investor's
portfolio.
1
<PAGE> 20
VALUE REPORT
HEARTLAND SMALL CAP CONTRARIAN FUND
A RUN FOR YOUR MONEY
Though it sounds redundant and a bit pretentious, a company's "net net working
capital" -- current assets minus all debt -- is an important value concept for
stock selection.
It was a major reason we purchased stock in HYDE ATHLETIC INDUSTRIES, INC.
Although best known for its Saucony running shoes, Hyde is building a niche in
performance-enhancing products for serious athletes, including triathletes.
This was the strategy behind its recent acquisitions of Quintana Roo mountain
bikes and Hind Sportswear.
While Hyde has been steadily gaining market share and has doubled its sales in
the past five years, its profitability hasn't kept pace. When we started buying
the stock at $5 in May '96, it was at 20X estimated '96 earnings. Not exactly a
bargain. But this very conservatively managed company had a tangible net worth
of $7.74 per share, only 10% debt, and -- most important -- was trading at only
80% of its net net working capital of $6.57. At our $5 stock price, we were
getting, in essence, all fixed assets -- plant, equipment, land, patents,
trademarks -- for free.
Based on our projections for improving margins, continued strength in the
Saucony line, and successful integration of its acquisitions, we believe Hyde's
earnings could take off in '97, thus attracting buyers for its stock.
On 12-31-96, the Fund owned 525,000 shares of Hyde Athletic Industries, Inc.
Class B common stock. At its price of $5.13, this stock represented 1.0% of
the Fund's net assets.
2
<PAGE> 21
VALUE REPORT
HEARTLAND SMALL CAP CONTRARIAN FUND
OBJECTIVE
The Heartland Small Cap Contrarian Fund pursues maximum long-term appreciation
through an aggressive investment strategy with small company stocks. It seeks
to take advantage of both undervalued and overvalued stocks, as well as both
rising and declining markets.
AVERAGE ANNUAL RETURNS
Since inception
1-year 4/27/95
---------- --------------
Heartland Small Cap Contrarian Fund 18.9% 24.0%
Russell 2000 16.5 22.7
The Russell 2000 Index is an unmanaged index of stocks considered to be
representative of the small cap market in general.
GENERAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Net assets ........................... $ 263 mil Median market cap ......................... $52 mil
Share price .............................. $13.40 P/E ratio ('97 est.) ......................... 13.8X
Number of holdings
Long positions .......................... 118 Growth of $10,000 since
Short positions ........................... 12 inception on 4/27/95 ...................... $14,362*
TOP 10 HOLDINGS
ICN Pharmaceuticals, Inc. ................... 3.4% Orthologic Corporation ........................ 2.1%
London Pacific Group Ltd. ................... 2.9 Cabot Oil & Gas Corporation ................... 2.0
Equity Inns Inc. ............................ 2.5 Shiloh Industries, Inc. ....................... 1.9
Charter Power Systems, Inc. ................. 2.3 Tipperary Corporation ......................... 1.8
Campbell Resources, Inc. .................... 2.1 Interdigital Communications Corp. ............. 1.7
</TABLE>
PORTFOLIO COMPOSITON
[graphic - A pie chart displays categories of the Heartland Small Cap
Contrarian Fund's portfolio as of 12/31/96: small cap stocks at 88.2%; short
positions at 6.9%; cash & equivalents at 4.9%]
All statistics are as of December 31, 1996.
* Assumes reinvestment of all dividends and capital gains distributions
3
<PAGE> 22
VALUE REPORT
HEARTLAND SMALL CAP CONTRARIAN FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
Heartland Small Cap Contrarian Fund finished 1996 with a gain of 18.9%. This
return compares quite favorably to the 16.5% return of the Russell 2000 Index,
the Fund's benchmark.
The Fund, however, achieved its performance erratically...a gain of 18.3%
through June versus a second half return of 0.5%. The sharp decline in small
cap stocks that started in the late second quarter was worst among the smallest
of the small caps. With its median cap of only $50 million, the Fund felt the
heat.
Another negative was the Fund's large holdings in healthcare. Throughout '96,
this was the worst performing sector among small caps, and took a particular
beating in the second half. An example is our largest holding, ICN
Pharmaceuticals, Inc., an international manufacturer and distributor of
pharmaceuticals. Following a high of $28 in May, it declined steeply,
bottoming at $17.62 in October. Yet ICN's fundamentals remained very strong,
and we estimate the company should earn $2.75 per share in '97.
ICN was not alone as a victim of uncertainty in this new age of managed care.
But we suspect the market has overreacted, and that our healthcare stocks will
rebound in '97. In fact, we believe investors will "rediscover" small caps in
general, as small company profits continue to rise and large caps start to fall
short of the growth expectations inherent in their stock prices.
[line chart illustrating performance of an assumed investment of $10,000 in
the Heartland Small Cap Contrarian Fund and the Russell 2000 Index beginning
on April 27, 1995 as follows:
Heartland
Small Cap
Contrarian Russell
Fund 2000
9/30/95 $11,690 $11,846
12/31/95 $12,083 $12,103
6/30/96 $14,296 $13,356
12/31/96 $14,362 $14,098
Legend in graph states that Past Performance is not predictive of future
results.
A box below the graph states Average Annual
Total Returns as of 12/31/96 as follows:
1-year 18.9%
since inception 24.0%]
Lastly, our short positions hurt performance, but we are fully confident that
our ability to short stocks will benefit our investors in the long term.
However, the general strategy of shorting in the midst of a raging bull market
is likely to produce some short-term losses.
Nevertheless, we are pleased with the Fund's results, and believe that our dual
strategy of buying small cap value for potential appreciation and selling short
overpriced growth issues will continue to reward our investors.
4
<PAGE> 23
VALUE REPORT
HEARTLAND VALUE FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
The equity markets enjoyed another outstanding year in 1996, with all of the
major indices posting returns well above their historical norms. And once
again, the Heartland Value Fund produced returns superior to those of its
benchmark, the small-cap Russell 2000 Index.
In an earnings-driven market that was dominated by large-cap stocks, we
attribute our continued success to our strategy of seeking out-of-favor,
undervalued small-cap stocks. While '96 was the third straight year that
small-cap stocks underperformed large caps, it made our strong performance
especially gratifying.
In large part, we attribute our 21% return in '96 to our assessment in late '95
that small cap energy stocks were especially undervalued. We more than doubled
our holdings in the energy sector during '96 -- from 4.1% of net assets in
January to 9.9% at year end. This sector was by far our best performer, thanks
in no small measure to Cliffs Drilling Company and Clayton Williams Energy,
Inc., which more than quadrupled in value during '96.
As we look ahead, we are still bullish on energy for the long-term. Right now,
however, we are looking for sectors that investors have beaten down. In the
environmental sector, for example, we have found a number of stocks that are
selling at book value and have strong balance sheets. We also expect some
healthcare stocks -- including current holdings such as ICN
[line chart illustrating performance of an assumed investment of $10,000 in the
Heartland Value Fund and the Russell 2000 Index beginning on December 28, 1984
as follows:
Heartland Russell
Value Fund 2000
12/31/85 $14,094 $13,219
12/31/86 $15,637 $13,970
12/31/87 $14,318 $12,745
12/31/88 $18,190 $15,918
12/31/89 $19,385 $18,503
12/31/90 $16,072 $14,892
12/31/91 $24,005 $21,751
12/31/92 $34,201 $25,756
12/31/93 $40,620 $30,625
12/31/94 $41,316 $30,069
12/31/95 $53,629 $38,621
12/31/96 $64,885 $44,990
Legend in graph states that Past Performance is not predictive of
future results.
A box below the graph states Average Annual Total Returns as of
12/31/96 as follows:
1-year 21.0%
5-year 22.0%
10-year 15.3%
since inception 16.9%]
Pharmaceuticals, Inc. and RightChoice Managed Care, Inc. -- to rebound after
lagging the market in '96.
As always, we will continue to focus on stocks that meet our value criteria.
Although a setback in equity prices appears overdue, we believe investors
should maintain a commitment to the dynamic small cap sector, which we believe
is poised to produce solid returns over the next few years. We are proud of the
Value Fund's long-term record and will endeavor to continue to reward your
trust and confidence.
5
<PAGE> 24
VALUE REPORT
HEARTLAND VALUE FUND
IT'S A WRAP
All kinds of events can create opportunities for value investors. One of them
is a streak of bad news. It was this that attracted us to GIBSON GREETINGS,
INC., the nation's third largest greeting card company, after Hallmark and
American Greetings.
Starting in '94, Gibson was hit with a series of problems. An unsuccessful
acquisition -- a giftwrap company -- resulted in major write-downs and losses.
Poor investments in derivative securities also produced multimillion-dollar
losses. Then the company fired its president. These problems -- all too visible
in the financial press -- prompted analysts and institutions to abandon the
stock, causing its price to drop from $24 in '94 to $8 in early '95.
At that time, we aggressively accumulated Gibson shares, acquiring 1.2 million
at an average cost below $10. Although a wallflower, Gibson offered features we
found attractive: a book value of $16, sales per share of $30, and a decent
balance sheet. The company was also taking aggressive actions that we liked. It
had cut losses by selling its giftwrap acquisition, was paying down debt, had
hired a new CEO and CFO, and redefined its marketing strategy.
These changes are clearly having a positive effect. After a disastrous 1995,
Gibson is forecasted to report $1.35 per share in '96 earnings, and $1.60 in
'97. As a result, the stock has nearly doubled from our average cost.
On 12-31-96, the Fund owned 1,000,000 shares of Gibson Greetings, Inc., almost
7.5% of the company. At its price of $19.63, Gibson represented 1.2% of
the Fund's net assets.
6
<PAGE> 25
VALUE REPORT
HEARTLAND VALUE FUND
OBJECTIVE
The Heartland Value Fund seeks capital appreciation through small company
stocks selected on a value basis. (Closed to new investors since 7/1/95.)
AVERAGE ANNUAL RETURNS
Since
inception
1-year 5-year 10-year 12/28/84
------ ------ ------- ---------
Heartland
Value Fund 21.0% 22.0% 15.3% 16.9%
Russell 2000 16.5 15.6 12.4 13.3
The Russell 2000 Index is an unmanaged index of stocks considered to be
representative of the small cap market in general.
GENERAL INFORMATION
<TABLE>
<S> <C> <C> <C>
Net assets......................... $ 1.6BIL P/E ratio ('97 est.)............. 15.2X
Share price........................ $ 31.65
Number of holdings....................... 267 Growth of $10,000 since
Median market cap.................. $ 86MIL inception on 12/28/84......... $64,885*
TOP 10 STOCK HOLDINGS
ICN Pharmaceuticals, Inc................ 3.8% Gibson Greetings, Inc............. 1.2%
Forest Oil Corporation.................. 1.7 Tesoro Petroleum Corporation...... 1.2
Maxicare Health Plans, Inc.............. 1.6 Allwaste, Inc..................... 1.2
Transitional Hospitals Corporation...... 1.4 First Financial Corporation....... 1.2
Presidential Life Corporation........... 1.3 John Alden Financial Corporation.. 1.2
</TABLE>
PORTFOLIO COMPOSITION
[graphic - A pie chart displays categories of the Heartland Value Fund's
portfolio as of 12/31/96: health care services at 11.5%; energy/natural
resources at 9.9%; insurance at 8.4%; manufacturing at 8.3%; banks and S&Ls at
7.4%; retail at 5.5% financial services at 4.5%; other at 44.5%]
All statistics are as of December 31, 1996.
* Assumes reinvestment of all dividends and capital gains distributions
7
<PAGE> 26
VALUE REPORT
HEARTLAND MID CAP VALUE FUND
A BUMPER CROP OF VALUE
Classic mid-cap value stocks tend to be somewhat unknown and in unexciting
industries. Take AGCO CORPORATION, for example. It manufactures and markets
agricultural equipment -- tractors, combines, hayers and the like -- hardly the
high-tech stuff that headlines are made of.
Nonetheless, AGCO is a $1.4 billion company with capable, acquisition-minded
management, 7,000 worldwide distributors, and brand names -- Massey Ferguson,
Gleaner, Heston, White -- that read like a Who's Who of agriculture. It also
has an outstanding competitive position, particularly in higher-growth overseas
markets. It derives nearly half its revenues from Europe, and controls nearly
40% and 50% of its markets in Brazil and Argentina, respectively. In addition,
AGCO finds itself at a favorable point in the agricultural cycle. High
commodity prices, little fallow land, pent-up demand for crops and worldwide
government subsidies point to a strong continuing need for equipment.
Yet despite this alignment of stars, AGCO's stock was a bargain when we bought
it in October. Its trailing P/E was only 10.4 versus 13 for competitors Case
and Deere, and its 24% return on equity was well above the industry average. In
addition, AGCO's earnings were rising, and its debt was being paid down. We
also liked the fact that management owned 13% of the stock and that the
Chairman, who already owned 310,000 shares, was purchasing additional shares in
the open market.
On 12-31-96, the Fund owned 7,000 shares of AGCO Corporation at an average cost
of $26.32. At its price of $28.63, this holding represented 2.9% of the Fund's
net assets.
8
<PAGE> 27
VALUE REPORT
HEARTLAND MID CAP VALUE FUND
OBJECTIVE
This Fund pursues long-term capital appreciation. Using intensive research and
Heartland's value criteria, it seeks undervalued opportunities among companies
with stock market capitalizations between $500 million and $2.5 billion.
TOTAL RETURNS (from 10-11-96 through 12-31-96)
Mid Cap Value Fund..............6.6% S&P Mid-Cap Index................5.6%
GENERAL INFORMATION
Net assets..................$6.9 MIL P/E ratio ('97 est.)............11.7X
Share price...................$10.66
Number of holdings................64 Growth of $10,000 since
Median market cap...........$1.3 BIL inception on 10/11/96.........$10,660
COMPARATIVE VALUATIONS*
Heartland S&P
Mid Cap Mid-Cap
Value Index
Price/Earnings Ratio** 12.9 19.7
Price/Cash Flow 6.5 11.7
Price/Book Value 1.6 3.1
Price/Sales 0.5 1.3
TOP 10 HOLDINGS
HealthPlan Services Corp. ..........3.1% Mid Ocean Ltd. ...................2.3%
AGCO Corporation....................2.9 Wellpoint Health Networks, Inc....2.2
Lehman Brothers Holdings, Inc. .....2.7 Oklahoma Gas & Electric Co........2.1
Horace Mann Educators Corp. ........2.6 Onex Corporation..................2.1
Heilig Meyers Company...............2.4 TR Financial Corporation..........2.1
PORTFOLIO COMPOSITION
[graphic - A pie chart displays categories of the Heartland Mid Cap Value
Fund's portfolio as of 12/31/96: cash & equivalents at 8.6%; common stocks at
91.4%. Common stocks is further broken down as follows: banks and S&Ls at
12.1%; manufacturing at 11.3%; insurance at 10.4%; health care services at
8.9%; technology at 6.1%; food & beverage at 6.0%; financial services at 5.0%;
energy & natural resources at 5.0%; construction/housing at 4.1%; forest
products at 3.5%; utilities at 3.5%; consumer products at 3.2%; chemicals at
2.5%; building products at 2.4%; retail at 2.3%; diversified operations at
2.1%; automotive at 1.7% REITs at 0.7%; leisure at 0.6%.]
All statistics are as of December 31, 1996.
The S&P Mid-Cap Index is an unmanaged index of 400 stocks generally considered
representative of the mid-cap market.
*Source: StockVal. **For the 12 months through 12/31/96.
9
<PAGE> 28
VALUE REPORT
HEARTLAND MID CAP VALUE FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
The Heartland Mid Cap Value Fund is off to a very good start. From its
inception on October 11 through year-end 1996, the Fund earned a return of
6.6%. This exceeds the 5.6% return of the S&P Mid-Cap Index, the Fund's
benchmark, as well as the 1% return of the Lipper Mid Cap Fund Index.*
As the accompanying statistics reveal, the Fund's valuations are significantly
lower than its benchmark's. This, we believe, represents a margin of safety.
Another margin of safety is our much higher dividend growth rate. It indicates
that our holdings generate enough free cash flow to raise their dividends
substantially.
Despite the general market's incessant rise and high valuations, we managed to
find what we considered attractively valued stocks in depressed sectors,
particularly banking, insurance, manufacturing and healthcare.
During these eleven short weeks, many of our stocks were stellar performers.
Pulte Corporation, for instance, a home builder, rose 14% from our average
cost. AGCO Corporation, an agricultural machinery manufacturer, gained 8.8%.
And Mid Ocean Ltd. rose 6%. In addition, two of our holdings rose dramatically
in response to being acquired. They were PHH Corporation up 31.2%, and Santa Fe
Pacific Gold Corporation up 26.8%. It's gratifying -- and profitable -- to be a
step ahead of other investors who find value where we do.
[line chart illustrating performance of an assumed investment of $10,000 in
the Heartland Mid Cap Value Fund and the S&P Mid-Cap Index beginning on
October 11, 1996 as follows:
Heartland S&P
Mid Cap Mid-Cap
Value Fund Index
10/31/96 $9,780 $9,988
11/30/96 $10,400 $10,550
12/31/96 $10,660 $10,562
Legend in graph states that Past Performance is not predictive of future
results.
A box below the graph states Average Annual Total Returns as of 12/31/96 of
6.6% since inception.]
In 1997, we expect stable to declining interest rates and continued modest
earnings growth. In addition, we believe that small and mid-cap stocks will
return to favor, reversing the higher valuations that large caps have enjoyed
for several years. But because the equity markets can be fickle, value
investing requires both prudence and patience. We will thus continue to look
not only for significant appreciation potential, but also for wealth protection
in the event of a market decline.
*The Lipper Mid Cap Fund Index is an equally weighted index of the performance
of the 30 largest mid cap funds as tracked by Lipper Analytical Services, Inc.
10
<PAGE> 29
VALUE REPORT
HEARTLAND LARGE CAP VALUE FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
From its October 11 inception to December 31, the Fund appreciated 5.0%. While
this was much better than the 1.4% gain of the Lipper Capital Appreciation Fund
Index, it was below the 7.1% rise of the S&P 500 Index, the Fund's benchmark.*
We attribute this relative lag to two factors: dramatic gains in the S&P 500
during the first two days of the Fund's life, when we hadn't yet put our
limited assets fully to work; and the caution that compelled us to maintain an
above-average cash position throughout the quarter.
Our caution reflected our concern over market conditions. After all, the stock
market was roaring ahead for the second straight year, and history shows that
price corrections have typically followed such a pattern. In defiance of
history, however, as well as valuation levels and our own investment strategy,
the market -- fueled by the energy and technology sectors -- continued its
momentum-driven ascent.
The market also became increasingly volatile, with many days on which
the Dow has swung up or down by a percentage point or more. On the down days,
the Fund has tended to have its strongest relative performance.
We believe this is consistent with the conservative nature of large cap
investing in general. Additionally, we have positioned the Fund to capitalize
on value by focusing on companies where expectations are relatively low.
[line chart illustrating performance of an assumed investment of $10,000 in
the Heartland Large Cap Value Fund and the S&P 500 Index beginning on October
11, 1996 as follows:
Heartland
Large Cap S&P
Value Fund 500
10/31/96 $9,930 $10,167
11/30/96 $10,470 $10,931
12/31/96 $10,500 $10,714
Legend in graph states that Past Performance is not predictive of future
results.
A box below the graph states Average Annual Total Returns as of 12/31/96 of
5.0% since inception.]
Conversely, we seek to avoid companies with profit margins reaching bold new
heights. Historically, this achievement has stimulated capital spending, which
- -- within the business cycle -- has all too often led to lower margins. We much
prefer companies with depressed margins, and management committed to raising
them to normal levels.
*The Lipper Capital Appreciation Fund Index is an unmanaged index of the 30
largest capital appreciation funds as tracked by Lipper Analytical Services,
Inc.
11
<PAGE> 30
VALUE REPORT
HEARTLAND LARGE CAP VALUE FUND
ONE BIG ELF
In October, at the Fund's inception, the energy sector had already roared ahead
in '96, fueled by higher prices for oil and gas. Our challenge: to participate
in this key area while adhering to our value principles.
Our answer was to look overseas, where misperceptions had created
opportunities. Of particular interest to us was ELF AQUITANE, based in France.
Though hardly a household name in the U.S., Elf Aquitane is the size of Texaco,
and one of the world's largest integrated oil companies.
Like many foreign oil companies, Elf had been government-owned, and had thus
gained the reputation of being run to increase employment rather than profit.
But a phased-in privatization -- due for completion in '96 -- had altered the
facts.
A new management team, which is clearly profit-oriented, has a 5-year plan in
place and has started to unburden the company of people and bureaucracy. We
regard this process as a built-in earnings improvement: it will inevitably
continue to expand margins, which are still only about half the industry
average. By contrast, the company has above-average proven reserves, and is
engaged in what we think are very exciting joint ventures in Africa, South
America and the Caspian Sea. Because of these positive factors, plus its low
valuations at purchase, we regard Elf as a superior risk/return opportunity.
On 12-31-96, the Fund owned 1,200 ADR units of Elf Aquitane valued at $54,300,
or 2.2% of net assets. The ADRs had increased to $45.25 from their
average cost of $40.65.
12
<PAGE> 31
VALUE REPORT
HEARTLAND LARGE CAP VALUE FUND
OBJECTIVE
This Fund pursues long-term capital appreciation and is our most conservative
equity offering. Using Heartland's value-investing criteria, it seeks
undervalued opportunities among companies with stock-market capitalizations of
over $1 billion.
TOTAL RETURNS (from 10-11-96 through 12-31-96)
<TABLE>
<S> <C>
Large Cap Value Fund............. 5.0% S&P 500 Index................... 7.1%
GENERAL INFORMATION
Net assets................... $2.4 MIL P/E ratio ('97 est.)........... 12.3X
Share price.................... $10.50
Number of holdings................. 45 Growth of $10,000 since
Median market cap............ $4.8 BIL inception on 10/11/96........ $10,500
</TABLE>
COMPARATIVE VALUATIONS*
Heartland
Large Cap S&P
Value Index
Price/Earnings Ratio** 14.1 20.6(1)
Price/Cash Flow 5.1 12.3(2)
Price/Book Value 1.6 4.3(1)
Price/Sales 0.7 1.2(2)
TOP 10 HOLDINGS
<TABLE>
<S> <C>
Tenet Healthcare Corporation.. 3.2% Beverly Enterprises ............. 2.9%
Fort Howard Corporation....... 3.2 YPF Sociedad Anonima (ADR)....... 2.7
Student Loan Marketing Assoc.. 3.1 K Mart Corporation............... 2.6
Consolidated Natural Gas Co... 2.9 AT&T Corporation................. 2.5
Shaw Industries, Inc.......... 2.9 Allmerica Financial Corporation.. 2.5
</TABLE>
PORTFOLIO COMPOSITION
[graphic - A pie chart displays categories of the Heartland Large Cap Value
Fund's portfolio as of 12/31/96: cash & equivalents at 16.3%; common stocks at
83.7%. Common stocks is further broken down as follows: insurance at 11.9%;
utilities at 9.7%; health care services at 8.1%; paper products at 7.6%;
tobacco at 6.5%; banks and S&Ls at 5.3%; energy & natural resources at 4.9%;
food & beverage at 4.6%; communications at 4.5%; financial services at 4.1%;
retail at 3.4%; home furnishings at 2.9%; manufacturing at 2.8%; electrical &
electronics at 2.0%; technology at 1.5%; construction/housing at 1.4%; air
freight at 1.3%; diversified operations at 1.2%.]
