<PAGE>
[Logo] Heartland Funds
------------------------
AMERICA'S VALUE INVESTOR
Value Report
June 30, 1998
Notes on value investing
for investors in
Heartland Funds
Semi-Annual Report
to Shareholders
Large Cap Value Fund
Mid Cap Value Fund
Value Plus Fund
U.S. Government Securities Fund
Small Cap Contrarian Fund
(closed to new accounts)
Value Fund
(closed to new accounts)
<PAGE>
VALUE REPORT
Dear Fellow Investor
Our servicemark is "America's Value Investor.(R)" How do we define value? Quite
precisely via our Heartland 10 Point Value Criteria. In view of the stock
market's currently heady valuation and the ill wind blowing from the East--Asian
economic turmoil that is already impacting the U.S. economy and corporate
profits--we thought this an appropriate time to review our 10 point valuation
grid. Be advised not every one of our equity holdings gets the highest marks in
each of these value criteria. That would be too much for even us to ask.
However, we like to see portfolio positions that clear most of these value
hurdles. (Refer to our grid on the next page.)
Although the past is not always prologue to the future, we think value stocks
are likely to hold up better than more richly priced stocks should the market
run into trouble. In Heartland Research Report #7 titled "Value Investing: Come
Rain or Come Shine" (December, 1997), Mid Cap Value Fund Portfolio Manager Mike
Berry studied the performance of low price/earnings ratio stocks (our proxy for
value) versus high P/E stocks during market downturns.* In 12 market declines
from 1937 through 1990, low P/E stocks outperformed high P/E stocks 9 times and
on an average annualized market-adjusted basis, gained 3.1% compared to a 4.7%
decline for high P/E stocks.
We can't promise value stocks will be immune to any broad-based bear market.
However, we sleep easier at night believing we own stocks more reasonably priced
relative to the market based on our disciplined appraisal of their "real world"
economic value.
Sincerely,
William J. Nasgovitz
President
[Photo of Bill Nasgovitz]
* The universe of stocks for this study encompassed all stocks listed on the New
York Stock Exchange. Low P/E stocks consisted of the bottom 20% based on
normalized P/E ratios and high P/E stocks consisted of the highest 20%, not
including stocks with ultra high multiples greater than 500.
<PAGE>
VALUE REPORT
Our Value Criteria for Stock Selection
1 Low price/earnings multiple. We look for a stock's price/earnings ratio to
be less than the market's average. If the stock is then "discovered" by Wall
Street, the low P/E provides opportunity for a sharp price increase. Also,
if the market drops, we believe low P/E stocks have less downside risk.
2 High cash flow. A strong cash flow permits a company to finance expansion
internally, repurchase shares or increase the dividend.
3 Positive earnings dynamics. We favor companies with improving earnings or
upwardly revised estimates.
4 Discount to book value. A company's book value--its assets minus its
liabilities--gives an indication of what it would be worth if liquidated. We
like to buy a stock for less than that. By contrast, we find trendy stocks
often selling at upwards of 5 or more times book value.
5 Financial soundness. How much debt does a company have relative to its
equity? We like low-debt balance sheets--with no more than 25% debt to total
capital.
6 High insider ownership. Executives who invest in their own stock have their
interests aligned with those of other shareholders.
7 Capable management. We look for companies with top decision-makers who have
a realistic vision for the company, as well as a history of success and the
drive to accomplish their goals.
8 Hidden assets. We like companies that have undervalued assets. These can
include understated natural resources, over-funded pension plans, or fixed
assets worth substantially more than their stated book value.
9 Positive technical analysis. We analyze how the stock's price has moved
over time. We prefer to buy stocks that have built long-term bases.
10 Catalyst for recognition. We look for a factor--a new product, for
instance--that could potentially ignite interest in the stock and close the
gap between the stock's price and what we believe is its intrinsic value.
<PAGE>
VALUE REPORT
Heartland Large Cap Value Fund
In second quarter 1998, our financial service and utilities holdings performed
well. Our energy investments continued to disappoint with oil prices declining
to twelve-year lows. Economically sensitive cyclicals also gave some ground as
Asian economic turmoil posed a threat to global economic growth. We believe
selected energy stocks still offer exceptional longer-term value.
All Aboard!
Union Pacific Corp. got flagged by Wall Street for trying to integrate its
acquisition of Southern Pacific too quickly. Ensuing operational difficulties,
including long delays and late freight deliveries, produced several quarters of
earnings disappointments. As is often the case when a high profile market
favorite suffers an earnings shortfall, Wall Street analysts began wearing out
their erasers lowering earnings estimates for 1999 and beyond. In our opinion,
Union Pacific Corp.'s operational problems are in the process of being solved.
We think 1999 earnings will come in around $4.50 or better per share and that
the company's 2000 earnings could be as high as $6.00 per share compared to the
$4.20 the Street is currently anticipating.
What if they are right and we are wrong? We still believe we are getting a
premier company in the railroad industry at around 6 times cash flow compared
with 16x for the S&P 500. Of course, we reserve the right to change course if
management can't get things back on track. However, we think the stock is cheap
for a company we believe to be turning around.
On 6/30/98, the Fund held 8,000 shares of Union Pacific Corporation, valued at
$353,000, representing 3.8% of the Fund's net assets.
[Photo of James P. Holmes]
James P. Holmes, CFA
Portfolio Manager
"As is often the case when a high profile market favorite suffers an earnings
shortfall, Wall Street analysts began wearing out their erasers lowering Union
Pacific Corp.'s earnings estimates for 1999 and beyond."
2
<PAGE>
VALUE REPORT
Heartland Large Cap Value Fund
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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS/1/ SINCE INCEPTION
YTD* 1-year (10/11/96)
<S> <C> <C> <C>
Large Cap Value Fund 5.8% 12.4% 19.9%
S&P 500 Index 17.7 30.2 35.4
</TABLE>
*Not annualized.
The S&P 500 Index is an unmanaged index of 500 stocks representing major U.S.
industries.
<TABLE>
<CAPTION>
FUND FACTS
Growth of $10,000 Fund vs. S&P 500/2/
<S> <C> <C> <C>
since inception (10/11/96).... $13,650/1/ Alpha................. -.30
Median market cap............... $4.0 bil. Beta.................. .68
Share price..................... $13.01 R-squared............. .73
Net assets...................... $9.3 mil. Number of holdings........ 52
</TABLE>
<TABLE>
<CAPTION>
COMPARATIVE VALUATIONS Heartland Large S&P 500
Cap Value Fund Index/4/
<S> <C> <C>
Price/Earnings Ratio/3/ 19.1x 23.9x
Price/Book Value Ratio 1.9x 4.5x
Price/Cash Flow Ratio 8.2x 16.1x
</TABLE>
<TABLE>
<CAPTION>
TOP 10 HOLDINGS
<S> <C> <C> <C>
Union Pacific Corporation ............... 3.8% Raychem Corporation ........................... 3.1%
Unicom Corporation ...................... 3.4 Consolidated Natural Gas Company .............. 2.9
Household International, Inc. ........... 3.3 St. Paul Companies, Inc. ...................... 2.8
Companhia Cervejaria Brahma (ADR) ....... 3.2 Owens Corning ................................. 2.7
Shaw Industries, Inc. ................... 3.1 Telecomunicacoes Brasileiras S.A. (ADR) ....... 2.7
</TABLE>
Past performance is no guarantee of future results.
All statistics are as of June 30, 1998.
/1/ Includes reinvestment of all dividends and capital gains distributions.
Without fee waivers and expense reimbursement in effect during the period,
total return for the Fund would have been lower./2/ Since the Fund commenced
operations on 10/11/96, the measurements are based on weekly data, rather
than monthly data, from inception through 6/30/98. Source: Heartland
Advisors, Inc., with data on the relevant benchmark index from Russell
Analytics./3/ '98 estimate./4/ Source: Emerging Growth Research at Schroder
& Co., Inc.
3
<PAGE>
VALUE REPORT
Heartland Mid Cap Value Fund
In second quarter 1998, our utilities holdings performed well. Our HMO positions
also rallied as investors began to realize federal government regulation would
not be as draconian as first expected and that those HMOs that have trimmed
costs should be more profitable. The Fund's homebuilder stocks (among our best
performing groups in the first quarter) were hammered on speculation the Federal
Reserve was leaning toward a rate hike. We doubt the Fed will raise rates in the
foreseeable future and believe some of the homebuilders are once again
outstanding bargains.
Checking In
Patriot American Hospitality is a large hotel Real Estate Investment Trust
(REIT) that owns, manages, leases or franchises 461 hotels under names including
Wyndham Hotels, International Hotels and Summerfield Suites.
REITs in general have not performed well in 1998 and Patriot American really got
slammed on news the Clinton Administration and Congress were determined to
eliminate the "paired share" structure--Patriot American is one of just four
companies currently allowed to pass the vast majority of operating company
income directly to the REIT and in the process, shield operating earnings from
taxes. We expect legislation to be passed this summer limiting Patriot's "paired
share" tax advantages to existing assets. Not great news, but hardly a disaster
for this already sizable company.
Patriot American stock slid from an October 1997 high of around $33 per share to
$20.375 in mid June. As of June 30, it was trading at around 7.3 times 1998 cash
flow estimates, (a substantial discount to the REIT group's average cash flow
multiple), and had a dividend yield of 5.3%. We'll keep an eye out for any
legislative developments or other conditions that might cause us to change our
view. However, at present, we believe Patriot American is a legitimate growth
company trading at a true value price.
On 6/30/98, the Fund held 29,700 shares of Patriot American Hospitality, Inc.,
valued at $710,944, representing 1.5% of the Fund's net assets.
[Photo of Michael A. Berry]
Michael A. Berry, Ph.D.
Portfolio Manager
"We believe Patriot American is still a legitimate growth company trading at
a true value price."
4
<PAGE>
VALUE REPORT
Heartland Mid Cap Value Fund
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 $750 million and $5 billion.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* SINCE INCEPTION
YTD* 1-year (10/11/96)
<S> <C> <C> <C>
Mid Cap Value Fund 9.0% 18.0% 23.0%
S&P Mid-Cap Index 8.6 27.2 27.5
</TABLE>
*Not annualized.
The S&P Mid-Cap Index is an unmanaged index of 400 stocks generally
considered representative of the mid-cap market.
<TABLE>
<CAPTION>
FUND FACTS
<S> <C> <C>
Growth of $10,000 Fund vs. S&P Mid-Cap Index/2/
since inception (10/11/96).. $14,273/1/ Alpha............. .52
Median market cap............ $1.5 bil. Beta.............. .79
Share price.................. $13.93 R-squared......... .86
Net assets................... $48.4 mil. Number of holdings... .64
</TABLE>
<TABLE>
<CAPTION>
COMPARATIVE VALUATIONS
<S> <C> <C>
Heartland Mid Cap S&P Mid-Cap
Value Fund Index/4/
Price/Earnings Ratio/3/ 16.8x 20.8x
Price/Book Value Ratio 2.4x 3.1X
Price/Cash Flow Ratio 10.4x 16.8x
</TABLE>
<TABLE>
<CAPTION>
TOP 10 HOLDINGS
<S> <C> <C> <C>
Reliance Group Holdings, Inc. .. 2.5% Trigon Healthcare, Inc. ........... 2.0%
Medusa Corporation ............. 2.5 Toll Brothers, Inc. ............... 1.9
Allegiance Corporation ......... 2.3 Sterling Software, Inc. ........... 1.9
Lennar Corporation ............. 2.2 Blount Int'l, Inc. (Class A) ...... 1.8
ICN Pharmaceuticals, Inc. ...... 2.0 Integrated Health Services, Inc. .. 1.8
</TABLE>
All statistics are as of June 30, 1998.
/1/ Includes reinvestment of all dividends and capital gains distributions. /2/
Since the Fund commenced operations on 10/11/96, the measurements are based on
weekly data, rather than monthly data, from inception through 6/30/98. Source:
Heartland Advisors, Inc., with data on the relevant benchmark index from Russell
Analytics. /3/ '98 estimate. /4/ Source: Emerging Growth Research at Schroder &
Co., Inc.
5
<PAGE>
VALUE REPORT
Heartland Value Plus Fund
In second quarter 1998, our insurance holdings performed quite well. Our
positions in high yielding groups like utilities and real estate investment
trusts (REITs) disappointed. However, the sector that was hit the hardest was
energy, which as of June 30 comprised 8.73% of the Fund.
Running on Empty?
With oil prices plummeting to a 12-year low, it is not surprising energy stocks
ran out of gas. As is reflected in the sharp decline of our energy positions,
small cap energy stocks got 4 flat tires as well.
Will energy stocks start moving in the right direction in the quarters ahead? We
note that El Nino years have historically been followed by colder than normal
winters in North America. OPEC has already made some production cuts and will
likely try to trim production further. Even with Asian demand projected to be
flat, worldwide demand is expected to grow by 2% in 1998. Oil production is
currently at about 95% of capacity and though readily available inventory has
risen modestly in 1998, it is still below levels of two years ago.
Interestingly, this is the sixth time in the last 17 years oil has dipped below
$17 per barrel. During the previous 5 occasions it was back above $17 within 24
weeks on average. We believe by the end of this year, oil prices will have risen
significantly. If we are right, the portfolio's largest energy holding
Southwestern Energy--currently trading at just 3.0 times trailing 12- month cash
flow versus 9 times cash flow for the major integrated oils and 16 times cash
flow for the S&P 500--has the potential to kick into high gear. Keep in mind
that as with any portfolio holding, we reserve the right to sell should
circumstances warrant it.
On 6/30/98, the Fund held 1,000,000 shares of Southwestern Energy, valued at
$9,187,500, representing 3.1% of the Fund's net assets.
[Photo of William J. Nasgovitz]
William J. Nasgovitz
Portfolio Co-Manager
[Photo of Patrick J. Retzer]
Patrick J. Retzer, CPA
Portfolio Co-Manager
"Interestingly, this is the sixth time in the last 17 years oil has dipped below
$17 per barrel. During the previous 5 occasions it was back above $17 within 24
weeks on average."
6
<PAGE>
VALUE REPORT
Heartland Value Plus Fund
An equity-income investment, this Fund seeks both capital appreciation and
current income. By investing chiefly in income-producing equity securities of
smaller companies, it pursues capital appreciation and a dividend yield higher
than the yield of the S&P 500. This approach involves investment risks in
addition to those presented by investments in larger-capitalization companies
including the potential for greater price volatility and lower market liquidity.
<TABLE>
<CAPTION>
JUNE YIELD
<S> <C>
Value Plus Fund.............................................................3.3%*
S&P 500 Index...............................................................1.5%
*SEC yield annualized for the 30 days ending 6/30/98.
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS/1/ SINCE INCEPTION
YTD** 1-year 3-year (10/26/93)
<S> <C> <C> <C> <C>
Value Plus Fund -0.7% 17.3% 22.3% 17.9%
Russell 2000 4.9 16.5 18.9 15.3
</TABLE>
**Not annualized.
The Russell 2000 Index is an unmanaged index of stocks considered
representative of the small cap market. 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.
<TABLE>
<CAPTION>
FUND FACTS
<S> <C>
Growth of $10,000
since inception (10/26/93)................$21,597/1/
Median market cap...........................$141 mil.
Share price.................................$15.67
Net assets..................................$293.4 mil.
comparative valuations
Fund vs. Russell 2000/2/
Alpha.......................................6.43
Beta........................................ .45
R-squared................................... .49
Number of holdings............................ 93
</TABLE>
COMPARATIVE VALUATIONS
<TABLE>
<CAPTION>
Heartland Russell
Value Plus Fund 2000/4/
<S> <C> <C>
Price/Earnings Ratio/3/ 15.1x 22.8x
Price/Book Value Ratio 1.3x 2.6x
Price/Cash Flow Ratio 7.3x 15.9x
</TABLE>
TOP 10 HOLDINGS
<TABLE>
<CAPTION>
<S> <C>
Fleming Companies, Inc..........................5.5%
London Pacific Group Ltd. (ADR).................3.2
Southwestern Energy Company.....................3.1
Interstate Energy Corporation...................2.8
UniSource Energy Corporation....................2.7
Dames & Moore, Inc..............................2.6%
Ziegler Coal Holding Company....................2.3
Wellman, Inc....................................2.3
Oil-Dri Corporation of America..................2.3
Anglogold Ltd. (ADR)............................2.1
</TABLE>
All statistics are as of June 30, 1998.
/1/ Includes reinvestment of all dividends and capital gains distributions. /2/
Based on monthly data for the 3-year period ending 6/30/98. Source: Heartland
Advisors, Inc., with data on the relevant benchmark index from Russell
Analytics. /3/ '98 estimate. /4/ Source: Emerging Growth Research at Schroder &
Co., Inc.
7
<PAGE>
VALUE REPORT
Heartland U.S. Government Securities Fund
Clicking on All Cylinders
Fueled by low inflation, benign Federal Reserve policy, signs of a slowing
domestic economy, and a global "flight to quality", U.S. government bonds surged
ahead in the second quarter of 1998. Can they maintain momentum in the quarters
ahead? Short term, we could see them stall. However, we believe sustainable
economic trends and a favorable supply/demand balance should continue to benefit
U.S. government bonds longer term. Some key points to remember:
. Commodity prices are declining globally and we believe Asian economic turmoil
should further limit domestic pricing flexibility. These forces should help
keep inflation under control.
. Rising Tax Receipts--High employment is swelling U.S. income tax coffers, with
a little kick coming from individuals' lower home mortgage interest deductions
resulting from extensive refinancings at lower interest rates.
. Treasury issuance is way down from year ago levels and with the prospect for a
$25-$50 billion federal budget surplus in 1998, should decline further. In
addition, the new Treasury Inflation Protected Securities (TIPs) should reduce
the supply of traditional Treasuries.
. The "full faith and credit" guarantee of Uncle Sam is worth a lot to investors
here and abroad. Periodic "flights to quality" may evolve into a more enduring
"appreciation of quality" in the years ahead.
In summary, although U.S. government securities have already experienced
impressive appreciation this year, long-term trends should continue to work in
our shareholders' favor.
[Photo of Patrick J. Retzer]
Patrick J. Retzer, CPA
Portfolio Manager
"The `full faith and credit' guarantee of Uncle Sam is worth
a lot to investors here and abroad."
8
<PAGE>
VALUE REPORT
Heartland U.S. Government Securities Fund
This Fund seeks a high level of current income, liquidity, and safety of
principal. It works to minimize credit risk by investing virtually all its
assets in securities issued or guaranteed by the U.S. Government or its
agencies./1/ And although its duration is unrestricted, the Fund generally looks
to limit price fluctuation by managing within a narrow, intermediate duration
range of 3 to 6 years.
<TABLE>
<CAPTION>
JUNE YIELD...................................................................................5.5%/2/
SEC yield annualized for the 30 days ending 6/30/98.
AVERAGE ANNUAL TOTAL RETURNS/3/
Since
inception
YTD* 1-year 5-year 10-year (4/9/87)
<S> <C> <C> <C> <C> <C>
U.S. Government
Securities Fund 4.0% 10.9% 5.6% 9.0% 8.6%
Lipper General
U.S Gov't Fund Index 3.5 10.0 5.6 7.7 7.3
</TABLE>
*Not annualized.
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.
<TABLE>
<CAPTION>
FUND FACTS
<S> <C>
Growth of $10,000
since inception (4/9/87).......................................$25,201/3/
Share price..........................................................$9.95
Net assets......................................................$53.0 mil.
Avg. weighted duration............................................4.1 yrs.
Avg. weighted credit quality.....................................Agency/1/
Dividends..............................Declared daily, distributed monthly
Sales commission......................................................None
TOP 5 HOLDINGS
U.S. Treasury Bond 7.875% 2/15/21.....................................12.0%
FHLMC CMO-SEQ 1921 B 6.5% 5/15/21.....................................11.4
VA Vendee CMO-SEQ 1992-2F 7.0% 2/15/18................................ 9.7
FHLMC CMO-SEQ 1978 BC 6.5% 5/15/25.................................... 9.4
US Treasury Bond 5.875% 11/15/99...................................... 7.6
</TABLE>
All statistics are as of June 30, 1998.
/1/The Government guarantee of interest and principal payment applies only to
the portfolio's underlying securities, not to the Fund's share price. /2/Without
fee waivers in effect during the period, SEC yield would have been 5.1% and
total return would have been lower. /3/Includes reinvestment of all dividends
and capital gains distributions.
9
<PAGE>
VALUE REPORT
Heartland Small Cap Contrarian Fund
In second quarter 1998, the Fund's long positions performed relatively well in a
difficult small cap market. However, our short positions, which comprised 21.2%
of total assets at quarter end, continued to hurt performance. We think
investors will eventually come to their collective senses and begin focusing on
the steak instead of the sizzle--that is, invest in fundamentals rather than
market momentum.
Forward and Reverse
Torrance, California-based Motorcar Parts & Accessories rebuilds alternators and
starters. Originally serving only the U.S. foreign car market, it is now taking
on the domestic car competition. As a low cost manufacturer, it is rapidly
taking market share from smaller regional firms and is now third in the
industry. We estimate Motorcar Parts will earn $1.60 in fiscal 1999 (March), up
from $1.16 reported in fiscal 1998. We project a 20% plus earnings growth rate
for the next several years. The company has about a $10 per share book value,
low debt, and an estimated P/E of 9.2, less than half of the S&P 500's current
multiple. We believe the stock will accelerate in the year ahead.
Everybody knows Compaq Computer, one of the leading personal computer
manufacturers and one of the Fund's short positions. Compaq is a sound company.
However, priced at 2 times revenue, over 6 times book value and 43 times 1998
estimated earnings, we think the stock is well ahead of itself. With PC sales
growth slowing, price competition heating up, and margins in the industry
shrinking, we think earnings are vulnerable. The Street seems to be looking past
1998 and betting that Compaq's acquisition of Digital Equipment will pay off big
in 1999. We think that's excessively optimistic and that if investors sense 1999
earnings are likely to disappoint, a selling panic could ensue. Of course, we
reserve the right to cover our short, but we think this stock may be shifting
into reverse in the year ahead.
On 6/30/98, the Fund held long 125,000 shares of Motorcar Parts & Accessories,
Inc., valued at $1,843,750 and held short 100,000 shares of Compaq Computer
Corporation, valued at ($2,837,500), representing 0.9% and (1.4%) of the Fund's
net assets, respectively.
[Photo of William J.
Nasgovitz]
William J. Nasgovitz
Portfolio Manager
"We think investors will eventually come to their collective senses and begin
focusing on the steak instead of the sizzle--that is, invest in fundamentals
rather than market momentum."
10
<PAGE>
VALUE REPORT
Heartland Small Cap Contrarian Fund
With a focus on small company stocks, this Fund seeks maximum long-term growth
through an aggressive value-based strategy. It seeks to take advantage of both
undervalued and overvalued stocks, as well as both rising and declining markets.
The Fund can short stocks it regards as overvalued, use leverage--or borrow--to
enhance returns, and use options and futures to hedge the portfolio. This
approach involves additional investment risks including the potential for
greater price volatility, lower market liquidity and interest expenses that may
be greater than the incremental return from leveraging.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS/1/
Since Inception
YTD* 1-year 3-year (4/27/95)
<S> <C> <C> <C> <C>
Small Cap Contrarian Fund -5.3% 1.4% 11.3% 14.7%
Russell 2000 4.9 16.5 18.9 20.5
</TABLE>
*Not annualized.
The Russell 2000 Index is an unmanaged index of stocks considered representative
of the small cap market.
<TABLE>
<CAPTION>
FUND FACTS
<S> <C>
Growth of $10,000
since inception (4/27/95).............................$15,465/1/
Median market cap......................................$55 mil.
Share price............................................$11.97
Net assets.............................................$206.2 mil.
comparative valuations
Fund vs. Russell 2000/2/
Alpha................................................ -.12
Beta................................................. .55
R-squared............................................ .34
Number of holdings..................................... 98
COMPARATIVE VALUATIONS
Heartland Small Cap
Contrarian Fund Russell
(Long Positions) 2000/4/
Price/Earnings Ratio/3/ 16.8x 22.8x
Price/Book Value Ratio 1.9x 2.6x
Price/Cash Flow Ratio 10.4x 15.9x
TOP 10 HOLDINGS
Matrix Pharmaceutical, Inc................................4.2%
BTG, Inc..................................................3.7
Drypers Corporation.......................................3.2
Shiloh Industries, Inc....................................3.0
Orthologic Corporation....................................2.9
Aldilia, Inc..............................................2.9%
Templeton Dragon Fund, Inc. (RIC).........................2.8
Executone Information Systems, Inc........................2.7
Home Security International, Inc..........................2.7
Syncor International Corporation..........................2.5
</TABLE>
All statistics are as of June 30, 1998.
/1/Includes reinvestment of all dividends and capital gains distributions.
/2/Based on monthly data for the three-year period ending 6/30/98. Source:
Heartland Advisors, Inc., with data on the relevant benchmark index from
Russell Analytics. /3/ '98 estimate. /4/ Source: Emerging Growth Research at
Schroder & Co., Inc.
11
<PAGE>
VALUE REPORT
Heartland Value Fund
Unappreciated, Unloved, and Unbelievably Cheap
Normally, we devote this space to some brief commentary on those portfolio
sectors that have performed well and those that have disappointed in the recent
quarter. We also detail one of our current holdings. This time, we want to
discuss what we believe is a more pressing issue: the dramatic under-performance
of small cap stocks relative to large cap equities in 1998.
For the six months ended June 30, 1998, the Russell 2000 underperformed with a
return of 4.9% compared to the S&P 500's 17.7% gain.* The second quarter was
particularly difficult for small caps. At the close of the quarter, 60% of all
stocks traded on NASDAQ were down 20% or more from their 1998 highs. While the
intensifying economic turmoil in Asia has only recently unsettled the large cap
stocks, the majority of small caps have already suffered a substantial
correction.
Should small cap stocks be out of favor? In our opinion, no. In fact, we think
the data in the table below indicates that our portfolio is a potential bargain
relative to the S&P 500.
<TABLE>
<CAPTION>
Heartland Standard &
Value Fund Poor's 500
<S> <C> <C>
Price/Earnings (1998 est) 18.9x 23.9x
Price/Book Value (1998 est) 2.0x 4.5x
Price/Cash Flow (1998 est) 10.6x 16.1x
</TABLE>
When will this great store of value be more widely recognized? We don't know.
Right now, we think the "hot money" has already gone chasing big cap stock
returns. We believe experienced small cap investors, who have not allowed recent
disappointment to cloud their investment judgment, are holding the fort. It
takes courage to go against the prevailing investment tide. Those that have it
are often rewarded for their fortitude with handsome opportunities.
*These are unmanaged indices representing companies of smaller and larger
capitalizations, respectively. They are not representative of the performance of
any Fund. Small company stocks may be more volatile than those of the S&P 500.
[Photo of William J. Nasgovitz]
William J. Nasgovitz
Portfolio Co-Manager
[Photo of Eric J. Miller]
Eric J. Miller, CMA
Portfolio Co-Manager
"It takes courage to go against the prevailing investment tide. Those that have
it, are often rewarded for their fortitude with handsome opportunities."
12
<PAGE>
VALUE REPORT
Heartland Value Fund
This Fund seeks capital appreciation through small company stocks selected on a
value basis. This approach involves investment risks in addition to those
presented by investments in larger-capitalization companies including the
potential for greater price volatility and lower market liquidity.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS1
Since
inception
YTD* 1-year 5-year 10-year (12/28/84)
<S> <C> <C> <C> <C> <C>
Value Fund 3.9% 12.2% 18.1% 16.5% 17.0%
Russell 2000 4.9 16.5 16.1 13.6 13.9
</TABLE>
* Not annualized.
The Russell 2000 Index is an unmanaged index of stocks considered
representative of the small cap market.
<TABLE>
<CAPTION>
FUND FACTS
<S> <C> <C> <C>
Growth of $10,000 Fund vs. Russell 2000/2/
since inception (12/28/84).. $83,0501 Alpha................ 1.71
Median market cap............. $94 mil. Beta................. .72
Share price................... $35.19 R-squared............ .71
Net assets.................... $2.1 bil. Number of holdings..... 328
</TABLE>
COMPARATIVE VALUATIONS
Heartland Russell
Value Fund 2000*
Price/Earnings Ratio /3/ 18.9x 22.8x
Price/Book Value Ratio 2.0x 2.6x
Price/Cash Flow Ratio 10.4x 15.9x
<TABLE>
<CAPTION>
TOP 10 HOLDINGS
<S> <C> <C> <C>
ICN Pharmaceuticals, Inc......... 4.9% Interdigital Communications Corp. 1.2%
Grand Casinos, Inc............... 1.6 Associated Banc-Corp............. 1.2
ShopKo Stores, Inc............... 1.4 Astec Industries, Inc............ 1.1
Presidential Life Corporation.... 1.4 El Paso Electric Company......... 1.1
John Alden Financial Corporation. 1.2 Tesoro Petroleum Corporation..... 1.0
</TABLE>
All statistics are as of June 30, 1998.
/1/Includes reinvestment of all dividends and capital gains distributions. /2/
Based on monthly data for the 3-year period ending 6/30/98. Source: Heartland
Advisors, Inc., with data on the relevant benchmark index from Russell
Analytics. /3/ '98 estimate. /4/ Source: Emerging Growth Research at
Schroder & Co., Inc.
13
<PAGE>
VALUE REPORT
Definitions
PLEASE NOTE...
Defined below are the Alpha, Beta and R-Squared measurements presented for our
equity funds. These definitions were provided by Russell Analytics, a division
of the Frank Russell Company, highly regarded specialists in investment
information and statistics. When calculating these measurements for each
Heartland equity fund, we have substituted the Fund's benchmark index for a
"market return" as indicated in the presentation for each fund.
Alpha. A measure of a portfolio's return in excess of the market return, both
adjusted for risk. It is a measure of the manager's contribution to performance
due to security selection. A positive Alpha indicates that the portfolio
outperformed the market on a risk-adjusted basis, and a negative Alpha indicates
the portfolio did worse than the market.
Beta. A measure of the sensitivity of a portfolio's rates of return against
those of the market. A Beta greater than 1.00 indicates volatility greater than
that of the market.
R-Squared. A measure that indicates the extent to which fluctuations in
portfolio returns are correlated with those of the general market. An R-Squared
of .75 indicates that 75% of the fluctuation in a portfolio's return is
explained by the fluctuation of the market.
14
<PAGE>
VALUE REPORT
Heartland Value Research
The following studies were conducted by Heartland's research staff and are
available to you upon request. Please call shareholder services at
1.800.432.7856.
#1 "THE CASE FOR LOW P/E AT MARKET TOPS"
Michael A. Berry, Ph.D.
#2 "OVER TIME, THERE'S BEEN NOTHING LIKE VALUE"
Michael A. Berry, Ph.D.
#3 "USING A MID-CAP VALUE STRATEGY TO HEDGE THE LARGE CAP/SMALL CAP CYCLE"
Michael A. Berry, Ph.D.
#4 "WHY INTERMEDIATE MATURITIES?"
Douglas S. Rogers, CFA
#5 "A REVEALING LOOK AT PRICE-TO-BOOK"
James P. Holmes, CFA
#6 "WHY GOVERNMENT BONDS?"
Douglas S. Rogers, CFA
#7 "VALUE INVESTING: COME RAIN OR COME SHINE"
Michael A. Berry, Ph.D.
