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[Logo] Heartland Funds
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AMERICA'S VALUE INVESTOR
Value Report
December 31, 1997
Notes on value investing
for investors in
Heartland Funds
Annual Report
to Shareholders
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VALUE REPORT
Dear Investor
[Photo of Bill Nasgovitz]
The excitement of the holidays has subsided. It is time for us to reflect on the
year gone by and some of the lessons we have learned. In 1997, we were reminded
that overvalued stocks can become even more overvalued when passion rather than
prudence rules the day. We learned that a new generation of investors has
dismissed the collective wisdom of their elders and proclaimed a new golden age
for equities. We have realized that investors are so conditioned to buying
stocks on market dips that they are prone to ignore the economic fundamentals
that support equities valuations. Have these lessons inspired us to change our
investment philosophy and methodology? Hardly. In fact, we remain totally
committed to the principles of value investing that have guided us since
inception.
For those who may be tempted to abandon these principles and take up the mantra
of new age investing, I want to share the resolutions that I and every member of
the Heartland investment team reaffirm each and every new year.
1. I will look down as well as up in making investment decisions--endeavoring to
assess risk as diligently as reward potential.
2. I will take the long view--realizing that short-term market trends are often
the product of investor emotion, not reason.
3. I will focus on value--stocks that we believe are priced realistically
relative to their "real world" economic value.
4. I will acknowledge the beneficial role bonds can play in a diversified
investment portfolio.
5. I will be my own person--recognizing that consensus wisdom is often wrong.
If you stick to these resolutions, I believe you will prosper in what may be a
very challenging investment environment in 1998.
If we are to continue to enjoy the "best of all possible worlds" for equity
investing--low inflation, low interest rates and strong corporate earnings
growth--perhaps for the time being, at least, high equity valuations are
justified. The issue is whether there is anything lurking out there to disrupt
this comfortable scenario. Due in part to the problems in Asia--devalued
currencies will likely increase low cost imports to the U.S., putting downward
pressure on domestic product pricing in the process--inflation is likely to
remain low. Consequently, we believe interest rates should stay low and probably
trend even lower in the year ahead.
But, what about earnings? The market seems to believe American companies will
continue to grow earnings at an 8-10% annual rate forever. We doubt it. In fact,
we think S&P earnings estimates for 1998 will prove to be optimistic. With U.S.
labor costs rising and, as aforementioned, pricing flexibility severely
restricted by cheap imports from Asia, corporate profit margins are likely to
suffer. I don't believe we can count on the kind of productivity
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VALUE REPORT
gains that have allowed companies to increase earnings at 2 to 3 times revenue
growth in recent years. If, as we anticipate, earnings fall well short of
consensus expectations, we could see a very substantial correction in stocks
that could last for more than just a few weeks.
Should investors sell all their stocks and equity mutual funds in anticipation
of a market correction? We don't think so. We do think investors would be
prudent to gravitate to individual stocks and equity mutual funds that offer
value as measured by time tested fundamental yardsticks such as low
price/earnings, low price/cash flow and low price/book value ratios. We also
believe they should consider bonds and bond funds. Today, you can make a
compelling case for bonds based solely on their own fundamental merits. In view
of what we see as the substantial risk in equities, bonds may currently be an
appealing alternative to stocks as well. It is worth noting that legendary
equity investor and fellow Graham & Dodd disciple, Warren Buffett, reportedly
bought several billions of dollars of zero coupon Treasury Bonds this Fall. We
don't know if neighbor Warren is still bullish on bonds, but he has
traditionally been a "buy and hold" type investor.
In our individual fund reports, we present examples of our investment selection
process. We hope you find them informative illustrations of our value oriented
discipline. Be advised, however, as with all our portfolio holdings, we
continuously monitor developments and reserve the right to change our views and
look for different opportunities.
In closing, over the last several years, stocks have delivered astounding
returns. We are delighted to have substantially enhanced our equity fund
shareholders' assets. We believe we will face a much sterner challenge in the
year ahead, but look forward to the opportunity to demonstrate the effectiveness
of our value discipline.
Warmest Regards,
William J. Nasgovitz
President
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Table of Contents
Fund Discussions
Large Cap Value Fund......................................................2
Mid Cap Value Fund........................................................4
U.S. Government Securities Fund...........................................6
Value Plus Fund...........................................................8
Small Cap Contrarian Fund................................................10
Value Fund...............................................................12
Fund Facts
Large Cap Value Fund.....................................................14
Mid Cap Value Fund.......................................................15
U.S. Government Securities Fund..........................................16
Value Plus Fund..........................................................17
Small Cap Contrarian Fund................................................18
Value Fund...............................................................19
Definitions..............................................................20
Financial Section
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VALUE REPORT
Heartland Large Cap Value Fund
In full year 1997, the Fund returned 22.9% versus the S&P 500's 33.4% advance.
In fourth quarter 1997, the Fund declined 2.7% compared to the Standard & Poor's
500 Index's 2.9% gain. For more information on the Fund, including top ten
holdings, please see the Fund Fact Sheet on page 14.
In 1997, our financial holdings led the performance parade. Insurance stocks did
well and, we believe, will continue to contribute to returns in the year ahead.
Our bank stocks also boosted performance; however, due in our opinion to fairly
rich valuations, we have largely eliminated them from the portfolio. The Asian
economic crisis short-circuited earlier gains in cyclical stocks, which had
performed well until falling out of bed in the fourth quarter. El Nino dampened
returns from the energy sector. The Fund's substantial cash position--15%-20%
through most of 1997, and 23% going into the fourth quarter--restrained returns.
Comparisons to our S&P 500 benchmark were also made more difficult by the
particularly strong gains made by the "favored fifty" type growth stocks that
have such a disproportionate impact on the Index.
Sharp market corrections in late October and December gave us the opportunity to
deploy our substantial cash reserves. By year-end 1997, the Fund was nearly
fully invested. We added to our positions in energy stocks, which, in our view,
were unduly punished by investors' response to El Nino--a classic example of
overreaction to a short-term, random event. We are still consuming more energy
than we are producing. Longer term, this should be favorable for energy prices
and energy stock earnings. We also added to our positions in cyclicals, which,
as aforementioned, sold off due to concern over Asian economic weakness. We
believe
[Photo of James P. Holmes]
James P. Holmes, CFA
Portfolio Manager
"Sharp market corrections in late October and December gave us the opportunity
to deploy our substantial cash reserves."
2
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VALUE REPORT
renewed economic momentum in Europe will help fill the void being created by the
downturn in Asia and that the earnings for cyclicals like paper companies will
surprise on the upside. We also beefed up positions in the deeply depressed
hospital and HMO stocks. We believe all the bad news is already built into
current stock prices and that the economics in these industries will improve in
1998.
Welcome Kmart Shoppers
Kmart has had its problems in recent years. However, we believe new management
is making progress with its sustained program to re-invigorate sales and improve
profit margins. The stock should be a beneficiary rather than a victim of Asian
economic problems, as the cost of goods imported from Asia declines. At year-end
1997, Kmart stock was trading at just 17% of sales, a substantial discount from
the retail group average, and at a rather modest 10% premium to book value.
Kmart has a price/earnings ratio of about 13 times our 1998 estimates and a
price/cash flow ratio of about 5.3 times our '98 projections. We will keep an
eye on management to see if our positive assessment is accurate, but we think
the stock is still too cheap for a company we believe is turning around.
[line chart illustrating performance of an assumed investment of $10,000 in
the Heartland Large Cap Value Fund and the S&P 500 Index beginning on
10/11/96 as follows:
Heartland Large
Cap Value Fund S&P 500
10/11/96 $10,000 $10,000
12/31/96 10,500 10,714
03/31/97 10,600 11,002
06/30/97 12,140 12,923
09/30/97 13,270 13,891
12/31/97 12,905 14,289
Legend in graph states that Past Performance is not predictive of future
results.
A box below the graph states Average Annual Total Returns as of 12/31/97 as
follows:
1-year 22.9%
since inception 23.2%]
On 12/31/97, the Fund held 7,000 shares of Kmart Corporation valued at $80,938,
representing 1.1% of the Fund's net assets.
3
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VALUE REPORT
Heartland Mid Cap Value Fund
In full year 1997, the Fund returned 22.8% versus the S&P Mid-Cap's 32.3%
advance. In fourth quarter 1997, the Fund declined 2.4% compared to the S&P
Mid-Cap Index's 0.8% gain. For more information on the Fund, including top ten
positions, please see the Fund Fact Sheet on page 15.
In 1997, the Fund's insurance company and bank holdings performed particularly
well. We are maintaining our positions in the insurers, but taking some profits
in bank stocks that we believe have become richly priced. Home builders, food
retailers and entertainment holdings also performed well. We continue to see
selected value in these groups.
Our holdings in cyclical companies, particularly the base metals like copper and
aluminum, disappointed. Investors appeared to recognize that weakness in Asian
economies would likely result in reduced demand and lower prices for the metals.
We think they are right, but that this will be a relatively temporary
phenomenon. As Asian countries attempt to export their way out of the current
economic malaise, we believe demand and base metals prices will recover.
Consequently, we are adding to positions in stocks we feel are very cheap
relative to longer-term prospects.
The Fund's median capitalization of approximately $1.3 billion compared to about
$2.8 billion for the S&P Mid-Cap Index also worked against us, as larger
mid-cap companies tended to outperform their smaller counterparts. We still are
finding more fundamental values in smaller mid-cap companies. In the year ahead,
we believe other investors will as well.
[Photo of Michael A. Berry]
Michael A. Berry, Ph.D.
Portfolio Manager
"We still are finding more fundamental values in smaller mid-cap companies. In
the year ahead, we believe other investors will as well."
4
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VALUE REPORT
There's No Business Like Show Business
King World Productions is one of the leading syndicators of television
programming, with an impressive roster that includes The Oprah Winfrey Show,
Wheel of Fortune, and The New Hollywood Squares. The stock got hit hard when it
was rumored that Oprah was going to hang up her microphone to direct and act in
more movies. We bought the stock shortly after Oprah announced she would
continue with the show.
King World stock has recovered nicely, rebounding from a 1997 low below $35 per
share to $57.75 at year-end 1997. On January 19, 1998 shareholders approved a
2-for-1 stock split. We think it still represents value. Prices for leading
syndicated programming are trending up. We expect King World's earnings will as
well. The company has a rock-solid balance sheet featuring around $370 million
in cash. Oprah owns 5% and the King family, including the Chairman and CEO, owns
around 20%. So, management and leading talent should be motivated to keep the
show on the road. At year-end 1997, King World stock was trading at around 14
times our 1998 earnings estimates and at around 2.6 times book value. Of course,
we'll stay tuned to developments, but for now, that is an attractive enough
value to keep us from changing the channel.
[line chart illustrating performance of an assumed investment of $10,000 in
the Heartland Mid Cap Value Fund and the S&P Mid-Cap Index beginning on
10/11/96 as follows:
Heartland Mid S&P Mid-Cap
Cap Value Fund Index
10/11/96 $10,000 $10,000
12/31/96 10,660 10,562
03/31/97 10,680 10,405
06/30/97 12,100 11,934
09/30/97 13,420 13,853
12/31/97 13,094 13,969
Legend in graph states that Past Performance is not predictive of future
results.
A box below the graph states Average Annual Total Returns as of 12/31/97 as
follows:
1-year 22.8%
since inception 24.7%]
On 12/31/97, the Fund held 15,000 shares of King World Productions, Inc., valued
at $866,250, or 2.4% of the Fund's net assets.
5
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VALUE REPORT
Heartland U.S. Government Securities Fund
[Photo of Douglas S. Rogers]
Douglas S. Rogers, CFA
Portfolio Co-Manager
[Photo of Patrick J. Retzer]
Patrick J. Retzer, CPA
Portfolio Co-Manager
"Barbelling our portfolio provided a total return advantage over concentrating
investments in intermediate term Treasuries."
In full year 1997, the Fund returned 9.7% versus the benchmark index's 7.7%
advance. In fourth quarter 1997, the Fund returned 3.4% compared to the Lehman
Intermediate Term Treasury Index's 2.2% gain.
Declining interest rates along the yield curve buoyed bond returns in 1997. In
fourth quarter 1997, investors' "flight to quality" from a highly volatile stock
market benefited Treasury securities in particular, with yield spreads to
corporates widening due, in our opinion, to developing concerns over the impact
the Asian crisis would have on corporate earnings and balance sheets.
Consequently, our decision earlier this year to eliminate corporate bonds from
the Fund's portfolio proved advantageous.
Our decision to limit interest rate risk by keeping the Fund's average portfolio
duration between 3 to 6 years might have restrained returns, as the long end of
the government bond market performed spectacularly well. However, we had
"barbelled" the portfolio, with heavy weightings in longer term bonds at one end
and short term mortgage agencies with higher yields than short term Treasuries
on the other. This strategy provided a total return advantage over concentrating
investments in intermediate term Treasuries.
As of year-end 1997, the Fund has approximately 60% of its assets in short and
intermediate duration Government Agency mortgage bonds. While mortgage bonds are
subject to prepayment risk, they provide a significant yield advantage over
similar duration Treasuries.
Looking ahead to 1998, we think interest rates will continue to trend down,
albeit not immediately and not as dramatically as in 1997. The federal budget
deficit is shrinking and some economists are forecasting a budget surplus in
1998. U.S. government securities still have a yield advantage over bonds from
other
6
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VALUE REPORT
developed nations--somewhat confounding in that America has the lowest deficit
to Gross Domestic Product of the G7 nations. So, we think foreign investment
will continue to be strong. Declining issuance of U.S. government bonds may also
result in a "scarcity" premium.
With our favorable outlook for the bond market, increasing volatility in the
stock market as growth stocks blow up on a regular basis, and certain foreign
markets offering all the safety of a minefield, we believe prudent investors
should consider allocating a larger portion of their assets to U.S. government
bond funds.
Oh Give Me a Home
As investors spooked by the volatile stock market stampeded into Treasuries,
prices took off. As value investors, we saw where the herd was heading and went
to an alternative water hole--non-callable Federal Home Loan Bank bonds. Our
reasoning was that, as Treasuries became more fully priced, some of the
buffaloes would seek value elsewhere. We were already sipping at this higher
yielding spring when they arrived. So, the portfolio got a yield boost and some
attractive capital appreciation as well as other investors dipped in.
[line chart illustrating performance of an assumed investment of $10,000 in
the Heartland U.S. Government Securities Fund, the Lipper Gen. U.S.
Government Fund Index and the Lehman Intermediate Treasury Index beginning on
4/9/97 as follows:
Heartland U.S. Lipper Gen. U.S Lehman Intermediate
Gov't Securities Fund Gov't Fund Index Treasury Index
04/09/87 $10,000 $10,000 $10,000
12/31/88 10,846 10,709 10,950
12/31/89 12,072 12,039 12,338
12/31/90 13,277 13,003 13,540
12/31/91 15,529 14,905 15,409
12/31/92 17,095 15,815 16,478
12/31/93 20,141 17,132 17,835
12/31/94 18,199 16,315 17,518
12/31/95 21,656 19,079 20,043
12/31/96 22,089 19,466 20,842
12/31/97 24,230 21,181 22,446
Legend in graph states that Past Performance is not predictive of future
results.
A box below the graph states Average Annual Total Returns as of 12/31/97 as
follows:
1-year 9.7%
5-year 7.2%
10-year 9.0%
since inception 8.6%]
On 12/31/97, the Fund held $2,500,000 par value of Federal Home Loan Bank bonds
worth $2,680,350 representing 5.5% of the Fund's net assets.
The Lehman Intermediate Treasury Index is an unmanaged index of all Treasury
securities issued by the U.S. Government with maturities of greater than one
year but less than ten years and at least $100 million in outstanding issuance.