All statistics are as of December 31, 1996.
The S&P 500 Index is an unmanaged index of 500 stocks representing major U.S.
industries.
* Source: Factset and StockVal. **For the 12 months through 12/31/96.
(1) S&P 500. (2) S&P Industrials.
13
<PAGE> 32
VALUE REPORT
HEARTLAND VALUE PLUS FUND
GETTING PAID TO WAIT
In assessing a company, we look for a potential catalyst -- a factor that could
drive up the stock price.
But a catalyst is rarely prompt, and ideally we like to get paid while we wait.
Which is one reason we're attracted to convertible bonds.
More conservative than common stocks, convertibles are hybrid securities, with
a fixed income component and an option on the underlying stock. Relative to
their underlying common stocks, convertibles typically offer much higher
yields, which provide downside price protection and have contributed to
historically competitive returns. Thus, we may purchase a company's convertible
instead of its common, gaining not only a generous stream of income while we
wait for a catalyst, but also the appreciation potential of the convertible
feature.
Take THERATX, INC., a nationwide provider of sub-acute care and occupational
health services. Although TheraTx was growing at 20% a year, potential changes
in Medicare reimbursement rules had caused its stock to drop to 8X earnings and
a tad above book value in '96.
Yet the company's debt seemed even more underpriced to us. So we purchased the
company's 8% convertible due in 2002. Our $920 cost gave us a current yield of
8.8% and a 10% yield to maturity.
We believe the Medicare issue -- our potential catalyst -- is bound to be
resolved. And we're happily collecting a very healthy yield while we wait.
On 12-31-96, the TheraTx, Inc. 8% convertible subordinated notes due on 2/1/02
were priced at $92.63 and represented 1.1% of the Fund's net assets.
14
<PAGE> 33
VALUE REPORT
HEARTLAND VALUE PLUS FUND
OBJECTIVE
The Heartland Value Plus Fund is an equity-income investment that seeks both
capital appreciation and current income.
AVERAGE ANNUAL RETURNS
Since inception
1-year 10/26/93
------ --------
Heartland Value Plus Fund 33.8% 17.4%
Russell 2000 16.5 13.9
Lipper Equity Income Index 17.9 14.1
January Yield(1) 2.8
S&P 500 Yield 2.0
The Russell 2000 Index is an unmanaged index of stocks considered to be
representative of the small cap market in general. The Lipper Equity Income Fund
Index is an equally weighted index of the performance of the 30 largest equity
income funds as tracked by Lipper Analytical Services, Inc. (1)January SEC
yield annualized for the 30 days commencing 1/1/97. The S&P 500 Index is an
unmanaged index of 500 stocks representing major U.S. industries. Small company
stocks may be more volatile than those of the S&P 500.
GENERAL INFORMATION
<TABLE>
<S> <C>
Net assets.......................$66.6 MIL P/E ratio ('97 est.)...........................13.8X
Share price.........................$13.73
Number of holdings......................53 Growth of $10,000 since
Median market cap.................$163 MIL Inception on 10/26/93.......................$16,646*
TOP 10 HOLDINGS
NovaCare, Inc. ........................3.8% Berry Petroleum Company.........................2.6%
TR Financial Corporation...............3.7 Stewart & Stevenson Services, Inc. .............2.4
Woodward Governor Company..............3.4 Bell Sports Corp. 4.25% 11/15/00................2.4
USX Delhi Group........................3.0 Flexsteel Industries, Inc. .....................2.3
Walden Residential Pfd. Stock..........2.9 Nash Finch Company..............................2.2
</TABLE>
PORTFOLIO COMPOSITION
[graphic - A pie chart displays categories of the Heartland Value
Plus Fund's portfolio as of 12/31/96: preferred stock at 2.9%; cash &
equivalents at 23.9%; corporate bonds at 4.6%; convertibles bonds at 14.2%;
common stocks at 54.4%. Common stocks is further broken down as follows:
manufacturing at 12.2%; banks and S&Ls at 8.2%; energy & natural resources at
7.6%; aerospace at 4.8%; food & beverage at 4.3%; health care services at 3.8%;
leisure at 3.7%; utilities at 3.0%; insurance at 2.8%; retail at 1.5%; REITs at
1.5%; financial services at 0.8%; communications at 0.2%.]
All statistics are as of
December 31, 1996.
* Assumes reinvestment of all dividends and capital gains distributions
15
<PAGE> 34
VALUE REPORT
HEARTLAND VALUE PLUS FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
The Value Plus Fund enjoyed a wonderful 1996. Its total return of 33.8% more
than doubled that of its index, the Russell 2000.
The Fund paid dividends of $0.38 for the year, and ended the year with a yield
of 3.12%.*
The Fund's exposure to the energy sector -- as high as 15% in August --
contributed to its performance. Energy stocks benefited from a 33% rise in
crude oil prices during the year.
In anticipation of a lower interest rate environment, we gradually increased
our exposure to the interest-rate-sensitive banking and financial services
sectors. At year-end, these holdings represented 12% of net assets.
In addition, we continued to find stocks of well-managed manufacturers selling
at compelling valuations relative to earnings, cash flow and book value. At
year-end, manufacturing companies were the Fund's largest holding, at 12.2% of
net assets.
The Fund is cautiously positioned for 1997, with 23.9% of net assets in cash
and equivalents. We believe the bull market of recent years has increased
investment risk by producing not only terribly high equity valuations, but also
highly unrealistic investor expectations. This risk, we believe, is exacerbated
by historically low levels of cash in mutual funds.
[line chart illustrating performance of an assumed investment of $10,000 in
the Heartland Value Plus Fund, the S&P 400 Mid-Cap Index and the Russell
2000 Index beginning on October 26, 1993 as follows:
Heartland S&P 400
Value Plus Mid-Cap Russell
Fund Index 2000
12/31/93 $10,522 $10,537 $10,296
12/31/94 $10,001 $10,159 $10,110
12/31/95 $12,441 $13,304 $12,985
12/31/96 $16,646 $15,631** $14,912
Legend in graph states that Past Performance is not predictive of future
results.
A box below the graph states Average Annual Total Returns as of 12/31/96 as
follows:
1-year 33.8%
since inception 17.4%]
Given these caution signs, we prefer to keep our powder dry until valuations
return to more normal historical levels. In the meantime, we will continue
investing -- on a highly selective basis -- in stocks and bonds of smaller
companies that meet our value criteria.
*SEC yield for the 30 days commencing 12-1-96. **In 1996, we refined the Fund's
investment policies to a small-cap, equity-income focus. We will thus now
compare the Fund only to the Russell 2000. We will no longer compare it to the
S&P Mid-Cap Index or the Lehman Intermediate Corporate Bond Index. For the
period from 10/26/93 through 12/31/96, $10,000 invested in the Lehman Index
would have grown to $12,022.
16
<PAGE> 35
VALUE REPORT
HEARTLAND U.S. GOVERNMENT SECURITIES FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
At this time last year, we were reporting the best year in the Fund's history
- -- a return of 19% for 1995. Regrettably, 1996 was less prosperous, with a
total return of only 2.0%. Granted, the Fund matched the return of Lipper's
General U.S. Government Fund Index (up 2.0%), but it was outdistanced by the
Lehman Intermediate Treasury Index (up 4.0%).*
The year began on a negative note for bonds, as the yield on the 30-year
Treasury rose from 6.0% at the end of '95 to 7.2% in June. The rise reflected a
stronger than expected economy and fears that the Federal Reserve would raise
rates.
Because we had expected rates to fall in 1996, we started the year with a
rather long maturity of 12.3 years. Within our strategy of active management,
we responded by shortening maturities dramatically -- to 2.8 years in March --
then lengthening to 11.5 years in June in anticipation of rallies in the bond
market. To further limit the Fund's volatility in this rising rate environment,
we also decreased our holdings of zero coupon and intermediate-term Treasuries.
At the same time, we purchased mortgage-backed securities for what we see as
their relative price stability and attractive yields.
During the year, about 25% of the Fund, on average, was invested in
[line chart illustrating performance of an assumed investment of $10,000 in
the Heartland U.S. Government Fund, the Lipper General U.S. Government Fund
Index and the Lehman Intermediate Treasury Index beginning on April 9, 1987
as follows:
Heartland Lipper Lehman
Fund Index Treasury
12/31/87 $10,191 $ 9,928 $ 9,984
12/31/88 $10,846 $10,710 $10,949
12/31/89 $12,072 $12,041 $12,338
12/31/90 $13,277 $13,006 $13,504
12/31/91 $15,529 $14,908 $15,410
12/31/92 $17,095 $15,819 $16,482
12/31/93 $20,141 $17,135 $17,838
12/31/94 $18,199 $16,324 $17,523
12/31/95 $21,656 $19,090 $20,050
12/31/96 $22,089 $19,255 $20,849
Legend in graph states that Past Performance is not predictive of future
results.
A box below the graph states Average Annual Total Returns as of 12/31/96 as
follows:
1-year 2.0%
5-year 7.3%
since inception 8.5%]
corporate securities. Bonds issued by IMC Fertilizer Group, Inc., GranCare,
Inc. and Quantum Health Resources, Inc. all showed substantial gains.
We believe 1997 will be more favorable for bonds. And we will use our
strategies of sector rotation, duration management and security selection to
enhance our investors' returns.
*The Lehman Intermediate Treasury Index is an unmanaged index of all Treasuries
issued by the U.S. Government that have maturities of greater than one year but
less than ten years and at least $100 million in outstanding issuance.
17
<PAGE> 36
VALUE REPORT
HEARTLAND U.S. GOVERNMENT SECURITIES FUND
CHANGES TO YOUR FUND
Ordinarily, we would devote this space to a discussion of the value criteria we
used to purchase or sell a particular security. Instead, we would like to
announce some major changes to the Fund. These changes become effective on
March 31, 1997. We believe they will make the Fund much more focused and
conservative, and thus suitable for a broader range of investors.
- - GREATER SAFETY. The Fund intends to invest virtually 100% of its assets in
securities issued or guaranteed by the U.S. Government or its agencies. This
should give the Fund's portfolio an average AAA credit rating. We have
eliminated its higher-risk corporate bond component.
- - LOWER PRICE VARIABILITY. Instead of operating within an open-ended maturity
range, the Fund will be managed with an average duration of 3 - 6 years.
Duration, like maturity, is a measure of interest-rate risk. But we at
Heartland Funds believe duration is a more precise measure. And we chose this
narrow duration range as a tool for reducing price variability in the Fund.
- - LOWER EXPENSES. To make the Fund more competitive, Heartland Advisors will
waive an additional portion of its management fee. The new fee -- just .25% of
assets -- will be half the current fee, and will result in a higher effective
yield for investors.
We hope these changes encourage people to invest -- or reinvest -- in the Fund.
"We restructured the Fund with the goal
of offering rock-solid credit safety, lower price variability, and highly
competitive returns."
Patrick J. Retzer
Portfolio Manager
18
<PAGE> 37
VALUE REPORT
HEARTLAND U.S. GOVERNMENT SECURITIES FUND
OBJECTIVE
The Heartland U.S. Government Securities Fund seeks a high level of current
income, liquidity and safety of principal.
AVERAGE ANNUAL RETURNS
Since
inception
1-year 5-year 4/9/87
------ ------ ---------
Heartland
U.S. Government Securities Fund 2.0% 7.3% 8.5%
Lipper General
U.S. Government Fund Index 2.0 5.5 7.1
January Yield(1) 6.5
(1)January SEC yield annualized for the 30 days commencing 1/1/97. The Lipper
General U.S. Government Fund Index is an equally weighted index of the
performance of the 30 largest U.S. general government funds as tracked by
Lipper Analytical Services, Inc.
GENERAL INFORMATION
<TABLE>
<S> <C> <C> <C>
Net assets ........................... $51.7 mil Avg. weighted duration ............ 8.0 yrs.
Share price .......................... $ 9.54 Growth of $10,000 since
Avg. weighted maturity ............... 11.6 yrs. inception on 4/9/87 ............... $22,089*
TOP 5 HOLDINGS
U.S. Treasury Bond 0% 11/15/2016 ......... 12.1% U.S. Treasury Bond 0% 11/15/2014 ...... 8.7
FNMA SEQ-CMO 1993-2 PG 7.00% 2/25/20 ..... 11.4 U.S. Treasury Note 7.25% 5/15/2004 .... 8.2
FHLMC PAC-CMO 1619B 6.40% 1/15/23 ........ 9.4
</TABLE>
PORTFOLIO COMPOSITION
[graphic - A pie chart displays categories of the Heartland U.S. Government
Securities Fund's portfolio as of 12/31/96: agency mortgage-backed securities
at 38.8%; cash/other at -0.2%; U.S. Treasury & agency at 35.8%; corporate bonds
at 25.6%.]
All statistics are as of December 31, 1996.
* Assumes reinvestment of all dividends and capital gains distributions
19
<PAGE> 38
VALUE REPORT
[PHOTO OF MILWAUKEE]
At Heartland, we're at home with the
Milwaukee traditions of hard work
and commitment to value.
[Logo] Heartland Funds
----------------------
AMERICA'S VALUE INVESTOR
<PAGE> 39
SCHEDULES OF INVESTMENTS
AND FINANCIAL STATEMENTS
PAGE FUND
---- ----
22 SMALL CAP CONTRARIAN FUND
28 VALUE FUND
37 MID CAP VALUE FUND
41 LARGE CAP VALUE FUND
45 VALUE PLUS FUND
50 U.S. GOVERNMENT SECURITIES FUND
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Shareholders and Board of Directors of Heartland Small Cap Contrarian
Fund, Heartland Value Fund, Heartland Mid Cap Value Fund, Heartland Large Cap
Value Fund, Heartland Value Plus Fund, and Heartland U.S. Government Securities
Fund:
We have audited the accompanying schedules of investments, including the
statements of assets and liabilities, of Heartland Small Cap Contrarian Fund,
Heartland Value Fund, Heartland Mid Cap Value Fund, Heartland Large Cap Value
Fund, Heartland Value Plus Fund, and the statement of net assets of Heartland
U.S. Government Securities Fund (collectively the "Funds," six of the series
comprising Heartland Group, Inc., a Maryland corporation) as of December 31,
1996 and the related statements of operations for the period then ended, the
statements of changes in net assets for each of the periods presented, and the
financial highlights for the periods 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 generally accepted auditing
standards. 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 securities owned as of
December 31, 1996 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 the
Funds as of December 31, 1996, the results of operations for the periods then
ended, the changes in net assets for each of the periods presented, and the
financial highlights for each of the periods then ended in conformity with
generally accepted accounting principles.
Milwaukee, Wisconsin ARTHUR ANDERSEN LLP
February 7, 1997
21
<PAGE> 40
HEARTLAND SMALL CAP CONTRARIAN FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS - 86.4% VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AUTOMOTIVE - 2.3%
100,000 Control Devices, Inc. - Circuit breakers, electronic sensors and electronic ceramic parts (a)..... $1,300,000
100,000 Deflecta-Shield Corporation - Accessories for light and heavy duty trucks (a)..................... 862,500
100,000 Donnelly Corporation - Glass related and plastic molded products for the auto industry............ 2,450,000
104,000 Motorcar Parts & Accessories - Remanufactures and distributes alternators and starters (a)........ 1,521,000
----------
6,133,500
BANKS AND SAVINGS & LOANS - 4.1%
50,000 BankUnited Financial Corp. (Class A) - Operates nine banking offices in south Florida (a)......... 500,000
42,000 Beverly Bancorporation - Community bank serving southwest Chicago................................. 758,625
37,800 CB Bancorp, Inc. - Savings bank in northern Indiana (a)........................................... 897,750
50,000 Community Financial Corporation - Savings bank operating in five southern Illinois counties....... 637,500
50,600 Foothill Independent Bancorp - Bank holding company operating in suburban LA (a).................. 581,900
104,167 Highland Federal Bank - Savings bank in Los Angeles, California (a)............................... 1,770,839
50,000 North Central Bancshares, Inc. - Savings bank in Fort Dodge, Iowa................................. 678,125
40,000 Security Capital Corporation - Holding company for Security Bank S.S.B. in Wisconsin.............. 2,950,000
57,500 Union Bankshares, Ltd. - Offers commercial banking services in Denver (a)(b)...................... 920,000
70,000 UnionBancorp, Inc. - Commercial banking, debt collection, data processing in IL................... 1,015,000
----------
10,709,739
COMMUNICATIONS - 4.1%
280,000 Communications Central, Inc. - Operator of pay phones and inmate phones (a)....................... 2,170,000
500,000 Executone Information Systems, Inc. - Telecommunications systems and equipment (a)................ 1,187,500
240,000 ICTS International NV - Provides aviation security services (a)................................... 2,430,000
775,000 Interdigital Communications Corporation - Mkts digital radio telephone systems (a)................ 4,456,250
100,000 TCI International, Inc. - Manufactures special purpose communications equipment (a)............... 700,000
----------
10,943,750
CONSTRUCTION/HOUSING - 0.4%
116,800 Belmont Homes, Inc. - Produces low cost high quality homes at competitive prices (a).............. 1,124,200
EDUCATION - 1.1%
400,000 Children's Discovery Centers of America, Inc. - Child care and preschool programs (a)(b).......... 2,800,000
ELECTRICAL & ELECTRONICS - 3.3%
250,000 Bolder Technologies Corp. - Develops and mfrs. rechargeable battery systems (a)(d)................ 2,671,100
200,000 Charter Power Systems, Inc. - Mfrs. battery-powered systems for motive power markets.............. 6,100,000
----------
8,771,100
ENERGY & NATURAL RESOURCES - 11.9%
187,500 Apex Silver Mines Ltd. - Explores and develops silver properties worldwide (d).................... 1,500,000
400,000 Alta Gold Company - Explores and produces metals including gold, silver, and zinc (a)............. 1,412,520
500,000 Beau Canada Exploration Ltd. - Explores and develops oil and natural gas in western Canada (a).... 875,600
300,000 Cabot Oil & Gas Corporation - Explores and develops natural gas; produces crude................... 5,137,500
50,000 Callon Petroleum Company - Gulf of Mexico oil and gas producer (a)................................ 950,000
6,000,000 Campbell Resources, Inc. - Explores for and produces gold and minerals in North America (a)....... 5,625,000
200,000 COHO Energy, Inc. - Develops, produces and explores for oil and gas in LA and MS (a).............. 1,425,000
72,300 Dawson Geophysical Company - Processes and interprets seismic data for oil and natural gas (a).... 813,375
702,700 Geomaque Explorations Ltd. - Exploration and development company in Mexico and Quebec (a)......... 1,692,031
530,000 Gothic Energy Corporation - Holds interests in oil and gas properties in OK, TX, AK and KS (a).... 1,258,750
750,000 HCO Energy Ltd. - Explores and produces oil and gas in Alberta and Saskatchewan (a)............... 848,250
300,000 High Plains Corporation - Manufacturer of fuel grade ethanol (a).................................. 1,556,250
41,600 Key Production Company, Inc. - Operates oil and gas properties in OK and TX (a)................... 530,400
63,000 McFarland Energy, Inc. - Explores and produces oil and gas in CA and the Gulf Coast (a)........... 763,875
55,000 Offshore Energy Development Corp. - Acquires, explores and develops natural gas (a)............... 838,750
410,000 Serv-Tech, Inc. - Offers maintenance services to petroleum refining industry (a)(b)............... 999,375
100,000 Summit Resources, Ltd. - Explores, develops, acquires, produces and markets oil and gas........... 507,110
1,000,000 Tipperary Corp. - Explores, develops and produces oil and gas primarily in Australia (a)(b)....... 4,625,000
----------
31,358,786
</TABLE>
22
<PAGE> 41
HEARTLAND SMALL CAP CONTRARIAN FUND
SCHEDULE OF INVESTMENTS [CONT'D] - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS - 86.4% [CONT'D] VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENVIRONMENTAL SERVICES - 4.8%
150,000 Dames & Moore, Inc. - Comprehensive environmental and specialized consulting services......... $ 2,193,750
600,000 GNI Group, Inc. - Recycles, reclaims, treats and disposes hazardous wastes (a)(b)............. 3,975,000
475,000 Harding Lawson Associates Group, Inc. - Remediator of contamination sites (a)(b).............. 3,325,000
100,000 KTI Inc. - Holds interest in environmental recycling and computer services (a)................ 750,000
275,000 O. I. Corporation - Produces devices for pollution detection (a)(b)........................... 979,688
650,000 Vectra Technologies, Inc. - Provides products/services to nuclear facilities worldwide (a)(b). 1,300,000
-----------
12,523,438
FINANCIAL SERVICES - 2.5%
125,000 ACC Consumer Finance Corporation - Indirect financing of automobile installment contracts (a). 1,203,125
400,000 Dignity Partners, Inc. - Provides viatical settlements for terminally ill people (a)(b)....... 1,050,000
200,000 Fahnestock Viner Holdings, Inc. - Full service regional brokerage............................. 2,900,000
100,000 Resource Bancshares Mortgage Corporation - Originates and secures residential mortgage loans.. 1,425,000
-----------
6,578,125
FOOD & BEVERAGE - 0.7%
700,000 Family Steak Houses of Florida, Inc. - Operates 28 restaurants in Florida (a)(b).............. 437,500
300,000 The Lion Brewery, Inc. - Brews and bottles specialty beers and soft drinks (a)(b)............. 1,256,250
-----------
1,693,750
HEALTH CARE SERVICES - 7.1%
100,000 Hanger Orthopedic Group, Inc. - Patient care services for orthotic and prosthetic rehab (a)... 650,000
195,000 Health Fitness Physical Therapy, Inc. - Acquires and develops physical therapy clinics (a).... 585,000
100,000 Help at Home, Inc. - General housekeeping services to the elderly and disabled (a)(b)......... 500,000
450,000 ICN Pharmaceuticals, Inc. - Manufactures and markets a broad range of drugs................... 8,831,250
759,000 In Home Health, Inc. - A national provider of home health care services (a)................... 1,470,563
600,000 Interpore International - Manufactures bone graft material for orthopedic market (a)(b)....... 2,550,000
300,000 Syncor International Corporation - Distributes radiopharmaceutical products (a)............... 4,012,500
-----------
18,599,313
INSURANCE - 5.1%
100,000 Cotton States Life & Health Insurance - Underwrites life, accident and health insurance....... 1,425,000
200,000 Financial Industries Corporation - Life and health insurance products (a)..................... 2,275,000
550,000 London Pacific Group Ltd. (ADR) - Offers insurance and trust services......................... 7,700,000
61,500 Motor Club of America - Provides insurance, finance and related services (a).................. 584,250
41,500 Omni Insurance Group, Inc. - Underwrites nonstandard automobile insurance for individuals (a). 394,250
100,000 Unico American Corporation - Commercial multi-peril insurance................................. 1,087,500
-----------
13,466,000
LEISURE - 0.3%
105,000 NTN Canada, Inc. - Markets and distributes NTN Entertainment Network in Canada (a)............ 538,125
14,000 Vacation Break USA, Inc. - Vacation interests in premium resorts (a).......................... 283,500
---------
821,625
MANUFACTURING - 11.3%
30,000 Astro-Med, Inc. - Specialty high-speed printers............................................... 255,000
100,000 Astrotech International Corp. - Storage tanks for oil, paper and agricultural industries (a).. 575,000
335,000 Consep, Inc. - Produces environmentally safe pest control products (a)........................ 1,005,000