#8 "HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND: THE INVENTION OF A
NEW SECTOR"
Thomas J. Conlin, CFA / Greg D. Winston, CFA
15
<PAGE>
VALUE REPORT
[Photo of
Shareholder
Services
Representative]
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
16
<PAGE>
Schedules of Investments and
Financial Statements
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
1..........................Large Cap Value Fund 20..............Statements of Assets and Liabilities
3............................Mid Cap Value Fund 22..........................Statements of Operations
5...............................Value Plus Fund 24.............................Statements of Changes
8...............U.S. Government Securities Fund in Net Assets
9.....................Small Cap Contrarian Fund 28..............................Financial Highlights
12...................................Value Fund 33.....................Notes to Financial Statements
========================================================================================================
HEARTLAND LARGE CAP VALUE FUND
SCHEDULE OF INVESTMENTS . June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS -- 88.5% Shares Industry Value Net Assets
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Earnings Ratio
AVX Corporation 9,200 Electronics $ 147,775 1.6%
British Steel PLC (ADR) 6,300 Steel 143,325 1.5
Creative Technology Ltd. (a) 15,000 Business Machines 185,625 2.0
Great Lakes Chemical Corporation 3,600 Chemicals 141,975 1.5
Hanna (M.A.) Company 8,400 Chemicals 153,825 1.6
Ispat International NV (N.Y. Registered) (a) 6,600 Non-Ferrous Metals 123,750 1.3
Jefferson-Pilot Corporation 2,400 Insurance 139,050 1.5
Lehman Brothers Holdings, Inc. 1,600 Miscellaneous Financial 124,100 1.3
Olsten Corporation 12,500 Business Services 139,844 1.5
PartnerRe Ltd. 3,400 Insurance 173,400 1.9
Philip Morris Companies, Inc. 1,200 Tobacco 47,250 0.5
Raychem Corporation 9,800 Consumer Durables 289,712 3.1
RJR Nabisco Holdings Corporation 1,600 Tobacco 38,000 0.4
St. Paul Companies, Inc. 6,122 Insurance 257,507 2.8
Telecomunicacoes Brasileiras S.A. (ADR) 2,300 Telephone 251,131 2.7
Toys "R" Us, Inc. (a) 7,900 Retail 186,144 2.0
UST, Inc. 2,200 Tobacco 59,400 0.6
Vencor, Inc. (a) 6,500 Drugs & Medicine 47,125 0.5
Ventas, Inc. (a) 6,500 Drugs & Medicine 89,781 1.0
Vishay Intertechnology, Inc. (a) 8,610 Electronics 154,442 1.7
YPF Sociedad Anonima (ADR) 6,100 International Oil 183,381 2.0
---------- -----
$3,076,542 33.0%
Low Price to Book Value
Aetna, Inc. 2,800 Drugs & Medicine $ 213,150 2.3%
Allmerica Financial Corporation 3,255 Insurance 211,575 2.3
American Financial Group, Inc. 4,100 Insurance 177,581 1.9
American General Corporation 1,200 Insurance 85,425 0.9
CalEnergy Company, Inc. (a) 6,000 Energy & Utilities 180,375 1.9
Champion International Corporation 3,600 Paper & Forest Products 177,075 1.9
Columbia HCA Healthcare Corporation 2,300 Drugs & Medicine 66,987 0.7
Companhia Cervejaria Brahma (ADR) 24,000 Food & Agriculture 300,000 3.2
Darden Restaurants, Inc. 9,800 Food & Agriculture 155,575 1.7
Elf Aquitane (ADR) 1,200 International Oil 85,200 0.9
Household International, Inc. 6,133 Miscellaneous Financial 305,117 3.3
International Paper Company 800 Paper & Forest Products 34,400 0.4
Jefferson Smurfit Group PLC (ADR) 3,100 Containers 94,550 1.0
Louisiana-Pacific Corporation 8,000 Paper & Forest Products 146,000 1.6
Mead Corporation 3,600 Paper & Forest Products 114,300 1.2
Petroleo Brasileiro S.A. (ADR) 7,000 International Oil 130,375 1.4
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND LARGE CAP VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . June 30, 1998 (Unaudited)
- -------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS -- 88.5% [CONT'D] Shares Industry Value Net Assets
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Low Price to Book Value [CONT'D]
Santa Fe Energy Resources, Inc. (a) 16,200 Domestic Oil $ 174,150 1.9%
Sonat, Inc. 2,600 Energy & Raw Materials 100,425 1.1
SUPERVALU, Inc. 1,700 Food & Agriculture 75,438 0.8
----------- ------
$ 2,827,698 30.4%
Below Average Price/Cash Flow Ratio
Consolidated Natural Gas Company 4,600 Energy & Raw Materials $ 270,825 2.9%
Noble Affiliates, Inc. 4,200 Domestic Oil 159,600 1.7
OGE Energy Corporation 3,000 Energy & Utilities 81,000 0.9
Owens Corning 6,200 Construction 253,037 2.7
Philips Electronics NV (N.Y. Registered) 2,400 Electronics 204,000 2.2
The Reynolds & Reynolds Company (Class A) 9,900 Producer Goods 180,056 1.9
Unicom Corporation 9,000 Energy & Utilities 315,563 3.4
Union Pacific Corporation 8,000 Railroads & Shipping 353,000 3.8
----------- ------
$ 1,817,081 19.5%
Special Situations
Chase Manhattan Corporation 800 Banks $ 60,400 0.7%
J.C. Penney Company, Inc. 800 Retail 57,850 0.6
Shaw Industries, Inc. 16,500 Apparel 290,812 3.1
Tenet Healthcare Corporation (a) 3,600 Drugs & Medicine 112,500 1.2
----------- ------
521,562 5.6%
-----------
TOTAL COMMON STOCKS (Cost $7,639,777) $ 8,242,883
- -----------------------------------------------------------------------------------------------------------
Par Percent of
SHORT-TERM INVESTMENTS - 11.9% Amount Value Net Assets
- -----------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER -- 7.5%
E.I. du Pont de Nemours & Company
0.00% 07/09/1998 $700,000 $ 699,106 7.5%
VARIABLE RATE DEMAND NOTES (+) - 4.4%
SJohnson Controls, Inc. 5.26% 100,000 100,000 1.0
General Mills, Inc. 5.26% 155,000 155,000 1.7
Warner-Lambert Company 5.25% 155,000 155,000 1.7
-----------
410,000
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $1,109,106) $ 1,109,106
TOTAL INVESTMENTS (Cost $8,748,883)............................................ $ 9,351,989 100.4%
Liabilities, less cash and receivables......................................... (35,478) (0.4)
----------- ------
TOTAL NET ASSETS............................................................... $ 9,316,511 100.0%
=========== ======
</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 June 30, 1998.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
2
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND MID CAP VALUE FUND
SCHEDULE OF INVESTMENTS . June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS -- 90.1% Shares Industry Value Net Assets
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Earnings Ratio
AK Steel Holding Corporation 18,750 Steel $ 335,156 0.7%
AGCO Corporation 18,300 Producer Goods 376,294 0.8
Carpenter Technology Corporation 15,700 Steel 788,925 1.6
Integrated Health Services, Inc. 23,400 Drugs & Medicine 877,500 1.8
Lehman Brothers Holdings, Inc. 9,150 Miscellaneous Financial 709,697 1.5
LNR Property Corporation 22,100 Real Property 566,313 1.2
Mid Ocean Ltd. 9,600 Insurance 753,600 1.6
Olsten Corporation 22,700 Business Services 253,956 0.5
Patriot American Hospitality, Inc. 29,700 Real Property 710,944 1.5
Philip Services Corporation (a) 61,800 Business Services 254,925 0.5
Precision Drilling Corporation (a) 41,350 International Oil 811,494 1.7
Protective Life Corporation 20,700 Insurance 759,431 1.6
Public Service Co. of New Mexico 23,200 Energy & Utilities 526,350 1.1
Reynolds Metals Company 12,950 Non-Ferrous Metals 724,391 1.5
Sun Healthcare Group, Inc. (a) 37,400 Drugs & Medicine 546,975 1.1
Toll Brothers, Inc. (a) 31,600 Construction 906,525 1.9
United Dominion Industries Ltd. 22,550 Producer Goods 752,606 1.5
Valero Energy Corporation 18,100 Domestic Oil 601,825 1.2
Walden Residential Properties, Inc. 16,500 Real Property 404,250 0.8
Zeigler Coal Holding Company 40,200 Energy & Raw Materials 688,425 1.4
----------- --------
$12,349,582 25.5%
Low Price to Book Value
Astoria Financial Corporation 10,950 Miscellaneous Financial $ 585,825 1.2%
BEC Energy 15,000 Energy & Utilities 622,500 1.3
Bowater, Inc. 15,700 Paper & Forest Products 741,825 1.5
Commercial Federal Corporation 21,450 Banks 678,356 1.4
Darden Restaurants, Inc. 39,600 Food & Agriculture 628,650 1.3
Equitable Resources, Inc. 20,750 Domestic Oil 632,875 1.3
First Union Corporation 9,570 Banks 557,453 1.1
Heilig-Meyers Company 51,800 Consumer Durables 637,788 1.3
King World Productions, Inc. 32,500 Media 828,750 1.7
Lennar Corporation 35,900 Construction 1,059,050 2.2
Newmont Mining Corporation 15,450 Gold 365,006 0.8
Popular, Inc. 8,600 Banks 571,900 1.2
Prime Hospitality Corporation (a) 36,450 Travel & Recreation 635,597 1.3
Ranger Oil Ltd. 94,500 International Oil 691,031 1.4
Reliance Group Holdings, Inc. 70,500 Insurance 1,233,750 2.6
SUPERVALU, Inc. 16,550 Food & Agriculture 734,406 1.5
Tesoro Petroleum Corporation (a) 36,300 Domestic Oil 576,263 1.2
Trigon Healthcare, Inc. (a) 27,000 Insurance 977,063 2.0
----------- --------
$12,758,088 26.3%
Below Average Price/Cash Flow Ratio
Allied Capital Corporation 29,980 Miscellaneous Financial $ 734,510 1.5%
Asarco, Inc. 10,000 Non-Ferrous Metals 222,500 0.5
Data General Corporation (a) 42,250 Business Machines 631,109 1.3
El Paso Electric Company (a) 91,100 Energy & Utilities 836,981 1.7
Fleming Companies, Inc. 47,800 Food & Agriculture 839,488 1.7
KLM Royal Dutch Airlines NV (ADR) 21,000 Air Transport 859,687 1.8
Ogden Corporation 16,800 Business Services 465,150 1.0
OGE Energy Corporation 22,600 Energy & Utilities 610,200 1.3
Poco Petroleum Ltd. (b) 66,000 International Oil 647,585 1.3
SPS Technologies, Inc. (a) 10,200 Producer Goods 596,700 1.2
Teekay Shipping Corporation 28,100 Railroads & Shipping 704,256 1.5
TransTexas Gas Corporation (a) 24,000 Domestic Oil 213,000 0.4
Wellman, Inc. 34,700 Chemicals 787,256 1.6
----------- --------
$ 8,148,422 16.8%
</TABLE>
3
<PAGE>
HEARTLAND MID CAP VALUE FUND
SCHEDULE OF INVESTMENTS (CONT'D) - June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 90.1% (cont'd) Shares Industry Value Net Assets
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Special Situations
Adobe Systems, Inc. 11,950 Business Services $ 507,128 1.1%
Allegiance Corporation 21,400 Drugs & Medicine 1,096,750 2.3
Bank United Corporation (Class A) 17,700 Miscellaneous Financial 847,387 1.8
Blount Int'l, Inc. (Class A) 31,300 Consumer Durables 892,050 1.8
Dean Foods Company 12,350 Food & Agriculture 678,478 1.4
Dime Bancorp, Inc. 16,400 Miscellaneous Financial 490,975 1.0
Horace Mann Educators Corporation 20,400 Insurance 703,800 1.4
ICN Pharmaceuticals, Inc. 21,550 Drugs & Medicine 984,566 2.0
McDermott International, Inc. 22,000 Construction 757,625 1.6
Medusa Corporation 19,550 Construction 1,226,763 2.5
Sterling Software, Inc. (a) 30,550 Business Services 903,134 1.9
Storage Technology Corporation (a) 14,800 Business Machines 641,950 1.3
Wellpoint Health Networks, Inc. (a) 9,200 Insurance 680,800 1.4
------------ -----
10,411,406 21.5%
------------
TOTAL COMMON STOCKS (Cost $36,741,003) $ 43,667,498
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Par Percent of
SHORT-TERM INVESTMENTS 9.9% Amount Value Net Assets
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMERCIAL PAPER - 7.3%
E.I. du Pont de Nemours & Company
0.00% 07/15/1998 $ 500,000 $ 498,911 1.0%
Exxon Asset Management 0.00%
07/02/1998 1,000,000 999,843 2.1
Ford Motor Credit Corporation 0.00%
07/06/1998 1,000,000 999,213 2.1
Nestle Capital Corporation 0.00%
07/06/1998 1,000,000 999,236 2.1
------------
3,497,203
VARIABLE RATE DEMAND NOTES (+) - 2.6%
General Mills, Inc. 5.26% 828,000 828,000 1.7
Pitney Bowes Credit Corporation 5.26% 55,000 55,000 0.1
Warner-Lambert Company 5.25% 394,500 394,500 0.8
------------
1,277,500
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $4,774,703) $ 4,774,703
TOTAL INVESTMENTS (Cost $41,515,706).......................................... $ 48,442,201 100.0%
Cash and receivables, less liabilities........................................ 6,672 0.0
------------ -----
TOTAL NET ASSETS.............................................................. $ 48,448,873 100.0%
============ =====
</TABLE>
(a) Non-income producing security.
(b) Foreign-denominated 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 June 30, 1998.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
4
<PAGE>
HEARTLAND VALUE PLUS FUND
SCHEDULE OF INVESTMENTS - June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 68.9% Shares Industry Value Net Assets
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Earnings Ratio
Aceto Corporation 150,000 Chemicals $ 12,437,500 0.8%
Colonial Properties Trust 125,000 Real Property 3,875,000 1.3
CORECap, Inc. (d) 222,222 Real Property 4,444,440 1.5
Dames & Moore,Inc. 600,000 Business Services 7,725,000 2.6
Decorator Industries, Inc. (b) 257,900 Miscellaneous & Conglomerates 3,352,700 1.1
Donegal Group, Inc. 65,066 Insurance 1,219,988 0.4
EMC Insurance Group, Inc. 300,000 Insurance 4,425,000 1.5
Ensign Resource Service Group, Inc. (c) 240,100 International Oil 4,090,007 1.4
Equity Inns, Inc. 200,000 Real Property 2,637,500 0.9
Fleming Companies, Inc. 920,000 Food & Agriculture 16,157,500 5.5
International Aluminum Company 100,000 Producer Goods 3,100,000 1.2
London Pacific Group Ltd. (ADR) 600,000 Insurance 9,525,000 3.2
Lufkin Industries, Inc. 94,200 Producer Goods 3,108,600 1.1
Ocwen Asset Investment Corporation 150,000 Real Property 2,484,375 0.9
Prime Retail, Inc. 200,000 Real Property 2,387,500 0.8
Rival Company 261,400 Consumer Durables 3,528,900 1.2
Riviera Tool Company (a)(b) 194,999 Producer Goods 1,706,241 0.6
Southwestern Energy Company 1,000,000 Energy & Raw Materials 9,187,500 3.1
United Investors Realty Trust 87,500 Real Property 831,250 0.3
Ziegler Coal Holding Company 400,000 Energy & Raw Materials 6,850,000 2.3
----------- ----
$93,074,001 31.7%
Low Price to Book Value
Amada Sonoike Company Ltd. (c) 200,000 Producer Goods $12,545,600 0.2%
Anglogold Ltd. (ADR) 300,000 Gold 6,018,750 2.1
Anthracite Capital, Inc. 175,000 Real Property 2,428,125 0.8
Capital Automotive 175,000 Real Property 2,482,812 0.9
Chubu Suisan Company Ltd. (c) 500,000 Miscellaneous & Conglomerates 1,435,950 0.5
Commercial Bankshares, Inc. 50,000 Banks 1,212,500 0.4
Denkyosha Company (c) 500,000 Electronics 2,159,350 0.7
Fletcher Challenge Forests (ADR) 300,000 Paper & Forest Products 1,706,250 0.6
Fort Bend Holding Corporation 16,718 Miscellaneous Financial 384,514 0.1
Foster (LB) Company (a) 300,000 Producer Goods 1,556,250 0.5
General Housewares Corporation 100,000 Steel 1,006,250 0.3
Gold Fields Ltd. (ADR) (a) 700,000 Gold 2,887,500 1.0
Grand Premier Financial,Inc. 77,200 Banks 1,235,200 0.4
Gryphon Holdings, Inc. (a) 300,000 Insurance 4,950,000 1.7
Hanover Capital Mortgage Holdings, Inc. 200,000 Real Property 1,900,000 0.6
Insteel Industries, Inc. (b) 432,000 Producer Goods 2,727,000 0.9
Intrav, Inc. 75,000 Travel & Recreation 1,575,000 0.5
Katy Industries, Inc. 100,000 Producer Goods 1,825,000 0.6
Klamath First Bancorp, Inc. 100,000 Banks 1,906,250 0.7
Nankai Plywood Company Ltd. (c) 100,000 Construction 439,790 0.2
Professional Bancorp, Inc. 55,000 Banks 1,027,813 0.4
Siam Food Products Public Company Ltd. (b)(c) 1,300,000 Food & Agriculture 1,189,500 0.4
Southwest Water Company 82,000 Energy & Utilities 1,435,000 0.5
Tab Products Company 200,000 Producer Goods 2,475,000 0.8
Yushiro Chemical Industry Company Ltd. (c) 463,000 Chemicals 1,759,632 0.6
----------- ----
$48,269,036 16.4%
Below Average Price/Cash Flow Ratio
Akita Drilling Ltd. (Class A) (b)(c) 788,500 International Oil $15,641,323 1.9%
Amcast Industrial Corporation 100,000 Electronics 1,862,500 0.6
Arctic Cat, Inc. 400,000 Motor Vehicles 3,950,000 1.4
Cooker Restaurant Corporation 485,900 Non-Durables & Entertainment 4,737,525 1.6
Dravo Corporation (a) 129,400 Construction 1,188,863 0.4
FlexsteelIndustries, Inc. 256,600 Consumer Durables 3,592,400 1.2
Haggar Corporation 269,900 Apparel 3,441,225 1.2
Interstate Energy Corporation 250,000 Energy & Utilities 8,125,000 2.8
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE PLUS FUND
SCHEDULE OF INVESTMENTS (CONT'D) . June 30, 1998 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 68.9% (cont'd) Shares Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Cash Flow Ratio (cont'd)
Nash Finch Company 65,500 Food & Agriculture $ 986,594 0.3%
Oil-Dri Corporation of America (b) 470,000 Non-Durables & Entertainment 6,785,625 2.3
Piccadilly Cafeterias, Inc. 125,500 Non-Durables & Entertainment 1,615,813 0.6
Providence Energy Corporation 135,500 Energy & Utilities 2,853,969 1.0
Trigen Energy Corporation 100,000 Energy & Utilities 1,381,250 0.5
UniSource Energy Corporation (a) 500,000 Energy & Utilities 7,875,000 2.7
Wellman, Inc. 300,000 Chemicals 6,806,250 2.3
------------ -----
60,843,337 20.8%
------------ -----
TOTAL COMMON STOCKS (Cost $197,330,887) $202,186,374
- ------------------------------------------------------------------------------------------------------------------
Percent of
PREFERRED STOCKS - 3.7% Shares Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------------------
Bolder Technologies Corporation
9.00% Ser. A Conv. (144A) (d) 80,000 Electronics $ 3,670,000 1.2%
BTI Cap Trust 6.50% Conv. (144A) (d) 40,000 Non-Durables & Entertainment 1,680,000 0.6
CORE Cap, Inc. 10.00% Series A Conv. (d) 222,222 Real Property 5,557,083 1.9
------------
TOTAL PREFERRED STOCKS (Cost $11,555,550) $ 10,907,083
- ------------------------------------------------------------------------------------------------------------------
Par Percent of
CONVERTIBLE BONDS - 15.7% Amount Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------------------
Bell Sports Corporation 4.25% 11/15/2000 $2,000,000 Non-Durables & Entertainment $ 1,692,500 0.6%
Danka Business Systems PLC 6.75%
04/01/2002 3,500,000 Business Machines 3,119,375 1.1
Data General Corporation 6.00%
05/15/2004 5,000,000 Business Machines 4,625,000 1.6
Dura Pharmaceuticals, Inc. 3.50%
07/15/2002 5,000,000 Drugs & Medicine 4,181,250 1.4
Fort Bend Holding Corporation 8.00%
12/01/2005 800,000 Miscellaneous Financial 1,698,000 0.6
Halter Marine Group, Inc. 4.50%
09/15/2004 2,000,000 Railroads & Shipping 1,607,500 0.5
Hector Communications
Corporation 8.50% 02/15/2002 426,000 Telephone 511,733 0.2
Kent Electronics Corporation 4.50%
09/01/2004 4,000,000 Electronics 3,310,000 1.1
Key Energy Group, Inc. 5.00%
09/15/2004 (144A) (d) 3,000,000 Domestic Oil 2,358,750 0.8
Key Energy Group, Inc. 5.00%
09/15/2004 2,000,000 Domestic Oil 1,572,500 0.5
Mercury Air Group,Inc. 7.75% 02/01/2006 3,250,000 Air Transport 3,656,250 1.2
Park Electrochemical Corporation 5.50%
03/01/2006 2,000,000 Electronics 1,692,500 0.6
Physicians Resources Group, Inc. 6.00%
12/01/2001 (144A) (d) 4,060,000 Drugs & Medicine 3,136,350 1.1
Professional Bancorp, Inc. 8.50%
03/01/2004 668,000 Banks 983,630 0.3
Read-Rite Corporation 6.50% 09/01/2004 5,000,000 Electronics 3,106,250 1.1
Remington Oil & Gas Corporation 8.25%
12/01/2002 5,000,000 Domestic Oil 4,793,750 1.6
Reptron Electronics, Inc. 6.75% 08/01/2004 1,445,000 Electronics 1,114,456 0.4
Source Capital Corporation 7.50%
03/01/2008 (d) 1,400,000 Banks 1,349,052 0.5
Thorn Apple Valley,Inc. 9.00% 04/01/2007 1,500,000 Food & Agriculture 1,425,000 0.5
------------
TOTAL CONVERTIBLE BONDS (Cost $47,355,127) $ 45,933,846
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE PLUS FUND
SCHEDULE OF INVESTMENTS (CONT'D) . June 30, 1998 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
Par Percent of
CORPORATE BONDS - 9.3% Amount Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ABC Rail Products Corporation 9.25%
01/15/2004 $3,000,000 Railroads & Shipping $ 3,026,250 1.0%
Canadian Forest Oil Ltd. 8.75%
09/15/2007 2,000,000 International Oil 1,965,000 0.7
Coho Energy, Inc. 8.875% 10/15/2007 1,500,000 Domestic Oil 1,425,000 0.5
Doman Industries Ltd. 9.25% 11/15/2007 2,700,000 Paper & Forest Products 2,706,750 0.9
First Republic Bank 7.75% 09/15/2012 3,000,000 Banks 3,131,250 1.1
Hawthorne Financial Corporation 12.50%
12/31/2004 2,000,000 Savings & Loans 2,100,000 0.7
Leucadia National Corporation 7.875%
10/15/2006 3,000,000 Insurance 3,150,000 1.1
Matrix Capital Corporation 11.50%
09/30/2004 3,000,000 Miscellaneous Financial 3,236,250 1.1
Resource America, Inc. 12.00%
08/01/2004 3,000,000 Domestic Oil 3,210,000 1.1
Sholodge, Inc. 9.55% 09/01/2007 3,000,000 Travel & Recreation 2,973,750 1.0
Southwest Royalties, Inc. 10.50%
10/15/2004 500,000 Domestic Oil 415,000 0.1
-----------
TOTAL CORPORATE BONDS (Cost $26,721,423) $27,339,250
- ------------------------------------------------------------------------------------------------------------------
Par Percent of
SHORT-TERM INVESTMENT - 0.0% Amount Value Net Assets
- ------------------------------------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTE (+) 0.0%
American Family Financial Services 5.25% $ 60,000 $ 60,000 0.0%
TOTAL SHORT-TERM INVESTMENT (Cost $60,000) $ 60,000
TOTAL INVESTMENTS (Cost $283,022,987).................................................. $286,426,553 97.6%
Cash and receivables, less liabilities................................................. 7,016,221 2.4
------------ -----
TOTAL NET ASSETS....................................................................... $293,442,774 100.0%
============ =====
</TABLE>
(a) Non-income producing security.
(b) Affiliated company. See Note 8 in Notes to Financial Statements.
(c) Foreign-denominated security.
(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 rate changes periodically on specified dates.
The rate listed is as of June 30, 1998.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
7
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND U.S. GOVERNMENT SECURITIES FUND
SCHEDULE OF INVESTMENTS . June 30, 1998 (Unaudited)
- ---------------------------------------------------------------------------------------------------------
Par Percent of
Amount LONG TERM INVESTMENTS - 97.4% Coupon Maturity Value Net Assets
- ---------------------------------------------------------------------------------------------------------
U.S. TREASURY AND AGENCY SECURITIES - 33.4%
U.S. TREASURY SECURITIES - 21.8%
<C> <S> <C> <C> <C> <C>
$5,000,000 U.S. Treasury Bond 7.875% 02/15/2021 $ 6,339,099 12.0%
1,000,000 U.S. Treasury Bond 7.250 08/15/2022 1,196,640 2.2
4,000,000 U.S. Treasury Bond 5.875 11/15/1999 4,018,200 7.6
-----------
11,553,939
AGENCY SECURITIES 11.6%
3,000,000 Federal National Mortgage Association
(Callable 12/12/2001) 6.700 12/12/2006 3,056,910 5.8
3,000,000 Federal National Mortgage Association
(Callable 07/06/2002) 6.760 07/16/2007 3,075,240 5.8
-----------
6,132,150
-----------
TOTAL U.S. TREASURY AND AGENCY SECURITIES (Cost $17,024,320) 17,686,089
MORTGAGE-RELATED SECURITIES - 64.0%
PASS-THROUGH SECURITIES - 28.3%
270,707 FHLMC #260666 8.250 03/01/2008 282,550 0.5
1,175,417 FHLMC #280656 9.000 06/01/2014 1,259,166 2.4
1,033,720 FNMA #208578 CL 7.500 03/01/2013 1,065,377 2.0
671,779 FNMA #304119 CL 8.500 02/01/2025 705,789 1.3
1,074,992 FNMA #309494 RE 6.500 09/01/2025 1,074,320 2.0
2,252,816 FNMA #361493 GL 9.000 01/01/2025 2,382,354 4.5
2,534,508 FNMA Grantor Trust 1995 - T5A 7.000 03/17/2035 2,331,133 4.4
288,908 GNMA #31652 8.500 09/15/2009 307,417 0.6
233,901 GNMA #293146 MHB 10.250 07/15/2005 248,168 0.5
1,507,649 GNMA #443630 MHD 9.000 11/15/2017 1,659,921 3.1
3,634,615 GNMA #411360 SF 7.000 09/15/2025 3,710,715 7.0
-----------
15,026,910
COLLATERALIZED MORTGAGE OBLIGATIONS 35.7%
5,000,000 FHLMC CMO-SEQ 1978 BC 6.500 05/15/2025 4,956,003 9.4
5,996,000 FHLMC CMO-SEQ 1921 B 6.500 05/15/2021 6,027,681 11.4
3,000,000 FNMA CMO-PAC 1993 - 38L 5.000 08/25/2022 2,793,317 5.2
5,000,000 VA VENDEE CMO-SEQ 1992 - 2F 7.000 02/15/2018 5,131,396 9.7
-----------
18,908,397
-----------
TOTAL MORTGAGE-RELATED SECURITIES (Cost $32,938,146) 33,935,307
-----------
TOTAL LONG-TERM INVESTMENTS (Cost $49,962,466) $51,621,396
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Par Percent of
Amount SHORT TERM INVESTMENTS - 2.3% Value Net Assets
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
VARIABLE RATE DEMAND NOTES (+) 2.3%
$238,500 American Family Financial Services 5.25% $ 238,500 0.5%
279,000 General Mills, Inc. 5.26% 279,000 0.5
385,500 Pitney Bowes Credit Corporation 5.26% 385,500 0.7
311,000 Warner-Lambert Company 5.25% 311,000 0.6
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $1,214,000) $ 1,214,000
TOTAL INVESTMENTS (Cost $51,176,466)...................... $52,835,396 99.7%
Cash and receivables, less liabilities.................... 182,517 0.3
----------- ------
TOTAL NET ASSETS.......................................... $53,017,913 100.0%
=========== ======
</TABLE>
(+) Variable rate demand notes are considered short-term obligations and are
payable on demand. The interest rates change periodically on specified
dates. The rates listed are as of June 30, 1998.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
8
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND SMALL CAP CONTRARIAN FUND
SCHEDULE OF INVESTMENTS . June 30, 1998 (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS 109.1% Shares Industry Value Net Assets
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Earnings Ratio
Advocat, Inc. (a)(b)(c) 279,200 Drugs & Medicine $ 1,919,500 0.9%
Allou Health & Beauty Care, Inc. (Class A) (a)(b)(c) 400,000 Drugs & Medicine 3,800,000 1.8
American Physicians Services Group, Inc. (a)(c) 207,200 Miscellaneous Financial 1,482,785 0.7
Atlantic American Corporation (a)(c) 337,800 Insurance 1,689,000 0.8
Capital Corp of the West (a)(c) 105,000 Banks 1,378,125 0.6
Control Devices, Inc. (c) 125,875 Electronics 1,636,375 0.7
Donnelly Corporation (b)(c) 300,000 Motor Vehicles 5,156,250 2.5
Fahnestock Viner Holdings, Inc. (Class A) (c) 200,000 Miscellaneous Financial 3,875,000 1.9
Friedman Industries, Inc. (c) 220,500 Steel 1,502,156 0.7
Home Security International, Inc. (a)(b)(c) 400,000 Business Services 5,550,000 2.7
ICTS International N.V. (a)(c) 325,000 Business Services 2,234,375 1.1
The Judge Group, Inc. (a)(c) 300,000 Business Services 1,518,750 0.7
Kentek Information Systems, Inc. (b)(c) 500,000 Business Machines 4,312,500 2.1
K-Tron International, Inc. (a)(c) 122,000 Electronics 2,272,250 1.1
Manchester Equipment Company, Inc. (a)(b)(c) 500,000 Business Services 1,968,750 1.0
Moore Medical Corporation (a)(b)(c) 200,000 Drugs & Medicine 2,450,000 1.2
Motor Club of America (a)(b)(c) 146,000 Insurance 2,226,500 1.1
Motorcar Parts & Accessories, Inc. (a)(c) 125,000 Motor Vehicles 1,843,750 0.9
M-Wave, Inc. (a)(b) 277,000 Electronics 519,375 0.2
Napco Security Systems, Inc. (a)(c) 150,000 Electronics 712,500 0.4
Northwest Pipe Company (a)(c) 200,000 Steel 4,700,000 2.3
O. I. Corporation (a)(b)(c) 352,000 Optical Photo & Equipment 1,716,000 0.8
Personnel Management, Inc. (a)(b)(c) 196,400 Business Services 2,970,550 1.4
PremiumWear, Inc. (b) 200,000 Apparel 975,000 0.5
Programmer's Paradise, Inc. (a)(b)(c) 251,900 Business Machines 2,078,175 1.0
Resource Bancshares Mortgage Group, Inc. (c) 105,000 Miscellaneous Financial 1,955,625 1.0
Riviera Tool Company (a)(b)(c) 156,400 Producer Goods 1,368,500 0.7
Shiloh Industries, Inc. (a)(c) 300,000 Producer Goods 6,075,000 3.0
Six Rivers National Bank (a)(b)(c) 67,100 Banks 1,107,150 0.5
Spectrum Control, Inc. (a)(c) 400,000 Electronics 2,400,000 1.1
Summit Bank Corporation (c) 50,000 Banks 1,050,000 0.5
Unico American Corporation (c) 90,000 Insurance 1,361,250 0.7
Washington Homes, Inc. (a)(c) 250,000 Construction 1,187,500 0.6
Winsloew Furniture, Inc. (a)(c) 138,200 Consumer Durables 3,731,400 1.8
------------ -----
$80,724,091 39.0%
Low Price to Book Value
Aldila, Inc. (a)(b)(c) 900,000 Non-Durables & Entertainment $ 5,962,500 2.9%
Alta Gold Company (a)(c) 800,000 Gold 1,400,000 0.7
Apex Silver Mines Ltd. (a)(d) 200,000 Gold 1,937,500 0.9
Astro-Med, Inc. (b)(c) 250,000 Business Machines 1,906,250 0.9
Bio-Vascular, Inc. (a)(b)(c) 154,000 Drugs & Medicine 673,750 0.3
Bitstream, Inc. (a)(b)(c) 492,200 Software 861,350 0.4
Catherines Stores Corporation (a)(b)(c) 497,500 Apparel 4,881,719 2.4
Diehl Graphsoft, Inc. (a) 50,000 Business Services 181,250 0.1
EDAP TMS S.A. (ADR) (a)(b)(c) 645,200 Drugs &Medicine 3,024,375 1.5
Edusoft Ltd. (a)(b) 300,000 Business Services 1,725,000 0.8
Family Steak Houses of Florida, Inc. (a)(b) 140,000 Non-Durables & Entertainment 315,000 0.2
First Philippine Fund, Inc. (c) 336,000 Regulated Investment Company 1,932,000 0.9
Geomaque Explorations Ltd. (a)(e) 1,000,000 Gold 1,362,800 0.7
Global Motorsport Group, Inc. (a)(b)(c) 150,000 Motor Vehicles 3,140,625 1.5
The GNI Group, Inc. (a)(b)(d) 600,000 Business Services 3,476,280 1.7
Harding Lawson Associates Group, Inc. (a)(b) 400,000 Business Services 3,625,000 1.8
High Plains Corporation (a)(b)(c) 1,500,000 Chemicals 3,937,500 1.9
Matrix Pharmaceutical, Inc. (a)(b)(c) 2,000,000 Drugs & Medicine 8,750,000 4.2
MetroBank National Association (a)(b)(d) 73,416 Banks 3,156,888 1.5
Microtest, Inc. (a)(c) 400,000 Electronics 1,825,000 0.9
Morgan Stanley Asia-Pacific Fund (c) 600,000 Regulated Investment Company 3,862,500 1.9
Ontro, Inc. (a) 300,000 Non-Durables & Entertainment 1,162,500 0.6
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND SMALL CAP CONTRARIAN FUND
SCHEDULE OF INVESTMENTS [CONT'D] . June 30, 1998 (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS 109.1% [cont'd] Shares Industry Value Net Assets
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Low Price to Book Value [CONT'D]
Orthologic Corporation (a)(c) 1,165,000 Drugs & Medicine $ 115,970,625 2.9%
Point West Capital Corporation (a)(b)(c) 400,000 Miscellaneous Financial 2,000,000 1.0
Rainforest Cafe, Inc. (a)(c) 200,000 Non-Durables & Entertainment 2,775,000 1.3
Scudder New Asia Fund, Inc. (c) 241,500 Regulated Investment Company 2,128,219 1.0
Southwall Technologies, Inc. (a)(c) 150,000 Chemicals 750,000 0.4
Templeton Dragon Fund (c) 700,000 Regulated Investment Company 5,862,500 2.8
-------------- ----
$ 178,586,131 38.1%
Below Average Price/Cash Flow Ratio
Ashanti Goldfields Company Ltd. (GDR) (c) 506,613 Gold $ 114,091,856 2.0%
BTG, Inc. (a)(b)(c) 835,000 Business Services 7,515,000 3.7
Drypers Corporation (a)(b)(c) 1,000,000 Paper & Forest Products 6,500,000 3.1
Dynamic Materials Corporation (a)(b)(c) 250,000 Chemicals 1,968,750 1.0
ELXSI Corporation (a)(c) 100,000 Non-Durables & Entertainment 1,050,000 0.5
Executone Information Systems, Inc.