7
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VALUE REPORT
Heartland Value Plus Fund
[Photo of William J. Nasgovitz]
William J. Nasgovitz
Portfolio Co-Manager
[Photo of Patrick J. Retzer]
Patrick J. Retzer, CPA
Portfolio Co-Manager
"We believe high-yielding stocks such as utilities and REITs may be a safe
port in a market storm."
In full year 1997, the Fund returned 30.6% versus the Russell 2000 Index's 22.4%
advance. In fourth quarter 1997, the Fund returned 2.3% compared to the Russell
2000 Index's decline of 3.3%. For more information on the Fund, including top
ten positions, please see the Fund Fact Sheet on page 17.
Value Plus really lived up to its name in 1997. Thirteen portfolio holdings were
taken over. It appears strategic corporate buyers are value investors as well.
Our financial stocks, including Real Estate Investment Trusts (REITs) performed
quite well, as did our substantial utilities holdings, with investors appearing
to recognize that deregulation may prove to be a blessing instead of a curse. We
also saw some nice moves in convertible preferred and convertible bond holdings.
It is hard to single out any industry group of any size in the portfolio that
truly disappointed. Our investment in Amway Asia Pacific Ltd. was premature and
we sold out at a loss. Also, several small positions in South African gold
mining stocks are presently underwater, but we believe they can do better in the
year ahead, if gold regains some of its glitter.
We believe that high-yielding groups like utilities and REITs, which together
represented about 24% of the Fund's net assets at year-end 1997, will contribute
to performance in the year ahead. We don't think these groups are as vulnerable
to earnings disappointments as other sectors of the market. Also, we believe
they will be perceived as safe havens and/or bond alternatives for equity
investors seeking a port in what may be a stock market storm.
8
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VALUE REPORT
By the Time They Get to Tucson, We'll be Waiting
In 1992, Tucson Electric Power Company was in bankruptcy. Despite explosive
growth in its market, the company was saddled with uneconomic long-term coal
contracts--all its electric generating plants were coal fired--and local
regulators who would not grant sufficient rate relief to ensure the company's
financial health. The Company was able to re-negotiate contracts with its coal
suppliers at prevailing market prices and emerge from bankruptcy in January,
1998, under a new name, UniSource Energy Corporation.
At year-end 1997, the company's stock was trading at 3.3 times our 1998 cash
flow estimates and 10.7 times our 1998 earnings projections. This compares to
price-to-cash flows in the 5 to 6 range and P/Es in the low to mid teens range
for other electric utilities. Why so cheap? In our opinion, it is the current
lack of a dividend. We believe the company will reinstitute a dividend as early
as second half 1998 and begin attracting traditionally yield-oriented stock
investors. UniSource Energy may attract other investors in the form of larger,
more well-heeled utilities from upstate or over in California with designs on
the fast-growing Tucson market. If the story continues to develop as we think it
will, by the time other investors get to Tucson, we'll be waiting.
[line chart illustrating performance of an assumed investment of
$10,000 in the Heartland Value Plus Fund and the Russell 2000 Index
beginning on 10/26/93 as follows:
Heartland
Value Plus Fund Russell 2000
10/26/93 $10,000 $10,000
12/31/94 10,001 10,109
12/31/95 12,441 12,984
12/31/96 16,646 15,125
12/31/97 21,740 18,507
Legend in graph states that Past Performance is not predictive of
future results.
A box below the graph states Average Annual Total Returns as of
12/31/97 as follows:
1-year 30.6%
3-year 29.5%
since inception 20.4%]
On 12/31/97, the Fund held 400,000 shares in Tucson Electric Power Company,
valued at $7,250,000, representing 2.2% of the Fund's net assets.
9
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VALUE REPORT
Heartland Small Cap Contrarian Fund
[Photo of William J. Nasgovitz]
William J. Nasgovitz
Portfolio Manager
"We are not inclined to cancel our life insurance, because we didn't get hit by
a bus last year."
In full year 1997, the Fund returned 13.7% versus the Russell 2000 Index's 22.4%
advance. In fourth quarter 1997, the Fund declined 8.7% compared to a 3.3% drop
in the Russell 2000 Index. For more information on the Fund, including top ten
holdings, please see the Fund Fact Sheet on page 18.
Mergers and acquisitions were responsible for much of our gains as 10 portfolio
companies were taken over in 1997. We buy stocks based on value, not takeover
prospects. However, we believe strategic corporate buyers are also using value
criteria in assessing potential acquisitions.
The Fund's defensive posture restrained performance. At year-end 1997,
approximately 25% of total assets was allocated to short sales, another 22% was
hedged via S&P 500 short futures, and 8% was held in cash and equivalents. We
actually had nice gains in some of our shorts, most notably Liposome Company,
Inc., Oracle Corporation, and Oxford Health Plans, Inc. Nevertheless, as a
percentage of average 1997 net assets, our short positions resulted in a 2.5%
loss for the year. However, we did successfully short S&P 500 index futures to
hedge the portfolio and produce a positive return for the year. We plan to
remain somewhat defensive in 1998 and are not inclined to cancel our life
insurance, because we didn't get hit by a bus last year.
The Long and the Short of It
To demonstrate our value discipline, we thought it would be interesting to
discuss a long and a short in the same industry. Matrix Pharmaceuticals, Inc. is
a small research and development oriented drug company whose Intradose, a
promising new treatment for shrinking cancerous tumors in the head and neck
region, is now in final clinical trials at the FDA. On the company's
announcements of the withdrawal of one product from
10
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VALUE REPORT
testing and an internal restructuring program, the stock dropped from a 1997
high near $8 per share. Based on most recently stated book values at the end of
the third quarter, Matrix was trading below its stated $3.78 book value and just
above its $2.75 per share in cash. We believe Matrix is a value oriented
opportunity in an industry group that is generally very richly priced.
Compare this with Organogenesis, Inc., a biotech company competing with six
other firms in developing artificial tissue for skin grafts. The company is
losing money, and 1997 revenues are forecast at just $270,000. We estimate book
value at $0.67 per share. Yet, at year-end 1997, the stock was trading at around
40 times book value, with a $484 million market cap. The company submitted its
technology to the FDA for initial testing nearly three years ago. While the
company recently announced that it received premarket approval from the FDA, we
still feel that the stock is overpriced. We are monitoring the situation
carefully and will close our short position if we see evidence Organogenesis can
live up to all the promise baked into its fanciful valuation.
[line chart illustrating performance of an assumed investment of $10,000 in the
Heartland Small Cap Contrarian Fund and the Russell 2000 Index beginning on
4/27/95 as follows:
Heartland Small Cap
Contrarian Fund Russell 2000
04/27/95 $10,000 $10,000
12/31/95 12,082 12,102
12/31/96 14,362 14,098
12/31/97 16,330 17,251
Legend in graph states that Past Performance is not predictive of future
results.
A box below the graph states Average Annual Total Returns as of 12/31/97 as
follows:
1-year 13.7%
since inception 20.1%]
On 12/31/97, the Fund held 0; 0; 0; 2,100,000; and (262,500) shares of Liposome
Company, Inc.; Oracle Corporation; Oxford Health Plans, Inc.; Matrix
Pharmaceuticals, Inc.; and Organogenesis, Inc.; representing 0%; 0%; 0%; 2.6%;
and (2.5%), respectively, of the Fund's net assets.
11
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VALUE REPORT
[Photo of William J. Nasgovitz]
William J. Nasgovitz
Portfolio Co-Manager
[Photo of Eric J. Miller]
Eric J. Miller, CMA
Portfolio Co-Manager
"...we don't think it is an accident that our portfolio performance was enhanced
by takeovers in 1997."
Heartland Value Fund
In 1997, the Fund returned 23.2% versus the Russell 2000 Index's 22.4% advance.
However, in fourth quarter 1997, the Fund declined 5.9% compared to the Russell
2000 Index's decline of 3.3%. For more complete information on the Fund,
including top ten holdings, please refer to the Fund Fact Sheet on page 19.
We are pleased to have materially outperformed the Russell 2000, our benchmark
index for the year. Some of the credit must go to strategic corporate buyers,
who provided new homes for 21 of our portfolio holdings. Strategic corporate
buyers are seeking to extend product lines and distribution systems by acquiring
niche companies in related industries. They appear to be looking for the same
things we are--companies with strong free cash flow, positive earnings dynamics,
capable management and sound balance sheets. Consequently, we don't think it is
an accident that our performance was enhanced by takeovers in 1997.
On an industry group basis, our financial service stocks--brokers, banks and
insurance companies--were among our best performing investments. We have been
reducing the portfolio's exposure to bank stocks, which in our opinion, have
gotten rather richly priced. Our investments in small, specialty retailers hurt
portfolio performance. We must confess to being caught in a "value trap" in this
group. Fundamentally, the stocks looked cheap. But, retailers in general have
struggled this year, especially small, single-category retailers, which have
been hurt worst of all. We have weeded out several losers, but still believe the
sector has merit at current valuations.
Buying the Steak not the Sizzle
Lone Star Steakhouse and Saloon, Inc. stock was sizzling from January 1995
through April 1996. Then, growth
12
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VALUE REPORT
slowed and momentum investors bailed out, dropping the stock from a high of $45
down to the mid teens. We looked at the menu carefully. It appeared the sizzle
was out of the stock, but that a fundamentally appetizing steak remained. We
began accumulating the stock at $18 per share.
With approximately 265 restaurants, Lone Star is second only to Outback in the
steakhouse category. The balance sheet is squeaky clean, with virtually no debt
and about $150 million in cash. We believe management will use this cash to
renew expansion. Lone Star plans on adding approximately 50 new restaurants and
to broaden its menu in 1998. The company is increasing its advertising budget in
an attempt to revive sales.
At year-end 1997, the stock was trading at around 10.6 times our 1998 earnings
projections and at a relatively modest premium to our estimated $13.91 per share
1997 book value. Insiders own approximately 16% of the stock--with the CEO
personally owning approximately 6% with another 2.5% in stock options at $28 per
share. So, management should be financially motivated to reinvigorate the
company. We expect relatively flat earnings in 1998, but looking farther out, we
believe Lone Star can grow earnings at around 15% annually. If we are right, we
think Lone Star Steakhouse stock will regain some of its sizzle.
[line chart illustrating performance of an assumed investment of $10,000 in the
Heartland Value Fund and the Russell 2000 Index beginning on 12/28/84 as
follows:
Heartland Value Fund Russell 2000
12/28/84 $10,000 $10,000
12/31/85 14,094 13,219
12/31/86 15,637 13,970
12/31/87 14,318 12,745
12/31/88 18,190 15,918
12/31/89 19,385 18,503
12/31/90 16,072 14,892
12/31/91 24,005 21,751
12/31/92 34,202 25,756
12/31/93 40,620 30,626
12/31/94 41,316 30,070
12/31/95 53,629 38,618
12/31/96 64,885 44,987
12/31/97 79,934 55,048
Legend in graph states that Past Performance is not predictive of future
results.
A box below the graph states Average Annual Total Returns as of 12/31/97 as
follows:
1-year 23.2%
5-year 18.5%
10-year 18.8%
since inception 17.3%]
On 12/31/97, the Fund held 825,000 shares of Lone Star Steakhouse and Saloon,
Inc. valued at $14,437,500, representing 0.7% of the Fund's net assets.
13
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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.
AVERAGE ANNUAL TOTAL RETURNS 1-year Since inception (10/11/96)
Large Cap Value Fund 22.9% 23.2%
S&P 500 Index 33.4 33.9
The S&P 500 Index is an unmanaged index of 500 stocks representing major U.S.
industries.
FUND FACTS
Growth of $10,000
since inception (10/11/96)..... $12,905/1/
Median market cap.................. $4.4 bil.
Share price........................ $12.30
Net assets......................... $7.7 mil.
Fund vs. S&P 500/2/
Alpha.......................... .70
Beta........................... .63
R-squared...................... .77
Number of holdings................. 57
COMPARATIVE VALUATIONS
Heartland
Large Cap S&P 500
Value Fund Index/4/
Price/Earnings Ratio/3/ 16.8x 23.1x
Price/Book Value Ratio 2.0x 3.9x
Price/Cash Flow Ratio 8.5x 14.0x
TOP 10 HOLDINGS
Consolidated Natural Gas Co.............. 3.6%
Unicom Corporation....................... 3.6
Telecomunicacoes Brasileiras S.A. (ADR).. 3.5
Shaw Industries, Inc..................... 3.3
Owens Corning............................ 2.8
YPF Sociedad Anonima (ADR)............... 2.7%
Aetna, Inc............................... 2.5
Reynolds & Reynolds Co. (Class A)........ 2.4
UCAR International, Inc.................. 2.3
Companhia Cervejaria Brahma (ADR)........ 2.2
All statistics are as of December 31, 1997.
/1/ Includes reinvestment of all dividends and capital gains distributions.
Without expense reimbursement and management fee waiver in effect during the
period, total return 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 12/31/97. Source: Heartland Advisors, Inc.,
with data on relevant benchmark index from Russell Analytics. /3/'97 estimate.
/4/ Source: The Micro-Cap Research Group at Schroder & Co. Inc.
14
<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 $500 million and $3.5 billion.
AVERAGE ANNUAL TOTAL RETURNS 1-year Since inception (10/11/96)
Mid Cap Value Fund 22.8% 24.7%
S&P Mid-Cap Index 32.3 31.5
The S&P Mid-Cap Index is an unmanaged index of 400 stocks generally considered
representative of the mid-cap market.
FUND FACTS
Growth of $10,000
since inception (10/11/96)...................... $13,094/1/
Median market cap................................... $1.3 bil.
Share price......................................... $12.78
Net assets.......................................... $36.6 mil.
Fund vs. S&P Mid-Cap Index/2/
Alpha........................................... .68
Beta............................................ .73
R-squared....................................... .83
Number of holdings.................................. 66
COMPARATIVE VALUATIONS
Heartland S&P
Mid Cap Mid-Cap
Value Fund Index/4/
Price/Earnings Ratio/3/ 16.6x 24.0x
Price/Book Value Ratio 2.2x 3.0x
Price/Cash Flow Ratio 9.3x 15.8x
TOP 10 HOLDINGS
Allegiance Corporation........................... 2.6%
Toll Brothers, Inc. ............................. 2.4
King World Productions, Inc. .................... 2.4
Lehman Brothers Holdings, Inc. .................. 2.3
Reliance Group Holdings, Inc. ................... 2.3
Medusa Corporation............................... 2.2
Bank United Corporation.......................... 2.1
Commercial Federal Corporation................... 2.1
Lennar Corporation............................... 2.1
Wellpoint Health Networks, Inc. ................. 2.0
All statistics are as of December 31, 1997.
/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 12/31/97.
Source: Heartland Advisors, Inc., with data on relevant benchmark index from
Russell Analytics. /3/'97 estimate. /4/Source: The Micro-Cap Research Group at
Schroder & Co. Inc.
15
<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.
DECEMBER YIELD.................................................... 5.7%/2/
SEC yield annualized for the 30 days ending 12/31/97.
AVERAGE ANNUAL TOTAL RETURNS
Since inception
1-year 5-year 10-year 4/9/87
U.S. Government
Securities Fund 9.7% 7.2% 9.0% 8.6%
Lipper General
U.S. Gov't Fund Index 8.8 6.0 7.8 7.2
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.
FUND FACTS
Growth of $10,000
since inception (4/9/87)................. $24,230/3/
Net assets................................... $48.6 mil.
Share price....................................... $9.85
Avg. weighted duration......................... 4.7 yrs.
Avg. weighted credit quality........................ AAA
Dividends.......... Declared daily, distributed monthly
Sales commission................................... None
TOP 5 HOLDINGS
FHLMC CMO-SEQ 1921 B 6.5% 5/15/21.................................... 12.3%
VA VENDEE CMO-SEQ 1992-2F 7.0% 2/15/18.............................. 10.6
US Treasury Bond 7.25% 8/15/22...................................... 9.5
FNMA 6.76% 7/16/07 (Callable 7/06/02)............................... 6.4
FNMA 6.7% 12/12/06 (Callable 12/12/01).............................. 6.3
All statistics are as of December 31, 1997.