200,000 Dynamic Materials Corporation - Produces chemical processing materials (a)(b)................. 1,875,000
200,000 Friedman Industries, Inc. - Processes and distributes steel products to manufacturers......... 1,150,000
525,000 Hyde Athletic Industries, Inc. (Class B) - Athletic shoes and outdoor recreational products (a) 2,690,625
110,000 K-Tron International Inc - Gravimetric feeders and blenders and other process control equip (a) 1,127,500
18,400 Koss Corporation - Designs and mfrs headphones, speakers and related products (a)............. 124,200
220,000 Northwest Pipe Company - Welded steel pipe for water transmission (a)......................... 3,575,000
200,000 Oregon Steel Mills, Inc. - Produces a variety of specialty and commodity steel products....... 3,350,000
200,000 Portec, Inc. - Produces railroad, construction and materials handling equipment............... 1,975,000
200,000 Shelter Components Corporation - Distributes products to housing and RV industries............ 2,450,000
300,000 Shiloh Industries, Inc. - Steel processor supplying automotive and other industries (a)....... 4,875,000
290,000 Speizman Industries, Inc. - Sells hosiery and knitting manufacturing equipment (a)(b)......... 1,721,875
300,000 Winsloew Furniture, Inc. - Designs, distributes and manufactures casual furniture (a)......... 2,925,000
-----------
29,674,200
</TABLE>
23
<PAGE> 42
HEARTLAND SMALL CAP CONTRARIAN FUND
SCHEDULE OF INVESTMENTS [CONT'D] - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS 86.4% - [CONT'D] VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MARKETING/CORP SERVICES - 3.0%
313,500 Business Resource Group - Workspace services and products in northern California (a)(b) ............ $ 1,645,875
195,000 Globe Business Resources, Inc. - Rents and sells office and residential furniture (a) .............. 1,998,750
1,000,000 Luminart, Inc. - Provides visual effects enhancements (a)(b) ....................................... 751,600
200,000 Personnel Management, Inc. - Temporary service in Midwest and Southeast (a)(b) ..................... 1,700,000
100,000 PIA Merchandising Services, Inc. - Supplier of regularly scheduled routed merchandising services (a) 1,050,000
100,000 RCM Technologies, Inc. - Temporary and full-time professional services (a) ........................ 875,000
------------
8,021,225
MEDICAL PRODUCTS - 7.1%
500,000 Autonomous Technologies Corp. - Excimer laser instruments for laser vision correction (a)(b) ....... 2,000,000
500,000 Bio-Vascular, Inc. - Markets biosynthetic-based medical products (a)(b) ........................... 3,312,500
175,000 Isomedix, Inc. - Irradiation services to manufacturers of medical supplies (a) ..................... 2,275,000
250,000 Life Medical Sciences, Inc. - Develops medical products using tissue culturing technology (a) ...... 1,656,250
200,000 Moore Medical Corporation - Pharmaceutical and medical products distributor (a)(b) ................. 2,050,000
231,105 New Brunswick Scientific, Inc. - Manufactures and markets biotechnology equipment (a)(b) ........... 1,617,735
1,000,000 Orthologic Corporation - Proprietary, technologically advanced orthopedic devices (a) .............. 5,625,000
------------
18,536,485
REITS - 2.5%
500,000 Equity Inns Inc. - Equity interests in hotels in 26 states ......................................... 6,500,000
RETAIL - 8.0%
505,000 Allou Health and Beauty, Inc. (Class A) - Health and beauty products (a)(b) ........................ 3,377,188
433,000 Catherines Stores Corporation - Specialty apparel retailer of women's clothing (a)(b) .............. 2,381,500
400,000 Chico's Fas, Inc. - Operates retail women's clothing stores (a)(b) ................................. 1,700,000
115,100 Coast Distribution System - Recreational vehicle accessories and marine parts (a) .................. 417,238
325,000 Crown Books Corporation - 247 retail book stores offering discount prices (a)(b) ................... 3,818,750
40,000 Dart Group Corporation (Class A) - Automotive parts stores, bookstores and grocery stores .......... 3,720,000
300,000 Fred's, Inc. (Class A) - Operates 188 discount general merchandise stores .......................... 2,587,500
700,000 Harmony Brook, Inc. - Water filtering equipment developer, mfr, distributor, operator (a)(b) ....... 393,750
400,000 Little Switzerland, Inc. - Retailer in the Caribbean Islands (a) ................................... 1,825,000
263,300 Strouds, Inc. - Specialty retailer of home textile products (a) .................................... 855,725
------------
21,076,651
TECHNOLOGY - 6.5%
400,000 Boca Research, Inc. - Manufactures computer enhancement products (a) ............................... 4,150,000
1,065,600 Compression Labs, Inc. - Markets and produces visual communications systems (a)(b) ................. 4,062,600
75,000 Diehl Graphsoft, Inc. - Develops and publishes computer software products (a) ...................... 515,625
343,500 Jaco Electronics, Inc. - Distributes electronic components and subsystems (a)(b) ................... 2,919,750
264,800 M-Wave, Inc. - Manufactures microwave circuit boards (a)(b) ........................................ 662,000
600,000 PolyVision Corporation - Manufactures visual display and interior design products (a)(b) ........... 450,000
100,000 Reptron Electronics, Inc. - Provides contract manufacturing services for electronic products (a) ... 2,062,500
300,000 UniComp, Inc. - Develops computer payment processing software (a)(b) ............................... 2,325,000
------------
17,147,475
TRANSPORTATION - 0.3%
50,000 Airnet Systems, Inc. - Air transportation network for time-critical shipment deliveries (a) ........ 737,500
------------
TOTAL COMMON STOCKS (Cost $215,495,302) ............................................................ $227,216,862
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SHARES PREFERRED STOCKS - 1.8% VALUE
- -----------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS - 1.1%
22,500 Drypers Corp. 7.5% Senior convertible cumulative - Manufactures and
markets disposable baby diapers (b)(d) ......................................................... $ 2,934,783
MANUFACTURING - 0.7%
690,000 Excelsior-Henderson Motorcycle Mfg. Co. Series A convertible -
American manufacturer of motorcycles (a)(b)(d) ................................................. 1,725,000
------------
TOTAL PREFERRED STOCKS (Cost $3,975,000) ............................................................ $ 4,659,783
</TABLE>
24
<PAGE> 43
HEARTLAND SMALL CAP CONTRARIAN FUND
SCHEDULE OF INVESTMENTS [CONT'D] - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT SHORT-TERM INVESTMENTS - 5.7% COUPON MATURITY VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. TREASURY SECURITIES - 5.2%
$14,000,000 U. S. Treasury Bill (c) .................................... 0.000% 04/17/1997 $ 13,793,360
VARIABLE RATE DEMAND NOTES (+) - 0.5%
1,320,000 Warner-Lambert Company ..................................... 5.479 03/18/1997 1,320,000
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $15,113,360) ......................................... $ 15,113,360
TOTAL INVESTMENTS - (Cost $234,583,662) ... 93.9% $ 246,990,005
Cash and receivables, less liabilities .... 6.1% $ 16,021,391
------ --------------
TOTAL NET ASSETS .......................... 100.0% $ 263,011,396
====== ==============
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SHARES SHORT SALES - (6.9)% VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
20,000 3Com Corporation - Designs, produces and mkts global data networking solutions (a) ...... $ 1,467,500
10,000 Alydaar Software Corporation - Translates old computer language to newer language (a) ... 120,000
50,000 BMC Industries, Inc. - Manufactures precision imaged and optical products (a) ........... 1,575,000
30,000 Cisco Systems, Inc. - Develops, mfrs, mkts and supports internetworking systems (a) ..... 1,908,750
100,000 Dollar Tree Stores, Inc. - Operates 400 discount variety stores in 20 states (a) ........ 3,825,000
120,000 Drypers Corporation - Manufactures and markets disposable baby diapers (a) .............. 450,000
100,000 Employee Solutions, Inc. - Provides lease staffing (a) .................................. 2,050,000
100,000 Gentex Corporation - Manufactures rearview mirrors and fire protection equipment (a) .... 2,012,500
50,000 Liposome Company, Inc. - Develops lipid and liposome-based pharmaceuticals (a) .......... 956,250
75,000 Pentair Inc. - Manufactures enclosures for various types of equipment ................... 2,418,750
35,000 Silicon Gaming, Inc. - Designs and develops interactive slot machines ................... 564,375
20,000 Sykes Enterprises, Inc - Provides technology outsourcing services (a). .................. 750,000
--------------
TOTAL SHORT SALES (Proceeds $16,004,793) ................................................ $ 18,098,125
==============
</TABLE>
(a) Non-income producing security.
(b) Affiliated company. See Note 7 in Notes to Financial Statements.
(c) Security committed as collateral for short sales. See Note 2(f) in Notes to
Financial Statements.
(d) Restricted Security. See Note 2(g) in Notes to Financial Statements.
(+) Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates.
The rate listed is as of December 31, 1996.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
25
<PAGE> 44
HEARTLAND SMALL CAP CONTRARIAN FUND
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (Cost $234,583,662) ......................... $246,990,005
Cash ............................................................................ 40,977
Receivable from investments sold short .......................................... 30,926,347
Deposits with brokers for investments sold short ................................ 4,012,680
Receivable from fund shares sold ................................................ 1,073,870
Accrued dividends and interest .................................................. 182,483
Deferred organization expense ................................................... 32,869
------------
Total Assets ................................................................ 283,259,231
------------
LIABILITIES:
Securities sold short, at value (Proceeds $16,004,793) .......................... 18,098,125
Payable for investments purchased ............................................... 1,618,910
Payable for fund shares redeemed ................................................ 280,538
Distributions payable ........................................................... 9,597
Payable to Advisor for management fee ........................................... 164,906
Payable to Advisor for deferred organization expense ............................ 32,869
Accrued expenses ................................................................ 42,890
------------
Total Liabilities ........................................................... 20,247,835
------------
NET ASSETS APPLICABLE TO OUTSTANDING SHARES
($.001 par value, 100,000,000 shares authorized, 19,623,261 shares outstanding).. $263,011,396
============
NET ASSET VALUE PER SHARE ........................................................... $ 13.40
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest ...................................................................... $ 1,981,319
Dividends ..................................................................... 999,936
------------
Total investment income ................................................... 2,981,255
------------
EXPENSES:
Management fees ............................................................... 1,448,964
Distribution fees ............................................................. 482,988
Transfer agent fees ........................................................... 335,584
Registration fees ............................................................. 72,907
Postage ....................................................................... 57,318
Custodian fees ................................................................ 53,044
Printing and communications ................................................... 36,755
Legal fees .................................................................... 14,657
Audit fees .................................................................... 10,365
Amortization of organization expenses ......................................... 9,861
Directors' fees ............................................................... 4,725
Other operating expenses ...................................................... 78,503
------------
Total expenses ............................................................ 2,605,671
------------
NET INVESTMENT INCOME ......................................................... 375,584
------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on:
Long sales ............................................................... 15,620,852
Short sales .............................................................. (292,511)
Futures contract .......................................................... (4,292,594)
Net increase in unrealized appreciation on investments ........................ 11,875,878
------------
TOTAL REALIZED AND UNREALIZED GAINS ON INVESTMENTS ............................ 22,911,625
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .......................... $ 23,287,209
============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
26
<PAGE> 45
HEARTLAND SMALL CAP CONTRARIAN FUND
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE APRIL 27, 1995
YEAR ENDED (COMMENCEMENT
DECEMBER 31, OF OPERATIONS)
1996 TO DEC. 31, 1995
------------ ----------------
<S> <C> <C>
OPERATIONS:
Net investment income ........................................................ $ 375,584 $ 238,523
Net realized gains on investments ............................................ 11,035,747 1,801,126
Net increase in unrealized appreciation on investments ....................... 11,875,878 1,027,647
------------ ------------
Net increase in net assets resulting from operations ..................... 23,287,209 3,067,296
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ........................................................ (375,584) (238,523)
Net realized gains on investments ............................................ (11,035,749) (1,801,125)
------------ ------------
Total distributions to shareholders ....................................... (11,411,333) (2,039,648)
------------ ------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (18,340,944 and 7,979,895 shares, respectively)... 245,828,468 92,981,836
Reinvested dividends from net investment income and distributions from net
realized gains on investments (743,593 and 165,607 shares, respectively)... 9,882,164 1,950,847
Cost of shares redeemed (6,717,525 and 889,253 shares, respectively) ......... (90,123,683) (10,411,760)
------------ ------------
Net increase in net assets derived from Fund share activities ............. 165,586,949 84,520,923
------------ ------------
TOTAL INCREASE IN NET ASSETS ..................................................... 177,462,825 85,548,571
NET ASSETS AT THE BEGINNING OF THE PERIOD ........................................ 85,548,571 ---
------------ ------------
NET ASSETS AT THE END OF THE PERIOD .............................................. $263,011,396 $ 85,548,571
============ ============
</TABLE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED APRIL 27, 1995(1)
DECEMBER 31, THROUGH
1996 DEC. 31, 1995
------------ -----------------
<S> <C> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of period .......................................... $ 11.79 $ 10.00
Income from investment operations:
Net investment income ..................................................... 0.02 0.03
Net realized and unrealized gains on investments .......................... 2.20 2.05
------------ ------------
Total income from investment operations ................................ 2.22 2.08
Less distributions from:
Net investment income ..................................................... (0.02) (0.03)
Net realized gains on investments ......................................... (0.59) (0.26)
------------ ------------
Total distributions .................................................... (0.61) (0.29)
Net asset value, end of period ............................................... $ 13.40 $ 11.79
============ ============
TOTAL RETURN .................................................................. 18.9% 20.8% (2)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) .................................. $ 263,011 $ 85,549
Ratio of expenses to average net assets ................................... 1.30% 1.44% (3)
Ratio of net investment income to average net assets ...................... 0.19% 1.01% (3)
Portfolio turnover rate ................................................... 57% 45%
Average commission per share(4) ........................................... $ 0.0464 N/A
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) Disclosure of average commission per share was not required prior to the
year ended December 31, 1996.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
27
<PAGE> 46
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS - 86.4% VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE - 1.8%
300,000 Aeroflex, Inc. - Designs electrical and magnetic products for defense contractors (a) .................. $ 1,425,000
600,000 ECC International Corporation - Produces flight simulators and vending machines (a)(b) ................. 4,950,000
354,000 FLIR Systems, Inc. - Mfrs thermal imaging systems that detect infrared radiation (a)(b) ................ 4,867,500
500,000 Mercury Air Group, Inc. - Ground support services to commercial airlines and US military (b) ........... 3,562,500
194,000 Sifco Industries, Inc. - Produces forgings for the aerospace, auto and defense industries .............. 2,012,750
1,000,000 UNC, Inc. - Manufactures engine and airframe parts (a)(b) .............................................. 12,000,000
------------
28,817,750
AUTOMOTIVE - 2.3%
850,100 The Cherry Corporation (Class A) - Mfrs switches and semiconductor products (a)(b) ..................... 13,601,600
400,000 Starcraft Corporation - Converter of vans, sport utility vehicles and trucks (a)(b) .................... 1,500,000
500,000 Strattec Security Corporation - Develops, mfrs and mkts automotive locks (a)(b) ........................ 9,125,000
399,000 Wescast Industries, Inc. (Class A) - Supplies exhaust manifolds to "big three" automakers .............. 9,382,724
500,000 Winnebago Industries, Inc. - Manufactures recreational vehicles ........................................ 3,625,000
------------
37,234,324
BANKS AND SAVINGS & LOANS - 7.4%
110,000 Alabama National Bancorporation - Alabama bank expanding through acquisitions .......................... 1,952,500
50,000 Banknorth Group, Inc. - Operates 44 banking offices throughout New England ............................. 2,075,000
220,630 Beverly Bancorporation - Community bank serving southwest Chicago ...................................... 3,985,129
100,000 California State Bank - 14 banking branches in Orange County ........................................... 1,737,500
100,000 Calumet Bancorp, Inc. - Chicago thrift that generates residential mortgages in several states (a)....... 3,325,000
200,000 Commercial Federal Corporation - S & L serving Nebraska, Colorado, Kansas and Oklahoma ................. 9,600,000
400,000 D & N Financial Corporation - Operates full service branches in central and northern MI (a)(b) ......... 6,700,000
110,500 Eagle Financial Corporation - Savings bank operating 24 offices in Connecticut ......................... 3,370,250
204,500 First Federal Bancshares of Eau Claire, Inc. - Operates 13 retail banking offices in central Wisconsin.. 3,732,125
783,125 First Financial Corporation - Serves WI and southern IL from approximately 124 locations ............... 19,186,562
141,750 Franklin Bank National Association - Business bank serving suburbs of Detroit, MI ...................... 1,665,563
100,000 GA Financial, Inc. - S & L in Pittsburgh area involved primarily in mortgage lending ................... 1,512,500
55,000 Hallmark Capital Corporation - One bank holding company in West Allis, WI (a) .......................... 976,250
250,000 HMN Financial, Inc. - Thrift serving Rochester, MN market (a)(b) ....................................... 4,531,250
193,500 Home Federal Bancorp - Provides banking services to portions of southeastern IN (b) .................... 4,982,625
400,000 MAF Bancorp, Inc. - Market share leader in Dupage County, IL ........................................... 13,900,000
100,000 Massbank Corporation - Serves customers in the Middlesex County area in eastern MA ..................... 3,812,500
90,000 Northwest Equity Corporation - WI holding company for Northwest Savings Bank (b) ....................... 1,091,250
67,800 Pinnacle Bancshares, Inc. - Operates five branches in central and SE Alabama (b) ...................... 1,178,025
224,000 Redwood Empire Bancorp - Holding company for banks and thrifts located in northern CA (a) .............. 2,576,000
35,800 SJNB Financial Corporation - General commercial banking services in Silicon Valley ..................... 675,725
100,000 St. Francis Capital Corporation - Wisconsin holding company for St. Francis State Bank ................. 2,600,000
81,600 State Financial Services Corporation (Class A) - Milwaukee area bank holding company ................... 1,632,000
275,000 Sterling Financial Corp. - Multi-branch savings bank serving WA and communities in OR (a)(b) ........... 3,884,375
176,775 Transworld Bancorp - 11 branch commercial bank in northern suburbs of Los Angeles (a)(b) ............... 3,115,659
129,200 United Federal Savings Bank - Commercial banking services to customers in North Carolina ............... 1,098,200
154,930 United Security Bancorp - Banking services through eight branches located in eastern WA (a) ............ 2,323,950
264,000 Virginia First Financial Corporation - Banking and mortgage services throughout VA ..................... 3,366,000
113,499 Washington Federal, Inc. - Operates 93 branch offices in western U.S. .................................. 3,007,723
100,000 Webster Financial Corporation - Third largest bank in CT ............................................... 3,675,000
138,000 Westerfed Financial Corporation - Thrift holding company in Montana .................................... 2,518,500
------------
119,787,161
COMMUNICATION/SECURITY - 3.3%
410,100 Children's Broadcasting Corporation - Provides radio programming for children (a)(b) ................... 1,896,712
500,000 Cobra Electronics Corp. - Dsgns/mkts communication and audio electronic products (a)(b) ................ 1,687,500
650,000 Comdial Corporation - Mfrs business communication systems (a)(b) ....................................... 4,062,500
233,700 Datron Systems, Inc. - Produces satellite communication terminals (a)(b) ............................... 1,869,600
750,000 First Alert, Inc. - Mfrs smoke detectors, fire extinguishers and home safety products (a) .............. 2,531,250
2,990,000 Interdigital Communications Corporation - Mkts digital radio telephone systems (a)(b) .................. 17,192,500
552,000 Norstan, Inc. - Distributes and services private telephone systems (a)(b) .............................. 9,936,000
1,396,000 Peoples Telephone Co., Inc. - Mkts, operates and services privately-owned pay telephones (a)(b) ........ 4,449,750
</TABLE>
28
<PAGE> 47
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS - 86.4% [CONT'D] VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMUNICATION/SECURITY - 3.3% [CONT'D.]