(a)(b)(c) 2,800,000 Business Services 5,600,000 2.7
Fortress Group, Inc. (b)(c) 555,000 Construction 3,052,500 1.5
Little Switzerland, Inc. (a)(c) 350,000 Retail 1,575,000 0.8
Networks North, Inc. (a)(b) 200,000 Media 512,500 0.3
Norland Medical Systems, Inc. (a)(b)(c) 700,000 Electronics 1,225,000 0.6
PDK Labs, Inc. (a)(b)(c) 250,000 Drugs & Medicine 1,000,000 0.5
Raytel Medical Corporation (a)(c) 400,000 Drugs & Medicine 2,200,000 1.1
Safety Components International, Inc. (a)(c) 74,700 Non-Durables & Entertainment 1,325,925 0.6
Speizman Industries, Inc. (a)(b)(c) 296,000 Producer Goods 1,554,000 0.8
Summit Resources Ltd. (a)(e) 1,200,000 International Oil 3,761,280 1.8
Syncor International Corporation (a)(c) 300,000 Drugs & Medicine 5,175,000 2.5
TransCoastal Marine Services, Inc. (a)(b)(c) 750,000 Domestic Oil 4,523,475 2.2
-------------- ----
$ 152,630,286 25.7%
Special Situations
Autonomous Technologies Corporation (a)(b)(c) 500,000 Drugs & Medicine $ 152,156,250 1.0%
Bolder Technologies Corporation (a)(b)(c) 405,000 Electronics 5,062,500 2.5
Convergent Communications, Inc.
(Units)(a)(d) 200,000 Telecommunications 500,000 0.2
Happy Kids, Inc. (a)(c) 165,000 Apparel 2,268,750 1.1
ICU Medical, Inc. (a)(b)(c) 87,400 Drugs & Medicine 1,256,375 0.6
In Home Health, Inc. (a)(b)(c) 1,600,000 Drugs & Medicine 1,600,000 0.8
Ontro, Inc. (Warrants) (a) 300,000 Non-Durables & Entertainment 225,000 0.1
-------------- ----
13,068,875 6.3%
--------------
TOTAL COMMON STOCKS (Cost $220,295,497) $ 225,009,383
- -----------------------------------------------------------------------------------------------------------------------
Par Percent of
SHORT-TERM INVESTMENT 0.2% Amount Value Net Assets
- -----------------------------------------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTE (+)
Warner-Lambert Company 5.25% $ 399,000 $ 110,399,000 0.2%
--------------
TOTAL SHORT-TERM INVESTMENT (Cost $399,000) $ 110,399,000
TOTAL INVESTMENTS (Cost $220,694,497)............................................... $ 225,408,383 109.3%
Liabilities, less cash and receivables.............................................. (19,254,725) (9.3)
-------------- ----
TOTAL NET ASSETS.................................................................... $ 206,153,658 100.0%
============== =====
</TABLE>
(a) Non-income producing security.
(b) Affiliated company. See Note 8 in Notes to Financial Statements.
(c) All or part of 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.
(e) Foreign-denominated security.
(+) Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rate changes periodically on specified dates.
The rate listed is as of June 30, 1998.
10
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND SMALL CAP CONTRARIAN FUND
SCHEDULE OF INVESTMENTS [CONT'D] . June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------------------------
Percent of
SHORT SALES (26.9%) Shares Industry Value Net Assets
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alydaar Software Corporation (2,700) Business Services $ (34,256) (0.1)%
Baan Company, N.V. (25,000) Business Services (893,750) (0.4)
Clear Channel Communications, Inc. (75,000) Media (8,184,375) (4.0)
Compaq Computer Corporation (100,000) Business Machines (2,837,500) (1.4)
Consolidated Graphics, Inc. (140,000) Media (8,260,000) (4.0)
Dollar Tree Stores, Inc. (189,000) Retail (7,678,125) (3.7)
HBO & Company (200,000) Media (7,050,000) (3.4)
i2 Technologies, Inc. (125,000) Business Services (4,390,625) (2.1)
Organogenesis, Inc. (328,125) Drugs & Medicine (6,480,469) (3.1)
Seven Seas Petroleum, Inc. (100,000) International Oil (2,025,000) (1.0)
Starbucks Corporation (75,000) Food & Agriculture (4,007,813) (1.9)
Vitesse Semiconductor Corporation (120,000) Electronics (3,705,000) (1.8)
------------
TOTAL SHORT SALES (Proceeds $36,641,545) $(55,546,913)
============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
11
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS - June 30, 1998 (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 80.6% Shares Industry Value Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Earnings Ratio
Align-Rite International, Inc. (a)(b) 300,000 Electronics $ 4,462,500 0.2%
Amwest Insurance Group, Inc. (b) 220,000 Insurance 3,162,500 0.2
Arcadia Financial Ltd. (a) 100,000 Miscellaneous Financial 756,250 0.0
Associated Banc-Corp 669,375 Banks 25,185,234 1.2
Atalanta/Sosnoff Capital Corporation 250,000 Miscellaneous Financial 2,437,500 0.1
Baldwin Piano & Organ Company (a)(b) 325,000 Non-Durables & Entertainment 4,875,000 0.2
Baldwin Technology Company, Inc. (a) 400,000 Optical Photo & Equipment 2,350,000 0.1
Banknorth Group, Inc. 100,000 Banks 3,700,000 0.2
Barrett Business Services, Inc. (a)(b) 625,000 Business Services 6,171,875 0.3
Blue Wave Systems, Inc. (a)(b) 440,400 Business Machines 1,541,400 0.1
Buckhead America Corporation (a)(b) 175,000 Travel & Recreation 1,225,000 0.1
Business Resource Group (a)(b) 486,000 Business Services 1,275,750 0.1
Cameron Ashley Building Products, Inc. (a)(b) 500,000 Construction 8,437,500 0.4
Cavalier Homes, Inc. 320,000 Construction 4,140,000 0.2
Commercial Federation Corporation 450,000 Banks 14,231,250 0.7
Consep, Inc. (a)(b) 900,000 Food & Agriculture 900,000 0.0
Cross-Continent Auto Retailers, Inc. (a)(b) 900,000 Motor Vehicles 6,243,750 0.3
Dain Rauscher Corporation 145,100 Miscellaneous Financial 7,944,225 0.4
Denyo Company Ltd. (c) 101,000 Producer Goods 501,616 0.0
Diamond Home Services, Inc. (a) 318,100 Construction 1,590,500 0.1
Duckwall-ALCO Stores, Inc. (a)(b) 370,000 Retail 6,475,000 0.3
Durakon Industries, Inc. (a)(b) 500,000 Trucking & Freight 5,562,500 0.3
Engle Homes, Inc. (b) 542,200 Construction 8,471,875 0.4
Esterline Technologies Corporation (a)(b) 600,000 Electronics 12,525,000 0.6
EZCorp, Inc. (Class A) (a)(b) 700,000 Miscellaneous Financial 7,656,250 0.4
FPIC Insurance Group, Inc. (a) 200,000 Insurance 6,725,000 0.3
Financial Industries Corporation (a)(b) 300,000 Insurance 5,812,500 0.3
Flour City International, Inc. 233,000 Construction 1,718,375 0.1
Franklin Bank National Association 156,278 Banks 2,500,448 0.1
Fuji Pharmaceutical Company Ltd. (c) 100,000 Drugs & Medicine 237,530 0.0
Fukuda Denshi Company (c) 448,000 Drugs & Medicine 5,191,693 0.2
Gehl Company (a) 270,000 Producer Goods 5,467,500 0.2
GeoScience Corporation (a) 350,000 Energy & Raw Materials 3,937,500 0.2
GKN Holding Corporation (a) 400,000 Miscellaneous Financial 1,200,000 0.1
GZA GeoEnvironmental
Technologies, Inc. (a)(b) 372,700 Business Services 1,840,206 0.1
Hampshire Group Ltd. (a) 197,500 Apparel 3,999,375 0.2
Health Power, Inc. (a)(b) 339,500 Drugs & Medicine 1,952,125 0.1
Hibiya Engineering Company Ltd. (c) 233,000 Construction 1,004,579 0.1
HMN Financial, Inc. (b) 250,500 Banks 3,976,687 0.2
Home Federal Bancorp (b) 290,250 Banks 8,780,062 0.4
II-VI, Inc. (a) 200,000 Optical Photo & Equipment 2,850,000 0.1
Intercontinental Life Corporation (a)(b) 225,800 Insurance 5,814,350 0.3
Interdigital Communications
Corporation (a)(b) 4,800,000 Telephone 25,800,000 1.2
Jason, Inc. (a) 162,000 Producer Goods 1,417,500 0.1
John Alden Financial Corporation 1,202,400 Insurance 26,452,800 1.2
Kaye Group, Inc. (b) 353,600 Insurance 2,298,400 0.1
Kofax Image Products, Inc. (a) 100,000 Business Machines 643,750 0.0
Kondotec, Inc. (c) 500,000 Construction 2,087,400 0.1
Koss Corporation (a) 151,000 Consumer Durables 1,528,875 0.1
LaCrosse Footwear, Inc. (b) 350,000 Apparel 4,025,000 0.2
LCS Industries, Inc. (b) 355,000 Business Services 5,191,875 0.2
Lithia Motors, Inc. (Class A) (a)(b) 300,000 Motor Vehicles 4,425,000 0.2
MAF Bancorp, Inc. 500,000 Banks 18,187,500 0.8
Magal Security Systems Ltd. (a)(b) 600,000 Business Services 1,687,500 0.1
Meadow Valley Corporation (a) 150,000 Construction 965,625 0.0
Medical Graphics Corporation (a)(b) 365,550 Drugs & Medicine 959,569 0.0
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS - June 30, 1998 (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 80.6% (CONT'D) Shares Industry Value Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Earnings Ratio (cont'd)
Mercury Air Group, Inc. (a)(b) 700,000 Air Transport $ 5,381,250 0.2%
Mining Services International Corporation 200,000 Energy & Raw Materials 1,225,000 0.1
MMI Companies, Inc. 200,000 Insurance 4,625,000 0.2
Morgan Products Ltd. (a)(b) 750,000 Construction 3,421,875 0.2
MYR Group, Inc. (b) 500,000 Construction 6,968,750 0.3
M.D.C. Holdings, Inc. 345,100 Construction 6,815,725 0.3
M/I Schottenstein Homes, Inc. 278,400 Construction 6,020,400 0.3
National Home Health Care Corporation 41,800 Drugs & Medicine 177,650 0.0
Norrell Corporation 200,000 Business Services 3,987,500 0.2
Northwest Equity Corporation (b) 80,000 Banks 1,570,000 0.1
Norwood Promotional Products, Inc. (a)(b) 400,000 Non-Durables & Entertainment 8,000,000 0.4
Park-Ohio Holdings Corporation (a) 126,700 Producer Goods 2,343,950 0.1
Penn Engineering & Manufacturing Corp. 200,000 Producer Goods 5,000,000 0.2
Planer Systems, Inc. (a) 400,000 Business Machines 4,200,000 0.2
Powell Industries, Inc. (a)(b) 600,000 Electronics 7,500,000 0.3
Presidential Life Corporation 1,400,000 Insurance 29,925,000 1.4
Printronix, Inc. (a) 100,000 Computer Peripherals 1,600,000 0.1
Professionals Group, Inc. (a)(b) 220,000 Insurance 8,250,000 0.4
Providence & Worcester Railroad Co. (b) 200,000 Railroads & Shipping 2,925,000 0.1
PXRE Corporation 600,000 Insurance 18,000,000 0.8
RenaissanceRe Holdings Ltd. 250,000 Insurance 11,578,125 0.5
Resound Corporation (a) 1,000,000 Optical Photo & Equipment 6,562,500 0.3
Rush Enterprises, Inc. (a) 200,000 Motor Vehicles 2,075,000 0.1
Ryan's Family Steak Houses, Inc. (a) 500,000 Non-Durables & Entertainment 5,125,000 0.2
Saucony, Inc. (Class B) (a)(b) 610,000 Apparel 3,431,250 0.2
Schuff Steel Company (a) 216,300 Construction 3,190,425 0.2
SCPIE Holdings, Inc. 257,800 Insurance 8,732,975 0.4
The Seibels Bruce Group, Inc. (a) 300,000 Insurance 2,212,500 0.1
Sermsuk Public Company Ltd. (c) 51,500 Food & Agriculture 367,200 0.0
Shikoku Coca-Cola Bottling Company (c) 258,000 Food & Agriculture 2,785,574 0.1
SIFCO Industries, Inc. 101,200 Aerospace 2,137,850 0.1
SK Kaken Company Ltd. (c) 150,000 Construction 1,684,305 0.1
Skymall, Inc. (a) 200,000 Retail 900,000 0.0
Southern Energy Homes, Inc. (a)(b) 700,000 Construction 6,868,750 0.3
The Stephan Company 200,000 Soap & Cosmetics 2,737,500 0.1
Stifel Financial Corporation 175,000 Miscellaneous Financial 2,657,813 0.1
Strattec Security Corporation (a)(b) 500,000 Producer Goods 15,062,500 0.7
St. Francis Capital Corporation 78,200 Banks 3,030,250 0.1
Sunrise International Leasing Corporation (a)(b) 630,000 Business Services 2,165,625 0.1
Tech-Sym Corporation (a)(b) 350,000 Aerospace 9,734,375 0.4
Timber Lodge Steakhouse, Inc. (a)(b) 300,000 Non-Durables & Entertainment 1,481,250 0.1
Tower Air, Inc. 500,000 Air Transport 1,828,150 0.1
The UniMark Group, Inc. (a) 424,200 Food & Agriculture 1,696,800 0.1
United Federal Savings Bank (d) 86,900 Banks 1,564,200 0.1
United Palm Oil Industry Public Co. Ltd. (c) 489,000 Food & Agriculture 459,073 0.0
United Security Bancorporation (a)(b) 187,465 Banks 4,030,498 0.2
United Wisconsin Services, Inc. 600,000 Insurance 17,025,000 0.8
Universal Forest Products, Inc. 342,300 Paper & Forest Products 5,605,163 0.3
Universal Stainless & Alloy Products, Inc. (a) 100,000 Non-Ferrous Metals 918,750 0.0
URS Corporation (a)(b) 800,000 Business Services 13,600,000 0.6
U.S. Home Corporation (a) 202,900 Construction 8,369,625 0.4
Volt Information Services, Inc. (a) 250,000 Business Services 6,781,250 0.3
Wall Data, Inc. (a) 100,000 Business Services 1,600,000 0.1
Webco Industries, Inc. (a) 247,100 Steel 2,347,450 0.1
Wescast Industries, Inc. (Class A) 149,500 Motor Vehicles 4,092,563 0.2
Weyco Group, Inc. 177,000 Apparel 4,624,125 0.2
Wilsons The Leather Experts, Inc. (a) 280,000 Retail 4,182,500 0.2
World Acceptance Corporation (a) 400,000 Miscellaneous Financial 2,275,000 0.1
Zindart Ltd. (ADR) (a)(b) 237,500 Miscellaneous & Conglomerates 3,221,094 0.2
------------ ----
$607,180,307 28.3%
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] - June 30, 1998 (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 80.6% [CONT'D] Shares Industry Value Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Low Price to Book Value
ACT Manufacturing,Inc. (a)(b) 700,000 Consumer Durables $ 6,650,000 0.3%
ACT Networks, Inc. (a)(b) 810,000 Business Machines 7,087,500 0.3
Allied Healthcare Products, Inc. (a)(b) 775,000 Drugs & Medicine 3,778,125 0.2
The Alpine Group, Inc. (a)(b) 1,000,000 Producer Goods 20,750,000 0.9
Amtech Corporation (a)(b) 190,000 Electronics 902,500 0.0
Anglogold Ltd. (ADR) 424,000 Gold 8,506,500 0.4
Aseco Corporation (a)(b) 350,000 Electronics 1,421,875 0.1
Barrick Gold Corporation 200,000 Gold 3,837,500 0.2
Bay Bancshares, Inc. 20,000 Banks 390,000 0.0
Beverly Bancorporation 243,244 Banks 5,807,450 0.3
Bunka Shutter Company Ltd. (c) 1,200,000 Construction 3,325,440 0.2
Cambior, Inc. 500,000 Gold 2,937,500 0.1
Campbell Resources, Inc. (a)(b) 12,000,000 Gold 4,500,000 0.2
Capital RE Corporation 150,000 Insurance 10,743,750 0.5
Cash America International, Inc. 650,000 Miscellaneous Financial 9,912,500 0.5
Cavell Energy Corporation (a)(b)(c) 1,863,000 International Oil 787,117 0.0
Ceanic Corporation (a)(b) 300,000 Energy & Raw Materials 5,812,500 0.3
Chieftain International, Inc. (a) 200,000 Energy & Raw Materials 4,737,500 0.2
Chofu Seisakusho Company (c) 300,000 Consumer Durables 4,081,200 0.2
Ciprico, Inc. (a)(b) 300,000 Business Machines 3,018,750 0.1
Clayton Williams Energy, Inc. (a)(b) 595,000 Domestic Oil 6,098,750 0.3
Collaborative Clinical Research, Inc. (a)(b) 600,000 Business Services 2,475,000 0.1
Collagen Corporation (b) 878,500 Drugs & Medicine 15,922,812 0.7
Consolidated Capital Corporation (a) 400,000 Miscellaneous & Conglomerates 8,993,760 0.4
CSP, Inc. (a)(b) 308,000 Electronics 2,887,500 0.1
Cyrk International, Inc. (a)(b) 630,500 Business Services 6,935,500 0.3
C.P. Clare Corporation (a) 250,000 Electronics 2,375,000 0.1
D & N Financial Corporation (b) 440,000 Banks 11,797,500 0.4
Datron Systems, Inc. (a)(b) 250,000 Business Machines 1,687,500 0.1
Designs, Inc. (a)(b) 1,100,000 Retail 1,718,750 0.1
ECC International Corporation (a)(b) 500,000 Electronics 1,625,000 0.1
Effective Management Systems, Inc. (a)(b) 375,000 Business Machines 1,593,750 0.1
ENStar, Inc. (a)(b) 206,833 Business Machines 1,318,560 0.1
Enviromental Technologies
Corporation (a)(b) 476,000 Chemicals 2,588,250 0.1
Evergreen Resources, Inc. (a)(b) 500,000 Domestic Oil 9,375,000 0.4
Fluor Daniel GTI, Inc. (a) 316,200 Business Services 1,897,200 0.1
Forest Oil Corporation (a)(b) 1,500,000 Domestic Oil 21,468,750 1.0
GA Financial, Inc. 100,000 Banks 1,837,500 0.1
Gish Biomedical, Inc. (a)(b) 275,000 Drugs & Medicine 790,625 0.0
Glamis Gold Ltd. (a) 300,000 Gold 1,050,000 0.1
Global Industrial Technologies, Inc. (a) 315,000 Construction 4,528,125 0.2
Haemonetics Corporation (a) 600,000 Drugs & Medicine 9,600,000 0.4
Hallmark Capital Corporation (a) 110,000 Banks 1,540,000 0.1
ImmuLogic Pharmaceutical Corporation (a)(b) 2,000,000 Drugs & Medicine 3,250,000 0.2
International Technology Corporation (a)(b) 402,900 Business Services 3,827,550 0.2
Iwerks Entertainment, Inc. (a)(b) 1,100,000 Non-Durables & Entertainment 1,856,250 0.1
Jaco Electronics, Inc. (a)(b) 380,000 Electronics 2,280,000 0.1
Kansai Kosaido Company Ltd. (c) 400,000 Media 2,562,440 0.1
Katsuragawa Electric Company (c) 220,000 Business Machines 886,776 0.0
Kentucky Fried Chicken Japan Ltd (c) 350,000 Non-Durables & Entertainment 3,501,750 0.2
Life USA Holding, Inc. 257,500 Insurance 3,331,406 0.2
Lindal Cedar Homes, Inc. (a)(b) 358,800 Construction 1,098,825 0.1
Lunar Corporation (a) 300,000 Drugs & Medicine 5,512,500 0.3
Maezawa Kasei Industries (c) 228,500 Chemicals 3,059,158 0.1
The Marcus Corporation 225,000 Non-Durables & Entertainment 4,021,875 0.2
Marisa Christina, Inc. (a)(b) 521,900 Apparel 1,239,513 0.1
Marquette Medical Systems, Inc. (Class A) (a) 400,000 Drugs & Medicine 10,262,520 0.5
Martin Industries, Inc. (b) 650,000 Producer Goods 3,250,000 0.2
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . June 30, 1998 (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 80.6% [CONT'D] Shares Industry Value Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Low Price to Book Value [CONT'D]
Massbank Corporation 133,333 Banks $ 6,533,317 0.3%
Material Sciences Corporation (a) 407,800 Producer Goods 4,740,675 0.2
Matsumoto Yushi-Seiyaku Company (c) 383,000 Chemicals 7,415,761 0.3
Maxicare Health Plans, Inc. (a)(b) 1,631,400 Drugs & Medicine 11,011,950 0.5
MFRI, Inc. (a)(b) 400,000 Producer Goods 3,400,000 0.2
M/A/R/C, Inc. (b) 300,000 Business Services 4,950,000 0.2
NABI, Inc. (a)(b) 2,470,000 Drugs & Medicine 7,487,311 0.3
New Brunswick Scientific Company, Inc. (a)(b) 277,136 Electronics 2,390,298 0.1
Nissui Pharmaceutical Company Ltd. (c) 776,000 Drugs & Medicine 3,351,311 0.2
Osmonics, Inc. (a)(b) 734,600 Producer Goods 8,769,288 0.4
Outlook Group Corporation (a)(b) 457,500 Media 1,772,813 0.1
PBOC Holdings, Inc. (a) 150,000 Banks 2,071,875 0.1
Pentech International, Inc. (a) 300,000 Non-Durables & Entertainment 412,500 0.0
PIA Merchandising Services, Inc. (a)(b) 500,000 Business Services 3,375,000 0.2
PICO Holdings, Inc. (a) 807,900 Insurance - Specialty 3,484,069 0.2
Pointe Financial Corporation (a) 20,000 Banks 302,500 0.0
Precision Response Corporation (a) 350,000 Business Services 2,800,000 0.1
RARE Hospitality International, Inc. (a) 462,300 Non-Durables & Entertainment 6,790,031 0.3
Rehabilicare, Inc. (a)(b) 312,100 Drugs & Medicine 838,769 0.0
Right Management Consultants, Inc. (a)(b) 500,000 Business Services 6,750,000 0.3
Riken Vitamin Company (c) 279,000 Drugs & Medicine 2,610,659 0.1
The Rottlund Company, Inc. (a)(b) 500,000 Construction 2,000,000 0.1
Roy F. Weston, Inc. (Class A) (a)(b) 825,000 Business Services 3,196,875 0.2
Salient 3 Communications, Inc. (b) 300,000 Electronics 2,737,500 0.1
Sangetsu Company Ltd. (c) 500,000 Consumer Durables 6,442,100 0.3
Sanko Sangyo Company (c) 111,000 Business Services 1,022,676 0.1
Sholodge, Inc. (a) 250,000 Travel & Recreation 1,968,750 0.1
Smartflex Systems, Inc. (a)(b) 388,000 Electronics 2,691,750 0.1
Spectrian Corporation (a) 180,000 Electronics 2,913,750 0.1
Starcraft Corporation (a)(b) 400,000 Motor Vehicles 825,000 0.0
Sterling Financial Corporation (a) 275,000 Banks 6,256,250 0.3
Strouds, Inc. (a)(b) 700,000 Retail 2,187,500 0.1
Successories, Inc. (a) 210,000 Retail 813,750 0.0
Technology Research Corporation (a)(b) 500,000 Producer Goods 1,000,000 0.1
Teikoku Hormone Manufacturing Company (c) 500,000 Drugs & Medicine 2,879,150 0.1
Tipperary Corporation (a)(b) 1,300,000 Energy & Raw Materials 3,737,500 0.2
Toyo Tec Company Ltd. (c) 71,000 Business Services 365,402 0.0
Trimark Holdings, Inc. (a)(b) 400,000 Non-Durables & Entertainment 1,500,000 0.1
Unionbancorp, Inc. 70,000 Banks 1,295,000 0.1
UroCor, Inc. (a) 200,000 Drugs & Medicine 1,425,000 0.1
U.S. Global Investors, Inc. (Class A) (a)(b) 550,300 Miscellaneous Financial 1,100,600 0.1
VTEL Corporation (a) 1,000,000 Telecommunications 6,437,500 0.3
Webster Financial Corporation 145,600 Banks 4,841,200 0.2
-------------- ----
$ 419,421,982 19.9%
Below Average Price/Cash Flow Ratio
Abraxas Petroleum Corporation (a) 300,000 Domestic Oil $ 2,737,500 0.1%
ABT Building Products Corporation (a) 200,000 Construction 3,437,500 0.2
American Buildings Company (a)(b) 500,000 Construction 14,875,000 0.7
Amtran, Inc. (a)(b) 278,900 Air Transport 6,867,912 0.3
Applied Films Corporation (a)(b) 250,000 Construction 1,312,500 0.1
Asia Pacific Wire & Cable
Corporation Ltd. (a)(b) 727,600 Producer Goods 3,819,900 0.2
BancTec, Inc. (a) 350,100 Business Machines 8,096,062 0.4
Barrington Petroleum Ltd. (a)(c) 1,240,000 International Oil 3,210,732 0.1
Beau Canada Exploration Ltd. (a)(c) 1,400,000 International Oil 1,669,360 0.1
Benton Oil & Gas Company (a) 1,000,000 Domestic Oil 10,625,000 0.5
Caretenders Health Corporation (a)(b) 308,900 Drugs & Medicine 1,698,950 0.1
Catalina Lighting, Inc. (a)(b) 700,000 Construction 2,668,750 0.1
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] - June 30, 1998
- -------------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 80.6% [CONT'D] Shares Industry Value Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Cash Flow Ratio [cont'd]
Central Sprinkler Corporation (a)(b) 325,000 Producer Goods $ 2,600,000 0.1%
CHC Helicopter Corporation (Class A) (b)(c) 536,000 International Oil 3,926,146 0.2
Check Technology Corporation (a) 180,000 Electronics 697,500 0.0
The Cherry Corporation (Class A) (a)(b) 776,000 Consumer Durables 12,222,000 0.5
Chic By H.I.S., Inc. (b) 600,000 Apparel 4,725,000 0.2
Comdial Corporation (a)(b) 427,000 Telephone 5,177,375 0.2
Commonwealth Industries, Inc. (b) 800,000 Non-Ferrous Metals 8,000,000 0.4
Crown Central Petroleum Corporation
(Class B) (a)(b) 300,000 Domestic Oil 3,787,500 0.2
Damark International, Inc. (Class A) (a)(b) 800,000 Retail 6,800,000 0.3
Dayton Mining Corporation (a)(b) 2,900,000 Gold 1,993,750 0.1
DeVlieg-Bullard, Inc. (a) 331,200 Producer Goods 745,200 0.0
Doman Industries Ltd. (a)(c) 900,000 Paper & Forest Products 2,452,950 0.1
El Paso Electric Company (a) 2,500,000 Energy & Utilities 22,968,750 1.1
Eltek Ltd. (a)(b) 400,200 Business Machines 525,262 0.0
Ensign Resource Service Group, Inc. (c) 500,000 International Oil 8,517,300 0.4
Fibermark, Inc. (a)(b) 395,000 Paper & Forest Products 6,320,000 0.3
Filene's Basement Corporation (a)(b) 1,200,000 Retail 6,543,720 0.3
Finlay Enterprises, Inc. (a) 150,000 Retail 3,618,750 0.2
Fuji Coca-Cola Bottling Company (c) 600,000 Food & Agriculture 5,830,260 0.3
The General Chemical Group, Inc. 500,000 Chemicals 13,875,000 0.6
Grand Casinos, Inc. (a)(e) 2,090,000 Travel & Recreation 35,007,500 1.6
Guangshen Railway Company Ltd. (ADR) 354,200 Railroads & Shipping 2,412,988 0.1
Gundle/SLT Environmental, Inc. (a) 600,000 Chemicals 2,700,000 0.1
Hallwood Consolidated Resources
Corporation (a)(b) 300,000 Domestic Oil 4,687,500 0.2
Hallwood Group, Inc. (a)(b) 59,500 Domestic Oil 2,034,156 0.1
Hanover Foods Corporation (Class A) (b) 50,500 Food & Agriculture 2,651,250 0.1
Home Products International, Inc. (a)(b) 317,500 Retail 3,690,937 0.2
Howell Corporation (b) 300,000 Domestic Oil 3,131,250 0.2
Hurricane Hydrocarbons Ltd. (Class A) (a) 500,000 International Oil 2,406,250 0.1
ICO Holdings, Inc. 480,000 Energy & Raw Materials 2,070,000 0.1
IEC Electronics Corporation (a)(b) 728,800 Electronics 5,056,050 0.2
Intermet Corporation 100,000 Non-Ferrous Metals 1,812,500 0.1
International Aircraft Investors (a)(b) 350,000 Miscellaneous Financial 3,018,750 0.1
International Airline Support Group, Inc. (a)(b) 220,000 Air Transport 1,375,000 0.1
Jasmine International Public Company Ltd. (c) 3,000,000 Business Services 962,700 0.0
John B. Sanfilippo & Son, Inc. (a)(b) 300,000 Food & Agriculture 1,462,500 0.1
Kentucky Electric Steel, Inc. (a)(b) 450,000 Steel 2,193,750 0.1
Lechters, Inc. (a) 850,000 Retail 4,170,355 0.2
The Lion Brewery, Inc. (a)(b) 375,000 Liquor 1,453,125 0.1
Lone Star Steakhouse & Saloon (a) 825,000 Non-Durables & Entertainment 11,395,313 0.5
Louis Dreyfus Natural Gas Corporation (a) 600,000 Domestic Oil 11,362,500 0.5
Marten Transport Ltd. (a)(b) 333,300 Trucking & Freight 5,999,400 0.3
Minntech Corporation (b) 513,100 Drugs & Medicine 6,349,613 0.3
Norstan, Inc. (a)(b) 500,000 Telephone 12,531,250 0.6
Novamerican Steel, Inc. (a) 208,000 Steel 1,612,000 0.1
Nu Horizons Electronics Corporation (a)(b) 600,000 Electronics 3,600,000 0.2
Numac Energy, Inc. (a) 1,500,000 International Oil 3,843,750 0.2
Patrick Industries, Inc. (b) 312,000 Construction 4,758,000 0.2
Petsec Energy Ltd. (ADR) (a)(b) 1,250,000 Domestic Oil 20,234,375 0.9
Precision Drilling Corporation 500,000 International Oil 9,812,500 0.5
Quad Systems Corporation (a)(b) 400,000 Business Machines 1,012,520 0.1
Ramsay Health Care, Inc. (a)(b) 700,000 Drugs & Medicine 1,400,000 0.1
Reliance Steel & Aluminum Company 350,000 Non-Ferrous Metals 13,518,750 0.6
Remington Oil & Gas Corp. (Class B) (a)(b) 1,600,000 Domestic Oil 8,600,000 0.4
Reptron Electronics, Inc. (a)(b) 400,000 Consumer Durables 4,475,000 0.2
Schnitzer Steel Industries, Inc. (Class A) (b) 300,000 Steel 7,087,500 0.3
ShopKo Stores, Inc. (a) 900,000 Retail 30,600,000 1.4
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] - June 30, 1998 (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 80.6% [CONT'D] Shares Industry Value Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Cash Flow Ratio [cont'd]
Spacehab, Inc. (a) 282,700 Electronics $ 3,268,719 0.2%
Staff Builders, Inc. (Class A) (a) 700,000 Drugs & Medicine 896,910 0.0
Steel of West Virginia, Inc. (a) 178,000 Steel 1,713,250 0.1
Steel Technologies, Inc. 300,000 Steel 3,075,000 0.1
Suprema Specialties, Inc. (a)(b) 267,000 Food & Agriculture 1,001,250 0.1
Teltrend, Inc. (a)(b) 500,000 Telephone 8,593,750 0.4
Tesoro Petroleum Corporation (a)(b) 1,372,000 Domestic Oil 21,780,500 1.0
Todhunter International, Inc. (a)(b) 490,000 Liquor 4,501,875 0.2
Trak Auto Corporation (a)(b) 366,500 Motor Vehicles 3,665,000 0.2
UniSource Energy Corporation (a) 1,000,000 Energy & Utilities 15,750,000 0.7
Vicorp Restaurants, Inc. (a)(b) 440,000 Non-Durables & Entertainment 6,765,000 0.3
World of Science, Inc. (a)(b) 500,000 Retail 1,437,500 0.1
Worldtex, Inc. (a) 555,000 Drugs & Medicine 3,225,938 0.2
-------------- ----
$ 498,509,353 23.2%
Special Situations
Alabama National Bancorporation 110,000 Banks $ 4,138,750 0.2%
Astec Industries, Inc. (a)(b) 690,000 Construction 23,805,000 1.1
Badger Meter, Inc. (b) 200,000 Electronics 7,087,500 0.3
Bonded Motors, Inc. (a)(b) 180,000 Motor Vehicles 1,777,500 0.1
Breed Technologies, Inc. (a) 436,100 Non-Durables & Entertainment 6,677,781 0.3
Children's Broadcasting Corporation (a)(b) 590,000 Media 1,770,000 0.1
Eaton Vance Corporation (b) 200,000 Miscellaneous Financial 9,262,500 0.4
Eskimo Pie Corporation (b) 271,500 Food & Agriculture 3,427,688 0.2
HealthRite, Inc. (a)(b) 403,000 Drugs & Medicine 604,500 0.0
Horipro, Inc. (c) 440,000 Non-Durables & Entertainment 2,501,972 0.1
ICN Pharmaceuticals, Inc. (b) 2,300,000 Drugs & Medicine 105,081,250 4.9
Interpore International (a)(b) 600,000 Drugs & Medicine 3,150,000 0.2
LSI Industries, Inc. 334,200 Construction 6,684,000 0.3
Peoples Telephone Company, Inc. (a)(b) 1,600,000 Telephone 5,000,000 0.2
Quixote Corporation (a)(b) 335,000 Business Services 4,103,750 0.2
RightCHOICE Managed Care, Inc.