/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 5.3% and
total return would be lower. /3/Includes reinvestment of all dividends and
capital gains distributions.
16
<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.
DECEMBER YIELD
Value Plus Fund .............................................. 3.8%*
S&P 500 Index ................................................ 1.6%
*SEC yield annualized for the 30 days ending 12/31/97.
AVERAGE ANNUAL TOTAL RETURNS Since inception
1-year 3-year 10/26/93
Value Plus Fund 30.6% 29.5% 20.4%
Russell 2000 22.4 22.3 15.9
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.
FUND FACTS
Growth of $10,000
since inception (10/26/93)......... $21,740/1/
Median market cap......................... $199 mil.
Share price............................. $16.13
Net assets.............................. $336.3 mil.
Fund vs. Russell 2000/2/
Alpha................................... 7.32
Beta..................................... .45
R-squared................................ .45
Number of holdings......................... 115
COMPARATIVE VALUATIONS
Heartland Russell
Value Plus Fund 2000/4/
Price/Earnings Ratio/3/ 16.4x 25.0x
Price/Book Value Ratio 1.4x 2.7x
Price/Cash Flow Ratio 7.8x 16.8x
<TABLE>
<CAPTION>
TOP 10 HOLDINGS
<S> <C>
Fleming Companies, Inc. .......................... 3.0%
WPL Holdings, Inc. ............................... 3.0
Central & South West Corporation ................. 2.5
USX-Delhi Group .................................. 2.4
Dames & Moore, Inc. .............................. 2.3
Tuscon Electric Power Company .................... 2.2
London Pacific Group Ltd. (ADR) .................. 2.1
Southwestern Energy Company ...................... 2.1
Rochester Gas & Electric Corporation ............. 2.0
Tecumseh Products Company (Class A) .............. 1.8
</TABLE>
All statistics are as of December 31, 1997.
/1/Includes reinvestment of all dividends and capital gains distributions.
/2/Based on monthly data for the 3-year period ending 12/31/97. Source:
Heartland Advisors, Inc., with data on relevant benchmark index from Russell
Analytics. /3/'97 estimate. /4/Source: The Micro-Cap Research Group at Schroder
& Co. Inc.
17
<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. In exchange
for potentially greater returns, these sophisticated techniques involve
additional risks. (Closed to new investors since 11/1/97)
AVERAGE ANNUAL TOTAL RETURNS 1-year Since inception (4/27/95)
Small Cap Contrarian Fund 13.7% 20.1%
Russell 2000 22.4 22.6
The Russell 2000 Index is an unmanaged index of stocks considered representative
of the small cap market in general.
FUND FACTS
Growth of $10,000
since inception (4/27/95)..........$16,330/1/
Number of holdings
Long positions.........................106
Short positions.........................23
Fund vs. Russell 2000/2/
Alpha.................................3.52
Beta.................................. .64
R-squared............................. .44
Net assets.........................$276.6 mil.
COMPARATIVE VALUATIONS
Heartland Small Cap
Contrarian Fund Russell
(Long Positions) 2000/4/
Price/Earnings Ratio/3/ 21.3x 25.0x
Price/Book Value Ratio 1.9x 2.7x
Price/Cash Flow Ratio 9.8x 16.8x
TOP 10 HOLDINGS
ICN Pharmaceuticals, Inc......................4.4%
Drypers Corp. (7.5% Sr. Conv. Cum. Pfd.)......3.7
Matrix Pharmaceutical, Inc....................2.6
Orthologic Corporation........................2.4
Executone Information Systems, Inc............2.2
BTG, Inc......................................2.2
Shiloh Industries, Inc........................2.1
ICU Medical, Inc..............................2.0
Templeton Dragon Fund, Inc....................1.9
Donnelly Corporation (Class A)................1.8
All statistics are as of December 31, 1997.
/1/ Includes reinvestment of all dividends and capital gains distributions.
/2/ Based on monthly data for the period from 4/27/95 through 12/31/97. Source:
Heartland Advisors, Inc., with data on relevant benchmark index from Russell
Analytics. /3/'97 estimate. /4/Source: The Micro-Cap Research Group at Schroder
& Co. Inc.
18
<PAGE>
VALUE REPORT
Heartland Value Fund
This Fund seeks capital appreciation through small company stocks selected on a
value basis. (Closed to new investors since 7/1/95)
AVERAGE ANNUAL TOTAL RETURNS
Since inception
1-year 5-year 10-year 12/28/84
Value Fund 23.2% 18.5% 18.8% 17.3%
Russell 2000 22.4 16.4 15.8 14.0
The Russell 2000 Index is an unmanaged index of stocks considered representative
of the small cap market.
FUND FACTS
Growth of $10,000
since inception (12/28/84).................$79,934/1/
Net assets.....................................$2.1 bil.
Median market cap...............................$94 mil.
Avg. weighted market cap.......................$436 mil.
Fund vs. Russell 2000/2/
Alpha...........................................2.70
Beta............................................ .65
R-squared....................................... .58
Number of holdings...................................353
COMPARATIVE VALUATIONS
Heartland Russell
Value Fund 2000/4/
Price/Earnings Ratio/3/ 19.7x 25.0x
Price/Book Value Ratio 2.1x 2.7x
Price/Cash Flow Ratio 10.2x 16.8x
TOP 10 HOLDINGS
ICN Pharmaceuticals, Inc...........6.2% Eaton Vance Corporation.........1.2%
Associated Banc-Corp...............1.4 Forest Oil Corporation..........1.2
John Alden Financial Corporation...1.4 Tesoro Petroleum Corporation....1.0
Grand Casinos, Inc.................1.3 PXRE Corporation................0.9
Presidential Life Corporation......1.3 ShopKo Stores, Inc..............0.9
All statistics are as of December 31, 1997.
/1/ Includes reinvestment of all dividends and capital gains distributions.
/2/ Based on monthly data for the 3-year period ending 12/31/97. Source:
Heartland Advisors, Inc., with data on relevant benchmark index from Russell
Analytics. /3/ '97 estimate. /4/ Source: The Micro-Cap Research Group at
Schroder & Co. Inc.
19
<PAGE>
VALUE REPORT
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 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 a fund
with 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.
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.
<PAGE>
SCHEDULES OF INVESTMENTS AND
FINANCIAL STATEMENTS
Table of Contents
------------------------------------------
2 ...................................................Small Cap Contrarian Fund
5 ..................................................................Value Fund
13 ..........................................................Mid Cap Value Fund
15 ........................................................Large Cap Value Fund
17 .............................................................Value Plus Fund
21 .............................................U.S. Government Securities Fund
22 ........................................Statements of Assets and Liabilities
24 ....................................................Statements of Operations
26 .......................................................Statements of Changes
in Net Assets
30 ........................................................Financial Highlights
35 ...............................................Notes to Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Heartland Group, Inc.:
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Heartland Small Cap Contrarian
Fund, Heartland Value Fund, Heartland Mid Cap Value Fund, Heartland Large Cap
Value Fund, Heartland Value Plus Fund and Heartland U.S. Government Securities
Fund (six of the portfolios constituting Heartland Group, Inc., hereafter
referred to as the "Funds") at December 31, 1997, the results of each of their
operations, the changes in each of their net assets and the financial highlights
for the year then ended, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Funds'
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at December 31, 1997 by correspondence with the
custodian and brokers and application of alternative auditing procedures where
confirmations were not received, provides a reasonable basis for the opinion
expressed above. The financial statements of the Funds presented for the periods
ended on or prior to December 31, 1996 were audited by other independent
accountants whose report dated February 7, 1997 expressed an unqualified opinion
on those statements.
Milwaukee, Wisconsin Price Waterhouse LLP
February 6, 1998
<PAGE>
HEARTLAND SMALL CAP CONTRARIAN FUND
SCHEDULE OF INVESTMENTS . December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 92.5% Shares Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Earnings Ratio
Advocat, Inc. (a)(b)(c) 279,200 Drugs & Medicine $ 2,373,200 0.9%
Allou Health & Beauty Care, Inc. (Class A) (a)(b)(c) 525,000 Drugs & Medicine 3,871,875 1.4
American Physicians Services Group, Inc. (a)(b)(c) 207,200 Insurance - Specialty 1,476,300 0.5
Atlantic American Corporation (c) 337,800 Insurance 1,710,112 0.6
Donnelly Corporation (Class A) (b)(c) 300,000 Motor Vehicles 5,043,750 1.8
Drypers Corporation (a)(b)(d) 168,882 Paper & Forest Products 898,773 0.3
Dynamic Materials Corporation (a)(b)(c) 222,000 Chemicals 1,776,000 0.6
ELXSI Corporation (c) 100,000 Non-Durables & Entertainment 1,150,000 0.4
Fahnestock Viner Holdings, Inc. (c) 200,000 Miscellaneous Financial 3,487,500 1.3
Family Steak Houses of Florida, Inc. (a)(b) 700,000 Non-Durables & Entertainment 415,660 0.1
First Philippine Fund, Inc. 400,000 Regulated Investment Company 2,725,000 1.0
Fortress Group, Inc. (b)(c) 700,000 Construction 2,975,000 1.1
Friedman Industries, Inc. (c) 210,000 Steel 1,260,000 0.5
Global Motorsport Group, Inc. (a)(b)(c) 400,000 Motor Vehicles 4,650,000 1.7
Home Security International, Inc. (a)(b)(c) 317,500 Business Services 3,571,875 1.3
ICTS International N.V. (a)(b)(c) 325,000 Business Services 2,843,750 1.0
Kentek Information Systems, Inc. (b)(c) 451,800 Business Machines 3,049,650 1.1
K-Tron International, Inc. (a)(c) 122,000 Electronics 2,104,500 0.8
Manchester Equipment Company, Inc. (a)(b)(c) 500,000 Business Services 2,000,000 0.7
Moore Medical Corporation (a)(b)(c) 200,000 Drugs & Medicine 2,175,000 0.8
Motor Club of America (a)(b)(c) 146,000 Insurance 1,971,000 0.7
Northwest Pipe Company (a)(c) 200,000 Steel 4,800,000 1.7
O. I. Corporation (a)(b)(c) 352,000 Optical & Photo Equipment 1,540,000 0.6
Point West Capital Corporation (a)(b) 400,000 Miscellaneous Financial 1,500,000 0.5
PremiumWear, Inc. (a)(b) 200,000 Apparel 1,062,500 0.4
Programmer's Paradise, Inc. (a)(b)(c) 251,900 Business Machines 2,361,563 0.9
Raytel Medical Corporation (a)(c) 200,000 Drugs & Medicine 2,325,000 0.8
Safety Components International, Inc. (a)(b)(c) 227,500 Non-Durables & Entertainment 2,730,000 1.0
Shiloh Industries, Inc. (a)(c) 300,000 Producer Goods 5,700,000 2.1
Speizman Industries, Inc. (a)(b)(c) 290,000 Producer Goods 1,631,250 0.6
The Stephan Company (c) 54,500 Soap & Cosmetics 725,531 0.3
Unico American Corporation (c) 100,000 Insurance 1,225,000 0.4
Washington Homes, Inc. (a)(c) 250,000 Construction 906,250 0.3
Winsloew Furniture, Inc. (a)(c) 287,000 Consumer Durables 4,161,500 1.5
------------- --------
$ 82,197,539 29.7%
Low Price to Book Value
Aldila, Inc. (a)(c) 350,000 Non-Durables & Entertainment $ 1,531,250 0.6%
Alta Gold Company (a)(c) 700,000 Gold 940,660 0.3
Apex Silver Mines, Ltd. (a)(d) 187,500 Gold 1,792,969 0.6
Ashanti Goldfields Company Ltd. (GDR) 350,000 Gold 2,625,000 0.9
Astro-Med, Inc. (c) 215,400 Business Machines 1,723,200 0.6
Bio-Vascular, Inc. (b)(c) 526,000 Drugs & Medicine 1,972,500 0.7
Bitstream, Inc. (a)(b)(c) 445,300 Software 834,937 0.3
BTG, Inc. (a)(b)(c) 610,000 Business Services 6,023,750 2.2
Cabot Oil & Gas Corporation (a) 100,000 Domestic Oil 1,943,750 0.7
Callon Petroleum Company (a)(c) 100,000 Domestic Oil 1,628,130 0.6
Capital Corp of the West (c) 100,000 Banks 1,475,000 0.5
Community Financial Corporation (c) 50,000 Banks 906,250 0.3
Crown Books Corporation (a)(b)(c) 325,000 Retail 2,071,875 0.7
Dailey International, Inc. (a)(c) 150,000 Energy & Raw Materials 1,631,250 0.6
Executone Information Systems, Inc. (a)(b)(c) 2,800,000 Business Services 6,125,000 2.2
Geomaque Explorations, Ltd. (a)(e) 862,500 Gold 1,531,455 0.6
Harding Lawson Associates Group, Inc. (a)(b)(c) 475,000 Business Services 4,868,750 1.8
High Plains Corporation (a)(b)(c) 1,000,000 Chemicals 2,875,000 1.0
Little Switzerland, Inc. (a)(c) 300,000 Retail 2,118,750 0.8
</TABLE>
2
<PAGE>
HEARTLAND SMALL CAP CONTRARIAN FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 92.5% [CONT'D] Shares Industry Value Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Low Price to Book Value [CONT'D]
Matrix Pharmaceutical, Inc. (a)(b)(c) 2,100,000 Drugs & Medicine $ 7,218,750 2.6%
Microtest, Inc. (a)(c) 300,000 Electronics 1,387,500 0.5
Motorcar Parts Accessories, Inc. (a)(c) 125,000 Motor Vehicles 2,093,750 0.8
M-Wave, Inc. (a)(b) 277,000 Electronics 969,500 0.4
Napco Security Systems, Inc. (a)(c) 108,700 Electronics 652,200 0.2
Net Bank, Inc. (a)(c) 230,000 Miscellaneous Financial 2,702,500 1.0
NTN Canada, Inc. (a)(b) 171,500 Media 600,250 0.2
PDK Labs, Inc. (a)(c) 125,000 Drugs & Medicine 859,375 0.3
Players International, Inc. (a)(c) 992,400 Travel & Recreation 3,163,275 1.1
Six Rivers National Bank (a) 50,000 Banks 887,500 0.3
Southwall Technologies, Inc. (a)(c) 88,600 Chemicals 620,200 0.2
TCI International, Inc. (a) 152,400 Electronics 742,950 0.3
Tipperary Corporation (a)(b) 937,900 Energy & Raw Materials 3,810,219 1.4
Union Bankshares, Ltd. (a)(b)(c) 40,000 Banks 1,005,000 0.4
Vital Images, Inc. (a) 90,000 Business Services 129,375 0.0
------------ -------
$ 71,461,820 25.7%
Below Average Price/Cash Flow Ratio
Butler International, Inc. (a)(c) 40,000 Business Services $ 700,000 0.3%
Catherines Stores Corporation (a)(b)(c) 600,000 Apparel 4,200,000 1.5
Chico's Fas, Inc. (a)(b)(c) 460,000 Apparel 3,105,000 1.1
Children's Discovery Centers
of America, Inc. (a)(b)(c) 500,000 Business Services 4,875,000 1.8
Communications Central, Inc. (a)(c) 300,000 Telephone 3,018,750 1.1
Control Devices, Inc. (c) 129,301 Electronics 2,068,816 0.7
Dart Group Corporation (Class A)(c) 39,500 Retail 4,582,000 1.7
Diehl Graphsoft, Inc. (a) 150,000 Business Services 543,750 0.2
Excelsior-Henderson Motorcycle
Mfg. Co. (a)(b)(d) 460,000 Motor Vehicles 1,868,704 0.7
The GNI Group, Inc. (a)(b)(c) 600,000 Business Services 2,925,000 1.1
ICN Pharmaceuticals, Inc. (c) 250,000 Drugs & Medicine 12,203,125 4.4
ICU Medical, Inc. (a)(b)(c) 450,000 Drugs & Medicine 5,568,750 2.0
Norland Medical Systems, Inc. (a)(b)(c) 540,000 Electronics 4,050,000 1.5
Personnel Management, Inc. (a)(b)(c) 200,000 Business Services 2,450,000 0.9
Portec, Inc. (c) 150,000 Railroads & Shipping 2,175,000 0.8
RCM Technologies, Inc. (a)(c) 139,000 Business Services 2,363,000 0.9
Resource Bancshares Mortgage Group, Inc. (c) 105,000 Miscellaneous Financial 1,712,813 0.6
Riviera Tool & Die Company (a)(b)(c) 156,400 Producer Goods 1,720,400 0.6
Spectrum Control, Inc. (a)(c) 515,000 Electronics 2,768,125 1.0
Summit Resources, Ltd. (a)(e) 1,200,000 International Oil 3,816,840 1.4
Summit Resources, Ltd. (Rights) (a)(e) 271,250 International Oil 37,920 0.0
Syncor International Corporation (a)(c) 290,100 Drugs & Medicine 4,677,863 1.7
Tufco Technologies, Inc. (a)(c) 70,000 Media 770,000 0.3
------------ -------
$ 72,200,856 26.3%
Special Situations
Autonomous Technologies Corporation (b)(c) 515,000 Drugs & Medicine $ 2,896,875 1.0%
Bolder Technologies Corporation (c) 267,500 Electronics 2,574,687 0.9
Coastal Physician Group, Inc. (a)(b) 1,500,000 Drugs & Medicine 1,218,750 0.4
Convergent Communications, Inc.