200,000 Superior Telecom, Inc. - Mfrs copper wire and cable products for telecommunications (a) ............. $ 4,075,000
289,000 Total-Tel USA Communications, Inc. - A discount long distance telephone company (a)(b) .............. 5,418,750
------------
53,119,562
CONSTRUCTION/HOUSING - 4.4%
500,000 American Buildings Company - Constructs and sells pre-engineered metal buildings (a)(b) ............. 11,937,500
400,000 Cameron Ashley Building Products - Distributor of building products to independent dealers (a) ...... 5,600,000
250,000 Castle & Cooke, Inc. - Hawaiian home builder with substantial land holdings (a) ..................... 3,968,750
200,000 Crossmann Communities, Inc. - Builds single family homes in Indiana (a) ............................. 3,400,000
581,500 Engle Homes, Inc. - Florida home builder and developer (b) .......................................... 4,942,750
590,000 The Fortress Group, Inc. - Home builder in NC, NV, CO and TX (a)(b) ................................. 3,540,000
750,000 MDC Holdings, Inc. - Constructs and sells residential housing ....................................... 6,468,750
300,000 MYR Group, Inc. - Transmission systems for electric utilities (b) ................................... 3,862,500
750,000 Morgan Products, Ltd. - Mfrs and distributes specialty building products (a)(b) ..................... 5,531,250
312,000 Patrick Industries, Inc. - Wholesale distributor of building products and materials (b) ............. 4,719,000
316,000 Rottlund Company, Inc. - Minneapolis based single family home builder (a)(b) ........................ 1,560,250
340,000 Schult Homes Corporation - Designs and builds manufactured homes (b) ................................ 7,990,000
860,000 URS Corporation - Provides architectural and engineering services to governments (a)(b) ............. 7,740,000
------------
71,260,750
EDUCATION - 0.0%
405,000 American Educational Products, Inc. - Sells educational materials to teachers and schools (a)(b) .... 392,364
ENERGY & NATURAL RESOURCES - 9.9%
500,000 3-D Geophysical, Inc. - Three-dimensional seismic data-acquisition service (a)(b) ................... 4,500,000
243,600 Abraxas Petroleum Corp. - Oil producer primarily in the Rockies and the Permian Basin, TX (a) ....... 2,405,551
208,000 Alamco, Inc. - Produces oil and gas in the Appalachian Basin (a) .................................... 2,340,000
500,000 American Oilfield Divers, Inc. - Undersea construction/repair for oil and gas (a)(b) ................ 5,937,500
800,000 Box Energy Corporation (Class B) - Oil and gas exploration and production company (a) ............... 7,300,000
1,000,000 CHC Helicopter Corp. (Class A) - Air transport to forestry, petroleum and construction (a)(b) ....... 4,250,000
225,000 Chieftain International, Inc. - Explr./dev./produces oil and natural gas in the Gulf of Mexico (a)... 5,850,000
500,000 Clayton Williams Energy, Inc. - Acquires, explores and produces oil and natural gas in TX (a)(b) .... 8,687,500
299,000 Dreco Energy Services, Ltd. (Class A) - Mfrs/mkts/rents downhole machines and equipment (a) ......... 10,950,875
560,000 Evergreen Resources, Inc. - Gas exploration, dev and production, primarily in CO (a)(b) ............. 4,620,000
300,000 Forasol-Foramer NV - Semi-submersible operator in W. Africa and S. America (a) ...................... 5,887,500
1,560,000 Forest Oil Corporation - Explrs/produces oil/gas in Gulf of Mexico and Canada (a)(b) ................ 27,495,000
100,000 Hallwood Consolidated Resources Group - Owns interest in 2,000 oil and gas wells (a)(b) ............. 6,950,000
200,000 Howell Corp. - Explores, produces and refines oil/natural gas and processes chemicals ............... 2,950,000
500,000 Ico, Inc. - Services sucker rods for the petroleum industry ......................................... 3,062,500
156,549 Mining Services International Corp. - Develops explosive chemicals for the mining industry .......... 1,917,725
200,000 Offshore Logistics, Inc. - Transportation services to offshore oil exploration companies (a) ........ 3,875,000
15,700 Pool Energy Services Company - Maintenance and overhauls to oil wells (a) ........................... 241,389
460,000 St. Mary Land & Exploration Co. - Diversified oil and gas in North America and Russia (b) ........... 11,442,500
200,000 Snyder Oil Corporation - Acquires, produces and develops domestic oil and gas properties ............ 3,475,000
2,550,000 Stampeder Exploration Ltd. - Explrs, dev and produces oil and gas in Alberta/Saskatchewan (a) ....... 14,343,750
1,400,000 Tesoro Petroleum Corporation - Refines, mkts and transports crude oil products (a)(b) ............... 19,600,000
418,400 Tipperary Corp. - Explores, develops and produces oil and gas primarily in Australia (a) ............ 1,935,100
100,000 TPC Corporation - Natural gas gathering and transmission systems (a) ................................ 900,000
------------
160,916,890
ENVIRONMENTAL SERVICES - 1.5%
3,800,000 Allwaste, Inc. - Industrial waste handling, processing and transportation (a)(b) .................... 19,475,000
372,700 GZA GeoEnvironmental Technologies, Inc. - Environmental consulting services (a)(b) .................. 1,257,863
723,500 Vectra Technologies, Inc. - Provides products/services to nuclear facilities worldwide (a)(b) ....... 1,447,000
550,000 Weston Roy F., Inc. (Class A) - Consulting, engineering and project mgt services (a)(b) ............. 1,925,000
------------
24,104,863
</TABLE>
29
<PAGE> 48
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS - 86.4% [CONT'D] VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES - 4.5%
322,100 Advest Group, Inc. - Brokerage, trading, investment banking, leasing/asset mgt (a) .................... $ 3,462,575
200,000 Atalanta/Sosnoff Capital Corp. - Provides investment management services .............................. 1,750,000
200,000 Capital Factors Holdings, Inc. - Provides receivable-based commercial financing (a) ................... 2,500,000
765,339 Cash America International, Inc. - Pawnshops located throughout the U.S., England and Sweden .......... 6,505,382
350,000 Eaton Vance Corporation - Advisor to mutual funds ..................................................... 16,668,750
532,300 EZCorp, Inc. (Class A) - Operates pawn shops in southern U.S. (a) ..................................... 3,393,413
300,000 Inter-Regional Financial Group, Inc. - Full-service securities broker operating through 83 offices .... 10,575,000
222,704 Kinnard Investments, Inc. - Minnesota based brokerage and investment banking firm (a) ................. 1,280,549
580,000 Phoenix Duff & Phelps Corp. - Investment manager for mutual funds and institutional investors ......... 4,132,500
500,000 Raymond James Financial, Inc. - Brokerage, investment banking and financial planning .................. 15,062,500
210,000 Stifel Financial Corporation - Securities brokerage with 64 offices located in central U.S. ........... 1,837,500
99,600 Student Loan Corporation - Originates, holds and services guaranteed student loans .................... 3,710,100
400,000 Sunrise Resources, Inc. - Leasing of new/used electronic data processing equipment (a)(b) ............. 1,350,000
110,000 Willis Lease Finance Corporation - Operating leases of spare commercial aircraft engines (a) .......... 1,416,250
-----------
73,644,519
FOOD & BEVERAGE - 1.9%
344,000 Eskimo Pie Corporation - Broad range of frozen novelty food items (b) ................................. 3,827,000
350,000 Grist Mill Company - Cereal, snack and confectionery products (a)(b) .................................. 2,056,250
50,500 Hanover Foods Corp. (Class A) - Produces and mkts prepared foods (a)(b) ............................... 1,666,500
172,700 International Dairy Queen, Inc. (Class A) - Operator of approx. 6,000 fast food restaurants (a) ....... 3,454,000
700,000 North Star Universal, Inc. - Holding co. w/interest in Michael Foods and Corvel Corp. (a)(b) .......... 5,687,500
640,000 Stokely USA, Inc. - A leading domestic producer of canned vegetables (a)(b) ........................... 800,000
421,000 Thorn Apple Valley, Inc. - Slaughters hogs; packages meat and poultry products (a)(b) ................. 5,578,250
300,000 Timber Lodge Steakhouse, Inc. - Owns restaurants in the Minneapolis/St. Paul area (a)(b) .............. 1,012,500
490,000 Todhunter International, Inc. - Citrus-based brandy, distilled spirits and fortified wine (a)(b) ...... 4,226,250
222,600 Vicorp Restaurants, Inc. - Operates "Bakers Square" and "Village Inn" restaurants (a) ................. 2,949,450
-----------
31,257,700
HEALTH CARE SERVICES - 11.5%
308,900 Caretenders Health Corp. - Home nursing and rehabilitative services (a)(b) ............................ 1,698,950
2,000,000 Coastal Physicians Group, Inc. - Medical group mgt services throughout the U.S. (a)(b) ................ 7,000,000
1,042,000 Grancare, Inc. - Operates 80 long-term health care facilities (a) ..................................... 18,625,750
275,000 Health Power, Inc. - Managed health care holding company (a)(b) ....................................... 756,250
620,000 Hospital Staffing Services, Inc. - Interim duty medical staff to hospitals (a)(b) ..................... 1,550,000
3,150,000 ICN Pharmaceuticals, Inc. - Manufactures and markets a broad range of drugs (b) ....................... 61,818,750
531,300 Integrated Health Services, Inc. - 192 facilities providing rehabilitation/pharmacy services .......... 12,950,438
1,133,000 Maxicare Health Plans, Inc. - Diversified medical products manufacturer and supplier (a)(b) ........... 25,209,250
186,666 Meadowbrook Rehabilitation Group, Inc. (Class A) - Provides rehabilitation services (a)(b) ............ 326,666
520,000 Ramsay Health Care, Inc. - One of the largest psychiatric services companies (a)(b) ................... 1,527,500
250,000 Ramsay Managed Health Care, Inc. - Managed behavioral health services (a) ............................. 140,625
500,000 Regency Health Services, Inc. - Operator of California health care facilities (a) ..................... 4,812,500
1,000,000 RightCHOICE Managed Care, Inc. (Class A) - Offers managed health care products and services (a)(b) .... 10,625,000
224,492 Star Multi Care Services, Inc. - Proprietary and custodial svcs and staffing to hospitals (a)(b) ...... 1,346,952
2,413,500 Transitional Hospitals Corp. - Drug therapy, alcoholic rehab and occupational therapy (a)(b) .......... 23,229,937
600,000 United Wisconsin Services, Inc. - Group health insurance and HMO operator ............................. 15,750,000
-----------
187,368,568
HOME APPLIANCES - 0.1%
300,000 Toastmaster, Inc. - U.S. producer of small electrical household appliances ............................ 1,125,000
</TABLE>
30
<PAGE> 49
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS - 86.4% [CONT'D] VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INSURANCE - 8.4%
300,000 American Eagle Group, Inc. - Property and casualty coverage to aviation/trucking industries .......... $ 1,425,000
200,000 Amwest Insurance Group, Inc. - Underwrites a variety of surety bonds (b) ............................. 2,700,000
500,000 AmVestors Financial Corporation - Writer of single-premium deferred annuities ........................ 7,375,000
200,000 Capital RE Corporation - Specialty reinsurance esp. mortgage guaranty market ......................... 9,325,000
200,000 CMAC Investment Corporation - Provides private mortgage insurance coverage (b) ....................... 7,350,000
181,200 Delphi Financial Group, Inc. (Class A) - Underwrites life, disability and personal accident ins (a)... 5,345,400
178,500 FPIC Insurance Group, Inc. - Malpractice ins to doctors and dentists in southeastern U.S. (a) ........ 2,409,750
1,020,000 John Alden Financial Corporation - Group health, life insurance and managed care services ............ 18,870,000
353,600 Kaye Group, Inc. - Underwrites property and casualty insurance for small businesses (b) .............. 1,856,400
1,000,000 Life USA Holding Inc. - Writes, sells universal life ins and annuity products in 40 states (a) ....... 12,000,000
220,000 Professionals Insurance Co. Management Group - Liability ins for medical professionals (a)(b) ........ 4,840,000
600,000 Pioneer Financial Services, Inc. - Underwrites health, accident, life and annuities (b) .............. 15,000,000
1,700,000 Presidential Life Corporation - Writes annuities, whole life, universal life and term policies (b).... 20,506,250
548,100 PXRE Corp. - Reinsurance products w/emphasis on commercial and personal property risk ................ 13,565,475
250,000 RenaissanceRe Holdings Ltd. - Property catastrophe reinsurance ....................................... 8,187,500
71,000 Symons International Group, Inc. - Nonstandard automobile and crop insurance (a) ..................... 1,189,250
500,000 Westbridge Capital Corp. - Underwrites and sells individual accident and health ins (a)(b) ........... 4,875,000
------------
136,820,025
LEISURE - 4.3%
325,000 Baldwin Piano & Organ Company - Maker of pianos and electric organs (a)(b) ........................... 3,656,250
669,000 Barefoot, Inc. - Residential lawn care services ...................................................... 10,620,375
150,000 Buckhead America Corporation - Mortgage servicing and hotel mgt services (a)(b) ...................... 900,000
500,000 ERO, Inc. - Children's products marketer featuring popular licensed characters (a) ................... 4,375,000
1,350,000 Grand Casinos, Inc. - Develops/manages land-based and dockside casinos, bingo facilities (a) ......... 18,225,000
856,000 Iwerks Entertainment, Inc. - Movie-based specialty theaters for out-of-home entertainment (a)(b) .... 4,280,000
323,900 Johnson Worldwide Associates, Inc. (Class A) - Manufactures recreational products (a) ................ 4,291,675
200,000 La Crosse Footwear, Inc. - Protective, industrial and recreational footwear .......................... 2,150,000
130,000 Marcus Corporation - Operates restaurants, theaters, hotels and motels ............................... 2,762,500
125,000 Matthews Int'l. Corp. (Class A) - Dsgns, mfrs and mkts custom-made identity products ................. 3,531,250
1,100,000 NTN Comm., Inc. - 24 hour entertainment network programming throughout U.S. (a) ...................... 4,193,750
907,000 Players International, Inc. - Operates casinos in regional mkts (a) .................................. 4,875,125
200,000 Sholodge, Inc. - Franchiser/operator of Shoney's Inn and Sumner Suites hotels (a) .................... 2,700,000
400,000 Trimark Holdings, Inc. - Distributor of home videos and feature films (a)(b) ......................... 2,100,000
200,000 West Coast Entertainment Corporation - Operates and franchises video specialty stores (a) ............ 1,750,000
------------
70,410,925
MANUFACTURING - 8.3%
1,100,000 Alpine Group, Inc. - Mfrs industrial copper wire, cable and refractory products (a)(b) ............... 7,562,500
650,000 Arden Industrial Products, Inc. - National distributor of specialty and standard fasteners (a)(b)..... 3,168,750
965,000 Astec Industries, Inc. - Dsgns, mfrs, and mkts asphalt plants, milling and paving equip (a)(b) ....... 9,167,500
100,000 Badger Meter, Inc. - Producer of fluid meters and flow valves (b) .................................... 3,837,500
182,300 Christiana Companies, Inc. - Constructs and sells pre-engineered metal buildings (a) ................. 4,694,225
300,000 Dakotah, Inc. - Dsgns, mfrs and mkts home fashion furnishings (a)(b) ................................. 1,293,750
692,500 Devlieg-Bullard, Inc. - Precision engineered machine tools (a)(b) .................................... 1,861,094
300,000 Encore Wire Corporation - Copper wire for commercial and residential uses (a) ........................ 5,175,000
391,500 Gehl Company - Agricultural and construction equipment (a)(b) ........................................ 4,257,562
700,000 General Chemical Group, Inc. - Mfrs and supplies inorganic chemicals ................................. 16,537,500
152,300 Global Industrial Technology, Inc. - Refractory products for iron and steel producers (a) ............ 3,369,637
117,500 Hampshire Group Ltd. - Produces classically-styled fashion sweaters (a) .............................. 1,586,250
210,000 Johnstown America Industries - Mfrs railroad freight cars and heavy truck components (a) ............. 918,750
450,000 Kentucky Electric Steel Company, Inc. - Owns and operates a mini steel mill (a)(b) ................... 2,587,500
318,300 Martin Industries, Inc. - Gas space heaters, gas logs, fireplaces and metal office furniture ......... 2,307,675
300,000 MFRI, Inc. - Manufacturer and marketer of filter bags, related parts and accessories (a)(b) .......... 2,381,250
162,200 Mosinee Paper Corporation - Industrial specialty and tissue paper products producer .................. 5,758,100
153,400 Penn Engineering & Manufacturing Corporation - Mfrs self-clinching fasteners ......................... 3,144,700
126,000 Pfeiffer Vacuum Technology (ADR) - Mfrs turbomolecular vacuum pumps (a) .............................. 2,268,000
600,000 Powell Industries, Inc. - Dsgns/mfrs/sells electrical power generation products (a)(b) ............... 8,325,000
</TABLE>
31
<PAGE> 50
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS - 86.4% [CONT'D] VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MANUFACTURING - 8.3% [cont'd.]
138,500 Reliance Steel & Aluminum Co. - Full-line distributor and processor of steel and aluminum ............ $ 4,847,500
300,000 Republic Group, Inc. - Gypsum wallboard and paperboard ............................................... 4,687,500
185,500 Rexworks, Inc. - Mfrs and sells concrete and waste mgt equipment (a)(b) .............................. 452,156
200,000 Schnitzer Steel Ind., Inc. (Class A) - Collects and recycles steel scrap, operates steel mini-mill ... 5,125,000
400,000 Spartech Corporation - Producer of single and multi-layer plastic sheet .............................. 4,450,000
250,000 Specialty Paperboard, Inc. - Supplier of heavyweight pressboard for office supplies (a)(b) ........... 5,000,000
590,000 Steel of West Virginia, Inc. - Operates a steel mini-mill in Huntington, West Virginia (a)(b) ........ 4,425,000
500,000 Stewart & Stevenson Services, Inc. - Engine-driven power systems ..................................... 14,562,500
219,000 Worldtex, Inc. - Mfrs elastic yarns used in apparel (a) .............................................. 1,943,625
------------
135,695,524
MARKETING/CORP SERVICES - 1.4%
300,000 Cyrk Int'l., Inc. - Custom-dsgns ads to promote brand names/corporate identities (a) ................. 3,900,000
312,500 LCS Industries, Inc. - Provides computer related direct response marketing services (b) .............. 4,531,250
300,000 LSI Industries, Inc. - Outdoor, indoor and landscape lighting for commercial/industrial uses ......... 3,975,000
250,000 M/A/R/C, Inc. - Provides market research, database marketing and consulting services (b) ............. 5,468,750
150,000 Norwood Promotional Products, Inc. - Supplies custom promotional products (a) ........................ 2,737,500
457,500 Outlook Group Corporation - Prints sports cards and product packaging materials (a)(b) ............... 2,173,125
------------
22,785,625
MEDICAL PRODUCTS - 4.6%
503,000 Allied Healthcare Products, Inc. - Mfrs/mkts medical gas and respiratory equip. (b) .................. 3,709,625
419,800 Collagen Corporation - Develops biomedical devices for the treatment of tissue ....................... 7,661,350
550,000 Conmed Corporation - Electrosurgical systems and ECG electrodes and accessories (a) .................. 11,275,000
585,100 The Female Health Company - Mfrs chemical and branded consumer health products (a)(b) ................ 2,376,968
275,000 Gish Biomedical, Inc. - Offers devices for use in cardiovascular and orthopedic surgery (a)(b) ....... 1,959,375
96,500 Hauser Chemical Research, Inc. - Chem. processor, extracts/purifies ingredients for drugs (a) ........ 566,938
416,500 Marquette Medical Systems, Inc. (Class A) - Medical electronic monitoring manufacturer (a) ........... 9,215,062
750,000 Matrix Pharmaceutical, Inc. - Develops new treatments for cancer and skin diseases (a) ............... 4,593,750
243,700 Medical Graphics Corporation - Computerized diagnostics to detect heart/lung diseases (a)(b) ......... 1,279,425
1,200,000 Mednet MPC Corporation - Provides pharmacy benefits mgt and prescription mail service (a) ............ 750,000
457,500 Minntech Corporation - Mfrs medical devices and supplies used in dialysis treatment (b) .............. 5,261,250
128,150 Nellcor Puritan Bennett, Inc. - Produces medical monitors and diagnostic equipment (a) ............... 2,803,281
600,000 OEC Medical Systems, Inc. - Mfrs computer based medical instruments (a) .............................. 9,000,000
550,000 Polymedica Industries, Inc. - Makes polyurethane-based drug delivery systems (a)(b) .................. 2,096,875
400,000 Rehabilicare, Inc. - Dsgns./mfrs/mkts electromedical rehab and pain mgt products (a)(b) .............. 1,700,000
500,000 Scios, Inc. - Develops drugs for cardiopulmonary diseases and tissue repair (a) ...................... 3,070,300
540,000 Sullivan Dental Products, Inc. - Consumable dental supplies and equipment to dentists (b) ............ 7,087,500
------------
74,406,699
RETAIL - 5.5%
450,000 Dairy Mart Convenience Stores, Inc. (Class A) - Operates over 800 convenience stores (a)(b) .......... 2,025,000
800,000 Damark International, Inc. (Class A) - Direct marketer of brand name merchandise (a)(b) .............. 7,600,000
962,000 Designs, Inc. - 120 specialty stores selling Levi Strauss and Boston Trader apparel (a)(b) ........... 5,411,250
330,000 Duckwall-ALCO Stores, Inc. - Discount retailer in small towns throughout central US (a)(b) ........... 4,702,500
1,000,000 Gibson Greetings, Inc. - Manufacturer and retailer of greeting cards (a)(b) .......................... 19,625,000
200,000 Good Guys, Inc. - Consumer electronics retailer in California (a) .................................... 1,300,000
720,000 Harmony Brook, Inc. - Water filtering equipment developer, mfr, distributor, operator (a)(b) ......... 405,000
403,000 HealthRite, Inc. - Dietary supplements, sports nutrition, personal care products (a)(b) .............. 1,057,875
345,800 Old America Stores, Inc. - Retailer of framing, floral, craft, decorative accent prod (a)(b) ......... 1,858,675
600,000 Oneita Industries, Inc. - Mfrs high quality blank T-shirts for screenprinting (a)(b) ................. 1,050,000
430,000 Regis Corporation - Operates hair and retail product salons .......................................... 6,987,500
651,800 Rhodes, Inc. - Retailer of brand-name furniture to middle-income customers (a)(b) .................... 5,051,450
229,700 Roberds, Inc. - Outlets of home furnishing products (a) .............................................. 1,895,025
1,206,500 Shopko Stores, Inc. - Discount store concentrated in the upper Midwest ............................... 18,097,500
100,000 Skymall, Inc. - Merchandise to airline passengers through in-flight catalogs (a) ..................... 887,500
500,000 Sports & Recreation, Inc. - 80 "Sports Unlimited" sporting goods superstores (a) ..................... 3,875,000
366,500 Trak Auto Corporation - Retail auto parts stores (a)(b) .............................................. 5,405,875
40,700 Weyco Group, Inc. - Manufacturer and retailer of quality shoes ....................................... 1,638,175
------------
88,873,325
</TABLE>
32
<PAGE> 51
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS - 86.4% [CONT'D] VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY - 4.5%
300,000 Align-Rite International, Inc. - Develops photomasks to produce integrated circuits (a)(b) ....... $ 3,300,000
300,000 Amtech Corporation - Hardware and software for the transportation industries (a) ................. 1,982,820
250,000 BancTec, Inc. - Computerized check processing systems (a) ........................................ 5,156,250
280,000 CSP, Inc. - Manufacturer of array processors to enhance computer speed (a)(b) .................... 2,310,000
400,000 Computer Products, Inc. - Dsgns and mfrs products for industrial data processing (a) ............. 7,800,000
467,500 C.P. Clare Corporation - Electromagnetic and semiconductor switches and relays (a)(b) ............ 4,675,000
885,000 Digital Biometrics, Inc. - Produces fingerprint recording and identification products (a)(b) ..... 1,880,625
350,000 Effective Mgmt. Systems, Inc. - Dev, mfrs, services integrated business mgt software (a)(b) ...... 2,012,500
300,000 Esterline Technologies Corporation - Aerospace/defense and instrumentation products (a) .......... 7,837,500
700,000 FSI International, Inc. - Manufacture of semiconductor equipment (a) ............................. 10,500,000
700,000 IEC Electronics Corporation - Complex printed circuit boards and electronic products (a)(b) ...... 5,775,000
144,200 Mizar, Inc. - Computer subsystems used in real-time image processing (a) ......................... 702,975
1,000,000 Netframe Systems, Inc. - Produces specialized systems for local area networks (a)(b) ............. 2,562,500
250,000 Nu Horizons Electronics, Inc. - Distributes memory chips, microprocessors, related prod (a) ...... 1,984,375
237,000 Pacific Scientific Company - Mfrs electrical and safety equipment ................................ 2,666,250
360,000 Peak Technologies Group, Inc. - Bar code data collection equip and systems distributor (a) ....... 4,320,000
562,000 Quixote Corporation - Legal technologies and highway crash barriers (b) .......................... 5,409,250
500,000 Technology Research Corporation - Control/measurement devices for electric power dist (b) ........ 2,250,000
--------------
73,125,045
TRANSPORTATION - 0.8%
600,000 Amtran, Inc. - Provides charter and selective scheduled air services to leisure travelers (a)(b).. 4,200,000
212,000 Marten Transport, Ltd. - Refrigerated long-haul motor carrier (a)(b) ............................. 2,915,000
264,000 MTL, Inc. - Transports industrial chemicals and bulk food products by tank truck (a)(b) .......... 5,346,000
500,000 Tower Air, Inc. - Long-haul scheduled and charter passenger air services ......................... 1,343,750
--------------
13,804,750
--------------
TOTAL COMMON STOCKS (Cost $1,136,414,937) ........................................................ $1,404,951,369
- -------------------------------------------------------------------------------------------------------------------------------
SHARES PREFERRED STOCK - 0.3% VALUE
- -------------------------------------------------------------------------------------------------------------------------------
HOME APPLIANCES - 0.3%
728,600 Fedders Corp. 6.25% convertible - Room air conditioner manufacturer ............................... $ 4,371,600
--------------
TOTAL PREFERRED STOCK (Cost $2,013,686) ........................................................... $ 4,371,600
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT CONVERTIBLE BONDS - 0.3% COUPON MATURITY VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AEROSPACE - 0.1%
$1,250,000 Mercury Air Group, Inc. - Ground support services
to commercial airlines and U.S. military (b) .............. 7.750% 02/01/2006 $ 1,243,750
BANKS AND SAVINGS & LOANS - 0.1%
400,000 Fort Bend Holding Corporation - S & L holding company with
four retail offices ....................................... 8.000 12/01/2005 449,500
1,000,000 Professional Bancorp - Five full service offices in
CA targeting professionals ................................ 8.500 03/01/2004 995,000
--------------
1,444,500
HEALTH CARE SERVICES - 0.0%
1,000,000 ICN Pharmaceuticals, Inc. - Manufactures and markets a broad
range of drugs ........................................... 8.500 11/15/1999 1,085,000
TECHNOLOGY - 0.1%
1,558,000 Quixote Corporation - Legal technologies and
highway crash barriers (b) ............................... 8.000 04/15/2011 1,371,040
--------------
TOTAL CONVERTIBLE BONDS (Cost $4,973,378) ......................................................... $ 5,144,290
</TABLE>
33
<PAGE> 52
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT CORPORATE BONDS - 0.4% COUPON MATURITY VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSTRUCTION/HOUSING - 0.4%
$ 6,905,000 Engle Homes, Inc. - Florida home builder and developer..... 11.750% 12/15/2000 $ 6,939,525
--------------
TOTAL CORPORATE BONDS (Cost $6,623,276) ............................................... $ 6,939,525
- -------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT U.S. GOVERNMENT SECURITIES - 3.0% COUPON MATURITY VALUE
- -------------------------------------------------------------------------------------------------------------------------------
$ 50,000,000 U.S. Treasury Note ........................................ 5.875% 08/15/1998 $ 49,937,500
--------------
TOTAL U.S. GOVERNMENT SECURITIES (Cost $49,824,213) ................................... $ 49,937,500
- -------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT SHORT-TERM INVESTMENTS - 4.8% COUPON MATURITY VALUE
- -------------------------------------------------------------------------------------------------------------------------------
U.S TREASURY SECURITIES - 4.8%
$ 27,500,000 U.S. Treasury Bill ........................................ 0.000% 02/27/1997 $ 27,284,055
50,000,000 U.S. Treasury Note ........................................ 6.500% 05/15/1997 50,156,250
--------------
77,440,305
VARIABLE RATE DEMAND NOTES (+) - 0.0%
362,000 Warner-Lambert Company .................................... 5.479% 03/18/1997 362,000
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $77,780,376) ....................................... $ 77,802,305
TOTAL INVESTMENTS - (Cost $1,277,629,866) ................. 95.2% $1,549,146,589
Cash and receivables, less liabilities .................... 4.8% 77,613,247
------ --------------
TOTAL NET ASSETS .......................................... 100.0% $1,626,759,836
====== ==============
</TABLE>
(a) Non-income producing security.