(Class A) (a)(b) 1,002,500 Drugs & Medicine 12,719,219 0.6
Scan-Optics, Inc. (a) 12,500 Business Machines 64,844 0.0
Strategic Diagnostics, Inc. (a) 260,000 Chemicals 780,000 0.0
-------------- ----
207,142,754 9.2%
--------------
TOTAL COMMON STOCKS (Cost $1,383,029,024) $1,732,254,396
</TABLE>
17
<PAGE>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Par Percent of
CORPORATE BONDS -- 0.3% Amount Industry Value Net Assets
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Engle Homes, Inc. 11.75%
12/15/2000 (b) $ 6,905,000 Construction $ 7,310,669 0.3%
--------------
TOTAL CORPORATE BONDS (Cost $6,713,385) $ 7,310,669
- --------------------------------------------------------------------------------------------------------
Par Percent of
GOVERNMENT BONDS -- 3.8% Amount Value Net Assets
- --------------------------------------------------------------------------------------------------------
AGENCY SECURITIES -- 3.8%
Federal Farm Credit Bank 5.92%
12/18/2002 $110,000,000 $ 10,081,400 0.5%
Federal Home Loan Bank 5.95%
10/06/2000 10,000,000 10,047,099 0.4
Federal Home Loan Mortgage
Corporation 6.78% 04/10/2002 10,000,000 10,371,300 0.5
Federal Home Loan Mortgage
Corporation 6.156% 09/25/2002 10,000,000 10,168,300 0.5
Federal National Mortgage
Association 6.40% 05/02/2001 10,000,000 10,182,500 0.5
Private Export Funding Corporation
7.90% 03/31/2000 10,000,000 10,362,500 0.5
Private Export Funding Corporation
6.24% 05/15/2002 10,000,000 10,175,000 0.5
Student Loan Marketing Association
6.05% 09/14/2000 10,000,000 10,074,500 0.4
--------------
TOTAL GOVERNMENTBONDS (Cost $80,934,924) $ 81,462,599
- --------------------------------------------------------------------------------------------------------
Par Percent of
SHORT-TERM INVESTMENTS -- 14.5% Amount Value Net Assets
- --------------------------------------------------------------------------------------------------------
AGENCY SECURITIES -- 5.5%
Federal Farm Medium Term Note 5.70%
12/01/1998 $150,000,000 $ 50,022,995 2.3%
Federal Home Loan Bank 5.72%
04/23/1999 50,000,000 49,955,995 2.3
Federal Home Loan Bank 5.605%
06/11/1999 20,000,000 19,981,800 0.9
--------------
119,960,790
COMMERCIAL PAPER -- 4.2%
Aetna Services, Incorporated 0.00%
07/09/1998 5,000,000 4,993,389 0.2
Cargill Financial Services Corporation
0.00% 07/08/1998 10,000,000 9,988,858 0.5
E.I du Pont de Nemours & Company
0.00% 07/15/1998 10,000,000 9,978,572 0.5
E.I du Pont de Nemours & Company
0.00% 07/15/1998 10,000,000 9,978,145 0.5
Florida Power & Light Company 0.00%
07/08/1998 10,000,000 9,988,722 0.5
Ford Motor Credit Corporation 0.00%
07/02/1998 10,000,000 9,998,350 0.5
Ford Motor Credit Corporation 0.00%
07/15/1998 10,000,000 9,978,572 0.5
IBM Credit Corporation 0.00%
07/15/1998 10,000,000 9,978,611 0.5
Xerox Credit Corporation 0.00%
07/06/1998 10,000,000 9,992,195 0.5
--------------
$ 84,875,414
</TABLE>
18
<PAGE>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
SHORT-TERM Par Percent of
INVESTMENTS -- 14.5% (cont'd) Amount Industry Value Net Assets
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS -- 4.8%
Associates First Capital Corporation
6.375% 08/15/1998 $ 14,000,000 $ 14,005,600 0.7%
First of America Bank Corporation
5.95% 08/13/1998 25,000,000 24,996,498 1.1
Huntington National Bank 5.80%
09/22/1998 15,000,000 14,992,499 0.7
John Deere Capital 5.85% 10/28/1998 25,000,000 25,005,748 1.2
Morgan Guaranty 5.93% 08/31/1998 25,000,000 24,995,748 1.1
--------------
103,996,093
VARIABLE RATE DEMAND NOTE (+) -- 0.0%
Johnson Controls, Inc. 5.26% 113,000 113,000 0.0
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $308,987,889) $ 308,945,297
TOTAL INVESTMENTS (Cost $1,779,665,222)............................. $2,129,972,961 99.2%
Cash and receivables, less liabilities.............................. 17,625,959 0.8
--------------
TOTAL NET ASSETS.................................................... $2,147,598,920 100.0%
============== ======
</TABLE>
(a) Non-income producing security.
(b) Affiliated company. See Note 8 in Notes to Financial Statements.
(c) Foreign-denominated security.
(d) All or part of security committed as collateral for short sales. See Note
2(f) in Notes to Financial Statements.
(e) All or part of security committed as collateral for written call options.
See Note 2(h) in Notes to Financial Statements.
(+) Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rate changes periodically on specified dates.
The rate listed is as of June 30, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Percent of
SHORT SALE -- 0.0% Shares Industry Value Net Assets
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Triangle Bancorp, Inc.(*) (7,100) Banks $ (222,763) (0.0)%
--------------
TOTAL SHORT SALE (Proceeds $228,333) $ (222,763)
==============
</TABLE>
(*) Executed a definitive merger agreement with United Federal Savings Bank.
The Fund holds 86,900 shares of United Federal Savings Bank as of June 30,
1998.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
19
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
June 30, 1998 (Unaudited)
<S> <C> <C> <C>
Large Cap Mid Cap Value Plus
Value Fund Value Fund Fund
-------------- -------------- -------------
ASSETS:
Investments in securities, at cost.......................... $ 8,748,883 $ 41,515,706 $ 283,022,987
============= ============== =============
Investments in securities, at value......................... $ 9,351,989 $ 48,442,201 $ 286,426,553
Cash........................................................ 1,948 285 --
Receivable from securities sold............................. -- -- 8,651,347
Receivable from fund shares sold............................ 54,122 67,320 829,227
Receivable from securities sold short....................... -- -- --
Deposits with brokers for securities sold short............. -- -- --
Receivable from options contracts written................... -- -- --
Accrued dividends and interest.............................. 19,323 45,038 1,784,796
Prepaid expenses............................................ 5,065 5,756 25,948
Deferred organization expenses.............................. 10,678 10,678 2,540
Receivable from Advisor for expense reimbursement........... 14,029 -- --
------------- -------------- -------------
Total Assets............................................ 9,457,154 48,571,278 297,720,411
------------- -------------- -------------
LIABILITIES:
Payable for securities purchased............................ 94,480 -- --
Payable for fund shares redeemed............................ 17,453 72,387 4,016,950
Payable to custodian........................................ -- -- --
Securities sold short, at value............................. -- -- --
Options contracts written, at value......................... -- -- --
Distributions payable....................................... -- -- 1,942
Payable to Advisor for management fee....................... 5,933 31,335 201,068
Payable to Advisor for deferred organization expenses....... 10,678 10,678 2,540
Accrued expenses............................................ 12,099 8,005 55,137
------------- -------------- -------------
Total Liabilities....................................... 140,643 122,405 4,277,637
------------- -------------- -------------
TOTAL NET ASSETS............................................ $ 9,316,511 $ 48,448,873 $ 293,442,774
============= ============== =============
NET ASSETS CONSIST OF:
Paid in capital............................................. $ 8,201,902 $ 41,161,552 $ 275,036,192
Accumulated undistributed net investment income............. 118,231 68,131 342
Accumulated undistributed net realized gains (losses) on
investments................................................ 393,272 292,695 15,002,674
Net unrealized appreciation (depreciation) on investments... 603,106 6,926,495 3,403,566
------------- -------------- -------------
TOTAL NET ASSETS............................................ $ 9,316,511 $ 48,448,873 $ 293,442,774
============= ============== =============
SHARES OUTSTANDING, $.001 par value (100,000,000 shares
authorized, respectively).................................. 715,989 3,476,914 18,723,868
============= ============== =============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE...................................................... $ 13.01 $ 13.93 $ 15.67
============= ============== =============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
20
<PAGE>
<TABLE>
<CAPTION>
U.S. Small Cap
Government Contrarian
Securities Fund Fund Value Fund
--------------- ------------- ---------------
<S> <C> <C> <C>
ASSETS: $ 51,176,466 $ 220,694,497 $ 1,779,665,222
Investments in securities, at cost.......................... ============= ============= ===============
Investments in securities, at value......................... $ 52,835,396 $ 225,408,383 $ 2,129,972,961
Cash........................................................ 4,010 1,993 --
Receivable from securities sold............................. 48,383 349,600 20,290,300
Receivable from fund shares sold............................ 27,693 19,071 1,207,531
Receivable from securities sold short....................... -- 36,641,545 228,333
Deposits with brokers for securities sold short............. -- 274,516 1,999
Receivable from options contracts written................... -- -- 516,382
Accrued dividends and interest.............................. 516,470 86,942 6,658,816
Prepaid expenses............................................ 10,293 21,312 71,615
Deferred organization expenses.............................. -- 18,078 --
Receivable from Advisor for expense reimbursement........... -- -- --
------------- ------------- ---------------
Total Assets............................................ 53,442,245 262,821,440 2,158,947,937
------------- ------------- ---------------
LIABILITIES:
Payable for securities purchased............................ -- 55,812 1,696,065
Payable for fund shares redeemed............................ 371,352 662,570 5,975,392
Payable to custodian........................................ -- -- 887,234
Securities sold short, at value............................. -- 55,546,913 222,763
Options contracts written, at value......................... -- -- 369,100
Distributions payable....................................... 2,014 -- 64,211
Payable to Advisor for management fee....................... 11,454 145,595 1,439,242
Payable to Advisor for deferred organization expenses....... -- 18,078 --
Accrued expenses............................................ 39,512 238,814 695,010
------------- ------------- ---------------
Total Liabilities....................................... 424,332 56,667,782 11,349,017
------------- ------------- ---------------
TOTAL NET ASSETS............................................ $ 53,017,913 $ 206,153,658 $ 2,147,598,920
============= ============= ===============
NET ASSETS CONSIST OF:
Paid in capital............................................. $ 57,151,280 $ 219,288,776 $ 1,630,111,174
Accumulated undistributed net investment income............. -- 6,770 2,552,120
Accumulated undistributed net realized gains (losses) on
investments................................................ (5,792,297) 1,049,594 164,475,035
Net unrealized appreciation (depreciation) on investments... 1,658,930 (14,191,482) 350,460,591
------------- ------------- ---------------
TOTAL NET ASSETS............................................ $ 53,017,913 $ 206,153,658 $ 2,147,598,920
============= ============= ===============
SHARES OUTSTANDING, $.001 par value (100,000,000 shares
authorized, respectively).................................. 5,328,457 17,217,916 61,036,504
============= ============= ===============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE...................................................... $ 9.95 $ 11.97 $ 35.19
============= ============= ===============
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
For the period from January 1, 1998 to June 30, 1998 (Unaudited)
Large Cap Mid Cap Value Plus
Value Fund Value Fund Fund
---------- ---------- ----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends......................... $ 103,817 $ 266,787 $ 4,405,563
Interest.......................... 16,746 66,618 4,425,132
Foreign tax withholding........... (2,332) (473) (9,113)
---------- ----------- -----------
Total investment income......... 118,231 332,932 8,821,582
---------- ----------- -----------
EXPENSES:
Management fees................... 32,191 163,046 1,279,891
Distribution fees................. 10,730 54,345 457,104
Transfer agent fees............... 7,765 16,688 126,313
Postage........................... 1,811 2,603 12,997
Custodian fees.................... 1,698 4,169 35,383
Printing and communications....... 1,148 2,099 16,458
Registration fees................. 6,710 10,217 26,882
Directors' fees................... 3,717 4,158 6,343
Audit fees........................ 3,217 4,176 5,410
Legal fees........................ 140 218 2,252
Amortization of organization
expenses......................... 1,643 1,644 3,812
Other operating expenses.......... 828 1,438 8,816
Total expenses before ---------- ----------- -----------
interest expense,
dividends on short
positions, and expense
reimbursement and
management fee waivers......... 71,598 264,801 1,981,661
Total interest expense and
dividends on short
positions...................... -- -- 31,545
---------- ----------- -----------
Total expenses before
expense reimbursement and
management fee waivers......... 71,598 264,801 2,013,206
Less: Expense reimbursement and
management fee waivers......... (71,598) -- --
---------- ----------- -----------
Net expenses.................... -- 264,801 2,013,206
---------- ----------- -----------
NET INVESTMENT INCOME.............. 118,231 68,131 6,808,376
---------- ----------- -----------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS:
Net realized gains (losses) on:
Long positions.................. 259,916 352,183 14,979,897
Short positions................. -- -- --
Futures contracts............... -- -- --
Options......................... -- -- 23,194
Net increase (decrease) in unrealized
appreciation on:
Long positions.................. 48,613 2,741,383 (21,710,214)
Short positions................. -- -- --
Futures contracts............... -- -- --
Options......................... -- -- --
TOTAL REALIZED AND UNREALIZED ---------- ----------- -----------
GAINS (LOSSES) ON INVESTMENTS.... 308,529 3,093,566 (6,707,123)
---------- ----------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS....................... $ 426,760 $ 3,161,697 $ 101,253
========== =========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
22
<PAGE>
STATEMENTS OF OPERATIONS
For the period from January 1, 1998 to June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
U.S. Small Cap
Government Contrarian
Securities Fund Fund Value Fund
--------------- ---------- ----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ -- $ 568,000 $ 4,584,977
Interest......................... 1,687,079 1,483,376 10,650,021
Foreign tax withholding.......... -- (4,200) (52,700)
---------- ----------- -----------
Total investment income........ 1,687,079 2,047,176 15,182,298
---------- ----------- -----------
EXPENSES:
Management fees.................. 164,489 957,509 8,353,813
Distribution fees................ 63,270 319,170 2,784,604
Transfer agent fees.............. 29,795 188,510 711,433
Postage.......................... 7,113 47,495 156,366
Custodian fees................... 3,994 28,954 156,202
Printing and communications...... 6,941 52,064 128,978
Registration fees................ 6,053 18,397 75,345
Directors' fees.................. 3,347 8,128 21,726
Audit fees....................... 5,667 12,342 17,710
Legal fees....................... 422 12,040 16,089
Amortization of organization
expenses........................ -- 4,930 --
Other operating expenses......... 4,135 19,876 116,964
---------- ---------- -------------
Total expenses before
interest expense,
dividends on short
positions, and expense
reimbursement and
management fee waivers........ 295,226 1,669,415 12,539,230
Total interest expense and
dividends on short
positions..................... -- 83,604 923
---------- ---------- -------------
Total expenses before
expense reimbursement and
management fee waivers........ 295,226 1,753,019 12,540,153
Less: Expense reimbursement and
management fee waivers........ (101,224) -- --
---------- ---------- -------------
Net expenses................... 194,002 1,753,019 12,540,153
---------- ---------- -------------
NET INVESTMENT INCOME............. 1,493,077 294,157 2,642,145
---------- ---------- -------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS:
Net realized gains (losses) on:
Long positions................. 365,901 27,578,212 168,405,403
Short positions................ -- (21,423,310) --
Futures contracts.............. -- (9,500,191) (6,552,239)
Options........................ -- -- --
Net increase (decrease) in unrealized
appreciation on:
Long positions................. 127,043 (8,390,875) (77,019,344)
Short positions................ -- (2,857,550) 5,570
Futures contracts.............. -- 3,682,762 --
Options........................ -- -- 147,282
TOTAL REALIZED AND UNREALIZED GAINS ---------- ------------ ------------
(LOSSES) ON INVESTMENTS........... 492,944 $(10,910,952) 84,986,672
---------- ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS...... $1,986,021 $(10,616,795) $ 82,628,817
========== ============ ============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
23
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
----------------------------------
Large Cap
Value Fund
----------------------------------
Jan. 1, 1998 to
June 30, 1998 Year Ended
(Unaudited) Dec. 31, 1997
--------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income............................. $ 118,231 $ 64,042
Net realized gains on investments................. 259,916 419,278
Net increase (decrease) in unrealized
appreciation on investments..................... 48,613 475,417
--------------- -------------
Net increase in net assets resulting
from operations............................... 426,760 958,737
--------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................. -- (64,103)
Net realized gains on investments................. -- (284,851)
--------------- -------------
Net distributions to shareholders............... -- (348,954)
--------------- -------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued....................... 3,228,880 6,205,875
Reinvested dividends from net investment
income and distributions from net
realized gains on investments.................... -- 337,665
Cost of shares redeemed........................... (2,004,485) (1,929,442)
--------------- -------------
Net increase (decrease) in net assets
derived from Fund share activities............ 1,224,395 4,614,098
--------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS............ 1,651,155 5,223,881
NET ASSETS AT THE BEGINNING OF THE PERIOD.......... 7,665,356 2,441,475
--------------- -------------
NET ASSETS AT THE END OF THE PERIOD................ $ 9,316,511 $ 7,665,356
=============== =============
UNDISTRIBUTED NET INVESTMENT INCOME................ $ 118,231 $ --
=============== =============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
24
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
----------------------------------- -----------------------------------
Mid Cap Value Plus
Value Fund Fund
----------------------------------- -----------------------------------
Jan. 1, 1998 to Jan. 1, 1998 to
June 30, 1998 Year Ended June 30, 1998 Year Ended
(Unaudited) Dec. 31, 1997 (Unaudited) Dec. 31, 1997
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income....................... $ 68,131 $ 140,656 $ 6,808,376 $ 6,504,237
Net realized gains on investments........... 352,183 657,060 15,003,091 23,512,585
Net increase (decrease) in unrealized
appreciation on investments............... 2,741,383 3,851,838 (21,710,314) 18,312,281
--------------- ------------- --------------- -------------
Net increase in net assets resulting
from operations......................... 3,161,697 4,649,554 101,253 48,329,103
--------------- ------------- --------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income....................... -- (140,668) (6,820,719) (6,491,552)
Net realized gains on investments........... -- (712,944) (539,961) (22,973,041)
--------------- ------------- --------------- -------------
Net distributions to shareholders......... -- (853,612) (7,360,680) (29,464,593)
--------------- ------------- --------------- -------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued................. 20,377,234 30,209,525 183,042,048 369,805,993
Reinvested dividends from net investment
income and distributions from net realized
gains on investments....................... -- 842,673 6,692,124 27,702,491
Cost of shares redeemed..................... (11,648,099) (5,224,061) (225,313,337) (146,673,814)
--------------- ------------- --------------- -------------
Net increase (decrease) in net assets
derived from Fund share activities...... 8,729,135 25,828,137 (35,579,165) 250,834,670
--------------- ------------- --------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS...... 11,890,832 29,624,079 (42,838,592) 269,699,180
NET ASSETS AT THE BEGINNING OF THE PERIOD.... 36,558,041 6,933,962 336,281,366 66,582,186
--------------- ------------- --------------- -------------
NET ASSETS AT THE END OF THE PERIOD.......... $ 48,448,873 $ 36,558,041 $ 293,442,774 $ 336,281,366
=============== ============= =============== =============
UNDISTRIBUTED NET INVESTMENT INCOME.......... $ 68,131 $ -- $ 342 $ 12,685
=============== ============= =============== =============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
25
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
U.S. Government
Securities Fund
-------------------------------
Jan. 1, 1998 to
June 30, 1998 Year Ended
(Unaudited) Dec. 31, 1997
--------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income...... $ 1,493,077 $ 2,843,458
Net realized gains
(losses) on investments... 365,901 (374,326)
Net increase (decrease) in
unrealized appreciation
on investments............ 127,043 1,726,965
------------ -----------
Net increase (decrease)
in net assets resulting
from operations......... 1,986,021 4,196,097
------------ -----------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income...... (1,495,274) (2,825,690)
Net realized gains on
investments............... -- --
------------ -----------
Net distributions to
shareholders............ (1,495,274) (2,825,690)
------------ -----------
FUND SHARE ACTIVITIES:
Proceeds from shares issued 13,694,894 15,023,609
Reinvested dividends from
net investment income and
distributions from net
realized gains on
investments............... 1,122,238 2,054,279
Cost of shares redeemed.... (10,852,051) (21,599,173)
------------ -----------
Net increase (decrease)
in net assets derived
from Fund
share activities........ 3,965,081 (4,521,285)
------------ -----------
TOTAL INCREASE (DECREASE) IN
NET ASSETS................ 4,455,828 (3,150,878)
NET ASSETS AT THE BEGINNING
OF THE PERIOD.............. 48,562,085 51,712,963
------------ -----------
NET ASSETS AT THE END OF THE
PERIOD..................... $ 53,017,913 $48,562,085
============ ===========
UNDISTRIBUTED NET INVESTMENT
INCOME (LOSS).............. $ -- $ 2,197
============ ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
26
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
Small Cap
Contrarian Fund Value Fund
------------------------------- -------------------------------
Jan. 1, 1998 to Jan. 1, 1998 to
June 30, 1998 Year Ended June 30, 1998 Year Ended
(Unaudited) Dec. 31, 1997 (Unaudited) Dec. 31, 1997
--------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income...... $ 294,157 $ 673,521 $ 2,642,145 $ 9,590,827
Net realized gains
(losses) on investments... (3,345,289) 50,933,962 161,853,164 273,233,950
Net increase (decrease) in
unrealized appreciation
on investments............ (7,565,663) (19,529,344) (76,866,492) 109,578,793
-------------- ------------ -------------- --------------
Net increase (decrease)
in net assets resulting
from operations......... (10,616,795) 32,078,139 87,628,817 392,403,570
-------------- ------------ -------------- --------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income...... -- (960,908) -- (9,680,852)
Net realized gains on
investments............... -- (46,539,079) -- (270,393,704)
-------------- ------------ -------------- --------------
Net distributions to
shareholders............ -- (47,499,987) -- (280,074,556)
-------------- ------------ -------------- --------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued 17,721,511 170,002,168 222,320,329 512,410,502
Reinvested dividends from
net investment income and
distributions from net
realized gains on
investments............... -- 44,487,188 -- 246,872,904
Cost of shares redeemed.... (77,592,952) (185,437,010) (289,064,906) (371,657,576)
-------------- ------------ -------------- --------------
Net increase (decrease)
in net assets derived
from Fund
share activities........ (59,871,441) 29,052,346 (66,744,577) 387,625,830
-------------- ------------ -------------- --------------
TOTAL INCREASE (DECREASE) IN
NET ASSETS................ (70,488,236) 13,630,498 20,884,240 499,954,844
NET ASSETS AT THE BEGINNING
OF THE PERIOD.............. 276,641,894 263,011,396 2,126,714,680 1,626,759,836
-------------- ------------ -------------- --------------
NET ASSETS AT THE END OF THE
PERIOD..................... $206,153,658 $276,641,894 $2,147,598,920 $2,126,714,680
============== ============ ============== ==============
UNDISTRIBUTED NET INVESTMENT
INCOME (LOSS).............. $ 6,770 $ (287,387) $ 2,552,120 $ (90,025)
============== ============ ============== ==============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
27
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Large Cap Value Fund Mid Cap Value Fund
--------------------------------------------------- -------------------------------------------------
For the six months Oct. 11, 1996(1) For the six months Oct. 11, 1996(1)
ended June 30, 1998 Year ended through ended June 30, 1998 Year ended through
(Unaudited) Dec. 31, 1997 Dec. 31, 1996 (Unaudited) Dec. 31, 1997 Dec. 31, 1996
------------------- ------------- ---------------- ------------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning
of period.......................... $12.30 $10.50 $10.00 $12.78 $ 10.66 $10.00
Income from investment operations:
Net investment income.............. 0.17 0.11 -- 0.02 0.05 --
Net realized and unrealized gains
on investments.................... 0.54 2.28 0.50 1.13 2.38 0.66
------ ------ ------ ------ ------- ------
Total income from investment
operations......................... 0.71 2.39 0.50 1.15 2.43 0.66
Less distributions from:
Net investment income.............. -- (0.11) -- -- (0.05) --
Net realized gains on investments.. -- (0.48) -- -- (0.26) --
------ ------ ------ ------ ------- ------
Total distributions................ -- (0.59) -- -- (0.31) --
------ ------ ------ ------ ------- ------
Net asset value, end of period...... $13.01 $12.30 $10.50 $13.93 $ 12.78 $10.66
====== ====== ====== ====== ======= ======
Total Return........................ 5.8%(2) 22.9% 5.0%(2) 9.0%(2) 22.8% 6.6%(2)
Ratios and Supplemental Data
Net assets, end of period
(in thousands)..................... $9,317 $7,665 $2,441 $48,449 $36,558 $6,934
Ratio of net expenses to average
net assets......................... 0.00%(3)(4) 1.36%(4) 2.73%(3) 1.18%(3) 1.29%(5) 1.94%(3)
Ratio of net investment income
(loss) to average net assets....... 2.68%(3)(4) 1.14%(4) (0.25)%(3) 0.30%(3) 0.54%(5) (0.16)%(3)
Portfolio turnover rate............ 17% 30%) 1% 17% 48% 4%
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) If there had been no expense reimbursement or management fee waiver by the
Advisor, the ratio of net expenses to average net assets for the period
ended June 30, 1998 and for the year ended December 31, 1997 would have been
1.62% and 2.00%, respectively, and the ratio of net investment income to
average net assets would have been 1.06% and 0.50%, respectively.
(5) If there had been no expense reimbursement or management fee waiver by the
Advisor, the ratio of net expenses to average net assets for the year ended
December 31, 1997 would have been 1.32% and the ratio of net investment
income to average net assets would have been 0.51%.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
28
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Value Plus Fund
------------------------------------------------------------------------------
For the six months Oct. 26, 1993(1)
ended June 30, 1998 For the year ended December 31, through
(Unaudited) 1997 1996 1995 1994 Dec. 31, 1993
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period........... $ 16.13 $ 13.73 $ 11.17 $ 9.53 $10.45 $10.00
Income (loss) from investment operations:
Net investment income......................... 0.33 0.48 0.38 0.41 0.41 0.07
Net realized and unrealized gains (losses)
on investments............................... (0.43) 3.66 3.33 1.89 (0.92) 0.45
-------- -------- ------- ------- ------ ------
Total income (loss) from investment
operations.................................. (0.10) 4.14 3.71 2.30 (0.51) 0.52
Less distributions from:
Net investment income......................... (0.33) (0.48) (0.38) (0.41) (0.41) (0.07)
Net realized gains on investments............. (0.03) (1.26) (0.77) (0.25) -- --
-------- -------- ------- ------- ------ ------
Total distributions.......................... (0.36) (1.74) (1.15) (0.66) (0.41) (0.07)
-------- -------- ------- ------- ------ ------
Net asset value, end of period................. $ 15.67 $ 16.13 $ 13.73 $ 11.17 $ 9.53 $10.45
======== ======== ======= ======= ====== ======
Total Return(4)................................ (0.7)%(2) 30.6% 33.8% 24.4% (4.9)% 5.2%(2)
Ratios and Supplemental Data
Net assets, end of period (in thousands)...... $293,443 $336,281 $66,582 $19,123 $9,884 $5,811
Ratio of operating expenses to average
net assets................................... 1.09%(3) 1.12% 1.45% 1.54% 1.80%) 1.30%(3)
Ratio of interest expense to average
net assets................................... 0.02%(3) -- -- -- -- --
Ratio of net investment income to average
net assets................................... 3.75%(3) 3.32% 3.23% 3.90% 4.39% 6.52%(3)
Portfolio turnover rate....................... 38% 74% 73% 150% 127% 6%
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) 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.
29
The accompanying Notes to Financial Statements are an integral part of these
Statements.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. Government Securities Fund
-----------------------------------------------------------------------------------------
For the six months
ended June 30, 1998 For the year ended December 31,
-----------------------------------------------------------------------------------------
(Unaudited) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period...... $ 9.85 $ 9.54 $ 9.96 $ 8.91 $ 10.50 $ 9.93
Income (loss) from investment operations:
Net investment income.................... 0.29 0.58 0.59 0.60 0.59 0.56
Net realized and unrealized gains
(losses) on investments................ 0.10 0.31 (0.42) 1.05 (1.59) 1.18
------- ------- ------- ------- ------- -------
Total income (loss) from investment
operations............................. 0.39 0.89 0.17 1.65 (1.00) 1.74
Less distributions from:
Net investment income.................... (0.29) (0.58) (0.59) (0.60) (0.59) (0.56)
Net realized gains on investments........ -- -- -- -- -- (0.61)
------- ------- ------- ------- ------- -------
Total distributions...................... (0.29) (0.58) (0.59) (0.60) (0.59) (1.17)
------- ------- ------- ------- ------- -------
Net asset value, end of period............ $ 9.95 $ 9.85 $ 9.54 $ 9.96 $ 8.91 $ 10.50
======= ======= ======= ======= ======= =======
Total Return(1)........................... 4.0%(2) 9.7% 2.0% 19.0% (9.6)% 17.8%
Ratios and Supplemental Data..............
Net assets, end of period
(in thousands).......................... $53,018 $48,562 $51,713 $66,261 $64,807 $66,789
Ratio of net expenses to average
net assets(4).......................... 0.76%(3) 0.87% 1.06% 1.07% 1.07% 1.06%
Ratio of net investment income to
average net assets(4).................. 5.83%(3) 6.12% 6.36% 6.31% 6.30% 5.09%
Portfolio turnover rate.................. 38% 143% 30% 97% 95% 200%
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) If there had been no expense reimbursement or management fee waiver by the
Advisor, the ratios of net expenses to average net assets for the period
ended June 30, 1998 and the years ended December 31, 1997, 1996, 1995, 1994,
and 1993 would have been 1.16%, 1.20%, 1.21%, 1.22%, 1.22%, and 1.21%,
respectively, and the ratios of net investment income to average net assets
would have been 5.43%, 5.79%, 6.21%, 6.16%, 6.15%, and 4.94%, respectively.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
30
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Small Cap Contrarian Fund
-------------------------------------------------------------------------------
For the six months April 27, 1995(1)
ended June 30, 1998 For the year ended December 31, through
(Unaudited) 1997 1996 Dec. 31, 1995
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period......... $ 12.64 $ 13.40 $ 11.79 $ 10.00
Income (loss) from investment operations:
Net investment income....................... 0.02 0.04 0.02 0.03
Net realized and unrealized gains (losses)
on investments............................. (0.69) 1.77 2.20 2.05
-------- ------- -------- ---------
Total income (loss) from investment
operations................................. (0.67) 1.81 2.22 2.08
Less distributions from:
Net investment income....................... -- (0.05) (0.02) (0.03)
Net realized gains on investments........... -- (2.52) (0.59) (0.26)
-------- ------- -------- ---------
Total distributions........................ -- (2.57) (0.61) (0.29)
-------- ------- -------- ---------
Net asset value, end of period............... $ 11.97 $ 12.64 $ 13.40 $ 11.79
======== ======= ======== =========
Total Return................................. (5.3%)(2) 13.7% 18.9% 20.8%(2)
Ratios and Supplemental Data
Net assets, end of period (in thousands).... $206,154 $276,642 $263,011 $ 85,549
Ratio of operating expenses to average
net assets................................. 1.32%(3) 1.30% 1.30% 1.44%(3)
Ratio of interest expense and dividends on
short positions to average net assets...... 0.07%(3) 0.05% 0.02% 0.00%(3)
Ratio of net investment income to average
net assets................................. 0.23%(3) 0.24% 0.19% 1.01%(3)
Portfolio turnover rate..................... 28% 103% 57% 45%
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
31
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Value Fund
---------------------------------------------------------------------------------------------
For the six months
ended June 30, 1998 For the year ended December 31,
(Unaudited) 1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning
of period................. $ 33.87 $ 31.65 $ 27.95 $ 22.72 $ 23.22 $ 20.41
Income (loss) from
investment operations:
Net investment income
(loss).................. 0.04 0.17 0.06 0.13 (0.09) (0.12)
Net realized and
unrealized gains
on investments.......... 1.28 7.09 5.78 6.63 0.47 3.95
---------- ---------- ---------- ---------- -------- --------
Total income from
investment
operations............ 1.32 7.26 5.84 6.76 0.38 3.83
Less distributions from:
Net investment income.... -- (0.17) (0.06) (0.13) -- --
Net realized gains on
investments............. -- (4.87) (2.08) (1.40) (0.88) (1.02)
---------- ---------- ---------- ---------- -------- --------
Total distributions.... -- (5.04) (2.14) (1.53) (0.88) (1.02)
---------- ---------- ---------- ---------- -------- --------
Net asset value, end of
period.................... $ 35.19 $ 33.87 $ 31.65 $ 27.95 $ 22.72 $ 23.22
========== ========== ========== ========== ======== ========
Total Return(1)............ 3.9%(2) 23.2% 21.0% 29.8% 1.7% 18.8%
Ratios and Supplemental Data
Net assets, end of
period (in thousands)... $2,147,599 $2,126,715 $1,626,760 $1,190,926 $339,364 $186,518
Ratio of net expenses to
average net assets...... 1.11%(3) 1.12% 1.23% 1.29% 1.39% 1.51%
Ratio of net investment
income (loss) to
average net assets...... 0.23%(3) 0.49% 0.22% 0.61% (0.52)% (0.71)%
Portfolio turnover rate.. 14% 55% 31% 31% 35% 51%
</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) Not annualized.