(Units)(a)(d) 200,000 Telecommunications 500,000 0.2
Harmony Brook, Inc. (a)(b) 700,000 Business Services 196,910 0.1
HMI Industries, Inc. (a) 29,900 Consumer Durables 179,400 0.1
In Home Health, Inc. (a)(b) 1,405,000 Drugs & Medicine 1,317,188 0.5
Korea Fund, Inc. 400,000 Regulated Investment Company 2,650,000 1.0
Morgan Stanley Asia-Pacific Fund 500,000 Regulated Investment Company 3,718,750 1.3
Orthologic Corporation (a)(c) 1,200,000 Drugs & Medicine 6,675,000 2.4
PolyVision Corporation (a)(b) 600,000 Construction 525,000 0.2
Scudder New Asia Fund, Inc. 241,500 Regulated Investment Company 2,339,531 0.8
</TABLE>
3
<PAGE>
HEARTLAND SMALL CAP CONTRARIAN FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 92.5% [CONT'D] Shares Industry Value Net Assets
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Special Situations [CONT'D]
Templeton Dragon Fund, Inc. 500,000 Regulated Investment Company $ 5,375,000 1.9%
VECTRA Technologies, Inc. (a)(b) 650,000 Business Services 19,500 0.0
------------ -------
30,186,591 10.8%
------------
TOTAL COMMON STOCKS (Cost $251,236,503) $256,046,806
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Percent of
PREFERRED STOCK - 3.7% Shares Industry Value Net Assets
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Drypers Corp. 7.5% Senior
Conv. Cumulative (b)(c)(d) 18,598 Paper & Forest Products $ 10,154,257 3.7%
------------
TOTAL PREFERRED STOCK (Cost $1,859,800) $ 10,154,257
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Par Percent of
SHORT-TERM INVESTMENT - 0.3% Amount Value Net Assets
- ----------------------------------------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTE (+)
Warner-Lambert Company 5.49% $ 781,000 $ 781,000 0.3%
-------------
TOTAL SHORT-TERM INVESTMENT (Cost $781,000) $ 781,000
TOTAL INVESTMENTS (Cost $253,877,303) ................................................ $266,982,063 96.5%
Cash and receivables, less liabilities ............................................... 9,659,831 3.5
------------- --------
TOTAL NET ASSETS ..................................................................... $276,641,894 100.0%
============= ========
</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 or futures
contracts. See Notes 2(e) and 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 December 31, 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Percent of
SHORT SALES - (34.7%) Shares Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advanced Fibre Communications 70,000 Telephone $ 2,038,750 (0.7)%
Advanced Tissue Sciences, Inc. 50,000 Drugs & Medicine 618,750 (0.2)
Alydaar Software Corporation 2,700 Business Services 42,525 (0.0)
Arterial Vascular Engineering, Inc. 60,000 Drugs & Medicine 3,900,000 (1.4)
Cisco Systems, Inc. 135,000 Business Machines 7,526,250 (2.7)
Clear Channel Communications, Inc. 75,000 Media 5,957,812 (2.2)
Consolidated Graphics, Inc. 140,000 Media 6,527,500 (2.4)
Dollar Tree Stores, Inc. 126,000 Retail 5,213,250 (1.9)
Drypers Corporation 450,000 Paper & Forest Products 2,643,750 (1.0)
Gentex Corporation 125,000 Construction 3,359,375 (1.2)
The Gillette Company 75,000 Soaps & Cosmetics 7,532,812 (2.7)
HBO & Company 165,000 Media 7,920,000 (2.9)
i2 Technologies, Inc. 40,000 Business Services 2,110,000 (0.8)
Information Management Resources, Inc. 22,000 Business Services 825,000 (0.3)
Iomega Corporation 220,000 Business Machines 2,736,250 (1.0)
Navistar International Corporation 100,000 Motor Vehicles 2,481,250 (0.9)
Organogenesis, Inc. 262,500 Drugs & Medicine 6,923,438 (2.5)
Pentair, Inc. 165,000 Producer Goods 5,929,688 (2.1)
Safeskin Corporation 150,000 Tires & Rubber Goods 8,512,500 (3.1)
Starbucks Corporation 75,000 Food & Agriculture 2,878,125 (1.0)
Sykes Enterprises, Inc. (a) 100,000 Business Services 1,950,000 (0.7)
Vitesse Semiconductor Corporation 50,000 Electronics 1,887,500 (0.7)
Yahoo! Inc. 92,000 Business Services 6,371,000 (2.3)
------------
TOTAL SHORT SALES (Proceeds $79,837,707) $ 95,885,525
============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
4
<PAGE>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS . December 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 85.5% Shares Industry Value Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Earnings Ratio
ABT Building Products Corporation (a) 200,000 Construction $3600,000 0.2%
Alabama National Bancorporation 110,000 Banks 2,901,250 0.1
Align-Rite International, Inc. (a)(b) 300,000 Electronics 3,825,000 0.2
American Buildings Company (a)(b) 500,000 Construction 12,625,000 0.6
Amwest Insurance Group, Inc. (b) 200,000 Insurance 2,900,000 0.1
Astec Industries, Inc. (a)(b) 965,000 Construction 16,163,750 0.8
Atalanta/Sosnoff Capital Corporation 250,000 Miscellaneous Financial 3,000,000 0.1
Baldwin Technology Company, Inc. (a) 250,000 Optical & Photo Equipment 1,250,000 0.1
BancTec, Inc. (a) 228,100 Business Machines 6,115,931 0.3
Belmont Homes, Inc. (a) 400,000 Construction 3,075,000 0.1
BMC Industries, Inc. 200,000 Electronics 3,225,000 0.1
Bonded Motors, Inc. (a)(b) 200,000 Motor Vehicles 1,700,000 0.1
Bunka Shutter Company Ltd. (c) 140,000 Construction 385,448 0.0
Cameron Ashley Building Products, Inc. (a)(b) 595,000 Construction 9,966,250 0.5
Chofu Seisakusho Company (c) 9,400 Consumer Durables 122,932 0.0
Compass Plastics & Technologies, Inc. (a) 87,900 Chemicals 670,238 0.0
Cross-Continent Auto Retailers, Inc. (a) 500,000 Motor Vehicles 4,187,500 0.2
Crossmann Communities, Inc. 375,000 Construction 10,359,375 0.5
DeVlieg-Bullard, Inc. (a)(b) 485,000 Producer Goods 1,849,063 0.1
Duckwall-ALCO Stores, Inc. (a)(b) 360,000 Retail 5,355,000 0.2
Engle Homes, Inc. (b) 551,500 Construction 10,133,813 0.5
Ensign Resource Service Group, Inc. (c) 100,000 International Oil 2,418,730 0.1
Esterline Technologies Corporation (a) 300,000 Electronics 10,800,000 0.5
Fibermark, Inc. (b) 395,000 Paper & Forest Products 8,492,500 0.4
Financial Industries Corporation (a)(b) 300,000 Insurance 6,037,500 0.3
Finlay Enterprises, Inc. (a) 62,000 Retail 1,410,500 0.1
Friedman, Billings, Ramsey Group, Inc. (a) 40,000 Miscellaneous Financial 717,500 0.0
Fuji Coca Cola Bottling Company (c) 17,000 Food & Agriculture 132,614 0.0
Fukuda Denshi Company (c) 36,000 Drugs & Medicine 366,181 0.0
Gainsco, Inc. 131,400 Insurance 1,116,900 0.1
Gehl Company (a)(b) 292,900 Producer Goods 6,150,900 0.3
The General Chemical Group, Inc. 500,000 Chemicals 13,375,000 0.6
Global Industrial Technologies, Inc. (a) 325,000 Construction 5,504,688 0.3
Haemonetics Corporation (a) 501,000 Drugs & Medicine 7,014,000 0.3
Hallwood Group, Inc. (a) 58,900 Domestic Oil 2,194,025 0.1
Hampshire Group Ltd. (a) 180,000 Apparel 3,375,000 0.2
Health Power, Inc. (a)(b) 300,000 Drugs & Medicine 1,500,000 0.1
Home Health Corporation of America (a) 300,000 Drugs & Medicine 3,112,500 0.1
Home Products International, Inc. (a)(b) 317,500 Retail 3,730,625 0.2
Hospital Staffing Services, Inc. (a)(b) 625,658 Drugs & Medicine 351,933 0.0
Intercontinental Life Corporation (a) 207,000 Insurance 4,140,000 0.2
Intermet Corporation 100,000 Non-Ferrous Metals 1,750,000 0.1
Interra Financial, Inc. 224,900 Miscellaneous Financial 15,518,100 0.7
Intervoice, Inc. (a) 600,000 Telephone 4,500,000 0.2
Jaco Electronics, Inc. (a)(b) 380,000 Electronics 2,375,000 0.1
Jason, Inc. (a) 150,000 Producer Goods 1,200,000 0.1
Katsuragawa Electric Company (c) 10,000 Business Machines 30,745 0.0
Kaye Group, Inc. (b) 353,600 Insurance 2,342,600 0.1
Koss Corporation (a) 100,000 Consumer Durables 1,150,000 0.1
LaCrosse Footwear, Inc. 317,500 Apparel 4,603,750 0.2
LCS Industries, Inc. (b) 350,000 Business Services 5,075,000 0.2
Lone Star Steakhouse & Saloon, Inc. (a) 825,000 Non-Durables & Entertainment 14,437,500 0.7
Lunar Corporation (a) 300,000 Drugs & Medicine 6,150,000 0.3
MAF Bancorp, Inc. 500,000 Banks 17,687,500 0.8
Marisa Christina, Inc. (a) 400,000 Apparel 1,650,000 0.1
Material Sciences Corporation (a) 110,700 Producer Goods 1,349,156 0.1
Maxicare Health Plans, Inc. (a)(b) 1,700,000 Drugs & Medicine 18,487,500 0.9
Meadow Valley Corporation (a) 150,000 Construction 918,750 0.0
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 85.5% [CONT'D] Shares Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Earnings Ratio [CONT'D]
Mercury Air Group, Inc. (b) 633,700 Chemicals $ 3,643,775 0.2%
MFRI, Inc. (a)(b) 300,000 Producer Goods 2,550,000 0.1
Midwest Express Holdings, Inc. (b) 500,000 Air Transport 19,406,250 0.9
Mining Services International Corporation (a) 152,649 Energy & Raw Materials 1,412,003 0.1
M.D.C. Holdings, Inc. 750,000 Construction 11,296,875 0.5
M/A/R/C, Inc. (b) 300,000 Business Services 5,400,000 0.2
M/I Schottenstein Homes, Inc. (a) 100,000 Construction 1,875,000 0.1
MYR Group, Inc. (b) 500,000 Construction 6,406,250 0.3
Norrell Corporation 200,000 Business Services 3,975,000 0.2
Norwood Promotional Products, Inc. (a)(b) 400,000 Non-Durables & Entertainment 6,100,000 0.3
Novamerican Steel Inc. (a) 218,000 Steel 2,534,250 0.1
Nu Horizons Electronics Corporation (a)(b) 600,000 Electronics 3,750,000 0.2
Optek Technology, Inc. (a) 112,000 Electronics 2,233,000 0.1
Patrick Industries, Inc. (b) 312,000 Construction 4,602,000 0.2
Philippine Long Distance
Telephone Company (ADR) 400,000 Telephone 9,000,000 0.4
Powell Industries, Inc. (a)(b) 600,000 Electronics 9,150,000 0.4
Printronix, Inc. (a) 78,300 Computer Peripherals 1,326,206 0.1
Professionals Insurance Co. Mgt. Group (a)(b) 220,000 Insurance 9,460,000 0.4
PXRE Corporation 600,000 Insurance 19,912,500 0.9
Quad Systems Corporation (a)(b) 400,000 Business Machines 2,100,000 0.1
RARE Hospitality International, Inc. (a) 300,000 Non-Durables & Entertainment 2,700,000 0.1
Raymond James Financial, Inc. 303,500 Miscellaneous Financial 12,045,156 0.6
Reliance Steel & Aluminum Company 400,000 Non-Ferrous Metals 11,900,000 0.6
RenaissanceRe Holdings Ltd. 250,000 Insurance 11,031,250 0.5
Republic Automotive Parts, Inc. (a)(b) 195,000 Motor Vehicles 2,851,875 0.1
Rush Enterprises,Inc. (a) 200,000 Motor Vehicles 1,600,000 0.1
Sanko Sangyo Company (c) 4,000 Business Services 28,450 0.0
Schuff Steel Company (a) 202,500 Construction 2,202,188 0.1
Schult Homes Corporation (b) 360,000 Construction 7,470,000 0.3
SCPIE Holdings,Inc 221,500 Insurance 6,409,656 0.3
The Seibels Bruce Group, Inc. 300,000 Insurance 2,250,000 0.1
Sermsuk Public Company Ltd. (c) 16,000 Food & Agriculture 112,341 0.0
Shikoku Coca-Cola Bottling Company (c) 7,500 Food & Agriculture 71,126 0.0
Sholodge, Inc. (a) 200,000 Travel & Recreation 3,150,000 0.2
SIFCO Industries, Inc. 159,600 Aerospace 3,052,350 0.1
Skymall, Inc. (a) 110,000 Retail 550,000 0.0
Southern Energy Homes, Inc. (a) 700,000 Construction 5,600,000 0.3
Spacehab, Inc. (a) 282,700 Electronics 2,986,019 0.1
Strattec Security Corporation (a)(b) 500,000 Producer Goods 12,750,000 0.6
Superior Telecom, Inc. (a) 100,000 Producer Goods 3,456,250 0.2
Teltrend, Inc. (a)(b) 500,000 Telephone 8,562,500 0.4
Universal Forest Products, Inc. 342,300 Paper & Forest Products 4,663,838 0.2
Universal Stainless & Alloy Products, Inc. (a) 100,000 Non-Ferrous Metals 1,450,000 0.1
URS Corporation (a)(b) 741,700 Business Services 11,542,706 0.5
U.S. Home Corporation (a) 202,900 Construction 7,963,825 0.4
Wescast Industries, Inc. (Class A) 149,500 Motor Vehicles 3,662,750 0.2
Weyco Group, Inc. 177,000 Apparel 4,004,625 0.2
Wilsons The Leather Experts, Inc. (a) 125,000 Retail 1,109,375 0.1
Wilsons The Leather Experts, Inc. (a)
(Warrants) (a) 100,000 Retail 93,750 0.0
World Acceptance Corporation (a) 400,000 Miscellaneous Financial 2,150,000 0.1
World of Science, Inc. (a)(b) 470,000 Retail 2,056,250 0.1
Worldtex, Inc. (a) 555,000 Drugs & Medicine 4,405,313 0.2
Zindart Limited (ADR) (a)(b) 220,000 Miscellaneous & Conglomerates 3,025,000 0.1
------------ -------
$557,616,949 26.1%
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 85.5% [CONT'D] Shares Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Low Price to Book Value
ACT Manufacturing, Inc. (a)(b) 600,000 Consumer Durables $ 8,475,000 0.4%
ACT Networks, Inc. (a)(b) 900,000 Business Machines 6,581,250 0.3
Advest Group, Inc. 109,300 Miscellaneous Financial 2,698,344 0.1
The Alpine Group, Inc. (a)(b) 1,000,000 Producer Goods 18,750,000 0.9
Amtech Corporation (a)(b) 1,025,000 Electronics 4,100,000 0.2
APS Holding Corporation (a) 500,000 Motor Vehicles 1,250,000 0.1
Aseco Corporation (a) 99,500 Electronics 848,864 0.0
Baldwin Piano & Organ Company (a)(b) 325,000 Non-Durables & Entertainment 5,078,125 0.2
Banknorth Group, Inc. 50,000 Banks 3,212,500 0.2
Beverly Bancorporation 231,661 Banks 5,299,245 0.2
Breed Technologies, Inc. 300,000 Non-Durables & Entertainment 5,475,000 0.3
Buckhead America Corporation (a)(b) 175,000 Travel & Recreation 1,246,875 0.1
Business Resource Group (a)(b) 500,000 Business Services 1,562,500 0.1
Campbell Resources, Inc. (a)(b) 10,000,000 Gold 4,375,000 0.2