(b) Affiliated company. See Note 7 in Notes to Financial Statements.
(+) Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates.
The rate listed is as of December 31, 1996.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
34
<PAGE> 53
HEARTLAND VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (Cost $1,277,629,866) ....................... $1,549,146,589
Receivable from investments sold short .......................................... 79,327,687
Deposits with brokers for investments sold short ................................ 1,533,985
Receivable from fund shares sold ................................................ 1,975,729
Receivable from options contracts written ....................................... 111,328
Accrued dividends and interest .................................................. 2,879,457
--------------
Total Assets ................................................................ 1,634,974,775
--------------
LIABILITIES:
Payable for investments purchased ............................................... 3,520,413
Payable for fund shares redeemed ................................................ 1,562,132
Options contracts written, at value (Premiums $111,328) ......................... 12,500
Payable to custodian ............................................................ 1,569,316
Distributions payable ........................................................... 6,814
Payable to Advisor for management fee ........................................... 1,027,495
Accrued expenses ................................................................ 516,269
--------------
Total Liabilities ........................................................... 8,214,939
--------------
NET ASSETS APPLICABLE TO OUTSTANDING SHARES
($.001 par value, 100,000,000 shares authorized, 51,400,775 shares outstanding).. 1,626,759,836
==============
NET ASSET VALUE PER SHARE ........................................................... $ 31.65
==============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest .......................................................................... $ 13,667,971
Dividends ......................................................................... 7,545,098
--------------
Total investment income ......................................................... 21,213,069
--------------
EXPENSES:
Management fees ................................................................... 10,877,255
Distribution expense .............................................................. 3,625,752
Transfer agent fees ............................................................... 1,716,119
Postage ........................................................................... 459,646
Registration fees ................................................................. 367,825
Custodian fees .................................................................... 298,983
Printing and communications ....................................................... 210,900
Audit Fees ........................................................................ 40,303
Legal fees ........................................................................ 11,686
Directors' fees ................................................................... 6,578
Other operating expenses .......................................................... 396,735
--------------
Total expenses ................................................................ 18,011,782
--------------
NET INVESTMENT INCOME ............................................................. 3,201,287
--------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on:
Long sales ..................................................................... 98,754,941
Short sales .................................................................... (6,037)
Futures contracts .............................................................. 2,633,917
Net increase in unrealized appreciation on investments ............................ 167,734,490
--------------
TOTAL REALIZED AND UNREALIZED GAINS ON INVESTMENTS ................................ 269,117,311
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............................. $ 272,318,598
==============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
35
<PAGE> 54
HEARTLAND VALUE FUND
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1996 1995
------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income......................................................... $ 3,201,287 $ 5,278,676
Net realized gains on investments............................................. 101,382,821 56,744,275
Net increase in unrealized appreciation on investments........................ 167,734,490 135,718,470
-------------- --------------
Net increase in net assets resulting from operations...................... 272,318,598 197,741,421
DISTRIBUTIONS TO SHAREHOLDERS FROM: -------------- --------------
Net investment income......................................................... (3,201,287) (5,278,676)
Net realized gains on investments............................................. (101,601,571) (56,744,275)
-------------- --------------
Total distributions to shareholders....................................... (104,802,858) (62,022,951)
FUND SHARE ACTIVITIES: -------------- --------------
Proceeds from shares issued (15,865,977 and 31,485,987 shares, respectively).. 482,657,821 818,599,002
Reinvested dividends from net investment income and distributions from net
realized gains on investments (2,886,369 and 2,044,105 shares, respectively) 90,283,401 56,699,525
Cost of shares redeemed (9,964,582 and 5,853,677 shares, respectively)........ (304,623,134) (159,455,377)
-------------- --------------
Net increase in net assets derived from Fund share activities............. 268,318,088 715,843,150
-------------- --------------
TOTAL INCREASE IN NET ASSETS..................................................... 435,833,828 851,561,620
NET ASSETS AT THE BEGINNING OF THE YEAR.......................................... 1,190,926,008 339,364,388
-------------- --------------
NET ASSETS AT THE END OF THE YEAR................................................ $1,626,759,836 $1,190,926,008
============== ==============
</TABLE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of year..................................... $ 27.95 $ 22.72 $ 23.22 $ 20.41 $16.06
Income from investment operations:
Net investment income (loss)........................................ 0.06 0.13 (0.09) (0.12) (0.09)
Net realized and unrealized gains on investments.................... 5.78 6.63 0.47 3.95 6.91
--------- --------- ------- ------- ------
Total income from investment operations.......................... 5.84 6.76 0.38 3.83 6.82
Less distributions from:
Net investment income............................................... (0.06) (0.13) -- -- --
Net realized gains on investments................................... (2.08) (1.40) (0.88) (1.02) (2.47)
--------- --------- ------- ------- ------
Total distributions.............................................. (2.14) (1.53) (0.88) (1.02) (2.47)
Net asset value, end of year........................................... $ 31.65 $ 27.95 $ 22.72 $ 23.22 $20.41
========= ========= ======= ======= ======
TOTAL RETURN(1) ....................................................... 21.0% 29.8% 1.7% 18.8% 42.5%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (in thousands).............................. $1,626,760 $1,190,926 $339,364 $186,518 $48,391
Ratio of expenses to average net assets............................. 1.23% 1.29% 1.39% 1.51% 1.48%
Ratio of net investment income (loss) to average
net assets......................................................... 0.22% 0.61% (0.52)% (0.71)% (0.49)%
Portfolio turnover rate............................................. 31% 31% 35% 51% 76%
Average commission per share (2).................................... $ 0.0530 N/A N/A N/A N/A
</TABLE>
(1) The contingent deferred and initial sales charges in effect for the Fund
prior to June 1, 1994 are not reflected in Total Return as set forth in the
table.
(2) Disclosure of average commission per share was not required prior to the
year ended December 31, 1996.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
36
<PAGE> 55
HEARTLAND MID CAP VALUE FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS - 91.4% VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AUTOMOTIVE - 1.7%
4,000 A. O. Smith Corporation - Makes auto frames, motors, water heaters and other misc. items........... $ 119,500
BANKS AND SAVINGS & LOANS - 12.1%
2,800 Commercial Federal Corporation - S & L serving Nebraska, Colorado,
Kansas and Oklahoma.............................................................................. 134,400
3,000 Cullen/Frost Bankers, Inc. - Bank holding company in Texas........................................ 99,750
5,000 First Financial Corporation - Charleston, SC area S & L............................................ 122,500
8,000 Hibernia Corporation (Class A) - Bank holding company in Louisiana................................. 106,000
3,600 Signet Banking Corporation - Bank holding company in VA, MD and DC................................. 110,700
9,500 Sovereign Bancorp, Inc. - S & L holding company in PA, NJ and DE................................... 124,688
4,000 TR Financial Corp. - Invests deposits in one to four family residential properties................. 142,000
-------------
840,038
BUILDING PRODUCTS - 2.4%
3,000 Medusa Corporation - Produces cement and stone..................................................... 103,125
1,200 Texas Industries, Inc. - Produces steel and construction materials, including cement............... 60,750
-------------
CHEMICALS - 2.5% 163,875
5,500 Agrium, Inc. - Manufacturer and distributor of fertilizers......................................... 75,625
6,500 Terra Industries, Inc. - Produces nitrogen fertilizer, crop protection chemicals and seed.......... 95,875
-------------
171,500
CONSTRUCTION/HOUSING - 4.1%
1,100 Pulte Corporation - Holding company for home-building and financial service cos.................... 33,825
1,600 Fleetwood Enterprises, Inc. - Produces recreational vehicles and manufactured housing.............. 44,000
4,500 Lennar Corporation - Builds single family homes; builds and manages rental units................... 122,625
4,300 Toll Brothers, Inc. - Designs, builds, markets, and finances single-family homes (a)............... 83,850
-------------
284,300
CONSUMER PRODUCTS - 3.2%
3,000 First Brands Corporation - Mfrs and sells products for the home and automobile markets............. 85,125
8,000 Wellman, Inc. - Mfrs high-quality "Fortel" polyester textile fibers; related products.............. 137,000
-------------
222,125
DIVERSIFIED OPERATIONS - 2.1%
10,000 Onex Corporation - In-flight catering, food service dist., auto steel parts and brakes............. 142,284
ENERGY & NATURAL RESOURCES - 5.0%
2,500 Asarco, Inc. - Mines zinc; produces copper, lead and silver........................................ 62,188
12,400 Ranger Oil Ltd. - Explores for and produces oil and natural gas.................................... 122,450
4,000 Santa Fe Pacific Gold Corporation - Explores for, develops gold properties/mines; processes ore.... 61,500
7,000 TransTexas Gas Corporation - Explores for, produces and transmits natural gas primarily in TX (a).. 101,500
-------------
347,638
FINANCIAL SERVICES - 5.0%
6,000 Lehman Brothers Holdings, Inc. - Worldwide investment banking and brokerage services............... 188,250
4,000 Olympic Financial Ltd. - Buys, sells and services retail installment contracts for cars (a)........ 57,500
2,400 PHH Corporation - Provides cost-effective vehicle and home-related services........................ 103,200
-------------
348,950
FOOD & BEVERAGE - 6.0%
12,000 Darden Restaurants, Inc. - Operates "Red Lobster," "Bahama Breeze" and "The Olive Garden".......... 105,000
3,500 Dean Foods Company - Buys, processes and distributes dairy and specialty food products............. 112,875
4,700 IBP Inc. - Produces fresh/boxed beef/pork products; treats hides for leather....................... 113,975
3,000 SUPERVALU, Inc. - Food distributor; operator of grocery stores..................................... 85,125
-------------
416,975
FOREST PRODUCTS - 3.5%
3,900 Boise Cascade Corporation - Mfrs paper products and building products; owns timberland............. 123,825
2,500 Bowater, Inc. - Produces paper and lumber.......................................................... 94,063
1,500 P. H. Glatfelter Company - Mfrs paper and manages woodlands........................................ 27,000
-------------
244,888
HEALTH CARE SERVICES - 8.9%
1,000 Allegiance Corporation - Provides healthcare products and cost management services................. 27,625
10,000 HealthPlan Services Corporation - Managed health care services company (a)......................... 211,250
5,000 Integrated Health Services, Inc. - 192 facilities providing rehabilitation/pharmacy services....... 121,875
7,400 Sun Healthcare Group, Inc. - Provides nursing, rehabilitation therapy, other specialized care (a).. 99,900
4,500 Wellpoint Health Networks, Inc. - Managed health care company (a).................................. 154,688
-------------
615,338
</TABLE>
37
<PAGE> 56
HEARTLAND MID CAP VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] o DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS - 91.4% [CONT'D] VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INSURANCE - 10.4%
4,500 Horace Mann Educators Corp. - Insurance provider to primarily public school employees ................. $ 181,688
3,000 Mid Ocean Ltd. - Reinsurance provider ................................................................. 157,500
700 Ohio Casualty Corporation - Offers full line of property and casualty insurance ....................... 24,850
3,000 Protective Life Corporation - Produces, distributes, services insurance/investment products ........... 119,625
12,000 Reliance Group Holdings, Inc. - Property, casualty and title insurance; diversified inv.; real estate . 109,500
4,000 Vesta Insurance Group, Inc. - Property and casualty insurance group ................................... 125,500
-----------
718,663
LEISURE - 0.6%
3,000 Grand Casinos, Inc. - Develops/manages land-based and dockside casinos, bingo facilities (a) .......... 40,500
MANUFACTURING - 11.3%
7,000 AGCO Corporation - Mfr/dist agricultural and related replacement parts worldwide ...................... 200,375
3,000 A K Steel Holding Corporation - Integrated steel producer ............................................. 118,875
1,000 Armco, Inc. - Produces electrical and stainless steels and steel products (a) ......................... 4,125
3,400 Blount Int'l, Inc. (Class A) - Mfrs outdoor products, industrial, power and sporting equipment ........ 130,475
1,400 Cummins Engine Company, Inc. - Mfrs heavy-duty and midrange diesel engines ............................ 64,400
1,800 La-Z-Boy, Inc. - Mfr of residential and office furniture .............................................. 53,100
2,000 McDermott International, Inc. - Worldwide energy services company ..................................... 33,250
500 Navistar International Corp. - Mfrs medium/heavy diesel trucks and midrange diesel engines (a) ........ 4,563
4,000 Stewart & Stevenson Services, Inc. - Engine-driven power systems ...................................... 116,500
1,000 Tecumseh Products Company - Mfrs refrigeration products, small gas engines, gear drives, pumps ........ 57,375
-----------
783,038
REITS - 0.7%
2,000 Walden Residential Properties, Inc. - Garden apts in OK, FL, AZ, TX, UT and TN ........................ 49,750
RETAIL - 2.3%
10,000 Heilig Meyers Company - Retailer of home furnishings .................................................. 162,500
TECHNOLOGY - 6.1%
4,000 Advanced Micro Devices, Inc. - Designs, develops, manufactures, and markets integrated circuits (a) ... 103,000
2,000 Auspex Systems Inc. - Develops, mfrs, and markets a line of UNIX/NFS file servers (a) ................. 23,250
5,000 National Semiconductor Corp. - Designs, develops, mfrs and mkts semiconductor products (a) ............ 121,875
3,300 MEMC Electronic Materials, Inc. - Produces silicon wafers used in semiconductors (a) .................. 74,250
4,000 Teradyne, Inc. - Mfrs electronic systems/connection systems and software (a) .......................... 97,500
-----------
419,875
UTILITIES - 3.5%
3,500 Oklahoma Gas & Electric Company - Generates, transmits and distributes electricity in OK and AK ....... 146,122
5,000 Public Service Co. of New Mexico - Operates electric, gas, and water utilities in NM .................. 98,125
-----------
244,247
-----------
TOTAL COMMON STOCKS (Cost $6,002,710) ................................................................. $ 6,335,984
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT SHORT-TERM INVESTMENTS - 7.5% COUPON MATURITY VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
VARIABLE RATE DEMAND NOTES (+) -7.5%
220,000 Sara Lee Corporation ............................. 5.467% 05/02/1997 $ 220,000
300,000 Warner-Lambert Company ........................... 5.479 03/18/1997 300,000
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $520,000) ................................................ $ 520,000
TOTAL INVESTMENTS - (Cost $6,522,710) .............. 98.9% $ 6,855,984
Cash and receivables, less liabilities ............. 1.1% 77,978
----- -----------
TOTAL NET ASSETS 100.0% $ 6,933,962
===== ===========
</TABLE>
(a) Non-income producing security.
(+) Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates.