(3) Annualized.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
(1) Organization
Heartland Group, Inc. (the "Corporation") is registered as an open-end
management company under the Investment Company Act of 1940. The Large Cap
Value Fund, Mid Cap Value Fund, Value Plus Fund, U.S. Government Securities
Fund, Small Cap Contrarian Fund, and Value Fund (the "Funds"), each of
which is a diversified fund, are six of the nine series of funds issued by
the Corporation at June 30, 1998.
(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 sales 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 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 June 30, 1998, the U.S. Government Securities Fund had Federal
income tax capital loss carryforwards of $4,940,986 expiring in 2002,
$858,458 expiring in 2003 and $358,754 expiring in 2005. The Fund does
not intend to make distributions of any future realized capital gains
until its Federal income tax capital loss carryforwards are completely
utilized.
Statement of Position 93-2 requires that permanent financial reporting
and tax differences be reclassified to paid in capital. Net assets are
not affected by these reclassifications.
(c) The Funds record security and shareholder transactions on trade date.
Net realized gains and losses on investments are computed on the
identified cost basis. The portion of security gains and losses
resulting from changes in foreign exchanges rates is included with net
realized and unrealized gains or losses from investments. Dividend
income is recognized on the ex-dividend date, and interest income is
recognized on an accrual basis. The Funds amortize premium and accrete
discount on investments utilizing the effective interest method.
(d) The Funds are charged for those expenses that are directly
attributable to them. Expenses that are not directly attributable to
any one Fund are typically allocated among all Funds issued by the
Corporation in proportion to the respective net assets, number of open
shareholder accounts, or net sales, as applicable.
(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 a futures contract, a Fund pledges to the broker
securities equal to the minimum "initial margin" requirements of the
exchange. Additionally, the Fund daily receives from or pays to the
broker on a daily basis 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 a
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 June 30, 1998.
33
<PAGE>
(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 subsequently borrow the same
security from a broker or other institution to complete the sale. The
predominant risk is that the market price may increase between the
date of the short sale and the date on which the Fund must replace the
borrowed security.
The Large Cap Value, Mid Cap Value, Value Plus, Small Cap Contrarian
and Value 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.
For financial statement purposes, an amount equal to a short sale's
settlement amount is included in the Statement of Assets and
Liabilities as an asset and an equivalent liability. The amount of the
liability is subsequently marked-to market to reflect the current
value of the short position. Subsequent fluctuations in the market
prices of securities sold short, at value, may require purchasing the
securities at prices which may differ from the market value reflected
on the Statement of Assets and Liabilities. The Fund is liable for any
dividends payable on securities while those securities are in a short
position.
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. At June 30, 1998, the
Small Cap Contrarian and Value Funds had cash and liquid assets
committed as collateral for open short positions in the amount of
$96,676,907 and $10,547,350, respectively. The receivables from
securities sold short and deposits with brokers for securities sold
short are with one major securities dealer. The Funds do not require
the broker to maintain collateral in support of the receivable from
securities sold short.
(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 (the "Act") or
pursuant to the resale limitations provided by Rule 144 under the Act,
or an exemption from the registration requirements of the Act. At June
30, 1998, the Value Plus Fund and Small Cap Contrarian Funds held
restricted securities equaling 7.56% and 4.34% of net assets,
respectively.
Restricted securities that are eligible for resale to qualified
institutional buyers pursuant to Rule 144A under the Act, provided
that such securities have been determined to be liquid pursuant to the
guidelines adopted by the Board of Directors, are valued at fair value
as furnished by independent pricing services. All other restricted
securities are identified below.
<TABLE>
<CAPTION>
Value Plus Fund
Shares/ Acquisition
Security Par Value Cost Fair Value Date
-------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
CORE Cap, Inc. Com. Stock 222,222 $4,444,440 $4,444,440 10/97
CORE Cap, Inc. Pfd. Stock 222,222 5,555,550 5,557,083 10/97
Source Capital Corporation
7.5% 03/01/2028
Conv. Bond 1,400,000 1,400,000 1,349,052 2/98
Small Cap Contrarian Fund
Shares/ Acquisition
Security Par Value Cost Fair Value Date
-------- --------- ---------- ---------- -----------
Apex Silver Mines Ltd. 187,500 $1,500,000 $1,816,406 8/96
Convergent Communications,
Inc. (Units) 200,000 500,000 500,000 9/97
The GNI Group, Inc. 600,000 3,305,385 3,476,280 8/95
MetroBank National Association 73,416 3,156,888 3,156,888 3/98
</TABLE>
(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 Large Cap Value, Mid Cap Value, Value
Plus, U.S. Government Securities and Value 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 Large Cap Value and Mid 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.
34
<PAGE>
For the period from January 1, 1998 through June 30, 1998, the Value
Plus and Value Funds had the following transactions in written covered
call options:
<TABLE>
<CAPTION>
Value Plus Fund
# of Premium
Contracts Amount
--------- -------
<S> <C> <C>
Balance at January 1, 1998 -- --
Options opened (ICN Pharmaceuticals, Inc. 3/98) 300 $ 23,194
Options expired (ICN Pharmaceuticals, Inc. 3/98) (300) (23,194)
Options closed -- --
----- ---------
Balance at June 30, 1998 -- $ --
===== =========
Value Fund
# of Premium
Contracts Amount
--------- -------
Balance at January 1, 1998 -- --
Options opened (Grand Casinos, Inc. 8/98 & 11/98) 6,082 $ 516,382
Options expired -- --
Options closed -- --
----- ---------
Balance at June 30, 1998 6,082 $ 516,382
===== =========
</TABLE>
(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) Credit Facility
Firstar Trust Company made available to the Small Cap Contrarian Fund a $25
million credit facility pursuant to a Credit Agreement dated September 5,
1997. The Credit Agreement terminated April 2, 1998. Outstanding principal
amounts under the credit facility bore interest at a rate per annum equal
to the prime rate or at the LIBOR rate plus 1.25%. Advances were
collateralized by securities owned by the Fund and held in its custody
account pursuant to a Collateral Pledge Arrangement dated September 5,
1997. During the period from January 1, 1998 through April 2, 1998 the Fund
had an outstanding average daily balance of $1,593,407. The maximum amount
outstanding during the period from January 1, 1998 through April 2, 1998
was $10,000,000. At June 30, 1998, the Fund had no outstanding principal
amounts under the credit facility. Interest expense amounted to $34,236 for
the period from January 1, 1998 through April 2, 1998.
Deutsche Bank AG has made available to the Small Cap Contrarian Fund a $30
million credit facility pursuant to a Credit Agreement dated March 31,
1998. Outstanding principal amounts under the credit facility bear interest
at a rate per annum equal to the NIBOR rate plus 0.5% or the prime rate.
Commitment fees are computed at a rate per annum equal to 0.08% of the
daily average unutilized credit. During the period from March 31, 1998
through June 30, 1998 the Fund had an outstanding average daily balance of
$64,130. The maximum amount outstanding during the period from March 31,
1998 through June 30, 1998 was $5,900,000. At June 30, 1998 the Fund had no
outstanding principal amounts under the credit facility. Interest expense
and commitment fees amounted to $993 and $5,987, respectively, for the
period from March 31, 1998 though June 30, 1998.
Deutsche Bank AG has made available to seven of the nine series of funds
issued by the Corporation, including the Large Cap Value, Mid Cap Value,
Value Plus and Value Funds, a $70 million credit facility pursuant to a
Credit Agreement dated March 31, 1998. Outstanding principal amounts under
the credit facility bear interest at a rate per annum equal to the NIBOR
rate plus 0.5% or the prime rate. Commitment fees are computed at a rate
per annum equal to 0.08% of the Funds' proportional daily average
unutilized credit. During the period from March 31, 1998 through June 30,
1998 the Value Plus Fund had an outstanding average daily balance of
$2,032,609 and a maximum outstanding balance of $24,600,000. At June 30,
1998, the Value Plus Fund had no outstanding principal amounts under the
credit facility. Interest expense for the Fund amounted to $31,545 for the
period from March 31, 1998 through June 30, 1998. No other Fund borrowed
against this credit facility. Commitment fees for the Large Cap Value, Mid
Cap Value, Value Plus, and Value Funds amounted to $63, $324, $1,567 and
$9,359, respectively.
35
<PAGE>
(4) 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 agreement, the Large Cap Value, Mid Cap Value, Small Cap Contrarian and
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.
The Advisor has voluntarily committed to waive the entire management and
distribution fees and to reimburse all other expenses for the Large Cap
Value Fund and to reimburse the Mid Cap Value Fund to the extent that
annual total fund operating expenses would exceed 1.25%. The Advisor
collected a partial fee for the U.S. Government Securities Fund at an
annual rate of .25% of the Fund's average daily net assets. The Advisor may
reinstate all or a portion of the Funds' fees or discontinue reimbursements
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 period from
January 1, 1998 through June 30, 1998, the Distributor received for the
Value Plus, Small Cap Contrarian and Value Funds $7,500, $12,000 and
$28,867, respectively, for brokerage fees on the execution of purchases and
sales of portfolio investments.
Officers and certain directors of the Corporation 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 Corporation 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.
(5) Deferred Organization Expenses
For the Large Cap Value, Mid Cap Value, Value Plus and Small Cap Contrarian
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 June 30, 1998, for the Large Cap Value,
Mid Cap Value, Value Plus and Small Cap Contrarian Funds were $10,678,
$10,678, $2,540 and $18,078, respectively. Reimbursements to the Advisor of
these amounts by the Funds will be subject to any expense limitations and
reimbursements in effect for the Funds at the time.
36
<PAGE>
(6) Investment Transactions
During the period from January 1, 1998 through June 30, 1998, purchases and
sales of securities, other than short-term obligations, were as follows (in
thousands):
<TABLE>
<CAPTION>
Large Cap Mid Cap Value U.S. Gov't. Small Cap
Value Value Plus Securities Contrarian Value
Fund Fund Fund Fund Fund Fund
--------- --------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cost of purchases $1,864 $12,438 $128,351 $ 24,606 $ 75,697 $ 275,129
Proceeds from
sales 1,400 6,957 147,419 18,720 125,764 462,974
</TABLE>
Included in these transactions were purchases and sales of U.S. obligations
as follows (in thousands):
<TABLE>
<CAPTION>
Large Cap Mid Cap Value U.S. Gov't. Small Cap
Value Value Plus Securities Contrarian Value
Fund Fund Fund Fund Fund Fund
--------- --------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cost of purchases $ -- $ -- $ -- $24,434 $ -- $100,455
Proceeds from
sales -- -- -- 18,500 -- 20,085
</TABLE>
At June 30, 1998, the gross unrealized appreciation and depreciation on
securities for tax purposes, excluding securities sold short, was as follows (in
thousands):
<TABLE>
<CAPTION>
Large Cap Mid Cap Value U.S. Gov't. Small Cap
Value Value Plus Securities Contrarian Value
Fund Fund Fund Fund Fund Fund
--------- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Appreciation $1,184 $ 9,016 $ 21,532 $1,660 $ 36,562 $ 529,453
Depreciation (581) (2,090) (18,129) (1) (32,183) (179,455)
------ ------- -------- ------ -------- ---------
$ 603 $ 6,926 $ 3,403 $1,659 $ 4,379 $ 349,998
====== ======= ======== ====== ======== =========
</TABLE>
At June 30, 1998, the cost of securities for federal income tax purposes
was as follows (in thousands):
<TABLE>
<CAPTION>
Large Cap Mid Cap Value U.S. Gov't. Small Cap
Value Value Plus Securities Contrarian Value
Fund Fund Fund Fund Fund Fund
--------- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tax cost $8,749 $41,516 $283,023 $51,176 $221,029 $1,780,128
</TABLE>
(7) Fund Share Transactions
For the period from January 1, 1998 through June 30, 1998, Fund share
transactions were as follows:
<TABLE>
<CAPTION>
Large Cap Mid Cap Value
Value Value Plus
Fund Fund Fund
--------- --------- ----------
<S> <C> <C> <C>
Shares issued 244,495 1,460,203 11,283,627
Reinvested dividends
from net investment
income and distributions
from net realized gains on investments -- -- 415,021
Shares redeemed (151,808) (844,455) (13,819,493)
-------- --------- -----------
Net increase (decrease) in Fund shares 92,687 615,748 (2,120,845)
======== ========= ===========
U.S. Gov't. Small Cap
Securities Contrarian Value
Fund Fund Fund
---------- ---------- ---------
Shares issued 1,383,345 1,369,765 6,353,889
Reinvested dividends
from net investment
income and distributions
from net realized gains
on investments 113,579 -- --
Shares redeemed (1,098,558) (6,040,336) (8,110,309)
---------- ---------- ----------
Net increase (decrease) in Fund shares 398,366 (4,670,571) (1,756,420)
========== ========== ==========
</TABLE>
37
<PAGE>
For the year ended December 31, 1997, Fund share transactions were as
follows:
<TABLE>
<CAPTION>
Large Cap Mid Cap Value
Value Value Plus
Fund Fund Fund
---------- ----------- -----------
<S> <C> <C> <C>
Shares issued 520,287 2,574,129 23,437,762
Reinvested dividends from net
investment income and distributions
from net realized gains on investments 28,315 67,511 1,736,643
Shares redeemed (157,719) (430,675) (9,180,571)
---------- ----------- -----------
Net increase in Fund shares 390,883 2,210,965 15,993,834
========== =========== ===========
U.S. Gov't. Small Cap
Securities Contrarian Value
Fund Fund Fund
---------- ----------- -----------
Shares issued 1,555,341 11,427,314 14,506,622
Reinvested dividends from net
investment income and distributions
from net realized gains on investments 214,422 3,558,914 7,402,442
Shares redeemed (2,258,183) (12,721,002) (10,516,915)
---------- ----------- -----------
Net increase (decrease) in Fund shares (488,420) 2,265,226 11,392,149
========== =========== ===========
</TABLE>
(8) Transactions with Affiliates
The following companies are affiliated with the Value Plus, Small Cap
Contrarian and Value Funds; that is, the Funds held 5% or more of the
outstanding voting securities during the period from January 1, 1998
through June 30, 1998. Such companies are defined in Section (2)(a)(3) of
the Investment Company Act of 1940.
<TABLE>
<CAPTION>
Value Plus Fund
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1998 Purchases Sales June 30,1998 Dividends (Losses)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Akita Drilling Ltd. (Class A) 500,000 350,000 61,500 788,500 $ 49,095 $ (256,661)
Decorator Industries, Inc. 250,000 40,000 32,100 257,900 39,501 93,738
Insteel Industries, Inc. 383,600 48,400 0 432,000 51,120 0
Oil-Dri Corporation of America 212,600 257,400 0 470,000 48,000 0
Riviera Tool Company 8.0% Conv. Pfd. 11,700 0 11,700 (1) 0 0 0
Riviera Tool Company Common 0 194,999 (1) 0 194,999 0 0
Salient 3 Communications, Inc. 225,000 75,000 300,000 0 24,660 (881,704)
Siam Food Products Public Company Ltd. 0 1,300,000 0 1,300,000 86,674 0
-------- -----------
$299,050 $(1,044,627)
======== ===========
</TABLE>
(1) Adjusted for conversion of 11,700 shares of Riviera Tool Company 8.0% Conv.
Pfd. stock into 194,999 shares of Riviera Tool Company common stock.
<TABLE>
<CAPTION>
Small Cap Contrarian Fund
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1,1998 Purchases Sales June 30,1998 Dividends (Losses)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Advocat, Inc. 279,200 0 0 279,200 $ 0 $ 0
Aldila, Inc. 350,000 550,000 0 900,000 0 0
Allou Health & Beauty Care, Inc. (Class A) 525,000 0 125,000 400,000 0 608,428
Astro-Med, Inc. 215,400 34,600 0 250,000 20,000 0
Autonomous Technologies Corporation 515,000 0 15,000 500,000 0 (17,816)
Bio-Vascular, Inc. 526,000 0 372,000 154,000 0 164,281
Bitstream, Inc. 445,300 54,700 7,800 492,200 0 163
Bolder Technologies Corporation 267,500 137,500 0 405,000 0 0
BTG, Inc. 610,000 257,500 32,500 835,000 0 181,885
Catherines Stores Corporation 600,000 0 102,500 497,500 0 87,154
Chico's Fas, Inc. 460,000 40,000 500,000 0 0 3,103,544
Children's Discovery Centers of America, Inc. 500,000 0 500,000 0 0 3,063,650
Coastal Physician Group, Inc. 1,500,000 0 1,500,000 0 0 (2,833,402)
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Small Cap Contrarian Fund (CONT'D)
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1998 Purchases Sales June 30, 1998 Dividends (Losses)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Crown Books Corporation 325,000 0 325,000 0 $ 0 $(2,669,436)
Donnelly Corporation 300,000 0 0 300,000 71,250 0
Drypers Corp. 7.5% Sr. Conv. Cum. Pfd. 18,598 0 18,598 (1) 0 298,927 0
Drypers Corporation Common 168,882 1,911,432 (1) 1,080,314 1,000,000 0 5,522,715
Dynamic Materials Corporation 222,000 28,000 0 250,000 0 0
EDAP TMS S.A. (ADR) 0 645,200 0 645,200 0 0
Edusoft Ltd. 0 300,000 0 300,000 0 0
Executone Information Systems, Inc. 2,800,000 0 0 2,800,000 0 0
Family Steak Houses of Florida, Inc. 140,000 (2) 0 0 140,000 0 0
Fortress Group, Inc. 700,000 0 145,000 555,000 4,950 141,003
Global Motorsport Group, Inc. 400,000 0 250,000 150,000 0 978,786
The GNI Group, Inc. 600,000 0 0 600,000 0 0
Harding Lawson Associates Group, Inc. 475,000 0 75,000 400,000 0 22,534
Harmony Brook, Inc. 700,000 0 700,000 0 0 (143,500)
High Plains Corporation 1,000,000 500,000 0 1,500,000 0 0
Home Security International, Inc. 317,500 82,500 0 400,000 0 0
ICU Medical, Inc. 450,000 0 362,600 87,400 0 2,245,313
In Home Health, Inc. 1,405,000 195,000 0 1,600,000 0 0
Kentek Information Systems, Inc. 451,800 48,200 0 500,000 20,000 0
Manchester Equipment Company, Inc. 500,000 0 0 500,000 0 0
Matrix Pharmaceutical, Inc. 2,100,000 0 100,000 2,000,000 0 78,108
MetroBank National Association 0 73,416 0 73,416 0 0
Moore Medical Corporation 200,000 0 0 200,000 0 0
Motor Club of America 146,000 0 0 146,000 0 0
M-Wave, Inc. 277,000 0 0 277,000 0 0
Networks North, Inc.(3) 171,500 28,500 0 200,000 0 0
Norland Medical Systems, Inc. 540,000 160,000 0 700,000 0 0
O. I. Corporation 352,000 0 0 352,000 0 0
PDK Labs, Inc. 125,000 125,000 0 250,000 0 0
Personnel Management, Inc. 200,000 0 3,600 196,400 0 15,055
Point West Capital Corporation 400,000 0 0 400,000 0 0
Polyvision Corporation 600,000 0 600,000 0 0 231,328
PremiumWear, Inc. 200,000 0 0 200,000 0 0
Programmer's Paradise, Inc. 251,900 0 0 251,900 0 0
Riviera Tool Company 156,400 0 0 156,400 0 0
Six Rivers National Bank 50,000 17,100 0 67,100 0 0
Speizman Industries, Inc. 290,000 6,000 0 296,000 0 0
TransCoastal Marine Services, Inc. 0 750,000 0 750,000 0 0
Tipperary Corporation 937,900 62,100 1,000,000 0 0 (303,024)
VECTRA Technologies, Inc. 650,000 0 650,000 0 0 (1,777,888)
-------- -----------
$415,127 $(8,698,881)
======== ===========
</TABLE>
(1) Adjusted for conversion of 18,598 shares of Drypers Corporation 7.5% Sr.
Conversion Cum. Pfd. Stock into 1,859,800 shares of Drypers Corporation
Common Stock.
(2) Adjusted for 1 for 5 reverse stock split.
(3) Name changed from NTN Canada, Inc.
39
<PAGE>
<TABLE>
<CAPTION>
Value Fund
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1998 Purchases Sales June 30, 1998 Dividends (Losses)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3-D Geophysical, Inc. 815,000 0 815,000 0 $ 0 $ 2,284,002
ACT Manufacturing,Inc. 600,000 100,000 0 700,000 0 0
ACT Networks, Inc. 900,000 0 90,000 810,000 0 168,107
Align-Rite International, Inc. 300,000 0 0 300,000 0 0
Allied Healthcare Products, Inc. 775,000 0 0 775,000 0 0
The Alpine Group, Inc. 1,000,000 0 0 1,000,000 0 0
American Buildings Company 500,000 0 0 500,000 0 0
Amtech Corporation 1,025,000 75,000 910,000 190,000 0 (617,596)
Amtran, Inc. 600,000 0 321,100 278,900 0 2,612,710
Amwest Insurance Group, Inc. 220,000(1) 0 0 220,000 44,000 0
Applied Films Corporation 190,000 60,000 0 250,000 0 0
Aseco Corporation 99,500 250,500 0 350,000 0 0
Asia Pacific Wire & Cable Corporation Ltd. 727,600 0 0 727,600 0 0
Astec Industries, Inc. 965,000 0 275,000 690,000 0 4,590,387
Badger Meter, Inc. 200,000 0 0 200,000 60,000 0
Baldwin Piano & Organ Company 325,000 0 0 325,000 0 0
Barrett Business Services, Inc. 500,000 125,000 0 625,000 0 0
Blue Wave Systems, Inc.(2) 440,400 0 0 440,400 0 0
Bonded Motors, Inc. 200,000 0 20,000 180,000 0 27,218
Buckhead America Corporation 175,000 0 0 175,000 0 0
Business Resource Group 500,000 0 14,000 486,000 0 (1,659)
Cameron Ashley Building Products, Inc. 595,000 0 95,000 500,000 0 321,192
Campbell Resources, Inc. 10,000,000 2,000,000 0 12,000,000 0 0
Caretenders Health Corporation 308,900 0 0 308,900 0 0
Catalina Lighting, Inc. 500,000 200,000 0 700,000 0 0
Cavell Energy Corporation 1,573,200 289,800 0 1,863,000 0 0
Ceanic Corporation(3) 300,000 0 0 300,000 0 0
Central Sprinkler Corporation 300,000 25,000 0 325,000 0 0
CHC Helicopter Corporation (Class A) 550,000 0 14,000 536,000 0 66,395
The Cherry Corporation (Class A) 850,100 0 74,100 776,000 0 316,311
Chic by H.I.S., Inc. 0 600,000 0 600,000 3,000 0
Children's Broadcasting Corporation 590,000 0 0 590,000 0 0
Ciprico, Inc. 42,500 257,500 0 300,000 0 0
Clayton Williams Energy, Inc. 595,000 0 0 595,000 0 0
Collaborative Clinical Research, Inc. 600,000 0 0 600,000 0 0
Collagen Corporation 878,500 0 0 878,500 87,850 0
Comdial Corporation 650,000 0 223,000 427,000 0 700,639
Commonwealth Industries, Inc. 615,000 185,000 0 800,000 68,850 0
Compass Plastics & Technologies, Inc. 87,900 212,100 300,000 0 0 (1,342,357)
Consep, Inc. 900,000 0 0 900,000 0 0
Cross-Continent Auto Retailers, Inc. 500,000 397,000 0 897,000 0 0
Crown Central Petroleum Corporation (Class B) 225,000 75,000 0 300,000 0 0
CSP, Inc. 308,000(4) 0 0 308,000 0 0
Cyrk International, Inc. 1,000,000 64,100 433,600 630,500 0 2,018,878
Dakotah, Inc. 300,000 0 300,000 0 0 (1,022,102)
Damark International, Inc. (Class A) 800,000 0 0 800,000 0 0
Datron Systems, Inc. 250,000 0 0 250,000 0 0
Dayton Mining Corporation 2,200,000 1,300,000 600,000 2,900,000 0 (2,092,395)
Designs, Inc. 1,100,000 0 0 1,100,000 0 0
Duckwall-ALCO Stores, Inc. 360,000 10,000 0 370,000 0 0
Durakon Industries, Inc. 500,000 0 0 500,000 0 0
D & N Financial Corporation 440,000 0 0 440,000 23,800 0
Eaton Vance Corporation 700,000 0 500,000 200,000 81,000 13,252,593
ECC International Corporation 757,600 0 257,600 500,000 0 (2,101,161)
Effective Management Systems, Inc. 375,000 0 0 375,000 0 0
Eltek Ltd. 261,200 139,000 0 400,200 0 0
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Value Fund [CONT'D]
Share Share Realized
Balance at Balance at Gains
Security Name Jan 1, 1998 Purchases Sales June 30, 1998 Dividends (Losses)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Engle Homes, Inc. 551,500 92,200 101,500 542,200 $ 43,376 $ 882,921
ENStar, Inc. 206,833 0 0 206,833 0 0
Environmental Technologies Corporation 330,800 145,200 0 476,000 0 0
Eskimo Pie Corporation 271,500 0 0 271,500 27,150 0
Esterline Technologies Corporation 600,000(5) 0 0 600,000 0 0
Evergreen Resources, Inc. 500,000 0 0 500,000 0 0
EZCorp, Inc. (Class A) 700,000 0 0 700,000 0 0
Fibermark, Inc. 395,000 0 0 395,000 0 0
Filene's Basement Corporation 1,200,000 0 0 1,200,000 0 0
Financial Industries Corporation 300,000 0 0 300,000 0 0
Forest Oil Corporation 1,500,000 0 0 1,500,000 0 0
Gish Biomedical, Inc. 275,000 0 0 275,000 0 0
Grist Mill Company 400,000 0 400,000 0 0 3,478,570
GZA GeoEnvironmental Technologies, Inc. 372,700 0 0 372,700 0 0
Hallwood Consolidated Resources Corporation 300,000 0 0 300,000 0 0
Hallwood Group, Inc. 58,900 23,600 23,000 59,500 0 121,290
Hanover Foods Corporation (Class A) 50,500 0 0 50,500 27,775 0
Harmony Brook, Inc. 720,000 0 720,000 0 0 (864,566)
Health Power, Inc. 300,000 39,500 0 339,500 0 0
HealthRite, Inc. 403,000 0 0 403,000 0 0
HMN Financial, Inc. 333,500(6) 0 83,000 250,500 15,030 1,251,192
Home Federal Bancorp 290,250 0 0 290,250 58,050 0
Home Products International, Inc. 317,500 0 0 317,500 0 0
Hospital Staffing Services, Inc. 625,658 0 625,658 0 0 (1,447,642)
Howell Corporation 300,000 0 0 300,000 24,000 0
IBAH, Inc. 750,000 1,000,000 1,750,000 0 0 2,832,775
ICN Pharmaceuticals, Inc. 3,775,000(7) 0 1,475,000 2,300,000 395,222 54,252,212
IEC Electronics Corporation 650,000 78,800 0 728,800 0 0
ImmuLogic Pharmaceutical Corporation 2,000,000 0 0 2,000,000 0 0
Intercontinental Life Corporation 207,000 18,800 0 225,800 0 0
Interdigital Communications Corporation 4,800,000 0 0 4,800,000 0 0
International Aircraft Investors 250,000 100,000 0 350,000 0 0
International Airline Support Group, Inc. 220,000 0 0 220,000 0 0
Interpore International 600,000 0 0 600,000 0 0
Iwerks Entertainment, Inc. 1,100,000 0 0 1,100,000 0 0
Jaco Electronics, Inc. 380,000 0 0 380,000 0 0
John B. Sanfilippo & Son, Inc. 292,000 7,500 0 300,000 0 0
Kaye Group, Inc. 353,600 0 0 353,600 17,680 0
Kentucky Electric Steel, Inc. 450,000 0 0 450,000 0 0
LaCrosse Footwear, Inc. 317,500 32,500 0 350,000 0 0
LCS Industries, Inc. 350,000 5,000 0 355,000 26,438 0
Lindal Cedar Homes, Inc. 155,000 203,800 0 358,800 0 0
The Lion Brewery, Inc. (Class A) 375,000 0 0 375,000 0 0
Lithia Motors, Inc. 68,200 231,800 0 300,000 0 0
Magal Security Systems Ltd. 600,000 0 0 600,000 0 0
Marisa Christina, Inc. 400,000 188,900 67,000 521,900 0 (416,899)
Marten Transport Ltd. 333,300(8) 0 0 333,300 0 0
Martin Industries, Inc. 650,000 0 0 650,000 50,720 0
Maxicare Health Plans, Inc. 1,700,000 0 68,600 1,631,400 0 (864,089)
Meadowbrook Rehabilitation
Group, Inc. (Class A) 279,999(9) 0 279,999 0 0 (970,221)
Medical Graphics Corporation 365,550(10) 0 0 365,550 0 0
Mercury Air Group, Inc. 633,700 66,300 0 700,000 0 0
MFRI, Inc. 300,000 100,000 0 400,000 0 0
Midwest Express Holdings, Inc. 500,000 0 500,000 0 0 7,174,380
Minntech Corporation 513,100 0 0 513,100 0 0
Morgan Products Ltd. 750,000 0 0 750,000 0 0
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Value Fund [CONT'D]
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1998 Purchases Sales June 30,1998 Dividends (Losses)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MYR Group, Inc. 500,000 0 0 500,000 $35,000 $ 0
M/A/R/C, Inc. 300,000 0 0 300,000 45,000 0
NABI, Inc. 1,600,000 870,000 0 2,470,000 0 0
New Brunswick Scientific Company, Inc. 279,636(11) 0 2,500 277,136 0 14,175
Norstan, Inc. 552,000 0 52,000 500,000 0 684,610
Northwest Equity Corporation 80,000 0 0 80,000 21,800 0
Norwood Promotional Products, Inc. 400,000 0 0 400,000 0 0
Nu Horizons Electronics Corporation 600,000 0 0 600,000 0 0
Nu-Kote Holding, Inc. (Class A) 1,100,000 100,000 1,200,000 0 0 (843,377)
Osmonics, Inc. 734,600 0 0 734,600 0 0
Outlook Group Corporation 457,500 0 0 457,500 0 0
Patrick Industries, Inc. 312,000 0 0 312,000 37,440 0
Peoples Telephone Company, Inc. 1,600,000 0 0 1,600,000 0 0
Petsec Energy Ltd. (ADR) 1,175,000 325,000 250,000 1,250,000 0 (2,426,470)
PIA Merchandising Services, Inc. 500,000 0 0 500,000 0 0
Powell Industries, Inc. 600,000 0 0 600,000 0 0
Professionals Group Inc.(12) 220,000 0 0 220,000 0 0
Prosource, Inc. 300,000 0 300,000 0 0 2,367,403
Providence & Worcester Railroad Company 0 200,000 0 200,000 6,000 0
Quad Systems Corporation 400,000 0 0 400,000 0 0
Quixote Corporation 585,500 0 250,500 335,000 43,550 249,753
Ramsay Health Care, Inc. 603,333 96,667 0 700,000 0 0
Rehabilicare, Inc. 312,100 0 0 312,100 0 0
Remington Oil & Gas Corp. (Class B) 1,560,000 40,000 0 1,600,000 0 0
Reptron Electronics, Inc. 165,000 235,000 0 400,000 0 0
Republic Automotive Parts, Inc. 195,000 0 195,000 0 0 490,266
Right Management Consultants, Inc. 500,000 0 0 500,000 0 0
RightCHOICE Managed Care, Inc. (Class A) 1,002,500 0 0 1,002,500 0 0
The Rottlund Company, Inc. 500,000 0 0 500,000 0 0
Roy F. Weston, Inc. (Class A) 725,000 100,000 0 825,000 0 0
Salient 3 Communications, Inc. 0 300,000 0 300,000 0 0
Saucony, Inc. (Class B) (13) 610,000 0 0 610,000 0 0
Schnitzer Steel Industries, Inc. (Class A) 210,000 90,000 0 300,000 30,000 0
Schult Homes Corporation 360,000 0 360,000 0 4,482 4,691,242
Smartflex Systems, Inc. 227,500 160,500 0 388,000 0 0
Southern Energy Homes, Inc. 700,000 0 0 700,000 0 0
Starcraft Corporation 400,000 0 0 400,000 0 0
Strattec Security Corporation 500,000 0 0 500,000 0 0
Strouds, Inc. 485,000 215,000 0 700,000 0 0
Sunrise International Leasing Corporation 630,000 0 0 630,000 0 0
Suprema Specialties, Inc. 170,400 96,600 0 267,000 0 0
Technology Research Corporation 500,000 0 0 500,000 0 0
Tech-Sym Corporation 300,000 50,000 0 350,000 0 0
Teltrend, Inc. 500,000 0 0 500,000 0 0
Tesoro Petroleum Corporation 1,400,000 0 28,000 1,372,000 0 200,479
Thorn Apple Valley, Inc. 436,000 0 436,000 0 0 259,275
Timber Lodge Steakhouse, Inc. 300,000 0 0 300,000 0 0
Tipperary Corporation 574,400 725,600 0 1,300,000 0 0
Todhunter International, Inc. 490,000 0 0 490,000 0 0
Total-Tel USA Communications, Inc. 250,000 0 250,000 0 0 8,402,309
Trak Auto Corporation 366,500 0 0 366,500 0 0
Trimark Holdings, Inc. 400,000 0 0 400,000 0 0
United Security Bancorporation 187,465(14) 0 0 187,465 0 0
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Value Fund [CONT'D]
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1998 Purchases Sales June 30,1998 Dividends (Losses)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
URS Corporation 741,700 58,300 0 800,000 $ 0 $ 0
U.S. Global Investors, Inc. (Class A) 502,000 48,300 0 550,300 0 0
VECTRA Technologies, Inc. 723,500 0 723,500 0 0 (2,180,395)
Vicorp Restaurants, Inc. 500,000 0 60,000 440,000 0 303,435
World of Science, Inc. 470,000 30,000 0 500,000 0 0
Zindart Ltd. (ADR) 220,000 17,500 0 237,500 0 0
---------- -----------
$1,277,213 $96,823,791
========== ===========
</TABLE>
(1) Adjusted for 10% stock dividend.