Capital RE Corporation 200,000 Insurance 12,412,500 0.6
Cash America International, Inc. 700,000 Miscellaneous Financial 9,056,250 0.4
Castle & Cooke, Inc. (a) 400,000 Construction 6,750,000 0.3
Check Technology Corporation (a) 155,000 Electronics 600,625 0.0
Children's Broadcasting Corporation (a)(b) 590,000 Media 2,396,875 0.1
Ciprico, Inc. (a) 42,500 Business Machines 499,375 0.0
Collaborative Clinical Research, Inc. (a)(b) 600,000 Business Services 3,037,500 0.1
Collagen Corporation (b) 878,500 Drugs & Medicine 18,338,687 0.9
Consep, Inc. (a)(b) 900,000 Food & Agriculture 1,350,000 0.1
Consolidated Capital Corporation (a 400,000 Miscellaneous & Conglomerates 8,125,000 0.4
CSP, Inc. (a)(b) 280,000 Electronics 2,240,000 0.1
Cyrk International, Inc. (a)(b) 1,000,000 Business Services 9,687,500 0.5
C.P. Clare Corporation (a)(b) 250,000 Electronics 3,250,000 0.1
Designs, Inc. (a)(b) 1,100,000 Retail 3,300,000 0.2
Diamond Home Services, Inc. (a) 350,000 Construction 2,493,750 0.1
Eaton Vance Corporation (b) 700,000 Miscellaneous Financial 26,425,000 1.2
ECC International Corporation (a)(b) 757,600 Electronics 2,320,150 0.1
Effective Management Systems, Inc. (a)(b) 375,000 Business Machines 1,171,875 0.1
ENStar, Inc. (a)(b) 206,833 Business Machines 1,602,956 0.1
Enviromental Technologies
Corporation (a)(b) 330,800 Chemicals 2,191,550 0.1
Evergreen Resources, Inc. (a)(b) 500,000 Domestic Oil 7,750,000 0.4
EZCorp, Inc. (Class A) (a)(b) 700,000 Miscellaneous Financial 8,137,500 0.4
Federal Trust Corporation (a) 40,000 Banks 110,000 0.0
First Alert, Inc. (a) 750,000 Consumer Durables 1,593,750 0.1
Flight Safety International, Inc. (a) 100,000 Producer Goods 1,175,000 0.1
Fluor Daniel/GTI, Inc. (a) 50,000 Business Services 475,000 0.0
Forest Oil Corporation (a)(b) 1,500,000 Domestic Oil 24,750,000 1.2
Franklin Bank National Association 148,837 Banks 2,679,066 0.1
GA Financial, Inc. 100,000 Banks 1,887,500 0.1
GeoScience Corporation (a) 200,000 Business Services 2,350,000 0.1
Gibson Greetings, Inc. (a)(b) 700,000 Non-Durables & Entertainment 15,312,500 0.7
Gish Biomedical, Inc. (a)(b) 275,000 Drugs & Medicine 1,185,938 0.1
Glamis Gold Ltd. 300,000 Gold 1,106,250 0.1
GZA GeoEnvironmental
Technologies, Inc. (a)(b) 372,700 Business Services 1,863,500 0.1
Hallmark Capital Corporation 110,000 Banks 1,870,000 0.1
HealthRite, Inc. (a)(b) 403,000 Drugs & Medicine 579,313 0.0
HMN Financial, Inc. (a)(b) 250,000 Banks 8,125,000 0.4
Hyde Athletic Industries,Inc. (Class B) (a)(b) 610,000 Apparel 2,440,000 0.1
ICO, Inc. 480,000 Energy & Raw Materials 2,940,000 0.1
ImmuLogic Pharmaceutical Corporation (a)(b) 2,000,000 Drugs & Medicine 3,750,000 0.2
Indochina Goldfields Ltd. (c) 1,000,000 Gold 2,034,300 0.1
Interpore International (a)(b) 600,000 Drugs & Medicine 3,600,000 0.2
Iwerks Entertainment, Inc. (a)(b) 1,100,000 Non-Durables & Entertainment 2,475,000 0.1
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 85.5% [CONT'D] Shares Industry Value Net Assets
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Low Price to Book Value [CONT'D]
John Alden Financial Corporation 1,200,000 Insurance $ 28,800,000 1.4%
Kentucky Electric Steel, Inc. (a)(b) 450,000 Steel 2,418,750 0.1
Life USA Holding, Inc. (a) 385,300 Insurance 6,501,937 0.3
Lindal Cedar Homes, Inc. (a) 155,000 Construction 561,875 0.0
Magal Security Systems Ltd. (a)(b) 600,000 Business Services 2,025,000 0.1
The Marcus Corporation 225,000 Non-Durables & Entertainment 4,148,438 0.2
Massbank Corporation 133,333 Banks 6,349,984 0.3
Meadowbrook Rehabilitation
Group, Inc. (Class A) (a)(b) 186,666 Business Services 548,331 0.0
Mizar, Inc. (a)(b) 440,400 Business Machines 2,642,400 0.1
Morgan Products Ltd. (a)(b) 750,000 Construction 3,984,375 0.2
NABI, Inc. (a) 1,600,000 Drugs & Medicine 5,450,080 0.3
National Energy Group, Inc. (a) 1,200,000 Domestic Oil 4,875,000 0.2
New Brunswick Scientific Company, Inc. (b) 254,215 Electronics 2,256,158 0.1
Northwest Equity Corporation (b) 80,000 Banks 1,660,000 0.1
Outlook Group Corporation (a)(b) 457,500 Media 3,316,875 0.2
Penn Engineering & Manufacturing
Corporation 235,500 Producer Goods 5,652,000 0.3
Petroglyph Energy, Inc. (a) 100,000 Domestic Oil 825,000 0.0
PIA Merchandising Services, Inc. (a)(b) 500,000 Business Services 2,500,000 0.1
PICO Holdings, Inc. (a) 700,000 Insurance - Specialty 4,506,250 0.2
Planar Systems, Inc. (a) 400,000 Business Machines 4,100,000 0.2
Presidential Life Corporation (b) 1,400,000 Insurance 28,350,000 1.3
Quixote Corporation (a)(b) 585,500 Business Services 4,684,000 0.2
Rehabilicare, Inc. (a)(b) 312,100 Drugs & Medicine 936,300 0.0
Resound Corporation (a) 852,000 Optical & Photo Equipment 4,686,000 0.2
Right Management Consultants, Inc. (a)(b) 500,000 Business Services 6,375,000 0.3
RightCHOICE Managed Care, Inc.
(Class A) (a)(b) 1,002,500 Drugs & Medicine 9,649,062 0.4
The Rottlund Company, Inc. (a)(b) 500,000 Construction 1,625,000 0.1
Roy F. Weston, Inc. (Class A) (a)(b) 725,000 Business Services 2,945,312 0.1
Schnitzer Steel Industries, Inc. (Class A) 210,000 Steel 5,893,125 0.3
Smartflex Systems, Inc. (a) 227,500 Electronics 2,161,250 0.1
Stifel Financial Corporation 212,300 Miscellaneous Financial 3,582,563 0.2
Strouds, Inc. (a)(b) 485,000 Retail 848,750 0.0
Suprema Specialties, Inc. (a) 170,400 Food & Agriculture 553,800 0.0
Technology Research Corporation (b) 500,000 Producer Goods 1,531,250 0.1
Tech-Sym Corporation (a) 300,000 Aerospace 7,631,250 0.4
TII Industries, Inc. (a) 200,000 Electronics 925,000 0.0
Tipperary Corporation (a) 574,400 Energy & Raw Materials 2,333,500 0.1
Trimark Holdings, Inc. (a)(b) 400,000 Non-Durables & Entertainment 2,050,000 0.1
The UniMark Group, Inc. (a) 100,000 Food & Agriculture 375,000 0.0
Unionbancorp, Inc. 70,000 Banks 1,531,250 0.1
VTEL Corporation (a) 746,200 Telecommunications 4,570,475 0.2
Webco Industries, Inc. (a) 247,100 Steel 1,729,700 0.1
Western Deep Levels Ltd. (ADR) 310,000 Gold 5,773,750 0.3
--------------- -------
$ 478,255,703 22.6%
Below Average Price/Cash Flow Ratio
3-D Geophysical, Inc. (a)(b) 815,000 Domestic Oil $ 5,297,500 0.3%
Abraxas Petroleum Corporation (a) 300,000 Domestic Oil 4,425,000 0.2
American Oilfield Divers, Inc. (a) 300,000 Energy & Raw Materials 3,825,000 0.2
Amtran, Inc. (a)(b) 600,000 Air Transport 4,725,000 0.2
Applied Films Corporation (a)(b) 190,000 Construction 1,615,000 0.1
Asia Pacific Wire & Cable
Corporation Ltd. (a)(b) 727,600 Producer Goods 5,229,625 0.2
Barrington Petroleum Ltd. (a)(c) 1,240,000 International Oil 3,987,467 0.2
Beau Canada Exploration Ltd. (a)(c) 1,000,000 International Oil 2,027,300 0.1
Benton Oil & Gas Company (a) 750,000 Domestic Oil 9,703,125 0.5
Bird Corporation (a) 149,500 Construction 598,000 0.0
</TABLE>
8
<PAGE>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . DECEMBER 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 85.5% [CONT'D] Shares Industry Value Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Cash Flow Ratio [CONT'D]
Cambior, Inc. 500,000 Gold $ 2,937,500 0.1%
Caretenders Health Corporation (a)(b) 308,900 Drugs & Medicine 2,162,300 0.1
Catalina Lighting, Inc. (a)(b) 500,000 Construction 1,781,250 0.1
Cavell Energy Corporation (a)(b)(c) 1,573,200 International Oil 1,319,757 0.1
Central Sprinkler Corporation (a)(b) 300,000 Producer Goods 5,531,250 0.3
CHC Helicopter Corporation (Class A) (b) 550,000 Domestic Oil 3,643,750 0.2
The Cherry Corporation (Class A) (a)(b) 850,100 Consumer Durables 14,876,750 0.7
Chieftain International, Inc. (a) 200,000 Energy & Raw Materials 4,250,000 0.2
Clayton Williams Energy, Inc. (a)(b) 595,000 Domestic Oil 8,925,000 0.4
Commonwealth Industries, Inc. 615,000 Non-Ferrous Metals 8,917,500 0.4
Crown Central Petroleum Corporation
(Class B) (a) 225,000 Domestic Oil 4,570,313 0.2
Dakotah, Inc. (a)(b) 300,000 Non-Durables & Entertainment 431,250 0.0
Damark International, Inc. (Class A) (a)(b) 800,000 Retail 7,800,000 0.4
Datron Systems, Inc. (a)(b) 250,000 Business Machines 2,156,250 0.1
Dayton Mining Corporation (a)(b) 2,200,000 Gold 4,262,500 0.2
Doman Industries Ltd. (a)(c) 700,000 Paper & Forest Products 2,569,000 0.1
Durakon Industries, Inc. (a)(b) 500,000 Trucking & Freight 4,750,000 0.2
El Paso Electric Company (a) 2,300,000 Energy & Utilities 16,818,750 0.8
Eltek, Ltd. (a)(b) 261,200 Business Machines 261,200 0.0
Filene's Basement Corporation (a)(b) 1,200,000 Retail 4,800,000 0.2
GKN Holding Corporation (a) 400,000 Miscellaneous Financial 1,100,000 0.1
Grand Casinos, Inc. (a) 2,090,000 Travel & Recreation 28,476,250 1.3
Grist Mill Company (a)(b) 400,000 Food & Agriculture 4,000,000 0.2
Gundle/SLT Environmental Inc. (a) 500,000 Chemicals 2,625,000 0.1
Hallwood Consolidated Resources
Corporation (b) 300,000 Domestic Oil 6,675,000 0.3
Hanover Foods Corporation (Class A) (a)(b) 50,500 Food & Agriculture 2,196,750 0.1
Harmony Brook, Inc. (a)(b) 720,000 Business Services 202,536 0.0
Howell Corporation (b) 300,000 Domestic Oil 5,193,750 0.2
Hurricane Hydrocarbons Ltd. (a)(c) 300,000 International Oil 2,327,850 0.1
ICN Pharmaceuticals, Inc. (b) 2,700,000 Drugs & Medicine 131,793,750 6.2
IEC Electronics Corporation (a)(b) 650,000 Electronics 8,856,250 0.4
International Aircraft Investors (a)(b) 250,000 Miscellaneous Financial 2,343,750 0.1
International Airline Support Group, Inc. (a)(b) 220,000 Air Transport 1,540,000 0.1
International Technology Corporation (a) 402,900 Business Services 3,021,750 0.1
Key Production Company, Inc. (a) 75,000 Domestic Oil 787,500 0.0
Lechters, Inc. 418,000 Retail 2,116,125 0.1
The Lion Brewery, Inc. (a)(b) 375,000 Liquor 1,218,750 0.1
Louis Dreyfus Natural Gas Corporation (a) 432,000 Domestic Oil 8,073,000 0.4
Marten Transport Ltd. (a)(b) 222,200 Trucking & Freight 4,916,175 0.2
Martin Industries, Inc. (b) 650,000 Producer Goods 3,412,500 0.2
MTL, Inc. (a)(b) 191,000 Trucking & Freight 4,822,750 0.2
Northstar Energy Corporation (a)(c) 1,000,000 International Oil 7,025,500 0.3
Nu-Kote Holding, Inc. (Class A) (a)(b) 1,100,000 Optical & Photo Equipment 653,180 0.0
Numac Energy Inc. (a) 1,243,200 Domestic Oil 4,817,400 0.2
Petsec Energy Ltd. (ADR) (a)(b) 1,175,000 Domestic Oil 16,156,250 0.8
Pohang Iron & Steel Company Ltd. (ADR) 100,000 Steel 1,743,750 0.1
Prosource, Inc. (a)(b) 300,000 Food & Agriculture 2,250,000 0.1
Ramsay Health Care, Inc. (a) 603,333 Drugs & Medicine 1,809,999 0.1
Remington Oil & Gas Corporation (a)(b) 1,560,000 Domestic Oil 8,092,500 0.4
Reptron Electronics, Inc. (a) 165,000 Consumer Durables 1,711,875 0.1
Safeguard Health Enterprises, Inc. (a) 100,000 Insurance 1,350,000 0.1
Sanfilippo John B. & Son, Inc. (a)(b) 292,500 Food & Agriculture 2,303,438 0.1
Searlight Company, Inc. (a) 110,100 Containers 1,362,488 0.1
ShopKo Stores, Inc. (a) 900,000 Retail 19,575,000 0.9
Snyder Oil Corporation 100,000 Domestic Oil 1,825,000 0.1
Staff Builders, Inc. (Class A) (a) 700,000 Drugs & Medicine 1,465,660 0.1
Steel of West Virginia, Inc. (a)(b) 200,000 Steel 1,825,000 0.1
</TABLE>
9
<PAGE>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 85.5% [CONT'D] Shares Industry Value Net Assets
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Cash Flow Ratio [CONT'D]
Steel Technologies, Inc. 300,000 Steel $ 3,525,000 0.2%
Sterling Financial Corporation (a)(b) 275,000 Banks 5,981,250 0.3
Sunrise International Leasing Corporation (a) 630,000 Business Services 1,653,750 0.1
Tesoro Petroleum Corporation (a)(b) 1,400,000 Domestic Oil 21,700,000 1.0
Thorn Apple Valley, Inc. (a)(b) 436,000 Food & Agriculture 6,322,000 0.3
Todhunter International, Inc. (a)(b) 490,000 Liquor 5,083,750 0.2
Tower Air, Inc. (a) 500,000 Air Transport 2,093,750 0.1
Trak Auto Corporation (a)(b) 366,500 Motor Vehicles 3,939,875 0.2
Tucson Electric Power Company (a) 1,000,000 Energy & Utilities 18,125,000 0.8
United Wisconsin Services, Inc. 600,000 Insurance 15,450,000 0.7
U.S. Global Investors, Inc. (Class A) (a)(b) 502,000 Miscellaneous Financial 941,250 0.0
Vicorp Restaurants, Inc. (a)(b) 500,000 Non-Durables & Entertainment 8,750,000 0.4
Wall Data, Inc. (a) 110,000 Business Services 1,498,750 0.1
-------------- --------
$ 538,928,188 25.3%
Special Situations
Akorn, Inc. (a) 305,500 Drugs & Medicine $ 1,107,437 0.1%
Allied Healthcare Products, Inc. (a)(b) 775,000 Drugs & Medicine 6,006,250 0.3
Associated Banc-Corp 535,500 Banks 29,519,438 1.4
Badger Meter, Inc. (b) 200,000 Electronics 8,150,000 0.4
Barrett Business Services, Inc. (a)(b) 500,000 Business Services 5,875,000 0.3
Bay Bancshares, Inc. (a) 20,000 Banks 395,000 0.0
Cadiz Land Company, Inc. (a) 300,000 Food & Agriculture 2,568,750 0.1
Christiana Companies, Inc. (a) 54,900 Energy & Raw Materials 2,175,412 0.1
Cohr, Inc. 100,000 Business Services 1,275,000 0.1
Comdial Corporation (a)(b) 650,000 Telephone 6,012,500 0.3
Commercial Federal Corporation 450,000 Banks 16,003,125 0.7
D & N Financial Corporation (b) 440,000 Banks 11,660,000 0.5
Dairy Mart Convenience Stores, Inc.