The rates listed are as of December 31, 1996.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
38
<PAGE> 57
HEARTLAND MID CAP VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (Cost $6,522,710) .......................... $6,855,984
Cash ........................................................................... 2,478
Receivable from fund shares sold ............................................... 79,334
Accrued dividends and interest ................................................. 8,831
Deferred organization expense .................................................. 15,607
----------
Total Assets ............................................................... 6,962,234
----------
LIABILITIES:
Payable to Advisor for management fee .......................................... 3,838
Payable to Advisor for deferred organization expense ........................... 15,607
Accrued expenses ............................................................... 8,827
----------
Total Liabilities .......................................................... 28,272
----------
NET ASSETS APPLICABLE TO OUTSTANDING SHARES
($.001 par value, 100,000,000 shares authorized, 650,201 shares outstanding) ... $6,933,962
==========
NET ASSET VALUE PER SHARE .......................................................... $ 10.66
==========
</TABLE>
STATEMENT OF OPERATIONS
FOR THE PERIOD OCTOBER 11, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividends ........................................... $ 10,834
Interest ............................................ 7,546
--------
Total investment income ........................... 18,380
--------
EXPENSES:
Management fees ......................................... 6,087
Distribution fees ....................................... 2,029
Audit fees .............................................. 5,500
Transfer agent fees ..................................... 3,699
Custodian fees .......................................... 844
Amortization of organization expenses ................... 821
Registration fees ....................................... 788
Legal fees .............................................. 189
Postage ................................................. 69
--------
Total expenses ........................................ 20,026
--------
NET INVESTMENT LOSS ..................................... (1,646)
--------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized losses on investments ...................... (3,604)
Net increase in unrealized appreciation on investments... 333,274
--------
TOTAL REALIZED AND UNREALIZED GAINS ON INVESTMENTS ...... 329,670
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .... $328,024
========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
39
<PAGE> 58
HEARTLAND MID CAP VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCT. 11, 1996
(COMMENCEMENT
OF OPERATIONS) TO
DEC. 31, 1996
- --------------------------------------------------------------------------------------
<S> <C>
OPERATIONS:
Net investment loss ................................................ $ (1,646)
Net realized losses on investments ................................. (3,604)
Net increase in unrealized appreciation on investments ............. 333,274
-----------
Net increase in net assets resulting from operations ........... 328,024
-----------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (662,589 shares) ....................... 6,732,455
Cost of shares redeemed (12,388 shares) ............................ (126,517)
-----------
Net increase in net assets derived
from Fund share activities ..................................... 6,605,938
-----------
TOTAL INCREASE IN NET ASSETS ........................................... 6,933,962
NET ASSETS AT THE BEGINNING OF THE PERIOD .............................. ---
-----------
NET ASSETS AT THE END OF THE PERIOD .................................... $ 6,933,962
===========
</TABLE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCT. 11, 1996(1)
THROUGH
DEC. 31, 1996
----------------
<S> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of period ................................ $ 10.00
Income from investment operations:
Net investment income ........................................... --
Net realized and unrealized gains on investments ................ 0.66
---------
Total income from investment operations ..................... 0.66
---------
LESS DISTRIBUTIONS FROM:
Net investment income ........................................... --
Net realized gains on investments ............................... --
---------
Total distributions ......................................... --
Net asset value, end of period ..................................... $ 10.66
=========
TOTAL RETURN ....................................................... 6.6% (2)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) ....................... $ 6,934
Ratio of expenses to average net assets ........................ 1.94% (3)
Ratio of net investment loss to average net assets ............. (0.16%)(3)
Portfolio turnover rate ........................................ 4%
Average commission per share ................................... $ 0.0675
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
40
<PAGE> 59
HEARTLAND LARGE CAP VALUE FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS - 83.7% VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AIR FREIGHT - 1.3%
700 Federal Express Corporation - Transports freight by air for overnight delivery (a) ............ $ 31,150
BANKS AND SAVINGS & LOANS - 5.3%
400 Chase Manhattan Corp. - Corporate finance, wholesale banking, investment services ............. 35,700
600 PNC Bank Corporation - Consumer, corporate, mortgage, and real estate banking ................. 22,575
1,100 Summit Bancorp - Commercial, retail, mortgage banking and investment mgt services ............. 48,125
600 Union Planters Corporation - Banking and broker/dealer services through 402 offices ........... 23,400
--------
129,800
COMMUNICATIONS - 4.5%
1,400 AT & T Corporation - Communication service and product provider ............................... 60,900
2,200 Frontier Corporation - National long distance telecom. provider ............................... 49,775
--------
110,675
CONSTRUCTION/HOUSING - 1.4%
1,600 Louisiana-Pacific Corporation - Produces lumber and building products; owns 1,585,000 acres ... 33,800
DIVERSIFIED OPERATIONS - 1.2%
300 Textron, Incorporated - Helicopters, combat vehicles, auto parts and missile reentry systems .. 28,275
ELECTRICAL & ELECTRONICS - 2.0%
1,200 Philips Electronics N.V. - Consumer electronics, medical products and comm. systems ........... 48,000
ENERGY & NATURAL RESOURCES - 4.9%
1,200 Elf Aquitane (ADR) - Explores, refines, and markets petroleum and related products ............ 54,300
2,600 YPF Sociedad Anonima (ADR) - Integrated oil and gas company ................................... 65,650
--------
119,950
FINANCIAL SERVICES - 4.1%
800 Lehman Brothers Holdings, Inc. - Worldwide investment banking and brokerage services .......... 25,100
800 Student Loan Marketing Association - Purchases and services student loans ..................... 74,500
--------
99,600
FOOD & BEVERAGE - 4.6%
6,400 Darden Restaurants, Inc. - Operates "Red Lobster," "Bahama Breeze" and "The Olive Garden" ..... 56,000
600 Guinness PLC (ADR) - Distills/brews and markets Guinness beer ................................. 23,487
1,200 SUPERVALU, Inc. - Food distributor; operator of grocery stores ................................ 34,050
--------
113,537
HEALTH CARE SERVICES - 8.1%
600 Aetna, Inc. - Health and life ins for individuals and employer-sponsored groups ............... 48,000
5,500 Beverly Enterprises - Nursing care facilities, home health care and retirement housing (a) .... 70,125
3,600 Tenet Healthcare Corporation - Operate more than 75 acute care hospitals (a) .................. 78,750
--------
196,875
HOME FURNISHINGS - 2.9%
6,000 Shaw Industries, Inc. - Manufactures tufted carpet for residential and commercial use ......... 70,500
INSURANCE - 11.9%
1,800 Allmerica Financial Corporation - Insurance and financial services provider ................... 60,300
1,100 Allmerica Property & Casualty Companies, Inc. - Underwrites property-liability insurance ...... 33,413
900 American General Corporation - Provides life insurance, annuities and consumer loans .......... 36,787
800 Jefferson-Pilot Corporation - Writes annuity policies, and life, accident, and health ins ..... 45,300
1,300 Ohio Casualty Corporation - Offers full line of property and casualty insurance ............... 46,150
600 St. Paul Companies, Inc. - Worldwide provider of property-liability insurance ................. 35,175
1,600 USF & G Corporation - Commercial, family, business, specialty business, and life ins .......... 33,400
--------
290,525
MANUFACTURING - 2.8%
2,000 Hanson PLC (ADR) - Broadly diversified international industrial company ....................... 13,500
1,800 Lubrizol Corporation - Manufacturer of chemical additives for lubricants and fuels ............ 55,800
--------
69,300
</TABLE>
41
<PAGE> 60
HEARTLAND LARGE CAP VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS - 83.7% [CONT'D] VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PAPER PRODUCTS - 7.6%
2,800 Fort Howard Corporation - Mfrs consumer tissue products from recycled fibers (a) ................ $ 77,525
800 International Paper Company - Paper, paperboard, packaging products and wood pulp ............... 32,300
1,100 Jefferson Smurfit Group PLC (ADR) - Corrugated cases, paper, paperboard, packaging materials .... 29,837
800 Mead Corporation - Makes and sells paper, paperboard, pulp and wood products .................... 46,500
----------
186,162
RETAIL - 3.4%
700 Dillard Dept. Stores, Inc. (Class A) - 245 retail department stores in Midwestern states ........ 21,613
6,000 K Mart Corp. - Int'l retailer with such outlets as "Kmart" and "Builders Square" (a) ............ 62,250
----------
83,863
TECHNOLOGY - 1.5%
1,000 Digital Equipment Corporation - Networked platforms for client/server computing (a) ............. 36,375
TOBACCO - 6.5%
400 Philip Morris Companies, Inc. - Tobacco, food, beer, and financial services ..................... 45,050
1,600 RJR Nabisco Holdings Corporation - Int'l consumer products co.; mostly tobacco and foods ........ 54,400
1,800 UST, Inc. - Smokeless tobacco and related products, and premium wines ........................... 58,275
----------
157,725
UTILITIES - 9.7%
1,300 Consolidated Natural Gas Company - Natural gas utility holding company .......................... 71,825
4,300 Niagara Mohawk Power Corporation - Produces and transmits electricity and gas in NY (a) ......... 42,463
800 Ohio Edison Company - Western Pennsylvania and Ohio electric service provider ................... 18,200
1,200 Oklahoma Gas & Electric Co. - Generates, transmits and distributes electricity in OK and AK ..... 50,100
2,000 Unicom Corporation - Chicago area and northern Illinois provider of electricity ................. 54,250
----------
236,838
----------
TOTAL COMMON STOCKS (Cost $1,963,874) ........................................................... $2,042,950
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT SHORT-TERM INVESTMENTS - 22.2% COUPON MATURITY VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
VARIABLE RATE DEMAND NOTES (+) - 22.2%
$120,700 Eli Lilly Company .............................. 5.440% 07/28/1997 $ 120,700
120,700 General Mills, Inc ............................. 5.495 08/19/1997 120,700
113,620 Pitney Bowes, Inc .............................. 5.507 01/31/1997 113,620
60,350 Sara Lee Corporation ........................... 5.487 05/02/1997 60,350
127,780 Warner-Lambert Company ......................... 5.479 03/18/1997 127,780
----------
TOTAL SHORT-TERM INVESTMENTS (Cost $543,150) ........................................ $ 543,150
TOTAL INVESTMENTS - (Cost $2,507,024) ............ (105.9)% $2,586,100
Liabilities, less cash and receivables ........... (5.9)% (144,625)
-------- ----------
TOTAL NET ASSETS ................................. 100.0 % $2,441,475
======== ==========
</TABLE>
(a) Non-income producing security.
(+) Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates.
The rates listed are as of December 31, 1996.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
42
<PAGE> 61
HEARTLAND LARGE CAP VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1996
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------
ASSETS:
Investments in securities, at value (Cost $2,507,024) ............................. $2,586,100
Cash .............................................................................. 2,201
Accrued dividends and interest .................................................... 4,045
Deferred organization expense ..................................................... 15,607
----------
Total Assets .................................................................. 2,607,953
----------
LIABILITIES:
Payable for investments purchased ................................................. 144,580
Payable to Advisor for management fee ............................................. 1,229
Payable to Advisor for deferred organization expense .............................. 15,607
Accrued expenses .................................................................. 5,062
----------
Total Liabilities ............................................................. 166,478
----------
NET ASSETS APPLICABLE TO OUTSTANDING SHARES
($.001 par value, 100,000,000 shares authorized, 232,419 shares outstanding) ..... $2,441,475
==========
NET ASSET VALUE PER SHARE ............................................................ $ 10.50
==========
</TABLE>
STATEMENT OF OPERATIONS
FOR THE PERIOD OCTOBER 11, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends .............................................................................. $ 5,908
Interest .............................................................................. 3,779
----------
Total investment income ............................................................ 9,687
----------
EXPENSES:
Management fees ........................................................................ 2,325
Distribution fees ...................................................................... 775
Audit fees ............................................................................. 3,500
Transfer agent fees .................................................................... 1,605
Custodian fees ......................................................................... 927
Amortization of organization expenses .................................................. 821
Legal fees ............................................................................. 373
Registration fees ...................................................................... 290
Postage ................................................................................ 57
----------
Total expenses ..................................................................... 10,673
----------
NET INVESTMENT LOSS .................................................................... (986)
----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized losses on investments ..................................................... (1,071)
Net increase in unrealized appreciation on investments ................................. 79,076
----------
TOTAL REALIZED AND UNREALIZED GAINS ON INVESTMENTS ..................................... 78,005
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................................... $ 77,019
==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
43
<PAGE> 62
HEARTLAND LARGE CAP VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
OCT. 11, 1996
(COMMENCEMENT
OF OPERATIONS)
TO DEC. 31, 1996
- ------------------------------------------------------------------------------------------
<S> <C>
OPERATIONS:
Net investment loss .................................................... $ (986)
Net realized losses on investments ..................................... (1,071)
Net increase in unrealized appreciation on investments ................. 79,076
----------
Net increase in net assets resulting from operations ............... 77,019
----------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (254,625 shares) ........................... 2,589,599
Cost of shares redeemed (22,206 shares) ................................ (225,143)
----------
Net increase in net assets derived from fund share activities ...... 2,364,456
----------
TOTAL INCREASE IN NET ASSETS .............................................. 2,441,475
NET ASSETS AT THE BEGINNING OF THE PERIOD ................................. --
----------
NET ASSETS AT THE END OF THE PERIOD ....................................... $2,441,475
==========
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
OCT. 11, 1996(1)
THROUGH
DEC. 31, 1996
----------------
<S> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of period .................................... $ 10.00
Income from investment operations:
Net investment income ............................................... --
Net realized and unrealized gains on securities ..................... 0.50
---------
Total income from investment operations ......................... 0.50
Less distributions from:
Net investment income ............................................... --
Net realized gains on investments ................................... --
---------
Total distributions ............................................. --
Net asset value, end of period .......................................... $ 10.50
=========
TOTAL RETURN ............................................................ 5.0%(2)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) ............................ $ 2,441
Ratio of expenses to average net assets ............................. 2.73 %(3)
Ratio of net investment loss to average net assets .................. (0.25)%(3)
Portfolio turnover rate ............................................. 1 %
Average commission per share ........................................ $ 0.0668
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
44
<PAGE> 63
HEARTLAND VALUE PLUS FUND
(FORMERLY THE HEARTLAND VALUE & INCOME FUND)
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS - 54.4% VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE - 4.8%
70,000 Kaman Corporation (Class A) - Produces advanced aerospace products ............................... $ 910,000
17,000 Woodward Governor Company - Controls and accessory products for prime movers ..................... 2,244,000
----------
3,154,000
BANKS AND SAVINGS & LOANS - 8.2%
25,000 CU Bancorp - Provider of commercial and mortgage banking services in CA .......................... 290,625
50,000 Hinsdale Financial Corp. - Holding company operating 10 retail banks in Illinois (a) ............. 1,250,000
25,000 Premier Financial Bancorp - Community bank holding company operating in Kentucky ................. 350,000
75,000 Teche Holding Company - Holding company for Teche Federal Savings Bank ........................... 1,078,125
70,000 TR Financial Corp. - Invests deposits in one to four family residential properties ............... 2,485,000
----------
5,453,750
COMMUNICATIONS - 0.2%
10,000 Gilbert Associates, Inc. (Class A) - Mfrs telecom equipment and provides technical services ...... 137,500
ENERGY & NATURAL RESOURCES - 7.6%
120,000 Berry Petroleum Company (Class A) - Explores and produces oil and natural gas .................... 1,725,000
125,000 USX Delhi Group - Sells natural gas to distribution companies and electric utilities ............. 1,984,375
71,300 Western Gas Resources, Inc. - Natural gas gathering and processing facilities .................... 1,372,525
----------
5,081,900
FINANCIAL SERVICES - 0.8%
35,000 Medallion Financial Corporation - Finance company specializing in taxi medallions ................ 533,750
FOOD & BEVERAGE - 4.3%
300,000 Morrison Fresh Cooking, Inc. - Operates cafeterias, and quick-service restaurants ................ 1,387,500
70,000 Nash Finch Company - Distributor of food and nonfood products .................................... 1,487,500
----------
2,875,000
HEALTH CARE SERVICES - 3.8%
228,500 NovaCare, Inc. - Contract rehabilitation services to health care institutions (a) ................ 2,513,500
INSURANCE - 2.8%
22,500 Donegal Group, Inc. - Underwrites a broad line of personal and commercial insurance .............. 461,250
70,500 Lawyers Title Corporation - Residential and commercial title insurance services .................. 1,383,562
----------
1,844,812
LEISURE - 3.7%
226,900 American Recreation Centers, Inc. - Operates 41 bowling centers in six states .................... 1,304,675
150,000 Intrav, Inc. - Designs, markets and operates escorted, international travel programs ............. 1,176,570
----------
2,481,245
MANUFACTURING - 12.2%
16,300 Alamo Group, Inc. - Designs, mfrs, mkts mowing equipment and replacement parts ................... 279,138
108,200 Decorator Industries, Inc. - Designs and prints fabric for home furnishings ...................... 1,230,775
120,000 Flexsteel Industries, Inc. - Upholstered furniture for various markets ........................... 1,560,000
59,500 Greenbrier Companies, Inc. - Mfrs and refurbishes rail cars and marine vessels ................... 617,313
50,000 Insteel Industries, Inc. - Welded wire reinforcement and industrial wires ........................ 443,750
26,000 Knape & Vogt Mfg, Inc. - Storage products ........................................................ 429,000
55,000 Stewart & Stevenson Services, Inc. - Engine-driven power systems ................................. 1,601,875
100,000 Tab Products Company - Office filing, furniture systems and computer products .................... 887,500
30,000 Toro Company - Consumer and commercial lawn and snow removal equipment ........................... 1,095,000
----------
8,144,351
REITS - 1.5%
25,000 Ambassador Apartments, Inc. - Multifamily residential properties in TX, AZ, IL and FL ........... 590,625
25,000 Equity Inns, Inc. - Equity interests in hotels in 26 states ..................................... 325,000
80,000 Walden Residential Properties, Inc. (Warrants) (144A) -
Garden apts in OK, FL, AZ, TX, UT and TN (a) .................................................. 96,000
----------
1,011,625
RETAIL - 1.5%
40,000 Carson Pirie Scott & Company - Department store retailer concentrated in upper Midwest (a) ...... 1,010,000
</TABLE>
45
<PAGE> 64
HEARTLAND VALUE PLUS FUND
(FORMERLY THE HEARTLAND VALUE & INCOME FUND)
SCHEDULE OF INVESTMENTS [CONT'D] - DECEMBER 31, 1996
<TABLE>
- -----------------------------------------------------------------------------------------------------------
SHARES COMMON STOCKS - 54.4% [CONT'D] VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES - 3.0%
25,000 Atlantic Energy, Inc. - Holding company for Atlantic City Electric................ $ 428,125
30,000 Minnesota Power & Light Company - Provides electric service in central
and northern MN................................................................. 825,000
40,000 Providence Energy Corporation - Parent of 2 wholly-owned gas utilities............ 700,000
------------
1,953,125
------------
TOTAL COMMON STOCKS (COST $29,957,252)............................................ $ 36,194,558
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
SHARES PREFERRED STOCK - 2.9% VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C>
REITS - 2.9%
80,000 Walden Residential Properties, Inc. 9.2% (144A)
- Garden apts in OK, FL, AZ, TX, UT and TN..................................... $ 1,920,000
-------------
TOTAL PREFERRED STOCK (Cost $1,904,000).......................................... $ 1,920,000
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PAR
AMOUNT CONVERTIBLE BONDS - 14.2% COUPON MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C>
BANKS AND SAVINGS & LOANS - 3.0% <C> <C> <C>
$1,000,000 Fort Bend Holding Corporation - S&L holding company
with four retail offices............................... 8.000% 12/01/2005 $ 1,123,750
500,000 Professional Bancorp, Inc. - Five full service offices in
CA targeting professionals............................. 8.500 03/01/2004 497,500
265,000 SierraWest Bancorp - Bank holding co. located
in Lake Tahoe, CA...................................... 8.500 02/01/2004 393,525
-----------
2,014,775
ELECTRICAL AND ELECTRONICS - 0.8%
500,000 Magnetek, Inc. - Mfrs motors, controls, lighting and
power supply products................................... 8.000 09/15/2001 511,250
FOOD & BEVERAGE - 1.1%
750,000 Chock Ful O' Nuts Corporation - Coffees, teas,
shell peanuts and peanut products....................... 8.000 09/15/2006 705,000
HEALTH CARE SERVICES - 2.8%
500,000 Healthsource, Inc. (144A) - Owns and operates
HMO's in eastern U.S.................................... 5.000 03/01/2003 391,250
700,000 ICN Pharmaceuticals, Inc. - Manufactures and
markets a broad range of drugs.......................... 8.500 11/15/1999 759,500
800,000 TheraTx, Inc. - Health care services in subacute
care and occupational health............................ 8.000 02/01/2002 741,000
-----------
1,891,750
HOME APPLIANCES - 0.8%
560,000 Fedders Corp. - Room air conditioner manufacturer......... 8.500 06/15/2012 532,000
LEISURE - 3.0%
2,000,000 Bell Sports Corporation - Produces and mkts
bicycle helmets and related accessories................. 4.250 11/15/2000 1,565,000
475,000 Outboard Marine Corp. - Mfrs and mkts marine products
for leisure time purposes............................... 7.000 07/01/2002 463,125
-----------
2,028,125
TECHNOLOGY - 1.9%
1,500,000 Park Electrochemical Corp. - Designs and produces advanced
electronic materials.................................... 5.500 03/01/2006 1,291,875
UTILITIES - 0.8%
500,000 Hector Communication Corporation - Five telephone
companies and 28 cable TV systems in MN and WI.......... 8.500 02/15/2002 510,000
-----------
TOTAL CONVERTIBLE BONDS (Cost $9,027,889)...........................................$ 9,484,775
</TABLE>
46
<PAGE> 65
HEARTLAND VALUE PLUS FUND
(FORMERLY THE HEARTLAND VALUE & INCOME FUND)
SCHEDULE OF INVESTMENTS [CONT'D] - DECEMBER 31, 1996
<TABLE>
- --------------------------------------------------------------------------------------------------------------
PAR
AMOUNT CORPORATE BONDS - 4.6% COUPON MATURITY VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AEROSPACE - 0.8%
$ 500,000 UNC, Inc. - Mfrs and remanufactures engine & airframe parts ..... 9.125% 07/15/2003 $ 501,250
CONSTRUCTION/HOUSING -1.5%
1,000,000 Engle Homes, Inc. - Florida home builder and developer........... 11.750 12/15/2000 1,005,000
HEALTH CARE SERVICES - 1.5%
1,000,000 Regency Health Services, Inc. - Operator of
California health care facilities............................ 9.875 10/15/2002 1,015,000
LEISURE - 0.8%
500,000 Grand Casinos, Inc. - Develops, manages land-based
and dockside casinos, bingo facilities....................... 10.125 12/01/2003 506,250
----------
TOTAL CORPORATE BONDS (Cost $2,936,193) ............................................. $3,027,500
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PAR
AMOUNT SHORT-TERM INVESTMENTS - 23.2% COUPON MATURITY VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DISCOUNT NOTES - 17.2%
$6,000,000 Federal Home Loan Mortgage Corporation..................... 0.000% 01/06/1997 $ 5,995,542
3,500,000 Federal National Mortgage Association...................... 0.000 01/13/1997 3,493,700
2,000,000 Federal National Mortgage Association...................... 0.000 01/21/1997 1,993,967
----------
11,483,209
VARIABLE RATE DEMAND NOTES (+) - 6.0%
967,500 Eli Lilly Company.......................................... 5.440 07/28/1997 967,500
3,000,000 Warner-Lambert Company..................................... 5.479 03/18/1997 3,000,000
----------
3,967,500
----------
TOTAL SHORT-TERM INVESTMENTS - (Cost $15,450,709)................................... $15,450,709
TOTAL INVESTMENTS - (Cost $59,276,043)..................... 99.3% $66,077,542
Cash and receivables, less liabilities..................... 0.7% 504,644
------ -----------
TOTAL NET ASSETS........................................... 100.0% $66,582,186
====== ===========
</TABLE>
(a) Non-income producing security.