(2) Name changed from Mizar, Inc.
(3) Name changed from American Oilfield Divers, Inc.
(4) Adjusted for 10% stock dividend.
(5) Adjusted for 2 for 1 stock split.
(6) Adjusted for 3 for 2 stock split.
(7) Adjusted for 3 for 2 stock split.
(8) Adjusted for 3 for 2 stock split.
(9) Adjusted for 3 for 2 stock split.
(10) Adjusted for 3 for 2 stock split.
(11) Adjusted for 10% stock dividend.
(12) Name changed from Professionals Insurance Company Management Group.
(13) Name changed from Hyde Atheletic Industries, Inc.
(14) Adjusted for 10% stock dividend.
43
<PAGE>
Heartland's Risk/Return Spectrum
[graphic - A spectrum illustrates the potential risk/return of the following
categories, both the categories and the funds within them being listed in an
aggregate order of lower to higher potential risk/return, respectively: Money
Market, which includes the Firstar Money Market; Bond, which includes Short
Duration High-Yield Municipal, U.S. Government Securities, Wisconsin Tax Free
and High-Yield Municipal Bond; and Equity or Stock, which includes Large Cap
Value, Value Plus, Mid Cap Value, Value and Small Cap Contrarian.]
In general, with mutual funds, as with other investments, the higher the risk,
the greater the potential return over time. Each investor should choose an
investment strategy that matches his or her particular investment goals.
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. There is no assurance that the Firstar Money Market Fund will be able to
maintain a stable net asset value of $1. Firstar Funds are not deposits or
obligations of or guaranteed by Firstar Bank or its affiliates, nor are they
insured by the FDIC, the U.S. Government or any governmental agency. For more
complete information, including charges and expenses, call Heartland Advisors at
1-800-432-7856 for a prospectus. Read it carefully before you invest.
<PAGE>
The Heartland Family of Funds
Large Cap Value Fund
Mid Cap Value Fund
Value Plus Fund
U.S. Government Securities Fund
Small Cap Contrarian Fund
(closed to new accounts)
Value Fund
(closed to new accounts)
Short Duration High-Yield
Municipal Fund
High-Yield Municipal Bond Fund
Wisconsin Tax Free Fund
(available to Wisconsin residents only)
Firstar Money Market Fund
1.800.432.7856
[Logo] Heartland Funds
------------------------
AMERICA'S VALUE INVESTOR
790 N. Milwaukee Street, Milwaukee, WI 53202
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.
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. Complete
portfolios for the Funds will be included in the Annual and Semi-Annual Reports
to Shareholders. Wisconsin Tax Free Fund income may be subject to alternative
minimum tax and Municipal Fund income may be subject to state, local and
alternative minimum tax.
This material may only be used when preceded or accompanied by a prospectus for
the Funds listed on the front cover. If you would like more complete information
on any other Fund, including charges and expenses, please call for a prospectus.
Read it carefully before you invest.
Heartland Advisors, Inc., distributor. Member SIPC.
<PAGE>
[Logo] Heartland Funds
------------------------
AMERICA'S VALUE INVESTOR
Value Report
June 30, 1998
Notes on value investing
for investors in the Heartland
Wisconsin Tax Free Fund
Semi-Annual Report
to Shareholders
Heartland Wisconsin
Tax Free Fund
<PAGE>
VALUE REPORT
[PHOTO OF
PAT RETZER]
Dear Fellow Investor
In the second quarter of 1998, we enjoyed the "best of all possible worlds" for
bonds. Inflation remained low as key commodity prices declined and the U.S.
began importing disinflation in the form of low cost goods from Asia. Despite
high employment and building wage pressure in the U.S., we believe the super
strong dollar and the continuing economic crisis in Asia has tied the Federal
Reserve's hands, making a Federal Funds rate hike highly unlikely in the
foreseeable future. We are seeing some hard evidence that our economy is
beginning to slow, further easing inflationary concerns. Finally, with Asian
stock and bond markets in disarray and U.S. stocks looking increasingly
vulnerable, the bond market is benefiting from U.S. and foreign investors'
"flight to quality". Put it all together, and we think the "big picture" for
bonds couldn't be much brighter.
Wisconsin municipal bonds have not performed quite as well as U.S. Treasury
securities--always the first and generally the greatest beneficiary of big bond
market rallies. However, the benefits of double tax-free investing have never
been so clear. According to the American Tax Foundation, Tax Freedom Day in
Wisconsin--the day Wisconsin citizens begin working for themselves rather than
the federal, state and local governments--fell on May 17*, the latest it has
occurred in history. This year, only Washington D.C. and Connecticut had later
Tax Freedom Days. Despite budget surpluses, no one in Washington or Madison
appears to be pounding the legislative table for tax relief.
In closing, we like the prospects for bonds in general and Wisconsin double tax-
free bonds in particular. Remember, you may be able to celebrate an earlier
personal Tax Freedom Day by shielding your investment income from federal and
state taxes.
Sincerely,
Patrick J. Retzer, CPA
Portfolio Co-Manager
**Based on Tax Foundation economists' projection of a 35.4% effective tax rate
(including federal, Wisconsin and local taxes) for 1998.
<PAGE>
VALUE REPORT
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.
THE VALUE OF DOUBLE TAX-FREE INCOME
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Federal Rate 28.0% 31.0% 36.0% 39.6%
Maximum Effective Federal Rate/1/ 29.4 32.6 37.8 41.6
Wisconsin Tax Rate 6.9 6.9 6.9 6.9
Maximum Effective Combined Rate/2/ 34.3 37.2 42.1 45.6
JUNE SEC TAX-FREE YIELD/3/ EQUIVALENT TAXABLE YIELDS
4.6% 7.0% 7.3% 7.9% 8.5%
</TABLE>
Past performance is no guarantee of future results.
/1/Based on federal rates adjusted for the maximum phase-out of itemized
deductions and personal exemptions.
/2/Based on the Wisconsin rate and the maximum effective federal rate, adjusted
to reflect the deductibility of state taxes.
/3/Yields are for the 30 days ended June 30, 1998.
<PAGE>
VALUE REPORT
Heartland Wisconsin Tax Free Fund
Green Bay's Winning Tradition
Although upset by the Denver Broncos in this year's Super Bowl, the Green Bay
Packers have extended their winning tradition. We think the Housing Authority of
the City of Green Bay, Wisconsin bonds, with a 6.15% coupon due 12/1/30, might
also be winners for the Fund's shareholders.*
Proceeds from these bonds provided financing for Moraine Ridge Limited
Partnership, a 101 unit multifamily housing project for elderly persons. Built
in 1990, Moraine Ridge has a 90% occupancy rate and a full time property manager
and rental agent. The bonds are insured by the Federal Housing Authority (FHA)
and as such, are rated AAA by Standard & Poor's.
America is aging. There are now approximately 34 million Americans 65 years and
older, constituting about 13% of the total population. This number is projected
to grow to 69 million senior citizens, representing 20% of the total population
by the year 2030. Currently, there are 3.7 million Americans age 85 or over.
This group is expected to increase to 8.5 million over the same period. We think
there is a compelling demographic case for investing in the bonds of entities
serving older Americans. This is just one example of the "Aging of America"
securities in our portfolio.
*On June 30, 1998, the Fund's City of Green Bay Housing Authority bonds (Moraine
Ridge)--6.15% due 12/1/30--were valued at $2,662,500 representing 1.94% of the
Fund's net assets.
[Photo of Pat Retzer]
Patrick J. Retzer, CPA
Portfolio Co-Manager
[Photo of Tom Conlin]
Thomas J. Conlin, CFA
Portfolio Co-Manager
"We think there is a compelling demographic case for investing in the bonds of
entities serving older Americans."
2
<PAGE>
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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Since inception
YTD/1/ 1-year 3-year 5-year (4/3/92)
<S> <C> <C> <C> <C> <C>
Heartland Wisconsin
Tax Free Fund 2.8% 7.4% 7.4% 5.7% 6.5%
Lehman 20-Year
Municipal Bond Index 3.0 10.2 9.0 7.1 8.5
</TABLE>
/1/ Not annualized.
The Lehman 20-Year Municipal Bond Index is an unmanaged index of certain
investment grade municipal securities with maturities between 17 and 22 years.
Total returns include reinvestment of dividends and capital gain distributions.
<TABLE>
<CAPTION>
GENERAL INFORMATION
<S> <C>
Sales commission............... None
Share price.................... $10.47
Weighted average maturity...... 8.1 yrs.
Weighted average duration...... 5.4 yrs.
Net assets..................... $136.9 mil.
Number of holdings............. 218
</TABLE>
<TABLE>
<CAPTION>
TOP 5 HOLDINGS COUPON MATURITY % OF NET ASSETS
<S> <C> <C> <C>
Milwaukee Redevelopment Auth. - WI Ave. ....... 5.5% 09/01/2012 8.4%
Wisconsin Center - Rev. Bnds. - Pub. Imp....... 5.7 12/15/2020 7.4
SE WI Professional Baseball Park Dist. ........ 5.8 12/15/2021 2.9
Guam Power Authority - Series A ............... 6.3 10/01/2012 2.6
Milwaukee Redevelopment Auth. - Multifamily ... 6.3 08/01/2038 2.5
</TABLE>
PORTFOLIO COMPOSITION
[graphic - A pie chart displays categories of the Heartland Wisconsin Tax
Free Fund's Portfolio as of 6/30/98: Housing at 46.3%; Education at 15.8%;
Industrial dev. at 13.6%; Public facilities at 12.6%; Other at 11.7%. Other
is further broken down as follows: Utilities at 3.8%; G.O. at 3.3%; Cash &
equiv. at 1.3%; Transportation at 0.9%; Health care at 0.7%; Other at 1.7%]
All statistics are as of June 30, 1998.
3
<PAGE>
Heartland's Risk/Return Spectrum
[graphic - A spectrum illustrates the potential risk/return of the following
categories, both the categories and the funds within them being listed in an
aggregate order of lower to higher potential risk/return, respectively: Money
Market, which includes the Firstar Money Market; Bond, which includes Short
Duration High-Yield Municipal, U.S. Government Securities, Wisconsin Tax Free
and High-Yield Municipal Bond; and Equity or Stock, which includes Large Cap
Value, Value Plus, Mid Cap Value, Value and Small Cap Contrarian.]
In general, with mutual funds, as with other investments, the higher the risk,
the greater the potential return over time. Each investor should choose an
investment strategy that matches his or her particular investment goals.
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. There is no assurance that the Firstar Money Market Fund will be able to
maintain a stable net asset value of $1. Firstar Funds are not deposits or
obligations of or guaranteed by Firstar Bank or its affiliates, nor are they
insured by the FDIC, the U.S. Government or any governmental agency. For more
complete information, including charges and expenses, call Heartland Advisors at
1-800-432-7856 for a prospectus. Read it carefully before you invest.
4
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS . June 30, 1998 (Unaudited)
- -----------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS - 98.7% COUPON MATURITY VALUE
- -----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
WISCONSIN - 88.1%
$ 20,000 Amery, WI Housing Authority - Revenue Bonds........... 7.375% 05/01/2005 $ 21,100
300,000 Appleton, WI Housing Authority - Industrial Park...... 6.500 10/01/2016 303,375
1,390,000 Appleton, WI Housing Authority - Industrial Park...... 6.750 10/01/2026 1,405,637
125,000 Barron, WI Housing Authority - Maplecroft Project..... 0.000 10/01/2004 90,469
130,000 Barron, WI Housing Authority - Maplecroft Project..... 0.000 10/01/2008 74,100
35,000 Barron, WI Housing Authority - Maplecroft Project..... 0.000 10/01/2005 23,975
520,000 Barron, WI Housing Authority - Maplecroft Project..... 5.375 10/01/2011 522,600
130,000 Barron, WI Housing Authority - Maplecroft Project..... 0.000 10/01/2006 83,688
85,000 Barron, WI Housing Authority - Maplecroft Project..... 0.000 10/01/2007 51,638
900,000 Bristol, WI Community Development Authority........... 6.125 03/01/2012 949,500
3,085,000 Brown County, WI Housing Authority - R.P. Terrace..... 6.500 06/01/2019 3,231,537
200,000 Brown County, WI Housing Auth. - Univ. Village Housing 5.400 04/01/2017 203,250
75,000 Dane County, WI Housing Authority - Forest Harbor Apts 5.950 07/01/2013 78,094
25,000 Dane County, WI Housing Authority - Forest Harbor Apts 6.000 07/01/2014 26,063
435,000 Deforest, WI Redev. Auth. - Lease Revenue Bonds....... 6.250 02/01/2018 460,012
265,000 Deforest, WI Redev. Auth. - Lease Revenue Bonds....... 6.200 02/01/2014 284,212
685,000 Eau Claire, WI Housing Auth. - London Hill............ 6.250 05/01/2015 703,837
550,000 Elkhart Lake, WI Community Development Authority...... 6.000 04/01/2015 574,062
195,000 Evansville, WI Housing Authority - Baker Block Project 5.750 12/01/2016 195,306
250,000 Franklin, WI Community Development Authority.......... 6.150 04/01/2012 262,812
890,000 Franklin, WI Community Development Authority.......... 6.100 04/01/2010 933,388
1,000,000 Franklin, WI Community Development Authority.......... 6.050 04/01/2008 1,056,250
250,000 Franklin, WI Community Development Authority.......... 5.850 04/01/2006 263,437
10,000 Franklin, WI Community Development Authority.......... 5.400 04/01/2003 10,000
380,000 Franklin, WI Community Development Authority.......... 5.250 04/01/2002 382,850
1,000,000 Glendale, WI Community Development Authority.......... 5.400 09/01/2018 995,000
2,940,000 Green Bay, WI Housing Authority - Pheasant Run Project 6.500 09/01/2019 3,061,275
2,500,000 Green Bay, WI Housing Authority - Moraine Ridge (a)... 6.150 12/01/2030 2,662,500
200,000 Hartford, WI Community Development Authority.......... 5.800 12/01/2005 215,000
100,000 Hartford, WI Community Development Authority.......... 5.450 12/01/2002 105,250
210,000 Hartford, WI Community Development Authority.......... 6.000 12/01/2007 225,225
225,000 Hartford, WI Community Development Authority.......... 6.100 12/01/2008 242,437
10,000 Hudson, WI Christian Community Home................... 8.000 07/01/2005 10,200
75,000 Hudson, WI Christian Community Home................... 6.800 05/01/2009 76,406
65,000 Hudson, WI Christian Community Home................... 6.900 05/01/2010 66,300
250,000 Hudson, WI Christian Community Home................... 7.000 05/01/2023 254,375
55,000 Hudson, WI Christian Community Home................... 6.700 05/01/2008 56,031
250,000 Hudson, WI Wintergreen Apartments..................... 6.000 07/01/2020 250,000
390,000 Jackson, WI Community Development Authority........... 7.000 12/01/2013 429,975
500,000 Jackson, WI Community Development Authority........... 7.000 12/01/2017 546,250
515,000 Jackson, WI Community Development Authority........... 7.000 12/01/2016 565,856
430,000 Jackson, WI Community Development Authority........... 7.000 12/01/2014 469,775
345,000 Jackson, WI Community Development Authority........... 7.000 12/01/2015 376,912
350,000 Jackson, WI Community Development Authority........... 7.000 12/01/2012 382,375
285,000 Jackson, WI Community Development Authority........... 6.900 12/01/2010 315,637
180,000 Jackson, WI Community Development Authority........... 6.700 12/01/2008 199,800
105,000 Jackson, WI Community Development Authority........... 6.600 12/01/2007 116,419
160,000 Jackson, WI Community Development Authority........... 6.500 12/01/2006 177,200
260,000 Jackson, WI Community Development Authority........... 6.800 12/01/2009 288,275
1,760,000 La Crosse, WI Housing Authority - Forest Park Project. 6.375 12/01/2018 1,819,400
1,100,000 La Crosse, WI Housing Authority - Ping Manor Project.. 6.375 04/01/2012 1,149,500
720,000 La Crosse, WI Housing Authority - Ping Manor Project.. 6.000 04/01/2005 741,600
350,000 La Crosse, WI Housing Authority - Washburn............ 6.500 10/01/2026 363,562
1,000,000 La Crosse, WI Housing Authority - Meadow Wood Project. 6.250 01/01/2028 1,007,500
100,000 Little Chute, WI Community Development Authority..... 5.625 03/01/2019 104,500
305,000 Madison, WI CDA - Dempsey Manor Project............... 6.400 10/01/2018 316,437
160,000 Madison, WI CDA - Dempsey Manor Project............... 6.665 10/01/2025 164,600
1,435,000 Madison, WI CDA - Edgewood College.................... 6.250 04/01/2014 1,519,306
95,000 Madison, WI CDA - Greentree Project - Series A........ 7.300 09/01/2032 97,256
1,000,000 Madison, WI CDA - Meriter Retirement Project.......... 6.125 12/01/2019 1,083,750
</TABLE>
5
<PAGE>
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS (CONT'D) - June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS - 98.7% [cont'd] COUPON MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------
WISCONSIN - 88.1% [cont'd]
<C> <S> <C> <C> <C>
$ 45,000 Madison, WI CDA - Monticello Apartments Project........... 7.125% 04/01/2009 $ 46,649
195,000 Madison, WI CDA - Second Mortgage - Revenue Bonds......... 5.875 07/01/2016 208,894
100,000 Marinette, WI Housing Authority - Multifamily - Series A.. 6.750 02/01/2024 104,500
165,000 Markesan, WI CDA - Elderly Housing Revenue Bonds.......... 6.750 10/01/2009 172,838
190,000 Markesan, WI CDA - Elderly Housing Revenue Bonds.......... 6.900 10/01/2011 199,737
635,000 Mayville, WI Community Development Authority.............. 5.600 04/01/2018 638,175
100,000 Menomonee Falls, WI CDA - Village Square Project.......... 5.200 09/01/2009 97,875
950,000 Menomonee Falls, WI CDA - Village Square Project.......... 5.350 09/01/2016 920,312
215,000 Milwaukee, WI Housing Authority - Blatz Apartments........ 7.500 12/01/2028 223,869
3,000,000 Milwaukee, WI Redevelopment Auth. - Campus Town........... 5.700 11/01/2018 3,120,000
55,000 Milwaukee, WI Redevelopment Auth. - Dynapro, Inc.......... 5.300 12/01/2007 56,994
65,000 Milwaukee, WI Redevelopment Auth. - Dynapro, Inc.......... 5.350 12/01/2008 67,275
55,000 Milwaukee, WI Redevelopment Auth. - Dynapro, Inc.......... 5.400 12/01/2010 56,375
225,000 Milwaukee, WI Redevelopment Auth. - Dynapro, Inc.......... 5.500 12/01/2013 230,625
1,955,000 Milwaukee, WI Redevelopment Auth. - MSOE - Series A....... 6.000 10/01/2017 2,006,319
1,385,000 Milwaukee, WI Redevelopment Auth. - MSOE - Series B....... 6.000 10/01/2017 1,417,894
3,250,000 Milwaukee, WI Redevelopment Auth. - Multifamily........... 6.300 08/01/2038 3,420,625
10,000 Milwaukee, WI Redevelopment Auth. - School Improve........ 0.000 03/01/2004 7,088
1,755,000 Milwaukee, WI Re. Auth. - Wisc. Ave/M.L. King, Jr. Dr..... 5.600 09/01/2009 1,851,525
11,000,000 Milwaukee, WI Re. Auth. - Wisc. Ave/M.L. King, Jr. Dr. (a) 5.500 09/01/2012 11,453,750
650,000 New Berlin, WI Housing Authority - Apple Glen............. 6.700 11/01/2020 693,062
1,210,000 New Berlin, WI Housing Authority - Apple Glen............. 6.700 11/01/2017 1,290,162
65,000 New Berlin, WI Housing Authority - Apple Glen............. 0.000 11/01/2007 39,163
70,000 New Berlin, WI Housing Authority - Apple Glen............. 0.000 05/01/2010 35,613
65,000 New Berlin, WI Housing Authority - Apple Glen............. 0.000 11/01/2009 33,881
70,000 New Berlin, WI Housing Authority - Apple Glen............. 0.000 05/01/2009 37,450
70,000 New Berlin, WI Housing Authority - Apple Glen............. 0.000 05/01/2005 49,000
70,000 New Berlin, WI Housing Authority - Apple Glen............. 0.000 05/01/2007 43,400
65,000 New Berlin, WI Housing Authority - Apple Glen............. 0.000 11/01/2004 46,800
65,000 New Berlin, WI Housing Authority - Apple Glen............. 0.000 11/01/2006 41,681
65,000 New Berlin, WI Housing Authority - Apple Glen............. 0.000 11/01/2003 49,481
65,000 New Berlin, WI Housing Authority - Apple Glen............. 0.000 11/01/2005 44,281
70,000 New Berlin, WI Housing Authority - Apple Glen............. 0.000 05/01/2006 46,113
165,000 New Berlin, WI Housing Authority - Pinewood Creek......... 6.800 11/01/2012 170,981
190,000 New Berlin, WI Housing Authority - Pinewood Creek......... 6.900 11/01/2014 202,350
135,000 New Berlin, WI Housing Authority - Pinewood Creek......... 6.900 05/01/2014 139,894
165,000 New Berlin, WI Housing Authority - Pinewood Creek......... 6.850 11/01/2013 177,994
160,000 New Berlin, WI Housing Authority - Pinewood Creek......... 6.850 05/01/2013 165,800
105,000 New Berlin, WI Housing Authority - Pinewood Creek......... 6.500 05/01/2009 107,888
155,000 New Berlin, WI Housing Authority - Pinewood Creek......... 6.700 11/01/2011 160,231
150,000 New Berlin, WI Housing Authority - Pinewood Creek......... 6.700 05/01/2011 155,063
125,000 New Berlin, WI Housing Authority - Pinewood Creek......... 6.600 05/01/2010 133,906
125,000 New Berlin, WI Housing Authority - Pinewood Creek......... 6.400 11/01/2008 128,438
125,000 New Berlin, WI Housing Authority - Pinewood Creek......... 6.400 05/01/2008 128,438
1,015,000 New Berlin, WI Housing Authority - Pinewood Creek......... 7.125 05/01/2024 1,083,512
80,000 Oak Creek, WI Housing Authority - Country Oaks II......... 6.000 08/01/2010 82,600
2,980,000 Oak Creek, WI Housing Authority - Country Oaks II......... 6.300 08/01/2028 3,196,050
1,440,000 Oak Creek, WI Housing Authority - Country Oaks II......... 6.200 08/01/2017 1,486,800
10,000 Oak Creek, WI Housing Authority - Multifamily............. 7.750 03/01/2031 10,350
125,000 Oak Creek, WI Housing Authority - Wood Creek.............. 0.000 01/20/2013 54,688
2,130,000 Oak Creek, WI Housing Authority - Wood Creek.............. 5.625 07/20/2029 2,167,275
1,000,000 Oak Creek, WI Housing Authority - Wood Creek.............. 5.500 07/20/2019 1,016,250
60,000 Oak Creek, WI Housing Authority - Wood Creek.............. 0.000 01/20/2014 24,675
125,000 Oak Creek, WI Housing Authority - Wood Creek.............. 0.000 07/20/2013 52,813
65,000 Oak Creek, WI Housing Authority - Wood Creek.............. 0.000 01/20/2012 30,144
125,000 Oak Creek, WI Housing Authority - Wood Creek.............. 0.000 07/20/2011 60,000
125,000 Oak Creek, WI Housing Authority - Wood Creek.............. 0.000 01/20/2011 61,719
35,000 Oak Creek, WI Housing Authority - Wood Creek.............. 0.000 01/20/2010 18,375
50,000 Oak Creek, WI Housing Authority - Wood Creek.............. 0.000 07/20/2007 30,563
100,000 Oak Creek, WI Housing Authority - Wood Creek.............. 27.750 07/20/1998 100,884
</TABLE>
6
<PAGE>
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS (CONT'D) - June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS - 98.7% [cont'd] COUPON MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------
WISCONSIN - 88.1% [cont'd]
<C> <S> <C> <C> <C>
$ 3,000,000 Oconto Falls, WI Community Development Authority......... 7.750% 12/01/2022 $ 3,183,750
335,000 Omro, WI CDA - Revenue Bonds............................. 5.875 12/01/2011 357,612
50,000 Omro, WI CDA - Revenue Bonds............................. 5.750 12/01/2006 54,000
200,000 Outagamie, WI Housing Authority - First Mortgage......... 5.000 11/15/2003 200,250
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
200,000 River Falls, WI Housing Authority - Lutheran Home Project 5.750 04/01/2028 200,500
170,000 Schofield, WI CDA - Lease Revenue........................ 6.000 10/01/2012 179,563
500,000 Schofield, WI CDA - Lease Revenue........................ 6.200 10/01/2017 526,250
970,000 SE WI Professional Baseball Park District................ 0.000 12/15/2015 401,337
1,000,000 SE WI Professional Baseball Park District................ 0.000 12/15/2017 371,250
3,700,000 SE WI Professional Baseball Park District................ 5.750 12/15/2021 3,898,875
1,315,000 SE WI Professional Baseball Park District................ 5.700 12/15/2017 1,390,612
315,000 Sheboygan, WI Housing Authority - Multifamily Housing.... 6.900 02/01/2024 326,812
125,000 Sheboygan, WI Housing Authority - Rocky Knoll Project.... 5.300 12/01/2016 125,625
175,000 Sheboygan, WI Housing Authority - Rocky Knoll Project.... 5.250 12/01/2013 173,469
35,000 Slinger, WI Redevelopment Auth. Lease Revenue............ 5.800 09/01/2007 36,094
95,000 Slinger, WI Redevelopment Auth. Lease Revenue............ 5.850 09/01/2008 97,850
540,000 Slinger, WI Redevelopment Auth. Lease Revenue............ 6.250 09/01/2017 558,225
250,000 Sparta, WI Housing Authority - Morrow Memorial Home...... 5.750 06/01/2022 250,312
560,000 Stevens Point, WI CDA - Mrtge. Refunding - Edgewater..... 6.625 09/01/2009 593,600
100,000 Stevens Point, WI CDA - Mrtge. Refunding - Edgewater..... 6.500 09/01/2006 106,750
435,000 Sturtevant, WI CDA - Redevelopment Lease................. 5.700 12/01/2009 453,487
375,000 Sturtevant, WI CDA - Redevelopment Lease................. 5.800 12/01/2010 391,875
200,000 Sturtevant, WI CDA - Redevelopment Lease................. 5.900 12/01/2011 209,250
1,000,000 Sturtevant, WI CDA - Redevelopment Lease................. 6.000 12/01/2015 1,053,750
200,000 Sturtevant, WI CDA - Redevelopment Lease................. 6.500 12/01/2015 216,750
1,190,000 St. Croix Falls, WI CDA Lease Revenue.................... 6.400 12/01/2014 1,252,475
115,000 St. Croix Falls, WI CDA Lease Revenue.................... 6.000 12/01/2007 121,181
105,000 St. Croix Falls, WI CDA Lease Revenue.................... 5.900 12/01/2006 110,250
310,000 Superior, WI Housing Authority - St. Francis Project.... 6.000 01/20/2022 323,175
195,000 Sussex, WI CDA - Revenue Bond........................... 5.700 04/01/2007 203,775
1,900,000 Sussex, WI CDA - Revenue Bond........................... 6.100 04/01/2015 1,999,750
270,000 Two Rivers, WI CDA - Arch Forest Project................. 6.350 12/15/2012 277,425
500,000 Waukesha, WI HA - Multifamily - Brookfield Woods......... 6.750 12/01/2034 513,125
5,000 Waukesha, WI HA - Multifamily - Summit Woods............. 7.375 12/01/2024 5,000
405,000 Waukesha, WI HA - Multifamily - The Court Apartments..... 5.800 04/01/2025 415,631
1,000,000 Waukesha, WI HA - Multifamily - The Court Apartments..... 6.000 04/01/2036 1,012,500
2,800,000 Waukesha, WI HA - The Arboretum Project.................. 5.250 12/01/2021 2,803,500
1,500,000 Waukesha, WI HA - Multifamily - Oak Hill Terrace Project. 5.450 06/01/2027 1,513,125
1,000,000 Waukesha, WI HA - Westgrove Woods - A.................... 6.000 12/01/2031 1,052,500
715,000 Waukesha, WI HA - Westgrove Woods - C.................... 6.750 02/01/2027 738,237
95,000 Waupaca, WI CDA - Series A............................... 6.100 10/01/2008 98,800
100,000 Waupaca, WI CDA - Series A............................... 6.200 10/01/2010 103,750
110,000 Waupaca, WI CDA - Series A............................... 6.200 10/01/2011 113,988
120,000 Waupaca, WI CDA - Series A............................... 6.200 10/01/2012 124,200
100,000 Waupaca, WI CDA - Series A............................... 6.100 10/01/2009 103,625
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project............. 0.000 05/01/2010 52,894
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project............. 0.000 05/01/2009 56,438
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project............. 0.000 11/01/2009 52,125
1,060,000 Wauwatosa, WI HA - Hawthorne Terrace Project............. 6.700 11/01/2019 1,106,375
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project............. 0.000 11/01/2010 49,000
1,200,000 Wauwatosa, WI HA - Hawthorne Terrace Project............. 6.700 11/01/2015 1,255,500
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project............. 0.000 05/01/2008 60,506
615,000 Wauwatosa, WI HA - Hawthorne Terrace Project............. 6.700 11/01/2022 641,906
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project............. 0.000 11/01/2008 55,875
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project............. 0.000 11/01/2006 64,000
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project............. 0.000 11/01/2007 60,250
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project............. 0.000 05/01/2004 77,438
75,000 Wauwatosa, WI HA - Hawthorne Terrace Project............. 0.000 05/01/2003 58,594
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project............. 0.000 11/01/2003 76,125
</TABLE>
7
<PAGE>
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS (CONT'D) - June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS 98.7% [cont'd] COUPON MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------
WISCONSIN - 88.1% [cont'd]
<C><S> <C> <C> <C> <C>
$ 70,000 Wauwatosa, WI HA - Hawthorne Terrace Project......... 0.000% 05/01/2005 $ 48,738
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project......... 0.000 11/01/2004 71,875
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project......... 0.000 05/01/2007 64,969
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project......... 0.000 11/01/2005 67,750
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project......... 0.000 05/01/2006 69,038
2,720,000 West Allis, WI CDA - Poblocki Investments Project.... 6.100 05/01/2007 2,879,800
150,000 Whitewater, WI Multifamily Housing - Revenue Bonds... 5.375 11/15/2005 154,688
100,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds. 5.625 05/01/2005 102,500
115,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds. 5.625 05/01/2007 113,275
120,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds. 5.625 05/01/2008 117,150
125,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds. 5.625 05/01/2009 120,938
135,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds. 5.625 05/01/2010 135,338
105,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds. 5.625 05/01/2006 104,213
10,000 Winnebago County, WI Housing Authority - Series A.... 6.200 03/01/2001 10,350
15,000 Winnebago County, WI Housing Authority - Series A.... 6.300 03/01/2002 15,675
10,000 Winnebago County, WI Housing Authority - Series A.... 6.000 03/01/1999 10,092
10,000 Winnebago County, WI Housing Authority - Series A.... 6.100 03/01/2000 10,225
380,000 Winnebago County, WI Housing Authority - Series A.... 7.125 03/01/2022 394,250
195,000 Winnebago County, WI Housing Authority - Series A.... 6.875 03/01/2012 201,825
9,650,000 Wisconsin Center - Revenue Bond - Public Improvements 5.700 12/15/2020 10,084,250
2,500,000 Wisconsin Center - Revenue Bond - Public Improvements 0.000 12/15/2026 546,875
90,000 WHEDA Home Ownership................................. 0.000 12/01/2007 36,225
60,000 Wittenberg, WI HA - Multifamily - Forest Park........ 7.200 06/20/2030 60,817
200,000 Wrightstown, WI Community Development Authority..... 5.950 06/01/2014 208,250
600,000 Wrightstown, WI Community Development Authority..... 6.000 06/01/2019 623,250
-------------
120,724,405
-------------
GUAM 7.3%
3,400,000 Guam Power Authority - Series A...................... 6.300 10/01/2012 3,608,250
250,000 Guam Power Authority - Series A...................... 5.250 10/01/2013 250,312
1,000,000 Guam Power Authority - Series A...................... 6.400 10/01/2005 1,081,250
1,000,000 Guam Power Authority - Series A...................... 5.250 10/01/2023 988,750
1,000,000 Guam Government G.O. - Series A...................... 5.375 11/15/2013 1,008,750
3,000,000 Guam Government G.O. - Series A...................... 5.400 11/15/2018 3,018,750
-------------
9,956,062
-------------
PUERTO RICO 1.6%
420,000 Puerto Rico Commonwealth - Public Improvement........ 5.500 07/01/2013 429,975
1,205,000 Puerto Rico Commonwealth Hwy./Transportation......... 5.500 07/01/2017 1,227,594
990,000 Puerto Rico Electric Power Authority - Series O...... 0.000 07/01/2017 372,487
135,000 Puerto Rico Housing Finance Corporation - Multifamily 7.500 10/01/2015 141,244
-------------
2,171,300
-------------
VIRGIN ISLANDS 1.7%
1,250,000 Virgin Islands Public Finance Authority.............. 5.875 10/01/2018 1,287,500
1,000,000 Virgin Islands Public Finance Authority.............. 6.000 10/01/2022 1,032,500
-------------
2,320,000
-------------
TOTAL INVESTMENTS (Cost $129,417,009)................ 98.7% $135,171,767
Cash and receivables, less liabilities............... 1.3 1,770,775
------- -------------
TOTAL NET ASSETS..................................... 100.0% $136,942,542
======= =============
</TABLE>
(a) All or a portion of security committed to cover margin
requirements for futures contracts.