(Class A) (a)(b) 145,000 Retail 725,000 0.0
Eskimo Pie Corporation (b) 271,500 Food & Agriculture 3,122,250 0.1
The Female Health Company (a)(b) 171,000 Soap & Cosmetics 598,500 0.0
FPIC Insurance Group, Inc. (a) 200,000 Insurance 5,825,000 0.3
Healthworld Corporation (a) 150,000 Business Services 1,809,375 0.1
Home Federal Bancorp (b) 290,250 Banks 7,546,500 0.4
IBAH, Inc. (a) 750,000 Drugs & Medicine 2,812,500 0.1
Interdigital Communications
Corporation (a)(b) 4,800,000 Telephone 14,700,000 0.7
Jasmine International Public Company Ltd. (c) 1,850,000 Business Services 362,045 0.0
Lithia Motors, Inc. (a) 68,200 Motor Vehicles 1,005,950 0.1
LSI Industries, Inc. 359,200 Construction 6,555,400 0.3
Marquette Medical Systems, Inc. (a) 416,500 Drugs & Medicine 11,089,312 0.5
Matthews International Corporation (Class A) 175,000 Producer Goods 7,700,000 0.4
Medical Graphics Corporation (a)(b) 243,700 Drugs & Medicine 1,096,650 0.1
Minntech Corporation (b) 513,100 Drugs & Medicine 6,349,612 0.3
Norstan, Inc. (a)(b) 552,000 Telephone 13,110,000 0.6
Osmonics, Inc. (a)(b) 734,600 Producer Goods 11,615,862 0.6
Park-Ohio Industries, Inc. (a) 126,700 Producer Goods 2,312,275 0.1
Pentech International, Inc. (a) 200,000 Non-Durables & Entertainment 575,000 0.0
Peoples Telephone Company, Inc. (a)(b) 1,600,000 Telephone 5,900,000 0.3
PETSMART, Inc. (a) 1,000,000 Retail 7,250,000 0.3
Polymedica Corporation (a)(b) 174,200 Drugs & Medicine 1,698,450 0.1
Praegitzer Industries, Inc. (a) 142,000 Electronics 1,357,875 0.1
Precision Response Corporation (a) 250,000 Business Services 2,546,875 0.1
Roberts Pharmaceutical Corporation (a) 500,000 Drugs & Medicine 4,781,250 0.2
Star Multi Care Services, Inc. (a)(b) 230,093 Drugs & Medicine 1,265,512 0.1
Starcraft Corporation (a)(b) 400,000 Motor Vehicles 750,000 0.0
Strategic Diagnostics, Inc. (a) 260,000 Chemicals 585,000 0.0
St. Francis Capital Corporation 78,200 Banks 3,949,100 0.2
</TABLE>
10
<PAGE>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 85.5% [CONT'D] Shares Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Special Situations [CONT'D]
Successories, Inc. (a) 210,000 Retail $ 1,601,250 0.1%
Teikoku Hormone Manufacturing Company (c) 22,000 Drugs & Medicine 102,634 0.0
Timber Lodge Steakhouse, Inc. (a)(b) 300,000 Non-Durables & Entertainment 1,968,750 0.1
Total-Tel USA Communications, Inc. (a)(b) 250,000 Telephone 7,375,000 0.3
United Federal Savings Bank (b) 143,700 Banks 2,820,112 0.1
United Palm Oil Industry Public Co. Ltd. (c) 180,800 Food & Agriculture 140,409 0.0
United Security Bancorporation 170,423 Banks 3,493,672 0.2
VECTRA Technologies, Inc. (a)(b) 723,500 Business Services 21,705 0.0
Webster Financial Corporation 72,800 Banks 4,841,200 0.2
Willis Lease Finance Corporation (a) 110,000 Miscellaneous Financial 1,925,000 0.1
--------------- -------
244,032,937 11.5%
---------------
TOTAL COMMON STOCKS (Cost $1,392,029,679) $1,818,833,777
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Par Percent of
CONVERTIBLE BOND - 0.0% Amount Industry Value Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fort Bend Holding Corporation 8.00%
12/01/2005 $400,000 Miscellaneous Financial $ 800,000 0.0%
--------------
TOTAL CONVERTIBLE BOND (Cost $400,000) $ 800,000
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Par Percent of
CORPORATE BOND - 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 $ 6,853,213 0.3%
--------------
TOTAL CORPORATE BOND (Cost $6,681,545) $ 6,853,213
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Par Percent of
GOVERNMENT BONDS - 4.3% Amount Value Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. TREASURY SECURITIES - 0.5%
U.S. Treasury Note 5.875% 02/15/2000 $ 10,000,000 $ 10,037,599 0.5%
AGENCY SECURITIES - 3.8%
Federal Farm Credit Bank 5.92%
12/18/2002 10,000,000 9,996,500 0.4
Federal Home Loan Bank 5.95%
10/05/2000 10,000,000 10,014,999 0.5
Federal Home Loan Mortgage
Corporation 6.78% 04/10/2002 10,000,000 10,306,699 0.5
Federal Home Loan Mortgage
Corporation 6.156% 09/25/2002 10,000,000 10,057,899 0.5
Federal National Mortgage
Association 5.78% 11/29/1999 10,000,000 9,979,699 0.4
Federal National Mortgage
Association 6.40% 05/02/2001 10,000,000 10,136,199 0.5
Private Export Funding Corporation
6.24% 05/15/2002 10,000,000 10,087,500 0.5
Student Loan Marketing Association
6.05% 09/14/2000 10,000,000 10,040,799 0.5
--------------
80,620,294
---------------
TOTAL GOVERNMENT BONDS (Cost $90,623,164) $ 90,657,893
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Par Percent of
SHORT-TERM INVESTMENTS - 10.7% Amount Value Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AGENCY SECURITY - 2.3%
Federal Farm Medium Term Note 5.70%
12/01/1998 $ 50,000,000 $ 49,934,995 2.3%
COMMERCIAL PAPER - 0.7%
Ford Motor Credit Corporation 0.00%
01/02/1998 15,000,000 14,997,291 0.7
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------
Par Percent of
SHORT-TERM INVESTMENTS - 10.7% [CONT'D] Amount Value Net Assets
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS - 7.3%
Associates First Capital Corporation
6.375% 08/15/1998 $ 14,000,000 $ 14,037,099 0.7%
CIT Group Holdings 6.75% 04/30/1998 10,000,000 10,028,499 0.5
First Interstate WFC 11.00% 03/05/1998 9,300,000 9,374,864 0.4
First of America Bank Corporation
5.95% 08/13/1998 25,000,000 24,999,498 1.2
Household Finance Co. 6.18% 06/30/1998 12,500,000 12,530,750 0.6
Huntington National Bank 5.80%
09/22/1998 15,000,000 14,983,950 0.7
John Deere Capital 5.85% 10/28/1998 25,000,000 25,012,998 1.2
Morgan Guaranty 5.93% 08/31/1998 25,000,000 24,999,248 1.2
Sears, Roebuck & Company 9.25%
04/15/1998 17,000,000 17,141,268 0.8
--------------
153,108,174
VARIABLE RATE DEMAND NOTES (+) - 0.4%
American Family Financial Services 5.49% 3,829,000 3,829,000 0.2
Pitney Bowes Credit Corporation 5.33% 496,000 496,000 0.0
Sara Lee Corporation 5.32% 982,000 982,000 0.0
Warner-Lambert Company 5.49% 3,544,000 3,544,000 0.2
Wisconsin Electric Power Company 5.49% 510,000 510,000 0.0
--------------
9,361,000
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $227,484,872) $ 227,401,460
TOTAL INVESTMENTS (Cost $1,717,219,260)............................ $2,144,546,343 100.8%
Liabilities, less cash and receivables............................. (17,831,663) (0.8)
-------------- --------
TOTAL NET ASSETS................................................... $2,126,714,680 100.0%
============== =======
</TABLE>
(a) Non-income producing security.
(b) Affiliated company. See Note 8 in Notes to Financial Statements.