(+) Variable rate demand notes are considered short-term obligations
and are payable on demand. Interest rates change periodically on
specified dates. The rates listed are as of December 31, 1996.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
47
<PAGE> 66
HEARTLAND VALUE PLUS FUND
(FORMERLY THE HEARTLAND VALUE & INCOME FUND)
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (Cost $59,276,043)............................... $ 66,077,542
Cash................................................................................. 20,086
Receivable from fund shares sold..................................................... 1,041,926
Accrued dividends and interest....................................................... 291,849
Deferred organization expense........................................................ 15,883
-------------
Total Assets..................................................................... 67,447,286
-------------
LIABILITIES:
Payable for investments purchased.................................................... 464,774
Payable for fund shares redeemed..................................................... 284,830
Distributions payable................................................................ 10,149
Payable to Advisor for management fee................................................ 33,748
Payable to Advisor for deferred organization expense................................. 15,883
Accrued expenses..................................................................... 55,716
-------------
Total Liabilities................................................................ 865,100
-------------
NET ASSETS APPLICABLE TO OUTSTANDING SHARES
($.001 par value, 100,000,000 shares authorized, 4,850,879 shares outstanding)....... $ 66,582,186
=============
NET ASSET VALUE PER SHARE................................................................ $ 13.73
=============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest............................................................................. $ 956,949
Dividends............................................................................ 601,136
-------------
Total investment income........................................................... 1,558,085
-------------
EXPENSES:
Management fees...................................................................... 218,448
Distribution fees.................................................................... 78,017
Transfer agent fees.................................................................. 94,865
Registration fees.................................................................... 24,299
Audit fees........................................................................... 16,914
Postage.............................................................................. 11,185
Amortization of organization expense................................................. 7,625
Custodian fees....................................................................... 7,604
Legal fees........................................................................... 6,730
Printing and communications.......................................................... 5,471
Directors' fees...................................................................... 4,195
Other operating expenses............................................................. 7,584
-------------
Total expenses.................................................................... 482,937
-------------
NET INVESTMENT INCOME................................................................ 1,075,148
-------------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investments.................................................... 3,357,002
Net increase in unrealized appreciation on investments............................... 5,791,869
-------------
TOTAL REALIZED AND UNREALIZED GAINS ON INVESTMENTS................................... 9,148,871
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................. $ 10,224,019
=============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
48
<PAGE> 67
HEARTLAND VALUE PLUS FUND
(FORMERLY THE HEARTLAND VALUE & INCOME FUND)
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DEC. 31,
1996 1995
----------- ----------
<S> <C> <C>
OPERATIONS:
Net investment income ............................................................ $ 1,075,148 $ 569,494
Net realized gains on investments ................................................ 3,357,002 574,699
Net increase in unrealized appreciation on investments ........................... 5,791,869 1,645,292
------------ ------------
Net increase in net assets resulting from operations ........................ 10,224,019 2,789,485
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................................ (1,075,148) (569,494)
Net realized gains on investments ................................................ (3,357,002) (420,255)
------------ ------------
Total distributions to shareholders ......................................... (4,432,150) (989,749)
------------ ------------
FUND SHARE ACTIVITIES:
Proceeds from shares (4,188,644 and 1,286,133 shares, respectively) .............. 54,866,412 14,200,423
Reinvested dividends from net investment income and distributions from net
realized gains on investments (299,317 and 81,006 shares, respectively) ..... 4,017,651 892,309
Cost of shares redeemed (1,349,351 and 691,990 shares, respectively) ............. (17,216,440) (7,653,916)
------------ ------------
Net increase in net assets derived from Fund share activities ............... 41,667,623 7,438,816
------------ ------------
TOTAL INCREASE IN NET ASSETS ......................................................... 47,459,492 9,238,552
NET ASSETS AT THE BEGINNING OF THE YEAR .............................................. 19,122,694 9,884,142
------------ ------------
NET ASSETS AT THE END OF THE YEAR .................................................... $ 66,582,186 $ 19,122,694
============ ============
</TABLE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCT. 26, 1993(1)
DECEMBER 31, THROUGH
1996 1995 1994 DEC. 31, 1993
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of period .............................. $ 11.17 $ 9.53 $ 10.45 $ 10.00
Income from investment operations:
Net investment income .......................................... 0.38 0.41 0.41 0.07
Net realized and unrealized gains (losses)
on investments ............................................... 3.33 1.89 (0.92) 0.45
------- ------- ------- -------
Total income from investment operations .................... 3.71 2.30 (0.51) 0.52
Less distributions from:
Net investment income ......................................... (0.38) (0.41) (0.41) (0.07)
Net realized gains on investments .............................. (0.77) (0.25) -- --
------- ------- ------- -------
Total distributions ........................................ (1.15) (0.66) (0.41) (0.07)
Net asset value, end of period .................................... $ 13.73 $ 11.17 $ 9.53 $ 10.45
======= ======= ======= =======
TOTAL RETURN(2) ................................................... 33.8% 24.4% (4.9)% 5.2%(3)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) ....................... $66,582 $19,123 $ 9,884 $ 5,811
Ratio of expenses to average net assets ........................ 1.45% 1.54% 1.80% 1.30%(4)
Ratio of net investment income to
average net assets ........................................... 3.23% 3.90% 4.39% 6.52%(4)
Portfolio turnover rate ........................................ 73% 150% 127% 6%
Average commission per share(5) ................................ $0.0573 N/A N/A N/A
</TABLE>
(1) Commencement of operations.
(2) The contingent deferred sales charge in effect for the Fund prior to June 1,
1994 is not reflected in Total Return as set forth in the table.
(3) Not annualized.
(4) Annualized.
(5) Disclosure of average commission per share was not required prior to the
year ended December 31, 1996.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
49
<PAGE> 68
HEARTLAND U.S. GOVERNMENT SECURITIES FUND
STATEMENT OF NET ASSETS - DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 100.2% COUPON MATURITY VALUE
- -------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
U.S. TREASURY AND AGENCY SECURITIES - 35.8%
$4,000,000 U.S. Treasury Note .................................. 7.250% 05/15/2004 $ 4,211,200
15,000,000 U.S. Treasury Bond .................................. 0.000 11/15/2014 4,501,650
24,000,000 U.S. Treasury Bond .................................. 0.000 11/15/2016 6,234,720
4,000,000 Tennessee Valley Authority (a) ...................... 8.625 11/15/2029 3,586,204
-----------
18,533,774
AGENCY MORTGAGE-BACKED SECURITIES - 38.8%
5,000,000 Federal Home Loan Mortgage Corporation (CMO) ........ 6.400 THRU 2023 4,818,300
3,574,000 Federal Home Loan Mortgage Corporation (CMO) ........ 7.000 THRU 2022 3,442,369
1,217,678 Federal Housing Administration ...................... 8.875 THRU 2030 1,266,767
2,490,980 Federal National Mortgage Association ............... 6.500 THRU 2011 2,453,765
23,157 Federal National Mortgage Association ............... 10.000 THRU 2017 25,393
1,882,029 Federal National Mortgage Association ............... 7.000 THRU 2035 1,826,745
6,000,000 Federal National Mortgage Association (CMO) ......... 7.000 THRU 2020 5,862,060
342,930 Government National Mortgage Association ............ 10.250 THRU 2005 371,221
-----------
20,066,620
CORPORATE BONDS - 25.6%
1,000,000 Brown Group, Inc. ................................... 8.450 02/15/1999 1,008,750
3,800,000 Coleman Holdings, Inc. .............................. 0.000 05/27/1998 3,163,500
2,950,000 Grancare, Inc. ...................................... 9.375 09/15/2005 3,211,813
2,389,000 IMC Fertilizer Group, Inc. .......................... 9.450 12/15/2011 2,777,213
1,000,000 Integrated Health Services, Inc. .................... 9.625 05/31/2002 1,032,500
1,940,000 Louis Dreyfus Natural Gas Corporation ............... 9.250 06/15/2004 2,044,275
-----------
13,238,051
TOTAL LONG-TERM INVESTMENTS (Cost $52,033,523) ...... 100.2 % $51,838,445
Liabilities, less cash and receivables .............. (0.2)% (125,482)
----- -----------
TOTAL NET ASSETS .................................... 100.0 % $51,712,963
===== ===========
NET ASSET VALUE PER SHARE ($.001 par value, 100,000,000
shares authorized, 5,418,511 shares outstanding) ..................... $ 9.54
===========
</TABLE>
(a) Deferred interest security that receives no coupon payments until
11/14/1999 at which time the stated coupon becomes effective.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest ............................................... $4,236,767
----------
EXPENSES:
Management fees ........................................ 378,850
Distribution expense ................................... 145,712
Transfer agent fees .................................... 74,857
Registration fees ...................................... 19,415
Postage ................................................ 14,735
Custodian fees ......................................... 11,396
Audit fees ............................................. 10,973
Printing and communications ........................... 8,087
Directors' fees ........................................ 4,218
Legal fees ............................................. 377
Other operating expenses ............................... 24,317
----------
Total expenses ...................................... 692,937
Less: Advisor management fee waiver ................. (87,427)
----------
Net expenses ........................................ 605,510
----------
NET INVESTMENT INCOME .................................. 3,631,257
----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on:
Securities .......................................... 549,572
Futures contracts ................................... (461,482)
Net increase in unrealized depreciation on investments.. (3,109,011)
----------
TOTAL REALIZED AND UNREALIZED LOSSES ON INVESTMENTS .... (3,020,921)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ... $ 610,336
==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
50
<PAGE> 69
HEARTLAND U.S. GOVERNMENT SECURITIES FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1996 1995
--------------- --------------
<C> <C> <C>
OPERATIONS:
Net investment income .................................................... $ 3,631,257 $ 4,120,863
Net realized gains (losses) on investments ............................... 88,090 (291,019)
Net increase in unrealized appreciation (depreciation) on investments..... (3,109,011) 7,612,595
----------- -----------
Net increase in net assets resulting from operations ................. 610,336 11,442,439
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .................................................... (3,631,257) (4,120,864)
----------- -----------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (976,754 and 1,191,613 shares, respectively).. 9,208,348 11,219,578
Reinvested dividends from net investment income (277,541 and 299,306
shares, respectively) ................................................ 2,603,735 2,843,803
Cost of shares redeemed (2,486,341 and 2,115,677 shares, respectively) ... (23,338,997) (19,931,232)
----------- -----------
Net decrease in net assets derived from Fund share activities ........ (11,526,914) (5,867,851)
----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS ..................................... (14,547,835) 1,453,724
NET ASSETS AT THE BEGINNING OF THE YEAR ...................................... 66,260,798 64,807,074
----------- -----------
NET ASSETS AT THE END OF THE YEAR ............................................ $51,712,963 $66,260,798
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of year ............................ $ 9.96 $ 8.91 $ 10.50 $ 9.93 $ 9.97
Income from investment operations:
Net investment income ..................................... 0.59 0.60 0.59 0.56 0.66
Net realized and unrealized gains (losses) on investments.. (0.42) 1.05 (1.59) 1.18 0.30
------ ------- ------- ------- -------
Total income from investment operations ............... 0.17 1.65 (1.00) 1.74 0.96
Less distributions from:
Net investment income ..................................... (0.59) (0.60) (0.59) (0.56) (0.66)
Net realized gains on investments ......................... -- -- -- (0.61) (0.34)
------ ------- ------- ------- --------
Total distributions ................................... (0.59) (0.60) (0.59) (1.17) (1.00)
Net asset value, end of year .................................. $ 9.54 $ 9.96 $ 8.91 $ 10.50 $ 9.93
====== ======= ======= ======= ========
TOTAL RETURN(1) ............................................... 2.0% 19.0% (9.6)% 17.8% 10.1%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (in thousands) .................... $51,713 $66,261 $64,807 $66,789 $28,378
Ratio of net expenses to average net assets (2) ........... 1.06% 1.07% 1.07% 1.06% 0.92%
Ratio of net investment income to average net assets ...... 6.36% 6.31% 6.30% 5.09% 6.71%
Portfolio turnover rate ................................... 30% 97% 95% 200% 149%
</TABLE>
(1) Contingent deferred and initial sales charges in effect for the Fund prior
to June 1, 1994 are not reflected in Total Return as set forth in the table.
(2) Heartland Advisors, Inc. voluntarily waived the Fund's management fees in
their entirety from May 7, 1988 through November 30, 1990. Effective
December 1, 1990, Heartland Advisors, Inc. partially reinstated a portion
of the Fund's management fees at the rate of .25 of 1% of average daily
net assets and, effective January 20, 1992 and January 1, 1993, reinstated
additional portions of the fees resulting in rates of .35 of 1% and .50 of
1% of average daily net assets, respectively.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
51
<PAGE> 70
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
(1) ORGANIZATION
The Heartland Group, Inc. (the "Corporation") is registered as a
diversified open-end management company under the Investment Company Act of
1940. The Small Cap Contrarian Fund, Value Fund, Mid Cap Value Fund, Large Cap
Value Fund, Value Plus Fund (formerly the Value & Income Fund), and U.S.
Government Securities Fund (the "Funds") are six of the seven series of funds
issued by the Corporation at December 31, 1996. Two additional series commenced
operations on January 2, 1997.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Funds in the preparation of the financial statements:
(a) Portfolio securities which are traded on stock exchanges are valued at
the last sale price as of the close of business on the day the
securities are being valued, or, lacking any sales, at the latest bid
price. Each over-the-counter security for which the last sale price on
the day of valuation is available from NASDAQ and falls within the
range of the latest bid and asked quotations is valued at that price.
All other securities traded in the over-the-counter market are valued
at the most recent bid prices. Foreign securities are valued on the
basis of quotations from the primary market in which they are traded,
and are translated from the local currency into U.S. dollars using
exchange rates as of the close of the New York Stock Exchange. Debt
securities are stated at fair value as furnished by independent pricing
services based primarily upon information concerning market
transactions and dealer quotations for similar securities or by dealers
who make markets in such securities. Debt securities having maturities
of 60 days or less may be valued at acquisition cost, plus or minus any
amortized discount or premium. Securities and other assets for which
quotations are not readily available are valued at their fair value
using methods determined by the Board of Directors.
(b) The Funds' policy is to comply with the requirements of the Internal
Revenue Code which are applicable to regulated investment companies and
to distribute substantially all of their taxable income to their
shareholders. The Funds accordingly paid no Federal income taxes, and
no Federal income tax provision is required.
At December 31, 1996, the U.S. Government Securities Fund had Federal
income tax capital loss carryforwards of $4,940,986 expiring in 2002
and $858,458 expiring in 2003. During the year ended December 31, 1996,
$89,239 of capital loss carryforward was utilized by this Fund. At
December 31, 1996, the Mid Cap Value and Large Cap Value Funds had
Federal income tax capital loss carryforwards of $3,604 and $1,071,
respectively, expiring in 2004. The U.S. Government Securities, Mid Cap
Value, and Large Cap Value Funds do not intend to make distributions of
any future realized capital gains until their Federal income tax
capital loss carryforwards are completely utilized.
(c) Net investment income, if any, is distributed to each shareholder as a
dividend. Dividends from the Small Cap Contrarian, Value, Mid Cap Value
and Large Cap Value Funds are declared and paid annually. Dividends
from the Value Plus Fund are declared and paid quarterly. Dividends
from the U.S. Government Securities Fund are declared daily and
distributed monthly. Dividends are recorded on the ex-dividend date.
Net realized gains on investments, if any, are distributed annually.
Statement of Position 93-2 requires that permanent financial reporting
and tax differences be reclassified to paid-in capital. For the year
ended December 31, 1996, the Mid Cap Value and Large Cap Value Funds
reclassified permanent differences between book and taxable net
investment loss in the amounts of $1,646 and $986, respectively, and
the U.S. Government Securities Fund reclassified a permanent difference
between book and taxable net realized gain on investments of $1,149.
Net assets were not affected by these reclassifications.
For the Small Cap Contrarian, Value, and Value Plus Funds, the
percentage of ordinary income which is eligible for the corporate
dividend received deduction for the fiscal year ended December 31,
1996, was 7.17%, 13.23%, and 15.93%, respectively.
(d) The Funds record security and shareholder transactions no later than
the first business day after the trade date. Net realized gains and
losses on investments are computed on the identified cost basis.
Dividend income is recognized on the ex-dividend date, and interest
income is recognized on an accrual basis. The Funds amortize premiums
and accrete discounts on investments utilizing the effective interest
method.
52
<PAGE> 71
(e) Each Fund may enter into futures contracts for hedging purposes, such
as to protect against anticipated declines in the market value of its
portfolio securities or to manage exposure to changing interest rates.
Upon entering into futures contracts, a Fund pledges to the broker
securities equal to the minimum "initial margin" requirements of the
exchange. Additionally, the Fund receives from or pays to the broker an
amount of cash equal to the daily fluctuation in value of the contract.
Such receipts or payments are known as "variation margin," and are
recorded by a Fund as unrealized gains or losses. When the futures
contract is closed, a Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened
and the value at the time it was closed.
The use of futures contracts involves, to varying degrees, elements of
market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The predominant risk is that the movement of
the futures contracts price may result in a loss which could render a
portfolio's hedging strategy unsuccessful. The Funds had no open
futures contracts at December 31, 1996.
(f) The Small Cap Contrarian Fund may enter into transactions where it will
sell a security short (sell a security which the Fund does not own for
delivery at a future date) and borrow the same security from a broker
or other institution to complete the sale. The predominant risk is that
the market price may decrease or increase between the date of the short
sale and the date on which the Fund must replace the borrowed security.
The Small Cap Contrarian, Value, Mid Cap Value, Large Cap Value, and
Value Plus Funds may each engage in "short sales against the box."
These transactions involve selling a security that a Fund owns for
delivery at a specified date in the future. Similarly, each of these
Funds may also engage in short sales of securities of an issuer
("acquiror") that has publicly announced a proposed or pending
transaction in which a portfolio security of the Fund will be converted
into securities of the acquiror.
Each Fund maintains a segregated collateral account with its custodian
consisting of cash or liquid assets to cover short positions, including
short sales in acquiror securities.
The Schedules of Investments for the Small Cap Contrarian and Value
Funds do not include the following "boxed" positions where the Funds
have either purchased a long security to close out a short position, or
sold a security short against the box. At December 31, 1996, these
Funds chose not to complete these boxed transactions which would have
required delivery of the long securities.
SMALL CAP CONTRARIAN FUND
LONG POSITIONS SHARES MARKET VALUE
-------------- ------ ------------
Vacation Break USA, Inc. 56,000 $ 1,134,000
===========
SHORT POSITIONS SHARES MARKET VALUE
--------------- ------ ------------
Advanced Tissue Sciences, Inc. 100,000 $ 956,250
Chesapeake Energy Corp. 50,000 2,781,250
Eagle Hardware & Garden, Inc. 10,000 207,500
Identix Inc. 23,900 195,681
Just For Feet, Inc. 75,000 1,968,750
The Men's Wearhouse, Inc. 50,000 1,225,000
Oracle Corporation 100,000 4,175,000
Sykes Enterprises, Inc. 20,000 750,000
-----------
$12,259,431
===========
VALUE FUND
LONG POSITIONS SHARES MARKET VALUE
--------------- ------ ------------
Abraxas Petroleum Corp. 19,300 $ 190,588
Chieftan International, Inc. 75,000 1,950,000
Clayton Williams Energy, Inc. 100,000 1,737,500
Cliffs Drilling Company 200,000 12,650,000
CMAC Investment Corporation 400,000 14,700,000
Computer Products, Inc. 600,000 11,700,000
Gehl Company 10,000 108,750
Gibson Greetings, Inc. 200,600 3,936,775
Inter-Regional Financial Group, Inc. 100,000 3,525,000
53
<PAGE> 72
VALUE FUND [CONT'D]
LONG POSITIONS [CON'T] SHARES MARKET VALUE
---------------------- ------ ------------
Matthews International Corp. (Class A) 25,000 706,250
Mosinee Paper Corporation 67,880 2,409,740
MTL, Inc. 36,000 729,000
Nellcor Puritan Bennett, Inc. 82,000 1,793,750
Pfeiffer Vacuum Technology (ADR) 24,000 432,000
Pool Energy Services Company 161,300 2,479,988
Read-Rite Corporation 600,000 15,150,000
Snyder Oil Corporation 300,000 5,212,500
Spartech Corporation 100,000 1,112,500
UNC, Inc. 100,000 1,200,000
Washington Federal, Inc. 127,900 3,389,350
Westcast Industries, Inc. (Class A) 45,000 1,058,202
-----------
$86,171,893
===========
Included in the "Receivable from Investments Sold Short" on the
Statements of Assets and Liabilities for the Small Cap Contrarian and Value
Funds was $1,103,513 and $79,327,687, respectively, related to these short
sales against the box. At December 31, 1996, the cost of the boxed positions
and the associated net unrealized appreciation related to these positions
for the Small Cap Contrarian Fund were $280,000 and $823,513, respectively,
and for the Value Fund were $33,194,948 and $46,132,739, respectively.
Also included in the "Receivable from Investments Sold Short" for the
Small Cap Contrarian Fund was $13,818,041 related to these short positions
for which the underlying securities have been purchased but not delivered.
At December 31, 1996, the cost of offsetting long positions and the
associated net unrealized appreciation related to these positions was
$12,050,340 and $1,767,701, respectively.
(g) A restricted security is a security which has been purchased through a
private offering and cannot be resold to the general public without prior
registration under the Securities Act of 1933. At December 31, 1996, the
Small Cap Contrarian Fund held the following restricted securities (equaling
3.1% of total assets). These securities are valued under the supervision of,
and pursuant to guidelines adopted by, the Funds' Board of Directors.
Acquisition
Security Shares Cost Market Value Date
-------- ------ ---- ------------ -----------
Bolder Technologies Corp. 250,000 $3,062,500 $2,671,100 10/96
Apex Silver Mines Ltd. 187,500 1,500,000 1,500,000 8/96
Excelsior-Henderson Motorcycle
Mfg. Co. Pfd. Stock 690,000 1,725,000 1,725,000 8/96
Drypers Corp. Pfd. Stock 22,500 2,250,000 2,934,783 2/96
(h) The Small Cap Contrarian Fund may buy and sell options, including
purchasing and writing put and call options and options on futures, based on
any type of security, index, or currency related to its investments,
including options traded on foreign exchanges and options not traded on
exchanges. The Value, Mid Cap Value, Large Cap Value, Value Plus and U.S.
Government Securities Funds each may write covered call options and purchase
put options that are traded on recognized U.S. exchanges and enter into
closing transactions with respect to such options. The Mid Cap Value and
Large Cap Value Funds may also purchase call options. The Funds may enter
into options transactions for hedging purposes, and will not use these
instruments for speculation. Written covered call options and purchased put
options are valued at the latest sales price at the time at which net asset
value per share of a Fund is computed (close of regular trading on the New
York Stock Exchange) or, lacking any sales, the latest asked or bid price,
respectively.
For the year ended December 31, 1996, the Small Cap Contrarian Fund had
purchased the following put options:
# of
Contracts Cost
--------- -----
Balance at January 1, 1996 -- --
Options purchased (S&P 500 Index) 500 $ 770,350
Options expired (100) (223,965)
Options closed (400) (546,385)
----- ---------
Balance at December 31, 1996 -- $ --
===== =========
54
<PAGE> 73
For the year ended December 31, 1996, the Value
Fund had written the following covered call options:
# OF PREMIUM
CONTRACTS AMOUNT
--------- -------
Balance at January 1, 1996 -- --
Options opened (Computer Products,
Inc. - Jan/97) 500 $111,328
Options expired -- --
Options closed -- --
--------- --------
Balance at December 31, 1996 500 $111,328
========= ========
(i) The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from the estimates.