The accompanying Notes to Financial Statements are an integral
part of this Schedule.
8
<PAGE>
HEARTLAND WISCONSIN TAX FREE FUND
STATEMENT OF ASSETS AND LIABILITIES - June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
ASSETS:
<S> <C>
Investments in securities, at cost............................ $129,417,009
============
Investments in securities, at value........................... $135,171,767
Cash.......................................................... 430,385
Receivable from fund shares sold.............................. 85,134
Accrued interest.............................................. 1,614,899
Prepaid expenses.............................................. 4,161
------------
Total Assets............................................. 137,306,346
------------
LIABILITIES:
Payable for fund shares redeemed.............................. 193,633
Payable to Advisor for management fee......................... 77,544
Variation margin on open futures contracts.................... 28,519
Accrued expenses.............................................. 64,108
------------
Total Liabilities........................................ 363,804
------------
TOTAL NET ASSETS................................................... $136,942,542
============
NET ASSETS CONSIST OF:
Paid in capital............................................... $132,068,699
Accumulated undistributed net realized losses on investments.. (833,415)
Net unrealized appreciation on investments.................... 5,707,258
------------
TOTAL NET ASSETS................................................... $136,942,542
============
SHARES OUTSTANDING, $.001 par value (100,000,000 shares
authorized]....................................................... 13,073,973
------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE..... $ 10.47
============
</TABLE>
STATEMENT OF OPERATIONS
For the period from January 1, 1998 to June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest...................................................... $ 3,841,791
------------
Total investment income.................................. 3,841,791
------------
EXPENSES:
Management fees............................................... 431,618
Transfer agent fees........................................... 40,131
Custodian fees................................................ 13,642
Printing and communications................................... 12,934
Postage....................................................... 8,794
Audit fees.................................................... 6,942
Directors' fees............................................... 3,483
Legal fees.................................................... 2,151
Registration fees............................................. 1,500
Other operating expenses...................................... 23,358
------------
Total expenses........................................... 544,553
Less: Fees paid indirectly............................... ---
------------
Net expenses............................................. 544,553
------------
NET INVESTMENT INCOME......................................... 3,297,238
------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on:
Securities............................................... 488,796
Futures contracts........................................ (4,598)
Net increase (decrease) in unrealized appreciation on:
Securities............................................... 77,054
Futures contracts........................................ (104,288)
------------
TOTAL REALIZED AND UNREALIZED GAINS ON INVESTMENTS............ 456,964
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......... $ 3,754,202
============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
9
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND WISCONSIN TAX FREE FUND
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------------
Jan. 1, 1998 to Year ended
June 30, 1998 Dec. 31,
(Unaudited) 1997
----------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income.............................................. $ 3,297,238 $ 6,371,342
Net realized gains (losses) on investments......................... 484,198 (782,935)
Net increase (decrease) in unrealized appreciation on investments.. (27,234) 4,203,774
--------------- ------------
Net increase in net assets resulting from operations............. 3,754,202 9,792,181
--------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................. (3,297,238) (6,371,342)
--------------- ------------
Total distributions to shareholders.............................. (3,297,238) (6,371,342)
--------------- ------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued........................................ 13,147,664 18,773,769
Reinvested dividends from net investment income.................... 2,376,894 4,507,242
Cost of shares redeemed............................................ (10,387,022) (19,898,571)
--------------- ------------
Net increase in net assets derived from Fund share activities.... 5,137,536 3,382,440
--------------- ------------
TOTAL INCREASE IN NET ASSETS......................................... 5,594,500 6,803,279
NET ASSETS AT THE BEGINNING OF THE PERIOD............................ 131,348,042 124,544,763
--------------- ------------
NET ASSETS AT THE END OF THE PERIOD.................................. $ 136,942,542 $131,348,042
=============== ============
UNDISTRIBUTED NET INVESTMENT INCOME.................................. $ -- $ --
=============== ============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
10
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Wisconsin Tax Free Fund
-----------------------------------------------------------------------------------
For the six months
ended June 30, 1998 For the year ended December 31,
(Unaudited) 1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period....... $ 10.44 $ 10.16 $ 10.30 $ 9.21 $ 10.38 $ 9.85
Income (loss) from investment operations:
Net investment income.................... 0.26 0.52 0.51 0.51 0.51 0.49
Net realized and unrealized gains
(losses) on investments.................. 0.03 0.28 (0.14) 1.09 (1.17) 0.55
-------- -------- -------- -------- -------- -------
Total income (loss) from investment
operations.......................... 0.29 0.80 0.37 1.60 (0.66) 1.04
Less distributions from:
Net investment income.................... (0.26) (0.52) (0.51) (0.51) (0.51) (0.49)
Net realized gains on investments........ -- -- -- -- -- (0.02)
-------- -------- -------- -------- -------- -------
Total distributions.................. (0.26) (0.52) (0.51) (0.51) (0.51) (0.51)
-------- -------- -------- -------- -------- -------
Net asset value, end of period............. $ 10.47 $ 10.44 $ 10.16 $ 10.30 $ 9.21 $ 10.38
======== ======== ======== ======== ======== =======
Total Return/(1)/.......................... 2.9%/(2)/ 8.1% 3.8% 17.8% (6.5)% 10.8%
Ratios and Supplemental Data
Net assets, end of period (in thousands). $136,943 $131,348 $124,545 $118,513 $101,749 $99,350
Ratio of net expenses to average
net assets.............................. 0.81%/(3)/ 0.81%/(4)/ 0.80%/(4)/ 0.84% 0.85% 0.84%
Ratio of net investment income to
average net assets...................... 4.91%/(3)/ 5.05% 5.12% 5.23% 5.28% 4.81%
Portfolio turnover rate.................. 8% 8% 14% 11% 22% 6%
</TABLE>
(1) 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.
(2) Not annualized.
(3) Annualized.
(4) The ratio does not include fees paid indirectly. If the Fund did not have
fees paid indirectly, the expense ratio would have been 0.82% for 1997 and
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.
11
<PAGE>
HEARTLAND WISCONSIN TAX FREE FUND
NOTES TO FINANCIAL STATEMENTS . June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
(1) Organization
Heartland Group, Inc. (the "Corporation") is registered as an open-end
management company under the Investment Company Act of 1940. The Wisconsin
Tax Free Fund (the "Fund"), which is a non-diversified Fund, is one of the
nine series of funds issued by the Corporation at June 30, 1998.
(2) Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Fund in 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 are 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 its shareholders. The
Fund accordingly paid no Federal income taxes, and no Federal income tax
provision is required.
At June 30, 1998, the Fund had Federal income tax capital loss
carryforwards of $534,679 expiring in 2003 and $333,310 expiring in 2005.
The Fund does not intend to make a distribution of any future realized
capital gains until its Federal income tax capital loss carryforward is
completely utilized.
Statement of Position 93-2 requires that permanent financial reporting and
tax differences be reclassified to paid in capital. Net assets are not
affected by these reclassifications.
(c) The Fund records security and shareholder transactions on 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.
(d) The Fund is charged for those expenses that are directly attributable to
it. Expenses that are not directly attributable to the Fund are typically
allocated among all Funds issued by the Corporation in proportion to their
respective net assets, number of open shareholder accounts, or net sales,
as applicable.
(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 a futures contract, 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 on a daily basis 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 the following open short futures contracts at June 30, 1998:
<TABLE>
<CAPTION>
Number Expiration Unrealized
Type of Contracts Date Depreciation
- ---- ------------- ---------- -------------
<S> <C> <C> <C>
U.S. Treasury Bond Index (100) Sept. 1998 $(47,500)
</TABLE>
12
<PAGE>
(f) The Fund has entered into a fee arrangement with its custodian bank
and transfer agent which provides for a reduction in custody and
transfer agent fees based upon net amounts of uninvested cash
balances. This reduction of expenses, if any, 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.
(3) Credit Facility
Deutsche Bank AG has made available to seven of the nine series of funds
issued by the Corporation, including the Wisconsin Tax Free Fund, a $70
million credit facility pursuant to a Credit Agreement dated March 31,
1998. Outstanding principal amounts under the credit facility bear interest
at a rate per annum equal to the NIBOR rate plus 0.5% or the prime rate.
Commitment fees are computed at a rate per annum equal to 0.08% of the
Fund's proportional daily average unutilized credit. During the period from
March 31, 1998 through June 30, 1998 the Fund did not borrow against the
facility. Commitment fees for the period from March 31, 1998 through June
30, 1998 were $917.
(4) 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 Corporation are also officers and/or
directors of the Advisor; however, they receive no compensation from the
Fund.
As permitted under Rule 10f-3 of the Investment Company Act of 1940, the
Board of Directors of the Corporation 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 Advisor is a member.
(5) Investment Transactions
During the period from January 1, 1998 through June 30, 1998, cost of
purchases and proceeds from sales of securities, other than short-term
obligations, were $12,042,297 and $10,488,445, respectively.
At June 30, 1998, the gross unrealized appreciation and depreciation on
securities for tax purposes were $5,807,567 and $52,809, respectively,
netting to $5,754,758.
Cost of investments is substantially the same for financial reporting
purposes and federal income tax purposes.
(6) Fund Share Transactions
For the period from January 1, 1998 through June 30, 1998, Fund share
transactions were as follows:
<TABLE>
<S> <C>
Shares issued................................................. 1,257,933
Reinvested dividends from net investment income............... 227,500
Shares redeemed............................................... (993,868)
----------
Net increase in Fund shares................................... 491,565
==========
For the year ended December 31, 1997, Fund share transactions
were as follows:
Shares issued................................................. 1,831,502
Reinvested dividends from net investment income............... 439,922
Shares redeemed............................................... (1,946,717)
----------
Net increase in Fund shares................................... 324,707)
==========
</TABLE>
13
<PAGE>
The Heartland Family of Funds
Large Cap Value Fund
Mid Cap Value Fund
Value Plus Fund
U.S. Government Securities Fund
Small Cap Contrarian Fund
(closed to new accounts)
Value Fund
(closed to new accounts)
Short Duration High-Yield
Municipal Fund
High-Yield Municipal Bond Fund
Wisconsin Tax Free Fund
(available to Wisconsin residents only)
Firstar Money Market Fund
1.800.432.7856
[Logo] Heartland Funds
------------------------
AMERICA'S VALUE INVESTOR
790 N. Milwaukee Street, Milwaukee, WI 53202
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.
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. Complete
portfolios for the Funds will be included in the Annual and Semi-Annual Reports
to Shareholders. Wisconsin Tax Free Fund income may be subject to alternative
minimum tax and Municipal Fund income may be subject to state, local and
alternative minimum tax.
This material may only be used when preceded or accompanied by the Heartland
Wisconsin Tax Free Fund's prospectus. If you would like more complete
information on any other Fund, including charges and expenses, please call for a
prospectus. Read it carefully before you invest.
Heartland Advisors, Inc., distributor. Member SIPC.
<PAGE>
[Logo] Heartland Funds
AMERICA'S VALUE INVESTOR
Value Report
June 30, 1998
Notes on value investing
for investors in the Heartland
Municipal Funds
Semi-Annual Report
to Shareholders
Heartland Short Duration
High-Yield Municipal Fund
Heartland High-Yield
Municipal Bond Fund
1
<PAGE>
VALUE REPORT
Dear Fellow Investor
Bond investors were dealt four aces in the second quarter of 1998: low
inflation; a restrained Federal Reserve; signs the domestic economy is finally
weakening; and disarray in Asian financial markets causing a "flight to quality"
in U.S. bonds. We're not gamblers, but we think the odds will continue to favor
bonds in the quarters ahead.
With record new issuance, it's been a buyer's market in municipal bonds. In
order to move all this new inventory, issuers dropped prices and yields rose.
Due to shrinking supply and strong demand, U.S. Treasury securities prices have
risen with yields declining. The result, we believe, is that municipal bonds are
now priced quite attractively relative to Treasuries. Since 1994, insured
municipal bond yields have been generally 84% to 86% of comparable maturity
Treasury securities. As of June 30, insured municipal bond yields were
approximately 91% of Treasuries--making municipal securities, in our view, an
even more appealing after-tax bargain.
Our Favorite Holiday
Christmas brings good cheer and great commercial fanfare. New Year's is
celebrated with confetti and champagne. Independence Day offers spectacular
fireworks displays and Labor Day, glorious picnics. Tax Freedom Day--the day
each year we're finished working for the government and can start working for
ourselves--yields only a great sigh of relief. But, it's our favorite holiday,
because it inspires people to think about tax-free investing.
This year, Tax Freedom Day for the average American fell on May 10*, the latest
it has occurred in history. Knowing our friends in Washington, despite prospects
for the first federal budget surplus in a generation, this grandest of all
holidays is likely to come even later in the years ahead. We can't do anything
about the taxes you pay on hard earned wages. We can help you reduce the taxes
you pay on investment income. So, let's raise a toast to Tax Freedom Day and if
you made a New Year's resolution to reduce your taxes, consider investing in one
of Heartland's municipal funds.
The Aging of America
With the population of older Americans increasing dramatically, there is a
powerful demographic argument for investing in the bonds of entities serving
older Americans.
In both the Short Duration High-Yield Municipal and High-Yield Municipal Bond
Funds, nursing homes and retirement facilities are currently the number 1 and 2
portfolio sectors.
We will detail a couple of the Funds' "Aging of America" portfolio holdings in
this value report.
Sincerely,
- -- Thomas J. Conlin, CFA
- -- Greg D. Winston, CFA
Portfolio Co-Managers
*Based on Tax Foundation economists' projection of a 35.4% effective tax rate
(including federal, state and local taxes) for the nation in 1998. Date will
vary due to differences in state tax rates.
<PAGE>
VALUE REPORT
INVESTMENT PERFORMANCE
Heartland Short Duration High-Yield Municipal Fund
Average annual total returns
June Equivalent taxable yield as of June 30, 1998
SEC yield/1/ at a 39.6% federal rate 1-year Since Inception
5.1% 8.4% 6.2% 6.6%
Heartland High-Yield Municipal Bond Fund
Average annual total returns
June Equivalent taxable yield as of June 30, 1998
SEC yield/1/ at a 39.6% federal rate 1-year Since Inception
6.2% 10.2% 10.3% 10.3%
Past performance is no guarantee of future results.
/1/ Yields are for the 30 days ending 6/30/98. Total returns include
reinvestment of all dividends and capital gain distributions. Performance
data reflects fee waivers in effect during the period. Without
subsidization of fees and expenses, total returns would have been lower,
and the SEC and equivalent taxable yields would have been 5.0% and 8.3% for
the Short Duration High-Yield Municipal Fund and 6.0% and 10.0% for the
High-Yield Municipal Bond Fund. Income may be subject to state, local and
alternative minimum tax.
These Funds invest primarily in medium- and lower-quality securities which have
higher yield potential but present greater investment and credit risk than
higher-quality securities. These risks may result in greater share price
volatility.
<PAGE>
VALUE REPORT
Heartland Short Duration High-Yield Municipal Fund
My Old Bohemian Home
The Bohemian Home for the Aged and Tabor Hills Health Care Community are located
on 35 acres in Naperville, Illinois, just west of metropolitan Chicago. The
Bohemian Home (for senior citizens of Czech and Slovak origin) consists of 82
townhouses, of which 76 are occupied, 3 have purchase deposits and the other 3
are being used as models. An additional 22 townhouses are being constructed in
1998, with purchase deposits on nearly all of them. Nearby Chicago's large
Bohemian population should continue to support demand for the home's independent
living townhouses. Tabor Hills Health Care Community is a 211-bed Medicaid-
certified, intermediate and skilled nursing facility in operation since April
1995. The facilities are managed by an administrator with over 20 years
experience in the health care industry.
As of June 30, the Fund owned $1.5 million par value of Illinois Health
Facilities Authority 5.25% bonds with a nominal maturity of 11/15/28 and an
optional put on 11/15/03. The bonds are secured by revenues derived from the
operation of the Bohemian Home and Tabor Hills Health Care facilities, a
mortgage lien on the buildings and a debt service reserve fund mandated to be
maintained at maximum annual debt service levels. Pro-forma, annual debt service
coverage was 1.99 times in 1996 and 2.05 times in 1997. Of course, circumstances
may change and we reserve the right to sell, but we believe these credits are as
solid and enduring as "the old country" values.
On June 30, 1998, the Bohemian Home for the Aged and Tabor Hills Health Care
Community bonds were valued at $1,500,000, representing 1.04% of the Fund's net
assets.
[Photo of
Thomas J. Conlin]
Thomas J. Conlin, CPA
Portfolio Co-Manager
[Photo of
Greg D. Winston]
Greg D. Winston, CPA
Portfolio Co-Manager
"Nearby Chicago's large Bohemian population should continue to support demand
for the [Bohemian] Home's independent living townhouses."
2
<PAGE>
VALUE REPORT
Heartland Short Duration High-Yield Municipal Fund
This Fund seeks a high level of federally tax-exempt current income with a low
degree of share-price fluctuation. It invests chiefly in short and intermediate
term municipal obligations of medium and lower quality, and maintains an average
portfolio duration of three years or less.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Since inception
YTD 1-Year (1/2/97)
<S> <C> <C> <C>
Heartland Short Duration
High-Yield Municipal Fund 2.3% 6.2% 6.6%
Lehman Brothers Municipal
1-3 Year Non-Investment Grade Index 2.7 6.4 6.6
</TABLE>
*Not Annualized
Lehman Brothers Municipal 1-3 Year Non-Investment Grade Index is an unmanaged
index and includes issues which have a maximum credit rating of Ba1, were issued
as part of a deal of at least $20 million, have an amount outstanding of at
least $3 million, have a maturity of 1 to 3 years, and have been issued after
December 31, 1990.
FUND FACTS
<TABLE>
<S> <C> <C> <C>
Sales commission....................... None Weighted average duration.......... 2.3 yrs.
Share price............................ $10.12 Net assets......................... $144.1 mil.
Weighted average maturity.............. 5.8 yrs. Number of holdings................. 93
</TABLE>
<TABLE>
<CAPTION>
% OF
TOP 5 HOLDINGS COUPON MATURITY CALL NET ASSETS
<S> <C> <C> <C> <C>
Allegheny County, PA Industrial Dev. Auth............. 6.8% 1/2005 -- 4.5%
Union County, NJ Utilities Auth........................ 7.2 6/2014 6/2002 4.3
Chicago, IL O'Hare International Airport............... 8.2 5/2018 5/1999 4.2
Independence, MO Tax Increment Rev..................... 8.75 4/2015 4/2004 3.8
Connecticut State Development Auth...................... 7.125 8/2014 8/2004 3.5
</TABLE>
PORTFOLIO COMPOSITION
[graphic - A pie chart displays categories of the Heartland Short Duration
High-Yield Municipal Fund's portfolio as of 6/30/98: Retirement at 18.5%;
Nursing at 16.8%; Resource recovery at 14.2%; IDR at 10.9%; Other at 39.6%.
Other is further broken down as follows: Hospital at 8.5%; Multifamily at
7.3%; Airport at 4.2%; Single family at 2.2%; GO at 1.3%; Lease at 0.6%;
Miscellaneous at 15.5%.]
All statistics are as of June 30, 1998.
3
<PAGE>
VALUE REPORT
Heartland High-Yield Municipal Bond Fund
Look Homeward Angel
In his famous novel "Look Homeward Angel", Asheville, North Carolina native son
Thomas Wolfe said you can never go home again. If he were still around today, he
might change his mind. We think the Avery's View Retirement Facilities,
a 48-apartment assisted living center located just 7 miles south of Asheville,
will offer a wonderful home for senior citizens in Buncombe County, North
Carolina.
Upon completion, Avery's View Retirement Facilities will consist of 36 single
occupant and 12 double occupant studio apartments, a large dining room, game
room, assembly room and laundry. The issuer projects a 93% occupancy rate by
September 30, 2000. The facility is part of The Hills of Avery's Creek, a 68-
acre retirement community designed for 158 two and three bedroom cottages, of
which 66 have been completed, sold and occupied, and a 56,000 square foot
independent living apartment building with one, two, and three bedroom
apartments.
As of June 30, 1998, the Fund owned $4 million of Town of Fletcher, North
Carolina (Avery's View Retirement Facilities) 7% bonds with a nominal maturity
of 3/1/2028 (the coupon automatically rises to 8% in 2005). These bonds are
secured by all revenues derived by the facility, a debt service reserve fund
equal to 10% of the face value of debt securities issued, and a first priority
deed of trust on the facility. The pro-forma debt service coverage after
subordinated management fees is projected to be 1.33 times in calendar 2000 and
1.37 times in calendar 2001. While the project is subject to risk, including
construction risk, we believe these are solid credits that will help our
shareholders grow old gracefully.
On June 30, 1998, the Avery's View Retirement Facilities and Town of Fletcher
bonds were valued at $4,025,000, representing 7.61% of the Fund's net assets.
[Photo of
Thomas J. Conlin]
Thomas J. Conlin, CFA
Portfolio Co-Manager
[Photo of
Greg D. Winston]
Greg D. Winston, CFA
Portfolio Co-Manager
"We think the Avery's View Retirement Facilities, a 48-apartment assisted living
center located just 7 miles south of Asheville, will offer a wonderful home for
senior citizens in Buncombe County, North Carolina."
4
<PAGE>
VALUE REPORT
Heartland High-Yield Municipal Bond Fund
This Fund seeks to maximize after-tax total return by investing for a high level
of current income that is federally tax-exempt. It invests chiefly in medium and
lower quality municipal obligations. While the duration of its portfolio is
unrestricted, the Fund expects to maintain an average duration of over five
years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
YTD* 1-year Since inception
(1/2/97)
<S> <C> <C> <C>
Heartland High-Yield
Municipal Fund 3.6% 10.3% 10.3%
Lehman Brothers Municipal
Non-Investment Grade Index 4.3 11.5 10.3
*Not Annualized
</TABLE>
Lehman Brothers Municipal Non-Investment Grade Index is an unmanaged index and
includes issues which have a maximum credit rating of Ba1, were issued as part
of a deal of at least $20 million, have an amount outstanding of at least $3
million, have maturity of at least one year, and have been issued after December
31, 1990.
<TABLE>
<CAPTION>
FUND FACTS
<S> <C> <C> <C> <C>
Sales commission......................None Weighted average duration........................7.2 yrs.
Share price.........................$10.45 Net assets.....................................$52.9 mil.
Weighted average maturity.........14.3 yrs Number of holdings.....................................32
% OF
TOP 5 HOLDINGS COUPON MATURITY CALL NET ASSETS
Fletcher, NC First Mortgage Housing Rev. 7.0% 3/2028 3/2007 7.6%
Houston County, GA Development Auth. 7.375 4/2028 4/2003 5.7
St. Tammany, LA Public Trust Finance Auth. 5.7 11/2028 11/2008 5.0
Seminole County, FL Industrial Dev. Auth. 9.25 4/2012 4/1999 4.9
Yucaipa, CA Redevelopment Agency 6.0 5/2030 5/2008 4.6
</TABLE>
PORTFOLIO COMPOSITION
[graphic - A pie chart displays categories of the Heartland High-Yield
Municipal Bond Fund's portfolio as of 6/30/98: Nursing at 28.9%; Retirement
at 21.2%; Multifamily at 15.7%; Resource recovery at 8.1%; Cash &
equivalents at 2.9%; Other at 23.2%. Other is further broken down as
follows: Lease at 4.7%; Water & sewer at 4.0%; Hospital at 3.2%; University
at 1.9%; Miscellaneous at 9.4%.]
All statistics are as of June 30, 1998.