(c) 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 December 31, 1997.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
12
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND MID CAP VALUE FUND
SCHEDULE OF INVESTMENTS . December 31, 1997
- ------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 96.0% Shares Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Earnings Ratio
AK Steel Holding Corporation 15,650 Steel $ 276,808 0.8%
AGCO Corporation 18,300 Producer Goods 535,275 1.5
Apria Healthcare Group, Inc. (a) 27,500 Drugs & Medicine 369,531 1.0
IBP, Inc. 26,000 Food & Agriculture 544,375 1.5
Integrated Health Services, Inc. 11,000 Drugs & Medicine 343,063 0.9
Lennar Corporation 35,200 Construction 759,000 2.1
Medusa Corporation 19,300 Construction 806,981 2.2
Olsten Corporation 22,700 Business Services 340,500 0.9
Penncorp Financial Group, Inc. 12,900 Insurance 460,369 1.3
Public Service Co. of New Mexico 22,500 Energy & Utilities 532,969 1.5
P. H. Glatfelter Company 18,500 Paper & Forest Products 344,563 0.9
Reliance Group Holdings, Inc. 59,500 Insurance 840,438 2.3
Sun Healthcare Group, Inc. (a) 27,200 Drugs & Medicine 527,000 1.4
Toll Brothers, Inc. (a) 33,100 Construction 885,425 2.4
Valero Energy Corporation 15,600 Domestic Oil 490,425 1.3
Walden Residential Properties, Inc. 16,500 Real Property 420,750 1.2
Wellpoint Health Networks, Inc. (a) 17,500 Insurance 739,375 2.0
------------ -----
$ 9,216,847 25.2%
Low Price to Book Value
Astoria Financial Corporation 10,600 Miscellaneous Financial $ 590,950 1.6%
Bank United Corporation 16,000 Miscellaneous Financial 783,000 2.1
Bowater, Inc. 12,200 Paper & Forest Products 542,138 1.5
Darden Restaurants, Inc. 38,400 Food & Agriculture 480,000 1.3
Equitable Resources, Inc. 20,000 Domestic Oil 707,500 1.9
Heilig-Meyers Company 43,000 Consumer Durables 516,000 1.4
Lehman Brothers Holdings, Inc. 16,500 Miscellaneous Financial 841,500 2.3
Newmont Mining Corporation 12,900 Gold 378,938 1.0
Ohio Casualty Corporation 11,800 Insurance 526,575 1.5
Poco Petroleum Ltd. (b) 66,000 International Oil 588,257 1.6
Prime Hospitality Corporation (a) 18,400 Travel & Recreation 374,900 1.0
Ranger Oil Ltd. 54,800 International Oil 376,750 1.0
Reynolds Metals Company 11,800 Non-Ferrous Metals 708,000 1.9
Sterling Software, Inc. (a) 14,000 Business Services 574,000 1.6
Storage Technology Corporation (a) 8,700 Business Machines 538,856 1.5
SUPERVALU, Inc. 10,000 Food & Agriculture 418,750 1.2
Trigon Healthcare, Inc. (a) 26,000 Insurance 679,250 1.9
Wellman, Inc. 30,000 Chemicals 585,000 1.6
------------ -----
$ 10,210,364 27.9%
Below Average Price/Cash Flow Ratio
Asarco, Inc. 11,800 Non-Ferrous Metals $ 264,763 0.7%
Carpenter Technology Corporation 13,000 Steel 624,813 1.7
Data General Corporation (a) 29,600 Business Machines 516,150 1.4
El Paso Electric Company (a) 72,700 Energy & Utilities 531,619 1.5
Ethyl Corporation 38,500 Chemicals 295,969 0.8
Fleming Companies, Inc. 42,500 Food & Agriculture 571,090 1.5
Horace Mann Educators Corporation 20,400 Insurance 580,125 1.6
KLM Royal Dutch Airlines NV (ADR) 19,100 Air Transport 721,025 2.0
Mid Ocean Ltd. 9,600 Insurance 520,800 1.4
Ogden Corporation 13,400 Business Services 377,713 1.0
OGE Energy Corporation 8,600 Energy & Utilities 470,313 1.3
Protective Life Corporation 12,000 Insurance 717,000 2.0
Tesoro Petroleum Corporation (a) 30,000 Domestic Oil 465,000 1.3
TransTexas Gas Corporation (a) 24,000 Domestic Oil 355,500 1.0
United Dominion Industries, Ltd. 9,800 Producer Goods 248,063 0.7
Ziegler Coal Holding Company 14,200 Energy & Raw Materials 231,638 0.6
------------ -----
$ 7,491,581 20.5%
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND MID CAP VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1997
- ----------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 96.0% [CONT'D] Shares Industry Value Net Assets
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Special Situations
Adobe Systems, Inc. 4,700 Business Services $ 193,875 0.5%
Allegiance Corporation 26,700 Drugs & Medicine 946,181 2.6
Allied Capital Corporation 16,480 Miscellaneous Financial 366,680 1.0
Blount Int'l, Inc. (Class A) 21,200 Consumer Durables 565,775 1.6
Boston Edison Company 9,600 Energy & Utilities 363,600 1.0
Commercial Federal Corporation 21,450 Banks 762,815 2.1
Dean Foods Company 10,500 Food & Agriculture 624,750 1.7
First Brands Corporation 20,500 Chemicals 552,219 1.5
First Union Corporation 9,570 Banks 490,463 1.3
King World Productions, Inc. 15,000 Media 866,250 2.4
LNR Property Corporation 17,500 Miscellaneous Financial 413,438 1.1
McDermott International, Inc. 19,200 Construction 703,200 1.9
Olin Corporation 13,200 Chemicals 618,750 1.7
Popular, Inc. 10,800 Banks 534,600 1.5
Tupperware Corporation 6,400 Chemicals 178,400 0.5
------------ -----
8,180,996 22.4%
------------ -----
TOTAL COMMON STOCKS (Cost $30,914,676) $ 35,099,788
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Par Percent of
SHORT-TERM INVESTMENTS - 8.9% Amount Value Net Assets
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DISCOUNT NOTES - 4.1%
Federal Home Loan Bank
0.00% 01/05/1998 $ 750,000 $ 749,527 2.1%
Federal National Mortgage
Association 0.00% 01/14/1998 750,000 748,457 2.0
------------
1,497,984
VARIABLE RATE DEMAND NOTES (+) - 4.8%
American Family Financial Services 5.49% 422,400 422,400 1.2
General Mills, Inc. 5.33% 373,000 373,000 1.0
Johnson Controls, Inc. 5.33% 381,000 381,000 1.0
Pitney Bowes Credit Corporation 5.33% 311,000 311,000 0.9
Sara Lee Corporation 5.32% 271,600 271,600 0.7
------------
1,759,000
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $3,256,984) $ 3,256,984
TOTAL INVESTMENTS (Cost $34,171,660)............................................ $ 38,356,772 104.9%
Liabilities, less cash and receivables.......................................... (1,798,731) (4.9)
------------- ------
TOTAL NET ASSETS................................................................ $ 36,558,041 100.0%
============= ======
</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 December 31, 1997.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
14
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND LARGE CAP VALUE FUND
SCHEDULE OF INVESTMENTS . December 31, 1997
- -------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 97.5% Shares Industry Value Net Assets
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Earnings Ratio
Aetna, Inc. 2,800 Drugs & Medicine $ 197,575 2.5%
AVX Corporation 6,700 Electronics 123,531 1.6
Chase Manhattan Corporation 400 Banks 43,800 0.6
Columbia HCA Healthcare Corporation 2,300 Drugs & Medicine 68,138 0.9
Companhia Cervejaria Brahma (ADR) 12,000 Food & Agriculture 170,250 2.2
Great Lakes Chemical Corporation 3,600 Chemicals 161,550 2.1
Ispat International NV (N.Y. Registered) 6,600 Non-Ferrous Metals 142,725 1.9
Lehman Brothers Holdings, Inc. 1,600 Miscellaneous 81,600 1.1
PartnerRe Ltd. 3,400 Insurance 157,675 2.1
Philip Morris Companies, Inc. 1,200 Tobacco 54,375 0.7
Raychem Corporation 3,400 Consumer Durables 146,413 1.9
Reynolds & Reynolds Company (Class A) 9,900 Producer Goods 182,531 2.4
RJR Nabisco Holdings Corporation 1,600 Tobacco 60,000 0.8
St. Paul Companies, Inc. 1,200 Insurance 98,475 1.3
SUPERVALU, Inc. 1,700 Food & Agriculture 71,188 0.9
UCAR International, Inc. (a) 4,500 Producer Goods 179,719 2.3
USF&G Corporation 6,600 Insurance 145,611 1.9
UST, Inc. 2,200 Tobacco 81,263 1.1
Vencor, Inc. 6,500 Drugs & Medicine 158,844 2.1
---------- ------
$2,325,263 30.4%
Low Price to Book Value
Allmerica Financial Corporation 3,255 Insurance $ 162,547 2.1%
American Financial Group, Inc. 4,100 Insurance 165,280 2.2
British Steel PLC (ADR) 6,300 Steel 135,056 1.7
Champion International Corporation 3,600 Paper & Forest Products 163,125 2.1
Darden Restaurants, Inc. 9,800 Food & Agriculture 122,500 1.6
Hanna (M.A.) Company 5,400 Chemicals 136,350 1.7
International Paper Company 800 Paper & Forest Products 34,500 0.5
Jefferson Smurfit Group PLC (ADR) 3,100 Containers 84,475 1.1
J.C.Penney Company, Inc. 800 Retail 48,250 0.6
Kmart Corporation (a) 7,000 Retail 80,938 1.1
Louisiana-Pacific Corporation 8,000 Paper & Forest Products 152,000 2.0
Mead Corporation 3,600 Paper & Forest Products 100,800 1.3
OGE Energy Corporation 1,500 Energy & Utilities 82,030 1.1
Ohio Casualty Corporation 1,300 Insurance 58,013 0.8
Petroleo Brasileiro S.A. (ADR) 7,000 International Oil 163,706 2.1
Shaw Industries, Inc. 21,700 Apparel 252,263 3.3
Toys "R" Us, Inc. (a) 4,200 Retail 132,038 1.7
Union Pacific Corporation 2,500 Railroads & Shipping 156,094 2.0
Vishay Intertechnology, Inc. 7,000 Electronics 165,375 2.2
---------- ------
$2,395,340 31.2%
Below Average Price/Cash Flow Ratio
American General Corporation 1,200 Insurance $ 64,875 0.8%
Beneficial Corporation 2,000 Miscellaneous 166,250 2.2
Elf Aquitane (ADR) 1,200 International Oil 70,350 0.9
FirstEnergy Corporation 800 Energy & Utilities 23,200 0.3
Inland Steel Industries, Inc. 3,900 Steel 66,787 0.9
Jefferson-Pilot Corporation 1,600 Insurance 124,600 1.6
Noble Affiliates, Inc. 4,200 Domestic Oil 148,050 1.9
Owens Corning 6,200 Construction 211,575 2.8
Philips Electronics NV 2,400 Electronics 145,200 1.9
Solutia, Inc. 3,600 Chemicals 96,075 1.3
Sonat, Inc. 2,600 Energy & Raw Materials 118,950 1.6
Telecomunicacoes Brasileiras S. A. (ADR) 2,300 Telephone 267,806 3.5
Unicom Corporation 9,000 Energy & Utilities 276,750 3.6
Union Texas Petroleum Holdings, Inc. 7,800 Domestic Oil 162,338 2.1
YPF Sociedad Anonima (ADR) 6,100 International Oil 208,544 2.7
---------- ------
$2,151,350 28.1%
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND LARGE CAP VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1997
- ------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 97.5% [CONT'D] Shares Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Special Situations
Consolidated Natural Gas Company 4,600 Energy & Raw Materials $ 278,300 3.6%
Frontier Corporation 5,400 Telephone 129,937 1.7
The Limited, Inc. 2,800 Apparel 71,400 0.9
Tenet Healthcare Corporation 3,600 Drugs & Medicine 119,250 1.6
---------- ------
598,887 7.8%
----------
TOTAL COMMON STOCKS (Cost $6,916,347) $7,470,840
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Par Percent of
SHORT-TERM INVESTMENTS - 2.7% Amount Value Net Assets
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VARIABLE RATE DEMAND NOTES (+) - 2.7%
Johnson Controls, Inc. 5.33% $ 93,000 $ 93,000 1.2%
Wisconsin Electric Power Company 5.49% 119,000 119,000 1.5
----------
TOTAL SHORT-TERM INVESTMENTS (Cost $212,000) $ 212,000
TOTAL INVESTMENTS (Cost $7,128,347)........................ $7,682,840 100.2%
Liabilities, less cash and receivables..................... (17,484) (0.2)
---------- --------
TOTAL NET ASSETS........................................... $7,665,356 100.0%
========== ========
</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 December 31, 1997.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
16
<PAGE>
HEARTLAND VALUE PLUS FUND
SCHEDULE OF INVESTMENTS . December 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 67.6% Shares Industry Value Net Assets
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Earnings Ratio
Akita Drilling (Class A) (b)(c) 500,000 Domestic Oil $ 4,508,900 1.4%
Arctic Cat, Inc. 312,500 Motor Vehicles 3,027,344 0.9
Colonial Properties Trust 65,300 Real Property 1,967,163 0.6
Cooker Restaurant Corporation 250,000 Non-Durables & Entertainment 2,390,625 0.7
Decorator Industries, Inc. (b) 250,000 Miscellaneous & Conglomerates 2,312,500 0.7
Donegal Group, Inc. 66,666 Insurance 1,474,985 0.4
Equity Inns, Inc. 300,000 Real Property 4,425,000 1.3
Gorman-Rupp Company 100,000 Producer Goods 2,112,500 0.6
Gryphon Holdings, Inc. (a) 250,000 Insurance 4,187,500 1.3
Guangshen Railway Company Ltd. (ADR) 200,000 Railroads & Shipping 2,687,500 0.8
Imperial Credit Commercial Mortgage
Investment Corporation 150,000 Real Property 2,193,750 0.7
Intrav, Inc. 125,000 Travel & Recreation 1,750,000 0.5
Katy Industries, Inc. 5,000 Producer Goods 101,875 0.1
Kloof Gold Mining Company Ltd. (ADR) 1,000,000 Gold 3,312,500 1.0
Lawyers Title Corporation 150,000 Insurance 4,715,625 1.4
London Pacific Group Ltd. (ADR) 600,000 Insurance 7,200,000 2.1
Lufkin Industries, Inc. 100,000 Producer Goods 3,575,000 1.1
MMI Companies, Inc. 125,000 Insurance 3,140,625 0.9
Oil-Dri Corporation of America 212,600 Non-Durables & Entertainment 3,507,900 1.0
Prime Retail, Inc. 225,000 Real Property 3,192,187 1.0
Road King Infrastructure Ltd. (c) 300,000 Construction 274,890 0.1
Stewart Information Services Corporation 50,000 Insurance 1,450,000 0.4
Tab Products Company 200,000 Producer Goods 2,475,000 0.7
TCBY Enterprises, Inc. 200,000 Non-Durables & Entertainment 1,512,500 0.4
Twin Disc, Inc. 50,000 Producer Goods 1,637,500 0.5
Vaal Reefs Exploration & Mining
Company Ltd. (ADR) 1,250,000 Gold 4,804,750 1.4
----------- -------
$73,938,119 22.0%
Low Price to Book Value
Aceto Corporation 100,000 Chemicals $ 2,050,000 0.6%
Angelica Corporation 47,000 Non-Durables & Entertainment 1,063,375 0.3
Central & South West Corporation 315,000 Energy & Utilities 8,524,688 2.5
Dames & Moore, Inc. 593,000 Business Services 7,857,250 2.3
Eagle Bancshares, Inc. 10,000 Banks 220,000 0.1
EMC Insurance Group, Inc. 300,000 Insurance 3,975,000 1.2
Fletcher Challenge Forests (ADR) 150,000 Paper & Forest Products 1,256,250 0.4
Flexsteel Industries, Inc. 200,000 Consumer Durables 2,825,000 0.9
Haggar Corporation 255,000 Apparel 4,016,250 1.2
Grand Premier Financial, Inc. 77,200 Banks 1,100,100 0.3
Hanover Capital Mortgage
Holdings, Inc. (Units) 225,000 Real Property 3,712,500 1.1
International Aluminum Company 78,100 Producer Goods 2,440,625 0.7
Klamath First Bancorp, Inc. 100,000 Banks 2,150,000 0.6
Ocwen Asset Investment Corporation 150,000 Real Property 3,075,000 0.9
Salient 3 Communications, Inc. (Class A) 225,000 Electronics 2,784,375 0.8
Southwest Water Company 44,100 Energy & Utilities 771,750 0.2
Tecumseh Products Company (Class A) 125,000 Producer Goods 6,093,750 1.8
Zeigler Companies, Inc. 3,800 Miscellaneous Financial 79,325 0.1
----------- -------
$53,995,238 16.0%
Below Average Price/Cash Flow Ratio
Amcast Industrial Corporation 100,000 Electronics $ 2,293,750 0.7%
Central Hudson Gas & Electric Corporation 100,000 Energy & Utilities 4,387,500 1.3
Central Vermont Public Service Corporation 29,700 Energy & Utilities 452,925 0.1
CORE Cap, Inc. (d) 222,222 Real Property 4,444,440 1.3
Entergy Corporation 200,000 Energy & Utilities 5,987,500 1.8
Ethyl Corporation 300,000 Chemicals 2,306,250 0.7
</TABLE>
17
<PAGE>
HEARTLAND VALUE PLUS FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 67.6% [CONT'D] Shares Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Below Average Price/Cash Flow Ratio [CONT'D]
Fleming Companies, Inc. 750,000 Food & Agriculture $ 10,078,125 3.0%
Foster (LB) Company (a) 209,400 Producer Goods 1,033,913 0.3
General Housewares Corporation 79,500 Steel 834,750 0.3
ICN Pharmaceuticals, Inc. 45,214 Drugs and Medicine 2,207,008 0.6
Insteel Industries, Inc. 383,600 Producer Goods 2,637,250 0.8
Mid-American Energy Holdings Company 62,100 Energy & Utilities 1,366,200 0.4
Mitchell Energy & Development Corporation 100,000 Domestic Oil 2,912,500 0.9
Nash Finch Company 200,000 Food & Agriculture 3,800,000 1.1
Piccadilly Cafeterias, Inc. 125,500 Non-Durables & Entertainment 1,647,187 0.5
Providence Energy Corporation 135,500 Energy & Utilities 2,955,594 0.9
Rival Company 225,000 Consumer Durables 2,953,125 0.9
Rochester Gas & Electric Corporation 200,000 Energy & Utilities 6,800,000 2.0
Southwestern Energy Company 550,000 Energy & Raw Material 7,081,250 2.1
Tucson Electric Power Company (a) 400,000 Energy & Utilities 7,250,000 2.2
USX-Delhi Group 400,000 Energy & Raw Material 8,200,000 2.4
WPL Holdings, Inc. 300,000 Energy & Utilities 9,937,500 3.0
Ziegler Coal Holding Company 150,000 Energy & Raw Material 2,446,875 0.7
------------- --------
$ 94,013,642 28.0%
Special Situations
Analysis & Technology, Inc. 100,000 Business Services $ 2,812,500 0.8%
Commercial Bankshares, Inc. 80,850 Banks 1,960,613 0.6
Unisource Worldwide, Inc. 50,000 Business Services 712,500 0.2
------------- --------
5,485,613 1.6%
-------------
TOTAL COMMON STOCKS (Cost $203,863,406) $227,432,612
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Percent of
PREFERRED STOCKS - 5.7% Shares Industry Value Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bolder Technologies Corporation
9.00% Ser. A Conv. (144A) (d) 80,000 Electronics $ 3,140,000 0.9%
BTI Cap Trust 6.50% Conv. (144A) (d) 40,000 Non-Durables & Entertainment 1,925,000 0.6
Chiquita Brands International, Inc.