(3) INVESTMENT MANAGEMENT FEES AND TRANSACTIONS WITH RELATED PARTIES
The Funds have management agreements with Heartland Advisors, Inc. (the
"Advisor") to serve as investment advisor and manager. Under the terms of
the agreements, the Small Cap Contrarian, Value, Mid Cap Value, and Large
Cap Value Funds pay the Advisor a monthly management fee at the annual rate
of .75% of the daily net asset value of the Funds; the Value Plus Fund pays
the Advisor a monthly management fee at the annual rate of .70% of the daily
net asset value of the Fund; and the U.S. Government Securities Fund pays
the Advisor a monthly management fee at the annual rate of .65% of the first
$100 million of the Fund's average daily net assets, .50% of the next $400
million of net assets, and .40% on net assets in excess of $500 million.
For the year ended December 31, 1996, the Advisor collected a partial fee
for the U.S. Government Securities Fund at the annual rate of .50% of the
Fund's average daily net assets. The Advisor may reinstate any portion or
all of the Fund's management fee at any time.
The Funds have adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. The Distributor is Heartland
Advisors, Inc. (the "Distributor"). The Plan requires the Funds to pay to
the Distributor a quarterly distribution fee on an annual basis up to .25%
of their daily net assets. Additionally, for the year ended December 31,
1996, the Distributor received for the Value, Value Plus, and U.S.
Government Securities Funds $91,223, $7,812 and $32,254, respectively, from
investors for commissions for Fund shares redeemed and for the Small Cap
Contrarian, Value, and Value Plus Funds, $22,532, $285,057 and $4,028,
respectively, for brokerage fees on the execution of purchases and sales of
portfolio investments.
Officers and certain directors of the Funds are also officers and/or
directors of Heartland Advisors, Inc.; however, they receive no compensation
from the Funds.
As permitted under Rule 10f-3 of the Investment Company Act of 1940, the
Board of Directors of the Funds has adopted a plan which will allow the
Funds, under certain conditions described in the Rule, to acquire
newly-issued securities from syndicates in which the Distributor is a
member.
(4) DEFERRED ORGANIZATION EXPENSES
For the Small Cap Contrarian, Mid Cap Value, Large Cap Value and Value Plus
Funds, organization expenses have been deferred and are being amortized
on a straight-line basis over sixty months. Payments for these expenses were
advanced by the Advisor, who will be reimbursed by the Funds over the same
period. The proceeds of any redemption of the initial shares by the original
shareholders will be reduced by a pro rata portion of any then unamortized
expenses. Unamortized deferred organization expenses and the related payable
to the Advisor at December 31, 1996, were $32,869, $15,607, $15,607 and
$15,883, respectively.
55
<PAGE> 74
(5) INVESTMENT TRANSACTIONS
During the year ended December 31, 1996, purchases and sales of
securities, other than short-term securities, were as follows (in
thousands):
<TABLE>
<CAPTION>
SMALL CAP MID CAP LARGE CAP VALUE U.S. GOVERNMENT
CONTRARIAN VALUE VALUE VALUE PLUS SECURITIES
FUND FUND FUND FUND FUND FUND
---------- -------- --------- --------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Purchases $240,966 $741,608 $ 6,127 $ 1,980 $46,312 $16,851
Proceeds from
Sales 100,038 396,739 121 15 20,097 29,096
</TABLE>
Included in these transactions were purchases and sales of U.S. obligations
in the Value Fund of $49,756,641 and $0, respectively, and in the U.S.
Government Securities Fund of $2,089,062 and $11,402,884, respectively.
At December 31, 1996, the gross unrealized appreciation and depreciation
on investments for tax purposes was as follows (in thousands):
<TABLE>
<CAPTION>
SMALL CAP MID CAP LARGE CAP VALUE U.S. GOVERNMENT
CONTRARIAN VALUE VALUE VALUE PLUS SECURITIES
FUND FUND FUND FUND FUND FUND
---------- -------- --------- --------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Appreciation $ 32,135 $397,695 $ 376 $ 90 $7,119 $ 948
Depreciation (19,231) (80,165) (43) (11) (317) (1,143)
---------- -------- --------- --------- ------ ---------------
$ 12,904 $317,530 $ 333 $ 79 $6,802 $ (195)
========== ======== ========= ========= ====== ===============
</TABLE>
Cost of investments is substantially the same for financial reporting
purposes and federal income tax purposes.
(6) SOURCES OF NET ASSETS
At December 31, 1996, the Funds' sources of net assets were as follows:
<TABLE>
<CAPTION>
SMALL CAP MID CAP
CONTRARIAN VALUE VALUE
FUND FUND FUND
------------ -------------- ---------------
<S> <C> <C> <C>
Paid-in capital $250,107,871 $1,309,230,296 $ 6,604,292
Net unrealized appreciation
on investments 12,903,525 317,748,290 333,274
Accumulated undistributed net realized
losses on investments -- (218,750) (3,604)
------------ -------------- ---------------
$263,011,396 $1,626,759,836 $ 6,933,962
============ ============== ===============
<CAPTION>
LARGE CAP VALUE U.S. GOVERNMENT
VALUE PLUS SECURITIES
FUND FUND FUND
------------ -------------- ---------------
<S> <C> <C> <C>
Paid-in capital $ 2,363,470 $ 59,780,687 $ 57,707,484
Net unrealized appreciation
(depreciation) on investments 79,076 6,801,499 (195,078)
Accumulated undistributed net
realized losses on investments (1,071) -- (5,799,443)
------------ -------------- ---------------
$ 2,441,475 $ 66,582,186 $ 51,712,963
============ ============== ===============
</TABLE>
56
<PAGE> 75
(7) TRANSACTIONS WITH AFFILIATES
The following companies are affiliated with the Small Cap Contrarian and
Value Funds; that is, the Funds hold 5% or more of the outstanding voting
securities. Such companies are defined in Section (2)(a)(3) of the
Investment Company Act of 1940.
SMALL CAP CONTRARIAN FUND
<TABLE>
<CAPTION>
SHARE SHARE REALIZED
BALANCE AT BALANCE AT DIVIDENDS GAINS
SECURITY NAME DEC. 31,1995 PURCHASES SALES DEC. 31,1996 RECEIVED (LOSSES)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Allou Health and Beauty, Inc. (Class A) 355,400 149,600 0 505,000 $0 $0
Autonomous Technologies Corp. 0 500,000 0 500,000 0 0
Bio-Vascular, Inc. 0 500,000 0 500,000 0 0
Business Resource Group 0 313,500 0 313,500 0 0
Catherines Stores Corporation 0 433,000 0 433,000 0 0
Chico's Fas, Inc. 250,000 250,000 100,000 400,000 0 646,686
Children's Discovery Centers of America, Inc. 0 400,000 0 400,000 0 0
Compression Labs, Inc. 0 1,065,600 0 1,065,600 0 0
Crown Books Corporation 35,700 289,300 0 325,000 0 0
Dignity Partners, Inc. 0 400,000 0 400,000 0 0
Drypers Corp. 7.5% Sr. Conv. Cum. Pfd. 0 22,500 0 22,500 0 0
Dynamic Materials Corporation 20,000 230,000 50,000 200,000 0 239,563
Excelsior-Henderson Motorcycle Mfg. Co.
Series A Conv. Pfd. 0 690,000 0 690,000 0 0
Family Steak Houses of Florida, Inc. 360,000 340,000 0 700,000 0 0
GNI Group, Inc. 138,000 462,000 0 600,000 0 0
Harding Lawson Associates Group, Inc. 200,000 275,000 0 475,000 0 0
Harmony Brook, Inc. 700,000 0 0 700,000 0 0
Help at Home, Inc. 0 100,000 0 100,000 0 0
Interpore International 516,700 83,300 0 600,000 0 0
Jaco Electronics, Inc. 0 343,500 0 343,500 0 0
The Lion Brewery, Inc. 0 300,000 0 300,000 0 0
Luminart, Inc. 0 1,000,000 0 1,000,000 0 0
Moore Medical Corporation 58,000 142,000 0 200,000 0 0
M-Wave, Inc. 0 264,800 0 264,800 0 0
New Brunswick Scientific, Inc. 138,705(1) 92,400 0 231,105 0 p
O. I. Corporation 0 275,000 0 275,000 0 0
Personnel Management, Inc. 200,000 0 0 200,000 0 0
PolyVision Corporation 0 600,000 0 600,000 0 0
Serv-Tech, Inc. 446,400 13,600 50,000 410,000 0 (208,738)
Speizman Industries, Inc. 0 342,600 52,600 290,000 0 105,138
Tipperary Corp. 0 1,000,000 0 1,000,000 0 0
UniComp, Inc. 0 300,000 0 300,000 0 0
Union Bankshares, Ltd. 60,000 0 2,500 57,500 0 15,000
Vectra Technologies, Inc. 502,000 148,000 0 650,000 0 0
------- --------
$0 $797,649
======= ========
</TABLE>
(1) Adjusted for 5% stock dividend.
57
<PAGE> 76
VALUE FUND
<TABLE>
<CAPTION>
SHARE SHARE REALIZED
BALANCE AT BALANCE AT DIVIDENDS GAINS
SECURITY NAME DEC. 31,1995 PURCHASES SALES DEC. 31,1996 RECEIVED (LOSSES)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3-D Geophysical, Inc. 0 500,000 0 500,000 $ 0 $ 0
Align-Rite International, Inc. 0 491,000 191,000 300,000 0 306,789
Allied Healthcare Products, Inc. 181,200 439,000 117,200 503,000 56,000 (1,022,683)
Allwaste, Inc. 2,843,300 956,700 0 3,800,000 0 0
Alpine Group, Inc. 1,000,000 100,000 0 1,100,000 0 0
American Buildings Company 0 500,000 0 500,000 0 0
American Educational Products, Inc. 405,000 0 0 405,000 0 0
American Oilfield Divers, Inc. 500,000 0 0 500,000 0 0
Amtran, Inc. 500,000 100,000 0 600,000 0 0
Amwest Insurance Group, Inc. 200,000 10,000 10,000 200,000 86,900 994
Arden Industrial Products, Inc. 206,500 443,500 0 650,000 0 0
Astec Industries, Inc. 1,000,000 0 35,000 965,000 0 (122,500)
Badger Meter, Inc. 100,000 0 0 100,000 86,000 0
Baldwin Piano & Organ Company 325,000 0 0 325,000 0 0
Buckhead America Corporation 116,000 34,000 0 150,000 0 0
Caretenders Health Corp. 243,900 65,000 0 308,900 0 0
CHC Helicopter Corporation (Class A) 0 1,000,000 0 1,000,000 0 0
The Cherry Corporation (Class A) 500,000 400,100 50,000 850,100 0 0
Children's Broadcasting Corporation 0 410,100 0 410,100 0 0
Clayton Williams Energy, Inc. (a) 505,000 120,000 25,000 600,000 0 (19,374)
CMAC Investment Corporation (a) 565,700(1) 34,300 0 600,000 74,120 3,089,002
Coastal Physicians Group, Inc. 1,000,000 1,020,000 20,000 2,000,000 0 (198,916)
Cobra Electronics Corp. 481,000 19,000 0 500,000 0 0
Comdial Corporation 0 650,000 0 650,000 0 0
CSP, Inc. 280,000 0 0 280,000 0 0
C.P. Clare Corporation 0 467,500 0 467,500 0 0
D & N Financial Corporation 169,600 230,400 0 400,000 0 0
Dairy Mart Convenience Stores, Inc. (Class A) 450,000 0 0 450,000 0 0
Dakotah, Inc. 150,500 149,500 0 300,000 0 0
Damark International, Inc. (Class A) 900,000 2,800 102,800 800,000 0 740,072
Datron Systems, Inc. 0 233,700 0 233,700 0 0
Designs, Inc. 978,200 121,800 138,000 962,000 0 (423,989)
Devlieg-Bullard, Inc. 692,500 0 0 692,500 0 0
Digital Biometrics, Inc. 0 940,000 55,000 885,000 0 89,764
Duckwall-ALCO Stores, Inc. 290,000 40,000 0 330,000 0 0
ECC International Corporation 504,900 245,100 150,000 600,000 0 (783,484)
Effective Management Systems, Inc. 350,000 0 0 350,000 0 0
Engle Homes, Inc. 500,000 81,500 0 581,500 86,520 0
Eskimo Pie Corporation 0 360,000 16,000 344,000 39,200 (71,377)
Evergreen Resources, Inc. 518,500 41,500 0 560,000 0 0
The Female Health Company 0 595,000 9,900 585,100 0 6,911
FLIR Systems, Inc. 155,600 198,400 0 354,000 0 0
Forest Oil Corporation 0 1,560,000 0 1,560,000 0 0
The Fortress Group, Inc. 0 590,000 0 590,000 0 0
Gehl Company (a) 311,500 90,000 0 401,500 0 0
Gibson Greetings, Inc. (a) 1,200,600 0 0 1,200,600 0 0
Gish Biomedical, Inc. 200,000 75,000 0 275,000 0 0
Grist Mill Company 0 350,000 0 350,000 0 0
GZA GeoEnvironmental Technologies, Inc. 363,300 9,400 0 372,700 0 0
Hallwood Consolidated Resources Group 100,000 0 0 100,000 0 0
Hanover Foods Corp. (Class A) 34,500 16,000 0 50,500 0 0
Harmony Brook, Inc. 720,000 0 0 720,000 0 0
Health Power, Inc. 242,400 107,600 75,000 275,000 0 (574,954)
HealthRite, Inc. 365,000 38,000 0 403,000 0 0
HMN Financial, Inc. 250,000 0 0 250,000 0 0
</TABLE>
58
<PAGE> 77
VALUE FUND [CONT'D]
<TABLE>
<CAPTION>
SHARE SHARE REALIZED
BALANCE AT BALANCE AT DIVIDENDS GAINS
SECURITY NAME DEC. 31,1995 PURCHASES SALES DEC. 31,1996 RECEIVED (LOSSES)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Home Federal Bancorp 0(2) 193,500 0 193,500 $ 45,150 $ 0
Hospital Staffing Services, Inc. 620,000 1,300 1,300 620,000 0 1,229
ICN Pharmaceuticals, Inc. 2,100,005 1,099,995 50,000 3,150,000 605,390 (242,245)
IEC Electronics Corporation 653,100 46,900 0 700,000 0 0
Interdigital Communications Corp. 0 3,100,000 110,000 2,990,000 0 (548,370)
Iwerks Entertainment, Inc. 1,000,000 456,000 600,000 856,000 0 3,360,034
Kaye Group, Inc. 0 353,600 0 353,600 17,680 0
Kentucky Electric Steel, Inc. 240,000 210,000 0 450,000 0 0
LCS Industries, Inc. 368,500 12,500 68,500 312,500 32,840 1,588,339
Marten Transport, Ltd. 212,000 0 0 212,000 0 0
Maxicare Health Plans, Inc. 750,000 571,100 188,100 1,133,000 0 3,063,376
Meadowbrook Rehabilitation Group, Inc. 159,166(3) 27,500 0 186,666 0 0
Medical Graphics Corporation 243,700 0 0 243,700 0 0
Mercury Air Group, Inc. 247,300(4) 252,700 0 500,000 18,373 0
MFRI, Inc. 300,000 0 0 300,000 0 0
Minntech Corporation 0 457,500 0 457,500 31,640 0
Morgan Products, Ltd. 418,800 331,200 0 750,000 0 0
MTL, Inc. (a) 150,000 159,000 0 300,000 0 0
MYR Group, Inc. 260,000 40,000 0 300,000 60,000 0
M/A/R/C, Inc. 269,000 0 19,000 250,000 103,800 243,237
Netframe Systems, Inc. 280,000 720,000 0 1,000,000 0 0
Norstan, Inc. 552,000(5) 0 0 552,000 0 0
North Star Universal, Inc. 700,000 0 0 700,000 0 0
Northwest Equity Corporation 100,000 0 10,000 90,000 36,000 13,375
Old America Stores, Inc. 0 345,800 0 345,800 0 0
Oneita Industries, Inc. 322,900 465,800 188,700 600,000 0 (1,191,027)
Outlook Group Corporation 300,000 165,000 7,500 457,500 0 (46,752)
Patrick Industries, Inc. 250,000 62,000 0 312,000 46,960 0
Peoples Telephone Company, Inc. 1,500,000 0 104,000 1,396,000 0 (6,138)
Pinnacle Bancorp 67,800 0 0 67,800 48,816 0
(formerly First Federal of Alabama F.S.B.)
Pioneer Financial Services, Inc. 374,000 226,000 0 600,000 121,000 0
Polymedica Industries, Inc. 0 550,000 0 550,000 0 0
Powell Industries, Inc. 600,000 0 0 600,000 0 0
Presidential Life Corporation 1,700,000 0 0 1,700,000 255,000 0
Professionals Insurance Co. Mgmt. Group 205,700(6) 14,300 0 220,000 0 0
(formerly Picom Insurace Company)
Quixote Corporation 424,400 175,600 38,000 562,000 131,040 0
Ramsay Health Care, Inc. 520,000 0 0 520,000 0 0
Rehabilicare, Inc. 438,000 0 38,000 400,000 0 77,255
Rexworks, Inc. 185,500 0 0 185,500 0 0
Rhodes, Inc. 0 711,700 59,900 651,800 0 (298,700)
RightCHOICE Managed Care, Inc. (Class A) 793,800 206,200 0 1,000,000 0 0
Rottlund Company, Inc. 156,500 159,500 0 316,000 0 0
Schult Homes Corporation 350,000 0 10,000 340,000 69,500 78,367
Specialty Paperboard, Inc. 250,000 0 0 250,000 0 0
Star Multi Care Services, Inc. 224,492(7) 0 0 224,492 0 0
Starcraft Corporation 315,500 84,500 0 400,000 0 0
Steel of West Virginia, Inc. 0 590,000 0 590,000 0 0
Sterling Financial Corporation 275,000 0 0 275,000 0 0
Stokely USA, Inc. 457,000 343,000 160,000 640,000 0 (597,198)
Strattec Security Corporation 200,000 300,000 0 500,000 0 0
St. Mary Land & Exploration Co. 490,000 10,000 40,000 460,000 79,000 192,875
Sullivan Dental Products, Inc. 540,000 0 0 540,000 81,000 0
Sunrise Resources, Inc. 400,000 0 0 400,000 0 0
</TABLE>
59
<PAGE> 78
VALUE FUND [CONT'D]
<TABLE>
<CAPTION>
SHARE SHARE REALIZED
BALANCE AT BALANCE AT DIVIDENDS GAINS
SECURITY NAME DEC. 31,1995 PURCHASES SALES DEC. 31,1996 RECEIVED (LOSSES)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Technology Research Corporation 500,000 0 0 500,000 $ 120,000 $ 0
Tesoro Petroleum Corp. 0 1,500,000 100,000 1,400,000 0 211,437
Thorn Apple Valley, Inc. 276,100 144,900 0 421,000 0 0
Timber Lodge Steakhouse, Inc. 250,000 50,000 0 300,000 0 0
Todhunter International, Inc. 490,000 0 0 490,000 0 0
Total-Tel USA Communications, Inc. 289,000(8) 0 0 289,000 0 0
Trak Auto Corporation 366,500 0 0 366,500 0 0
Transitional Hospitals Corp. 0 2,413,500 0 2,413,500 0 0
Transworld Bancorp 176,775(9) 0 0 176,775 0 0
Trimark Holdings, Inc. 400,000 0 0 400,000 0 0
UNC, Inc. (a) 1,100,000 0 0 1,100,000 0 0
URS Corporation 700,100 299,900 140,000 860,000 0 237,439
Vectra Technologies, Inc. 700,000 23,500 0 723,500 0 0
Westbridge Capital Corporation 500,000 0 0 500,000 0 0
Weston, Roy F., Inc. (Class A) 100,000 450,000 0 550,000 0 0
---------- ----------
$2,331,929 $7,152,788
========== ==========
</TABLE>
(1) Adjusted for 2 for 1 stock split.
(2) Adjusted for 3 for 2 stock split.
(3) Adjusted for 1 for 3 reverse stock split.
(4) Adjusted for 10% stock dividend.
(5) Adjusted for 2 for 1 stock split.
(6) Adjusted for 10% stock dividend.
(7) Adjusted for 5% stock dividend.
(8) Adjusted for 2 for 1 stock split.
(9) Adjusted for 5 for 4 stock split.
(a) Short sales against the box have not been reflected in the "Sales"
information or Dec. 31, 1996 balances.
SHAREHOLDER UPDATE (UNAUDITED)
A Special Meeting of the shareholders of the Heartland Value & Income Fund
(currently the Value Plus Fund) was held on September 26, 1996, at which votes
were cast for two proposals as follows:
1. To approve a proposed amendment to the fundamental investment objective of
the Value & Income Fund to change the investment objective from "capital
growth and current income" to "capital appreciation and current income." For:
1,167,874. Against: 68,339. Abstain: 33,271.
2. To approve a proposed amendment to a fundamental investment restriction of
the Value & Income Fund concerning Real Estate Investment Trusts ("REITs")
and to adopt a new non-fundamental investment policy concerning REITs. For:
1,098,418. Against: 105,366. Abstain: 55,854.
60
<PAGE> 79
VALUE REPORT
Dear Investor
We are here to help you meet your investment needs.
If you have a question, please call Heartland Shareholder Services. We're
confident you'll find our representatives to be knowledgeable and responsive.
[Photo of Heartland Shareholder Services Representative]
1-800-432-7856
[Logo] Heartland Funds
------------------------
AMERICA'S VALUE INVESTOR
<PAGE> 80
THE HEARTLAND FAMILY OF FUNDS
SMALL CAP CONTRARIAN FUND
VALUE FUND
(closed to new investors 7/1/95)
MID CAP VALUE FUND NEW
LARGE CAP VALUE FUND NEW
VALUE PLUS FUND
U.S. GOVERNMENT SECURITIES FUND
WISCONSIN TAX FREE FUND
SHORT DURATION HIGH-YIELD
MUNICIPAL FUND NEW
HIGH-YIELD MUNICIPAL
BOND FUND NEW
PORTICO MONEY MARKET FUND
[LOGO] Heartland Funds
--------------------------
AMERICA'S VALUE INVESTOR
1-800-432-7856
These are not recommendations to buy or sell the securities discussed, but
rather illustrations of our value investment strategy. Statements regarding
particular securities represent the portfolio manager's views when made and are
subject to change at any time based on market and other considerations.
The performance data quoted represents past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
This material may only be used when preceded or accompanied by the Funds'
prospectus. Heartland Advisors, Inc., distributor. Member SIPC/NASD.