5
<PAGE>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS - JUNE 30, 1998 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
AMOUNT LONG-TERM INVESTMENTS--99.4% COUPON MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS 99.4%
ALABAMA 1.8%
<S> <C> <C> <C> <C>
$ 370,000 Valley, Alabama Special Care Facilities Finance Authority -
Lanier Memorial Hospital....................................... 5.000% 11/01/2000 $ 373,700
325,000 Valley, Alabama Special Care Facilities Finance Authority -
Lanier Memorial Hospital....................................... 4.650 11/01/2002 324,187
1,730,000 West Jefferson, Alabama Amusement & Public Park
Authority - Visionland Alabama
(Callable 12/01/2006).......................................... 8.000 12/01/2026 1,859,750
-----------
2,557,637
ARKANSAS 0.8%
1,000,000 Arkansas Development Finance Authority
Single Family Mortgage (Callable 10/01/2007) (a)............... 6.500 02/01/2011 1,091,250
COLORADO 1.2%
1,500,000 Mesa County, Colorado Industrial Development Revenue -
Joy Technologies, Incorporated (Callable 03/15/2002)........... 8.500 09/15/2006 1,693,125
CONNECTICUT 7.0%
1,600,000 Connecticut State Development Authority -
Alzheimers Resource Center..................................... 6.875 08/15/2004 1,712,000
3,160,000 Connecticut Health & Education Facilities Authority -
Griffin Hospital (Callable 07/01/2003)......................... 6.000 07/01/2013 3,274,550
4,625,000 Connecticut State Development Authority -
Alzheimers Resource Center (Callable 08/15/2004)............... 7.125 08/15/2014 4,989,219
-----------
9,975,769
FLORIDA 5.5%
2,500,000 Gulf Environmental Services, Florida Water & Sewer Revenue
(Callable 10/01/2008).......................................... 5.000 10/01/2023 2,390,625
1,260,000 Lee County, Florida Industrial Development Authority -
Cypress Cove at Healthpark, Florida, Inc. Project.............. 5.625 10/01/2026 1,282,050
890,000 Lee County, Florida Industrial Development Authority -
Cypress Cove at Healthpark, Florida, Inc. Project.............. 5.600 10/01/2004 906,687
585,000 Lee County, Florida Industrial Development Authority -
Cypress Cove at Healthpark, Florida, Inc. Project.............. 5.700 10/01/2005 597,431
795,000 Palm Bay, Florida Lease Revenue -
Florida Education & Research Foundation........................ 6.100 09/01/2003 797,981
1,835,000 Seminole County, Florida Industrial Development Authority -
RHA/Fern Park MR, Incorporated (Callable 04/01/1999)........... 9.250 04/01/2012 1,890,050
-----------
7,864,824
GEORGIA 2.8%
2,000,000 Athens-Clarke County, Georgia Residential Care-Wesley Woods
of Athens, Inc. Project (Callable 10/01/2000).................. 5.300 10/01/2001 2,020,000
2,000,000 Clayton County, Georgia Development Authority
Industrial Development Revenue - Outboard Marine Corporation
(Callable 10/01/1998).......................................... 6.000 10/01/2002 2,022,500
-----------
4,042,500
IDAHO 1.3%
1,880,000 Idaho Health Facilities Authority -
Bonner General Hospital........................................ 5.700 10/01/2004 1,922,300
ILLINOIS 9.6%
5,780,000 Chicago - O'Hare International Airport
United Airlines, Incorporated (Callable 05/01/1999)............ 8.200 05/01/2018 6,108,015
1,500,000 Illinois Health Facilities Authority - Bohemian Home -
Tabor Hills Health Care (Callable 11/15/2000).................. 5.250 11/15/2028 1,500,000
1,000,000 Illinois Health Facilities Authority -
Lifelink Corporation (Callable 02/15/2008)..................... 5.700 02/15/2024 973,750
</TABLE>
6
<PAGE>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS (cont'd) - JUNE 30, 1998 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
AMOUNT LONG-TERM INVESTMENTS--99.4% COUPON MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS 99.4%
ILLINOIS 96% (CONT'D)
<S> <C> <C> <C> <C>
$2,500,000 Illinois Health Facilities Authority -
Victory Health Services (Callable 08/15/2007).................. 5.750% 08/15/2027 $ 2,550,000
2,660,000 Worth, Illinois Nursing Home Revenue -
Belhaven Convalescent Center (Callable 12/15/2002)............. 6.200 12/15/2007 2,676,625
-----------
13,808,390
INDIANA 1.1%
300,000 Elkhart, Indiana Economic Development Multifamily
Mortgage - Prairie Village Apartments (Callable 07/01/1998).... 5.125 07/01/2012 300,255
650,000 Greensburg, Indiana Economic Development Revenue -
Kroger Company (Callable 12/01/2004)........................... 7.250 06/01/2011 751,562
500,000 Indiana Health Facilities Finance Authority -
Hancock Memorial Hospital (Callable 08/15/2006)................ 5.900 08/15/200 7 530,625
-----------
1,582,442
IOWA 2.7%
1,500,000 Elk Horn, Iowa Health Care Facility -
Salem Lutheran Homes (Callable 04/01/1999)..................... 7.250 04/01/2018 1,501,275
1,450,000 Iowa Finance Authority Health Care Facilities -
Care Initiatives............................................... 5.500 07/01/2008 1,473,563
900,000 Ottumwa, Iowa Revenue - Penn Place
Regional Retirement Living (Callable 02/15/1999)............... 5.150 02/15/2028 892,125
-----------
3,866,963
KANSAS 1.4%
500,000 Topeka, Kansas Industrial Revenue -
Reser's Fine Foods, Incorporated (Callable 04/01/2001)......... 5.100 04/01/2002 500,625
500,000 Topeka, Kansas Industrial Revenue -
Reser's Fine Foods, Incorporated (Callable 04/01/2001)......... 5.200 04/01/2003 500,625
500,000 Topeka, Kansas Industrial Revenue -
Reser's Fine Foods, Incorporated (Callable 04/01/2001)......... 5.300 04/01/2004 500,625
500,000 Topeka, Kansas Industrial Revenue -
Reser's Fine Foods, Incorporated (Callable 04/01/2001)......... 5.400 04/01/2005 500,625
-----------
2,002,500
LOUISIANA 3.2%
2,040,000 Louisiana Public Facilities Authority
Beverly Enterprises, Incorporated (Callable 09/01/2002)........ 8.250 09/01/2008 2,244,000
1,420,000 St. Tammany, Louisiana Public Trust Finance Authority -
Christwood..................................................... 5.000 11/15/2003 1,407,575
1,000,000 St. Tammany, Louisiana Public Trust Finance Authority -
Christwood..................................................... 5.250 11/15/2008 983,750
-----------
4,635,325
MARYLAND 3.5%
1,500,000 Frederick County, Maryland Retirement Community -
Buckingham's Choice (Callable 01/01/2000)...................... 5.250 01/01/2027 1,501,875
3,600,000 Maryland Health & Higher Education Facilities Authority -
Heron Point of Chestertown (Callable 10/01/2000) (b)........... 5.250 10/01/2028 3,577,500
-----------
5,079,375
MASSACHUSETTS 3.7%
1,260,000 Massachusetts Industrial Finance Agency -
Reeds Landing Project (Callable 07/01/1998).................... 7.750 10/01/2000 1,282,365
945,000 Massachusetts Industrial Finance Agency - Glenmeadow
Retirement Community (Callable 02/15/2000)..................... 5.000 02/15/2026 946,181
970,000 Massachusetts Industrial Finance Agency - Glenmeadow
Retirement Community (Callable 02/15/2000)..................... 5.250 02/15/2026 970,000
2,000,000 Massachusetts Housing Finance Agency -
Single Family Mortgage (Callable 04/01/2003)................... 6.375 04/01/2021 2,117,500
-----------
5,316,046
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [cont'd] . JUNE 30, 1998 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 99.4% [cont'd] COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS - 99.4% [cont'd]
MINNESOTA - 0.9%
<S> <C> <C> <C> <C>
$ 1,325,000 Burnsville, Minnesota Commercial Development Revenue -
Holiday Inn Project (Callable 04/01/2005)................................ 5.650% 10/01/2007 $1,334,938
MISSOURI - 5.1%
4,875,000 Independence, Missouri Tax Increment Revenue -
Homart Development Company (Callable 04/01/2004)......................... 8.750 04/01/2015 5,527,031
900,000 Missouri Health & Education Facilities Authority -
Freeman Health System.................................................... 4.700 02/15/2004 894,375
1,000,000 Missouri Health & Education Facilities Authority -
Freeman Health System.................................................... 4.750 02/15/2005 992,500
-----------
7,413,906
NEW HAMPSHIRE - 0.5%
650,000 New Hampshire Higher Education & Health Facilities -
River Woods at Exeter (Callable 09/01/1998).............................. 8.000 03/01/2001 663,969
NEW JERSEY - 9.6%
3,500,000 South Amboy, New Jersey Housing Authority -
Shore Gate Village Grand Project (Callable 07/15/1998)................... 6.000 08/15/1999 3,500,875
120,000 Union County, New Jersey Utilities Authority -
Solid Waste Revenue...................................................... 6.850 06/15/2002 120,150
105,000 Union County, New Jersey Utilities Authority -
Solid Waste Revenue (Callable 06/15/2002)................................ 6.950 06/15/2003 105,131
245,000 Union County, New Jersey Utilities Authority -
Solid Waste Revenue (Callable 06/15/2002)................................ 7.000 06/15/2004 245,306
1,180,000 Union County, New Jersey Utilities Authority -
Solid Waste Revenue (Callable 06/15/2002)................................ 7.100 06/15/2006 1,182,950
2,510,000 Union County, New Jersey Utilities Authority -
Solid Waste Revenue (Callable 06/15/2002)................................ 7.150 06/15/2009 2,516,275
6,200,000 Union County, New Jersey Utilities Authority -
Solid Waste Revenue (Callable 06/15/2002)................................ 7.200 06/15/2014 6,207,750
-----------
13,878,437
NEW MEXICO - 0.7%
1,000,000 Santa Fe County, New Mexico Project Revenue -
El Castillo Retirement Residences (Callable 05/15/2000).................. 5.250 05/15/2028 1,001,250
NEW YORK - 0.7%
1,070,000 Suffolk County, New York Industrial Development Agency -
Spellman High-Voltage Electronics Corporation............................ 5.625 12/01/2004 1,076,688
NORTH CAROLINA - 0.8%
1,000,000 Gaston County, North Carolina Industrial Facilities & PCR
Finance Authority - Combustion Engineering (Callable 11/01/2001)......... 8.850 11/01/2015 1,117,500
OHIO - 7.2%
1,054,181 Clark County, Ohio Industrial Development Revenue -
Main Associates Project (Callable 07/01/1998)............................ 8.000 11/01/2005 1,059,452
640,000 Cuyahoga County, Ohio Mortgage Revenue -
Maple Care Center........................................................ 6.350 08/20/2006 696,000
745,000 Franklin County, Ohio Mortgage Revenue -
Gateway Apartment Homes (Callable 07/20/1998)............................ 5.375 10/20/2010 745,365
1,000,000 Holmes County, Ohio Industrial Development Revenue -
Owens-Illinois, Incorporated (Callable 09/01/1998)....................... 5.850 09/01/2007 1,000,390
1,050,000 Montgomery County, Ohio Health Care Facilities -
Friendship Village of Dayton (Callable 02/01/2001)....................... 5.375 02/01/2022 1,056,563
1,700,000 Montgomery County, Ohio Health Care Facilities -
Friendship Village of Dayton (Callable 02/01/2003)....................... 5.500 02/01/2007 1,723,375
1,100,000 Ohio Capital Corporation for Housing -
Bella Vista Section 8 Assisted Project................................... 7.250 02/01/2002 1,102,750
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [cont'd] . JUNE 30, 1998 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 99.4% [cont'd] COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS - 99.4% [cont'd]
OHIO - 7.2% [cont'd]
<S> <C> <C> <C> <C>
$ 1,200,000 Pike County, Ohio Hospital Facilities -
Pike Health Services, Incorporated........................................ 6.350% 07/01/2007 $1,236,000
1,610,000 Summit County, Ohio Industrial Development Revenue -
Kroger Company (Callable 10/01/2002)...................................... 7.650 10/01/2006 1,807,225
-----------
10,427,120
OKLAHOMA - 1.4%
1,065,000 Tulsa County, Oklahoma Industrial Authority - Multifamily
Housing 1st Mortgage Revenue (Callable 12/01/2005)........................ 7.400 12/01/2017 1,057,013
1,000,000 Tulsa County, Oklahoma Industrial Authority - Multifamily
Housing 1st Mortgage Revenue (Callable 12/01/2005)........................ 7.500 12/01/2027 991,250
-----------
2,048,263
PENNSYLVANIA - 12.0%
6,400,000 Allegheny County, Pennsylvania Industrial Development
Authority - Lanchester Energy Partners.................................... 6.800 01/01/2005 6,408,000
730,000 Clarion County, Pennsylvania Industrial Development Authority -
Beverly Enterprises, Inc. (Callable 05/01/1999)........................... 10.125 05/01/2007 775,443
500,000 Delaware County, Pennsylvania Industrial Development
Authority Revenue - Martins Run Project (Callable 12/15/2001)............. 5.750 12/15/2003 510,000
1,000,000 Montgomery County, Pennsylvania Industrial Development
Authority Revenue - Meadowood Corporation (Callable 12/01/1999)........... 5.500 12/01/2019 1,002,500
700,000 Montgomery County, Pennsylvania Industrial Development
Authority Revenue - Meadowood Corporation (Callable 12/01/1999)........... 5.150 12/01/2003 700,875
745,000 Philadelphia, Pennsylvania Hospitals & Higher Education
Facilities - Graduate Health System....................................... 7.000 07/01/2001 743,137
410,000 Philadelphia, Pennsylvania Hospitals & Higher Education
Facilities - Graduate Health System....................................... 5.900 07/01/2003 404,363
2,550,000 Philadelphia Authority for Industrial Development -
The Baptist Home of Philadelphia (Callable 11/15/2000).................... 5.250 11/15/2028 2,556,375
500,000 Scranton-Lackawanna Health & Welfare Authority - Allied
Services Rehabilitation Hospitals (Callable 07/15/2004).................. 7.125 07/15/2005 550,000
3,600,000 Westmoreland County, Pennsylvania Industrial Development
Authority - Lancaster Energy Partners..................................... 6.800 01/01/2005 3,604,500
-----------
17,255,193
TENNESSEE - 2.5%
1,000,000 Rutherford County, Tennessee Industrial Development
Board - Kroger Company (Callable 12/01/2004).............................. 7.300 06/01/2021 1,165,000
2,450,000 Shelby County, Tennessee Health, Education & Housing
Facilities - Kirby Pines Retirement Community (Callable 11/15/1999)....... 5.500 11/15/2027 2,474,500
-----------
3,639,500
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [cont'd] . JUNE 30, 1998 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 99.4% [cont'd] COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS - 99.4% [cont'd]
TEXAS - 5.2%
<S> <C> <C> <C> <C>
$ 2,405,000 Edinburg, Texas Industrial Development Corporation -
Water Park Project........................................................ 7.000% 09/01/2006 $ 2,411,013
2,000,000 Edinburg, Texas Industrial Development Corporation -
Water Park Project (Callable 09/01/2008).................................. 7.500 09/01/2023 1,965,000
190,000 Rusk County, Texas Health Facilities Corporation -
Sugarland Retirement Communities (Callable 03/01/2000).................... 6.375 03/01/2006 190,712
270,000 Rusk County, Texas Health Facilities Corporation -
Sugarland Retirement Communities (Callable 03/01/2000).................... 6.500 03/01/2007 271,013
155,000 Rusk County, Texas Health Facilities Corporation -
Sugarland Retirement Communities (Callable 03/01/2000).................... 6.625 03/01/2008 155,581
1,430,000 Rusk County, Texas Health Facilities Corporation -
Sugarland Retirement Communities (Callable 03/01/2000).................... 7.500 03/01/2014 1,435,362
1,000,000 San Antonio, Texas Health Facilities Development
Corporation - Beverly Enterprises, Incorporated (Callable 12/01/2002)..... 8.250 12/01/2019 1,102,500
------------
7,531,181
VIRGIN ISLANDS - 4.4%
3,000,000 Virgin Islands Public Finance Authority -
Virgin Islands Matching Fund Loan......................................... 6.000 10/01/2004 3,172,500
3,000,000 Virgin Islands Public Finance Authority -
Virgin Islands Matching Fund Loan......................................... 6.000 10/01/2005 3,183,750
------------
6,356,250
WEST VIRGINIA - 0.8%
1,175,000 Monongalia County, West Virginia Building Commission -
The Village at Heritage Point (Callable 11/15/1999)....................... 5.250 11/15/2027 1,176,469
WISCONSIN - 2.0%
1,110,000 Wisconsin Health & Education Facilities Authority -
The Millennium Housing Foundation......................................... 5.750 01/01/2008 1,112,775
1,750,000 Wisconsin Health & Education Facilities Authority -
St. John's Home and Sunrise Care Center (Callable 12/15/2002)............. 5.625 12/15/2022 1,747,813
------------
2,860,588
TOTAL MUNICIPAL BONDS................................................................................... $143,219,698
------------
TOTAL LONG-TERM INVESTMENTS (Cost $141,861,555)......................................................... $143,219,698
------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [cont'd] . JUNE 30, 1998 (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT SHORT TERM INVESTMENTS - 2.2% COUPON MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS - 0.6%
ALABAMA - 0.2%
<S> <C> <C> <C> <C>
$ 340,000 Valley, Alabama Special Care Facilities Finance Authority -
Lanier Memorial Hospital.................................................. 4.250% 11/01/1998 $ 340,125
NEW HAMPSHIRE - 0.4%
600,000 New Hampshire Industrial Development Authority -
Maryland Cup Corporation (Callable 07/01/1998)............................ 6.750 06/01/1999 606,000
------------
TOTAL MUNICIPAL BONDS................................................................................... $ 946,125
DAILY VARIABLE RATE PUT BONDS - 1.6%
INDIANA - 0.4%
500,000 Rockport, Indiana Pollution Control Revenue -
AEP Generating Company Project............................................ 2.700 07/01/2025 $ 500,000
NEW YORK - 1.2%
1,800,000 New York State Dormitory Authority Revenue -
St. Francis Center at the Knolls.......................................... 2.900 07/01/2023 1,800,000
TOTAL DAILY VARIABLE RATE PUT BONDS..................................................................... $ 2,300,000
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $3,244,460).......................................................... $ 3,246,125
------------
TOTAL INVESTMENTS (Cost $145,106,015)....................101.6% $146,465,823
Liabilities, less cash and receivables................... (1.6) (2,317,735)
----- ------------
TOTAL NET ASSETS.........................................100.0% $144,148,088
===== ============
</TABLE>
(a) All or a portion of security pledged to cover margin requirements for
futures contracts.
(b) When-issued security.
The accompanying Notes to Financial Statements are an integral part of
this Schedule.
11
<PAGE>
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS - JUNE 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT LONG-TERM INVESTMENTS 97.1% COUPON MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 97.1%
ALABAMA 5.9%
$2,000,000 Mobile, Alabama Industrial Development Board -
Mobile Energy Services (Callable 01/01/2005)....................... 6.950% 01/01/2020 $ 1,000,000
2,000,000 Vance, Alabama Governmental Utility Services Corporation -
Sewer Services Revenue (Callable 10/01/2007)....................... 7.500 10/01/2018 2,127,500
-----------
3,127,500
CALIFORNIA 4.6%
2,500,000 Yucaipa, California Redevelopment Agency - Eldorado Palms
Mobile Home Estates (Callable 05/01/2008).......................... 6.000 05/01/2030 2,418,750
FLORIDA 10.6%
1,000,000 Leon County, Florida Educational Facilities Authority -
Southgate Residence Hall (Callable 03/01/2008)..................... 6.750 09/01/2028 1,003,750
2,000,000 Mexico Beach, Florida Public Service Facilities -
Heritage House of Sarasota (Callable 12/01/2002)................... 8.000 12/01/2027 2,015,000
2,500,000 Seminole County, Florida Industrial Development Authority -
RHA/Fern Park MR, Incorporated (Callable 04/01/1999)............... 9.250 04/01/2012 2,575,000
-----------
5,593,750
GEORGIA 5.7%
3,000,000 Houston County, Georgia Development Authority -
Grantley, Incorporated Project (Callable 04/01/2003)............... 7.375 04/01/2028 2,988,750
ILLINOIS 3.2%
1,700,000 Worth, Illinois Nursing Home Revenue -
Belhaven Convalescent Center (Callable 12/15/2002)................. 7.250 12/15/2027 1,708,500
INDIANA 6.8%
715,000 Beech Grove, Indiana Economic Development Revenue -
Diplomat South Apartments (Callable 01/01/2003).................... 7.000 01/01/2028 708,744
1,200,000 Beech Grove, Indiana Economic Development Revenue -
Beech Grove Village Apartments (Callable 01/01/2003)............... 7.000 01/01/2028 1,216,500
1,700,000 Huntingburg, Indiana Hospital Revenue - St. Joseph's
Hospital of Huntingburg (Callable 01/01/2006) (a).................. 5.750 01/01/2018 1,674,500
-----------
3,599,744
LOUISIANA 5.0%
2,725,000 St. Tammany, Louisiana Public Trust Finance Authority -
Christwood (Callable 11/15/2008)................................... 5.700 11/15/2028 2,646,656
MICHIGAN 5.6%
1,140,000 Redford Township, Michigan Economic Development
Corporation - The Malachi Corp. (Callable 05/01/2003).............. 7.500 05/01/2028 1,140,000
1,800,000 Riverview, Michigan Economic Development Corporation -
The Malachi Corporation (Callable 05/01/2003)...................... 7.500 05/01/2028 1,806,750
-----------
2,946,750
MINNESOTA 3.1%
1,600,000 Oakdale, Minnesota Elderly Housing Revenue -
PMH/Oakdale, Incorporated (Callable 03/01/2005).................... 6.000 03/01/2028 1,622,000
MISSOURI 8.2%
630,000 Gallatin, Missouri Certificates of Participation -
Electric Distribution System (Callable 07/01/2007)................. 7.125 01/01/2014 641,025
1,820,000 Gallatin, Missouri Certificates of Participation -
Electric Distribution System (Callable 07/01/2007)................. 7.375 01/01/2028 1,865,500
1,750,000 St. Louis County, Missouri Industrial Development Authority -
Dasal Caring Centers (Callable 12/01/2007)......................... 7.750 12/01/2016 1,828,750
-----------
4,335,275
NORTH CAROLINA 7.6%
4,000,000 Fletcher, North Carolina First Mortgage Housing Revenue -
Avery's View Retirement Facilities (Callable 03/01/2007) (b)....... 7.000 03/01/2028 4,025,000
</TABLE>
12
<PAGE>
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS [cont'd] . JUNE 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT LONG-TERM INVESTMENTS 97.1% (cont'd) COUPON MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 97.1% (cont'd)
OHIO 2.3%
$ 555,000 Franklin County, Ohio Hospital Facilities
Worthington Christian Village...................................... 7.875% 06/01/2005 $ 555,000
675,000 Franklin County, Ohio Hospital Facilities -
Worthington Christian Village (Callable 06/01/2005)................ 8.000 06/01/2010 675,000
-----------
1,230,000
OKLAHOMA 3.7%
2,000,000 Tulsa County, Oklahoma Industrial Authority - 1st Mortgage
Multifamily Housing (Callable 12/01/2005).......................... 7.500 12/01/2027 1,982,500
PENNSYLVANIA 3.0%
1,600,000 Westmoreland County, Pennsylvania Industrial Development
Authority - Lancaster Energy Partners.............................. 7.000 01/01/2008 1,594,000
TENNESSEE 3.6%
630,000 Shelby County, Tennessee Health, Education & Housing
Facilities - Winfield Village of Cordova (Callable 08/29/2006)..... 8.500 07/01/2026 680,400
1,225,000 Sweetwater, Tennessee Industrial Development Board -
Wood Presbyterian Home (Callable 01/01/2006)....................... 7.750 01/01/2029 1,232,656
-----------
1,913,056
TEXAS 12.5%
2,370,000 Bexar County, Texas Housing Finance Corporation -
King's Point & Thompson Place Apartments (Callable 07/01/2003)..... 7.000 07/01/2028 2,378,888
665,000 Danforth, Texas Health Facilities Corporation - Sam Houston
Long-Term Care Facility (Callable 03/01/2004)...................... 8.250 03/01/2027 679,962
1,800,000 Rusk County, Texas Health Facilities Corporation -
Sugarland Retirement Communities (Callable 03/01/2000)............. 7.750 03/01/2019 1,775,250
1,095,000 Rusk County, Texas Health Facilities Corporation -
Sugarland Retirement Communities (Callable 03/01/2000)............. 8.250 03/01/2028 1,085,419
685,000 Tarrant County, Texas Health Facilities Development
Corporation - St. Joseph Long Term Care Facility
(Callable 05/01/2004).............................................. 8.500 05/01/2027 708,975
------------
6,628,494
WISCONSIN 5.7%
1,000,000 Wisconsin Health & Education Facilities Authority -
RFDF, Incorporated Project (Callable 07/15/2007)................... 7.375 07/15/2027 1,017,500
2,000,000 Wisconsin Health & Education Facilities Authority -
The Millennium Housing Foundation (Callable 07/01/2008)............ 6.100 01/01/2028 2,000,000
-----------
3,017,500
TOTAL MUNICIPAL BONDS................................................................................. $51,378,225
-----------
TOTAL LONG-TERM INVESTMENTS (Cost $51,007,958)........................................................ $51,378,225
-----------
</TABLE>
13
<PAGE>
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS [cont'd] . JUNE 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT SHORT-TERM INVESTMENT 0.6% COUPON MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
DAILY VARIABLE RATE PUT BOND 0.6%
TEXAS 0.6%
<S> <C> <C> <C> <C> <C>
$300,000 Lone Star, Texas Airport Improvement Authority -
American Airlines, Incorporated........................ 2.900% 12/01/2014 $ 300,000
-----------
TOTAL SHORT-TERM INVESTMENT (Cost $300,000)................................ $ 300,000
-----------
TOTAL INVESTMENTS (Cost $51,307,958)........ 97.7% $51,678,225
Cash and receivables, less liabilities...... 2.3% 1,217,559
------ -----------
TOTAL NET ASSETS............................. 100.0% $52,895,784
====== ===========
</TABLE>
(a) All or a portion of security pledged to cover margin requirements for
futures contracts.
(b) Coupon payment periodically increases over the life of the security.
Rate stated is in effect on June 30, 1998.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
14
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
June 30, 1998 (Unaudited)
Short
Duration
High-Yield High-Yield
Municipal Municipal
ASSETS: Fund Bond Fund
------------ -------------
<S> <C> <C>
Investments in securities, at cost.................................... $145,106,015 $ 51,307,958
============ =============
Investments in securities, at value................................... $146,465,823 $ 51,678,225
Receivable from securities sold....................................... 2,583,387 --
Receivable from fund shares sold...................................... 2,223,522 715,596
Accrued interest...................................................... 2,171,904 898,189
Prepaid expenses...................................................... 12,901 6,679
Deferred organization expenses........................................ 16,550 16,550
Receivable from Advisor for expense reimbursement
and management fee waiver........................................... 7,745 6,446
------------ -------------
Total Assets......................................................... 153,481,832 53,321,685
------------ -------------
LIABILITIES:
Payable for securities purchased...................................... 8,772,220 250,097
Payable for fund shares redeemed...................................... 360,211 109,231
Payable to custodian.................................................. 59,813 7,903
Payable to Advisor for management fee................................. 49,134 26,522
Payable to Advisor for deferred organization expenses................. 16,550 16,550
Variation margin on open futures contracts............................ 51,562 6,249
Accrued expenses...................................................... 24,254 9,349
------------ -------------
Total Liabilities.................................................... 9,333,744 425,901
------------ -------------
TOTAL NET ASSETS........................................................ $144,148,088 $ 52,895,784
============ =============
NET ASSETS CONSIST OF:
Paid in capital....................................................... $143,562,987 $ 52,244,628
Accumulated undistributed net realized gains (losses) on investments.. (346,582) 285,264
Net unrealized appreciation on investments............................ 931,683 365,892
------------ -------------
TOTAL NET ASSETS........................................................ $144,148,088 $ 52,895,784
============ =============
SHARES OUTSTANDING, $.001 par value
(100,000,000 shares authorized, respectively)......................... 14,242,101 5,061,584
============ =============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE.......... $ 10.12 $ 10.45
============ =============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
15
<PAGE>
STATEMENTS OF OPERATIONS
For the period from January 1, 1998
to June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Short
Duration
High-Yield High-Yield
Municipal Municipal
INVESTMENT INCOME: Fund Bond Fund
---------- ----------
<S> <C> <C>
Interest........................................................... $3,823,331 $1,474,925
---------- ----------
Total investment income......................................... 3,823,331 1,474,925
---------- ----------
EXPENSES:
Management fees.................................................... 264,776 131,034
Distribution fees.................................................. 165,176 54,598
Registration fees.................................................. 27,821 9,899
Transfer agent fees................................................ 16,386 8,646
Custodian fees..................................................... 10,264 5,019
Audit fees......................................................... 4,180 2,356
Directors' fees.................................................... 3,775 3,621
Printing and communications........................................ 2,926 1,235
Amortization of deferred organization expenses..................... 2,364 2,364
Postage............................................................ 1,601 1,167
Legal fees......................................................... 565 368
Other operating expenses........................................... 7,403 2,991
---------- ----------
Total expenses.................................................. 507,237 223,298
Less: Fees paid indirectly...................................... -- --
Less: Expense reimbursement and management fee waiver........... (169,630) (100,247)
---------- ----------
Net expenses.................................................... 337,607 123,051
---------- ----------
NET INVESTMENT INCOME..................................................... 3,485,724 1,351,874
---------- ----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on:
Securities...................................................... (39,671) 320,347
Futures contracts............................................... (336,174) (62,840)
Net increase (decrease) in unrealized appreciation on:
Securities...................................................... 214,770 (151,643)
Futures contracts............................................... (147,393) 70,228
---------- ----------
TOTAL REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS............... (308,468) 176,092
---------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...................... $3,177,256 $1,527,966
========== ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
16
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Short Duration High-Yield High-Yield Municipal
Municipal Fund Bond Fund
--------------------------------- ---------------------------------
Jan. 2, 1997 Jan. 2, 1997
Jan. 1, 1998 (commencement of Jan. 1, 1998 (commencement of
to June 30, 1998 operations) to to June 30,1998 operations to
(Unaudited) Dec. 31, 1997 (Unaudited) Dec. 31, 1997
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income......................................... $ 3,485,724 $ 3,076,220 $ 1,351,874 $ 887,447
Net realized gains (losses) on investments.................... (375,845) 29,263 257,507 345,439
Net increase (decrease) in unrealized
appreciation on investments.................................. 67,377 864,306 (81,415) 447,307
------------ ------------ ------------ -----------
Net increase in net assets resulting from
operations................................................... 3,177,256 3,969,789 1,527,966 1,680,193
------------ ------------ ------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income......................................... (3,485,724) (3,076,220) (1,351,874) (887,447)
Net realized gains on investments............................. -- -- (230,338) (87,344)
------------ ------------ ------------ -----------
Total distributions to shareholders......................... (3,485,724) (3,076,220) (1,582,212) (974,791)
FUND SHARE ACTIVITIES:
Proceeds from shares issued................................... 81,010,761 162,747,963 40,400,304 34,304,367
Reinvested dividends from net investment income
and distributions from net realized gains on investments..... 3,059,755 2,700,941 1,375,653 858,813
Cost of shares redeemed....................................... (60,555,778) (45,400,655) (19,434,001) (5,260,508)
------------ ------------ ------------ -----------
Net increase in net assets derived from Fund
share activities........................................... 23,514,738 120,048,249 22,341,956 29,902,672
------------ ------------ ------------ -----------
TOTAL INCREASE IN NET ASSETS.................................... 23,206,270 120,941,818 22,287,710 30,608,074
NET ASSETS AT THE BEGINNING OF THE PERIOD....................... 120,941,818 -- 30,608,074 --
------------ ------------ ------------ -----------
NET ASSETS AT THE END OF THE PERIOD............................. $144,148,088 $120,941,818 $ 52,895,784 $30,608,074
============ ============ ============ ===========
UNDISTRIBUTED NET INVESTMENT INCOME............................. $ -- $ 4,729 $ -- $ 4,729
============ ============ ============ ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
17
<PAGE>
18
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Short Duration High-Yield High-Yield Municipal
Municipal Fund Bond Fund
------------------------------------ -------------------------------------
For the For the
six months ending Jan. 2, 1997(1) six months ending Jan. 2, 1997(1)
June 30, 1998 through June 30, 1998 through
(Unaudited) Dec. 31, 1997 (Unaudited) Dec. 31, 1997
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of
period........................... $ 10.15 $ 10.00 $ 10.45 $ 10.00
Income from investment operations:
Net investment income.......... 0.26 0.57 0.32 0.68
Net realized and unrealized
gains on investments.......... (0.03) 0.15 0.05 0.48
-------- --------- ------- -------
Total income from investment
operations.................... 0.23 0.72 0.37 1.16
Less distributions from:
Net investment income.......... (0.26) (0.57) (0.32) (0.68)
Net realized gains on
investments................... -- -- (0.05) (0.03)
-------- --------- ------- -------
Total distributions.......... (0.26) (0.57) (0.37) (0.71)
-------- --------- ------- -------
Net asset value, end of period.... $ 10.12 $ 10.15 10.45 $10.45
======== ========= ======= =======
Total Return...................... 2.3%(2) 7.4% 3.6%(2) 11.7%
Ratios and Supplemental Data
Net assets, end of period (in
thousands).................... $144,148 $ 120,942 $52,896 $30,608
Ratio of net expenses to
average net assets............ 0.50%(3)(4) 0.00%(4) 0.53%(3)(5) 0.00%(5)
Ratio of net investment income
to average net assets......... 5.18%(3)(4) 5.33%(4) 5.89%(3)(5) 6.01%(5)
Portfolio turnover rate........ 121% 175% 198% 439%
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) If there had been no expense reimbursement and management fee waiver by the
Advisor, the ratio of net expenses to average net assets for the periods ended
June 30, 1998 and December 31, 1997 would have been 0.75% and 0.84%,
respectively, and the ratio of net investment income to average net assets would
have been 4.93% and 4.49%, respectively.
(5) If there had been no expense reimbursement and management fee waiver by the
Advisor, the ratio of net expenses to average net assets for the periods ended
June 30, 1998 and December 31, 1997 would have been 0.97% and 1.25%,
respectively, and the ratio of net investment income to average net assets would
have been 5.45% and 4.76%, respectively.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS . June 30, 1998 (Unaudited)
- -------------------------------------------------------------------------------
(1) Organization
Heartland Group, Inc. (the "Corporation") is registered as an open-end
management company under the Investment Company Act of 1940. The Short Duration
High-Yield Municipal Fund and High-Yield Municipal Bond Fund (the "Funds"), each
of which is a diversified fund, are two of the nine series of funds issued by
the Corporation at June 30, 1998.
(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) 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 June 30, 1998, the Short Duration High-Yield Municipal Fund had a
Federal income tax capital loss carryforward of $27,690 expiring in
2005. The Fund does not intend to make distributions of any future
realized capital gains until its Federal income tax capital loss
carryforward is completely utilized.
Statement of Position 93-2 requires that permanent financial reporting
and tax differences be reclassified to paid in capital. Net assets are
not affected by these reclassifications.
(c) The Funds record security and shareholder transactions on 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 Funds amortize premium and accrete original issue discount
on investments utilizing the effective interest method.
(d) The Funds are charged for those expenses that are directly
attributable to them. Expenses that are not directly attributable to
any one Fund are typically allocated among all Funds issued by the
Corporation in proportion to their respective net assets, number of
open shareholder accounts, or net sales, as applicable.
(e) The Funds may enter into futures contracts for hedging purposes, such
as to protect against anticipated declines in the market value of
their portfolio securities or to manage exposure to changing interest
rates. Upon entering into a futures contract, 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 on a daily basis 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 Statements 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 the following open short futures contracts at June 30,
1998:
Short Duration High-Yield Municipal Fund
<TABLE>
<CAPTION>
Number Expiration Unrealized
Type of Contracts Date Depreciation
---- ------------ -------------- ------------
<S> <C> <C> <C>
Municipal Bond Index (165) September 1998 ($428,125)
High-Yield Municipal Bond Fund
Number Expiration Unrealized
Type of Contracts Date Depreciation
---- ------------ -------------- ------------
Municipal Bond Index (20) September 1998 ($4,375)
</TABLE>
19
<PAGE>
(f) The Funds have entered into a fee arrangement with its custodian
bank and transfer agent which provides for a reduction in custody
and transfer agent fees based upon net amounts of uninvested cash
balances. This reduction of expenses, if any, 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.
(3) Credit Facility
Deutsche Bank AG has made available to seven of the nine series of funds
issued by the Corporation, including the Short Duration High-Yield
Municipal and High-Yield Municipal Bond Funds, a $70 million credit
facility pursuant to a Credit Agreement dated March 31, 1998. Outstanding
principal amounts under the credit facility bear interest at a rate per
annum equal to the NIBOR rate plus 0.5% or the prime rate. Commitment fees
are computed at a rate per annum equal to 0.08% of the Funds' proportional
daily average unutilized credit. During the period from March 31, 1998
though June 30, 1998 the Funds did not borrow against the credit facility.
Commitment fees for the Short Duration High-Yield Municipal Fund and the
High-Yield Municipal Bond Fund were $1,006 and $349, respectively.
(4) 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 Short Duration High-Yield Municipal Fund pays the
Advisor a monthly management fee at the annual rate of .40% of the daily
net asset value of the Fund and the High-Yield Municipal Bond Fund pays the
Advisor a monthly management fee at the annual rate of .60% of the daily
net asset value of the Fund.
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.
The Advisor voluntarily committed to waive the entire management and Rule
12b-1 fees and to reimburse all other expenses for the Funds for the fiscal
year ending December 31, 1997. Effective January 1, 1998, the Advisor began
to reduce the amount of this waiver and reimbursement each month by 0.15%
on an annualized basis, but will voluntarily reimburse the Funds to the
extent that annual total fund operating expenses would exceed 0.75% for the
Short Duration High-Yield Municipal Fund and 0.95% for the High-Yield
Municipal Bond Fund.
Officers and certain directors of the Corporation 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 Corporation 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.
(5) 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 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 organizational expenses and the
related payable to the Advisor at June 30, 1998, were $16,550 for each
fund. Reimbursement to the Advisor of these amounts by the Funds will be
subject to the expense limitations and reimbursements in effect for the
Funds at the time.
20
<PAGE>
(6) Investment Transactions
During the period from January 1, 1998 through June 30, 1998, purchases and
sales of securities, other than short-term obligations, were as follows (in
thousands):
Short Duration High-Yield
High-Yield Municipal
Municipal Fund Bond Fund
--------------- -----------
Cost of purchases $188,340 $106,616
Proceeds from sales 161,495 $ 86,318
At June 30, 1998, the gross unrealized appreciation and depreciation on
securities for tax purposes were as follows (in thousands):
Short Duration High-Yield
High-Yield Municipal
Municipal Fund Bond Fund
-------------- ----------
Appreciation $1,456 $653
Depreciation (97) (283)
-------------- ----------
$1,359 $370
============== ==========
Cost of investments is substantially the same for financial reporting
purposes and federal income tax purposes.
(7) Fund Share Transactions
For the period from January 1, 1998 through June 30, 1998, Fund share
transactions were as follows:
Short Duration High-Yield
High-Yield Municipal
Municipal Fund Bond Fund
--------------- -----------
Shares issued 8,009,108 3,864,975
Reinvested dividends from net
investment income and
distributions from net realized
gains on investments 302,510 131,723
Shares redeemed (5,988,186) (1,864,895)
-------------- ----------
Net increase in Fund shares 2,323,432 2,131,803
============== ==========
For the period ended December 31, 1997, Fund share transactions were as
follows:
Short Duration High-Yield
High-Yield Municipal
Municipal Fund Bond Fund
--------------- ----------
Shares issued 16,144,715 3,358,272
Reinvested dividends from net
investment income and
distributions from net realized
gains on investments 267,346 83,609
Shares redeemed (4,493,392) (512,100)
--------------- ----------
Net increase in Fund shares 11,918,669 2,929,781
=============== ==========
21
<PAGE>
The Heartland Family of Funds
Large Cap Value Fund
Mid Cap Value Fund
Value Plus Fund
U.S. Government Securities Fund
Small Cap Contrarian Fund
(closed to new accounts)
Value Fund
(closed to new accounts)
Short Duration High-Yield Municipal Fund
High-Yield Municipal Bond Fund
Wisconsin Tax Free Fund
(available to Wisconsin residents only)
Firstar Money Market Fund
1.800.432.7856
[Logo] Heartland Funds
------------------------
AMERICA'S VALUE INVESTOR
790 N. Milwaukee Street, Milwaukee, WI 53202
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.
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. Complete
portfolios for the Funds will be included in the Annual and Semi-Annual Reports
to Shareholders. Wisconsin Tax Free Fund income may be subject to alternative
minimum tax and Municipal Fund income may be subject to state, local and
alternative minimum tax.
This material may only be used when preceded or accompanied by a prospectus for
the Funds listed on the front cover. If you would like more complete information
on any other Fund, including charges and expenses, please call for a prospectus.
Read it carefully before you invest.
Heartland Advisors, Inc., distributor. Member SIPC.