5.75% Ser. A Conv. 25,000 Food & Agriculture 1,279,687 0.4
CORE Cap, Inc. 10.00% Series A Conv. (d) 222,222 Real Property 5,686,661 1.7
Excel Realty Trust, Inc. 2.125% Series A Conv. 80,000 Real Property 2,375,000 0.7
ICO, Inc. $1.6875 Series Conv. 100,000 Energy & Raw Material 2,200,000 0.7
International Technology Corporation Conv 24,600 Business Services 498,150 0.1
Riviera Tool & Die Company 8.00% Conv. (d) 11,700 Producer Goods 2,037,750 0.6
-------------
TOTAL PREFERRED STOCKS (Cost $18,564,013) $ 19,142,248
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Par Percent of
CONVERTIBLE BONDS - 9.1% Amount Industry Value Net Assets
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bell Sports Corporation 4.25% 11/15/2000 $ 2,000,000 Non-Durables & Entertainment $ 1,737,500 0.5%
Chock Ful O' Nuts Corporation
8.00% 09/15/2006 500,000 Food & Agriculture 525,625 0.2
Danka Business Systems PLC 6.75%
04/01/2002 2,500,000 Business Machines 2,262,500 0.7
Fort Bend Holding Corporation 8.00%
12/01/2005 1,000,000 Miscellaneous Financial 2,000,000 0.6
Hector Communications
Corporation 8.50% 02/15/2002 500,000 Telephone 527,500 0.2
Homestake Mining Company 5.50%
06/23/2000 1,000,000 Gold 942,500 0.3
J Baker, Inc. 7.00% 06/01/2002 140,000 Retail 103,600 0.1
Kent Electronics Corporation 4.50%
09/01/2004 1,000,000 Electronics 831,250 0.2
</TABLE>
18
<PAGE>
HEARTLAND VALUE PLUS FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Par Percent of
CONVERTIBLE BONDS - 9.1% [CONT'D] Amount Industry Value Net Assets
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mercury Air Group, Inc. 7.75% 02/01/2006 $ 3,250,000 Air Transport $ 3,233,750 1.0%
Park Electrochemical Corporation 5.50%
03/01/2006 2,000,000 Electronics 1,857,500 0.5
Physicians Resources Group, Inc. 6.00%
12/01/2001 (144A) (d) 4,060,000 Drugs & Medicine 2,654,225 0.8
Professional Bancorp, Inc. 8.50%
03/01/2004 1,500,000 Banks 1,755,000 0.5
Read-Rite Corporation 6.50%
09/01/2004 3,000,000 Electronics 2,508,750 0.7
Remington Oil & Gas Corporation 8.25%
12/01/2002 4,922,000 Domestic Oil 4,786,645 1.4
Reptron Electronics, Inc. 6.75%
08/01/2004 3,000,000 Electronics 2,426,250 0.7
Richardson Electronics, Ltd. 7.25%
12/15/2006 763,000 Electronics 638,059 0.2
Richey Electronics, Inc. 7.00% 03/01/2006 200,000 Electronics 192,500 0.1
Thorn Apple Valley, Inc. 9.00% 04/01/2007 1,500,000 Food & Agriculture 1,501,875 0.4
-------------
TOTAL CONVERTIBLE BONDS (Cost $29,953,693) $ 30,485,029
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Par Percent of
CORPORATE BONDS - 10.9% Amount Industry Value Net Assets
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ABC Rail Products Corporation 9.125%
01/15/2004 $ 3,000,000 Railroads & Shipping $ 2,996,250 0.9%
Bay View Capital Corporation 9.125%
08/15/2007 500,000 Banks 513,750 0.2
Beal Financial Corporation 12.75%
08/15/2000 2,000,000 Banks 2,142,500 0.6
Canadian Forest Oil, Ltd. 8.75%
09/15/2007 (144A) (d) 2,000,000 International Oil 2,022,500 0.6
Cleveland Electric Illuminating Company
8.375% 12/01/2011 2,000,000 Energy & Utilities 2,055,000 0.6
Coho Energy, Inc. 8.875% 10/15/2007 1,500,000 Domestic Oil 1,503,750 0.4
Engle Homes, Inc. 11.75% 12/15/2000 1,000,000 Construction 992,500 0.3
First Republic Bank 7.75% 09/15/2012 3,000,000 Banks 3,063,750 0.9
Hawthorne Financial Corporation 12.50%
12/31/2004 (144A) (d) 2,000,000 Savings & Loans 1,995,000 0.6
Leucadia National Corporation 7.875%
10/15/2006 3,000,000 Insurance 3,120,000 0.9
Local Financial Corporation 11.00%
09/08/2004 (144A) (d) 3,100,000 Banks 3,286,000 1.0
Matrix Capital Corporation 11.50%
09/30/2004 3,000,000 Miscellaneous Financial 3,007,500 0.9
National Energy Group, Inc. 10.75%
11/01/2006 220,000 Domestic Oil 230,450 0.1
Ocwen Capital Trust 10.875% 08/01/2027 200,000 Miscellaneous Financial 216,250 0.1
Resource America, Inc. 12.00%
08/01/2004 (144A) (d) 3,000,000 Domestic Oil 3,067,500 0.9
Rohr, Inc. 9.25%
03/01/2017 3,000,000 Air Transport 3,101,250 0.9
Sholodge, Inc. 9.55%
09/01/2007 3,000,000 Travel & Recreation 2,970,000 0.9
Southwest Royalties, Inc. 10.50%
10/15/2004 (144A) (d) 500,000 Domestic Oil 493,750 0.1
-------------
TOTAL CORPORATE BONDS (Cost $36,345,597) $ 36,777,700
</TABLE>
19
<PAGE>
HEARTLAND VALUE PLUS FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Par Percent of
MUNICIPAL BOND - TAXABLE - 0.4% Amount Industry Value Net Assets
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mexico Beach, Florida Public Service
Facilities - Heritage House of Sarasota
10.00% 12/01/2005 (e) $1,160,000 Drugs & Medicine $1,162,900 0.4%
-----------
TOTAL MUNICIPAL BOND - TAXABLE (Cost $1,160,000) $1,162,900
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Par Percent of
SHORT-TERM INVESTMENTS - 5.2% Amount Value Net Assets
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMERCIAL PAPER - 1.8%
Ford Motor Credit Corporation 0.00%
01/05/1998 $ 6,000,000 $ 5,995,908 1.8%
VARIABLE RATE DEMAND NOTES (+) - 3.4%
American Family Financial Services 5.49% 4,543,000 4,543,000 1.4
Johnson Controls, Inc. 5.33% 500,000 500,000 0.1
Sara Lee Corporation 5.32% 1,498,000 1,498,000 0.4
Warner-Lambert Company 5.49% 4,252,000 4,252,000 1.3
Wisconsin Electric Power Company 5.49% 736,000 736,000 0.2
-------------
11,529,000
-------------
TOTAL SHORT-TERM INVESTMENTS (Cost $17,524,908) $ 17,524,908
TOTAL INVESTMENTS (Cost $307,411,617)........................ $ 332,525,397 98.9%
Cash and receivables, less liabilities....................... 3,755,969 1.1
------------- --------
TOTAL NET ASSETS............................................. $336,281,366 100.0%
============= ========
</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.
(e) When-issued security.
(+) Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates.
The rates listed are as of December 31, 1997.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
20
<PAGE>
HEARTLAND U.S. GOVERNMENT SECURITIES FUND
SCHEDULE OF INVESTMENTS . December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Par Percent of
Amount LONG-TERM INVESTMENTS - 93.2% Coupon Maturity Value Net Assets
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY AND AGENCY SECURITIES - 32.7%
U.S. TREASURY SECURITIES - 14.5%
$ 2,000,000 US Treasury Bond 7.875% 02/15/2021 $ 2,455,520 5.0%
4,000,000 US Treasury Bond 7.250 08/15/2022 4,618,880 9.5
-----------
7,074,400
AGENCY SECURITIES - 18.2%
2,500,000 Federal Home Loan Bank 7.360 07/01/2004 2,680,350 5.5
3,000,000 Federal National Mortgage Association
(Callable 12/12/2001) 6.700 12/12/2006 3,058,710 6.3
3,000,000 Federal National Mortgage Association
(Callable 07/06/2002) 6.760 07/16/2007 3,085,290 6.4
-----------
8,824,350
-----------
TOTAL U.S. TREASURY AND AGENCY SECURITIES (Cost $15,268,246) 15,898,750
MORTGAGE-RELATED SECURITIES - 60.5%
PASS-THROUGH SECURITIES - 26.0%
2,620,695 FNMA #361493 GL 9.000 01/01/2025 2,787,765 5.8
2,684,593 FNMA #374082 CL 8.000 03/01/2027 2,778,554 5.7
1,941,329 FNMA #376640 CL 8.000 06/01/2027 2,009,276 4.1
325,087 GNMA #31652 8.500 09/15/2009 344,491 0.7
1,598,236 GNMA #443630 MHD 9.000 11/15/2017 1,746,520 3.6
245,828 GNMA #293146 MHB 10.250 07/15/2005 265,108 0.6
2,602,240 FNMA Grantor Trust 1995 - T5A 7.000 03/17/2035 2,671,021 5.5
-----------
12,602,735
COLLATERALIZED MORTGAGE OBLIGATIONS - 34.5%
3,000,000 FHLMC CMO-SEQ 1978 BC 6.500 05/15/2025 2,920,912 6.0
5,996,000 FHLMC CMO-SEQ 1921 B 6.500 05/15/2021 5,990,447 12.3
3,000,000 FNMA CMO-PAC 1993 - 38L 5.000 08/25/2022 2,723,915 5.6
5,000,000 VA VENDEE CMO-SEQ 1992 -2F 7.000 02/15/2018 5,116,850 10.6
-----------
16,752,124
-----------
TOTAL MORTGAGE RELATED SECURITIES (Cost $28,453,476) 29,354,859
-----------
TOTAL LONG-TERM INVESTMENTS (Cost $43,721,722) $45,253,609
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Par Percent of
Amount SHORT-TERM INVESTMENTS - 7.0% Coupon Maturity Value Net Assets
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AGENCY DISCOUNT NOTES - 6.2%
$ 1,000,000 Federal Home Loan Mortgage Corporation 0.000% 01/05/1998 $ 999,366 2.1%
2,000,000 Federal National Mortgage Association 0.000 1/05/1998 1,998,731 4.1
-------------
2,998,097
VARIABLE RATE DEMAND NOTE (+) - 0.8%
410,000 Warner-Lambert Company 5.49% 410,000 0.8
-------------
TOTAL SHORT-TERM INVESTMENTS (Cost $3,408,097) $ 3,408,097
TOTAL INVESTMENTS (Cost $47,129,819)............................ $ 48,661,706 100.2%
Liabilities, less cash and receivables ......................... (99,621) (0.2)
------------- ------
TOTAL NET ASSETS................................................ $ 48,562,085 100.0%
============= ======
</TABLE>
(+) 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 December 31, 1997.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
21
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
Small Cap
Contrarian Mid Cap
Fund Value Fund Value Fund
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at cost.................................... $ 253,877,303 $1,717,219,260 $ 34,171,660
============== ============== ==============
Investments in securities, at value................................... $ 266,982,063 $2,144,546,343 $ 38,356,772
Cash.................................................................. 5,425 16,457 2,595
Receivable from investments sold...................................... 21,643,094 1,326,456 433,337
Receivable from fund shares sold...................................... 382,036 3,884,587 140,028
Receivable from securities sold short................................. 79,837,707 -- --
Deposits with brokers for securities sold short....................... 9,180,876 -- --
Variation margin on open futures contracts............................ 17,000 -- --
Accrued dividends and interest........................................ 706,398 5,014,056 42,144
Deferred organization expenses........................................ 23,008 -- 12,321
Receivable from Advisor for expense reimbursement..................... -- -- 1,981
-------------- -------------- --------------
Total Assets...................................................... 378,777,607 2,154,787,899 38,989,178
-------------- -------------- --------------
LIABILITIES:
Payable for investments purchased..................................... 4,507,722 22,988,630 2,311,680
Payable for fund shares redeemed...................................... 1,287,084 2,862,634 57,069
Securities sold short, at value....................................... 95,885,525 -- --
Distributions payable................................................. 82 6,434 --
Payable to Advisor for management fee................................. 194,152 1,459,890 23,527
Payable to Advisor for deferred organization expenses................. 23,008 -- 12,321
Accrued expenses...................................................... 238,140 755,631 26,540
-------------- -------------- --------------
Total Liabilities................................................. 102,135,713 28,073,219 2,431,137
-------------- -------------- --------------
TOTAL NET ASSETS......................................................... $ 276,641,894 $2,126,714,680 $ 36,558,041
============== ============== ==============
NET ASSETS CONSIST OF:
Paid in capital....................................................... $ 279,160,217 $1,696,855,751 $ 32,432,417
Accumulated undistributed net investment income (loss)................ (287,387) (90,025) --
Accumulated undistributed net realized gains (losses) on investments.. 4,394,883 2,621,871 (59,488)
Net unrealized appreciation (depreciation) on investments............. (6,625,819) 427,327,083 4,185,112
-------------- -------------- --------------
TOTAL NET ASSETS......................................................... $ 276,641,894 $2,126,714,680 $ 36,558,041
============== ============== ==============
SHARES OUTSTANDING, $.001 par value (100,000,000 shares authorized,
respectively)........................................................... 21,888,487 62,792,924 2,861,166
============== ============== ==============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE........... $ 12.64 $ 33.87 $ 12.78
============== ============== ==============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
22
<PAGE>
<TABLE>
<CAPTION>
U.S.
Large Cap Value Plus Government
Value Fund Fund Securities Fund
------------ -------------- ---------------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at cost.............................................. $ 7,128,347 $ 307,411,617 $ 47,129,819
============ ============== ==============
Investments in securities, at value............................................. $ 7,682,840 $ 332,525,397 $ 48,661,706
Cash............................................................................ 2,484 21,995 4,495
Receivable from investments sold................................................ -- 1,076,525 --
Receivable from fund shares sold................................................ 13,213 8,299,410 182,963
Receivable from securities sold short........................................... -- -- --
Deposits with brokers for securities sold short................................. -- -- --
Variation margin on open futures contracts...................................... -- -- --
Accrued dividends and interest.................................................. 13,672 1,967,157 544,344
Deferred organization expenses.................................................. 12,321 8,258 --
Receivable from Advisor for expense reimbursement............................... 15,242 -- --
------------- -------------- --------------
Total Assets................................................................ 7,739,772 343,898,742 49,393,508
------------- -------------- --------------
LIABILITIES:
Payable for investments purchased............................................... -- 5,340,842 --
Payable for fund shares redeemed................................................ 41,983 1,887,954 777,799
Securities sold short, at value................................................. -- -- --
Distributions payable........................................................... -- 8,201 --
Payable to Advisor for management fee........................................... 5,073 196,829 10,946
Payable to Advisor for deferred organization expenses........................... 12,321 8,258 --
Accrued expenses................................................................ 15,039 175,292 42,678
------------- -------------- --------------
Total Liabilities........................................................... 74,416 7,617,376 831,423
------------- -------------- --------------
TOTAL NET ASSETS .................................................................. $ 7,665,356 $ 336,281,366 $ 48,562,085
============ ============== ==============
NET ASSETS CONSIST OF:
Paid in capital................................................................. $ 6,977,568 $ 310,615,357 $ 53,186,199
Accumulated undistributed net investment income (loss).......................... -- 12,685 2,197
Accumulated undistributed net realized gains (losses) on investments............ 133,295 539,544 (6,158,198)
Net unrealized appreciation (depreciation) on investments....................... 554,493 25,113,780 1,531,887
------------- -------------- --------------
TOTAL NET ASSETS................................................................... $ 7,665,356 $ 336,281,366 $ 48,562,085
------------- -------------- --------------
SHARES OUTSTANDING, $.001 par value (100,000,000 shares authorized, respectively).. 623,302 20,844,713 4,930,091
============ ============== ==============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE..................... $ 12.30 $ 16.13 $ 9.85
============ ============== ==============
</TABLE>
23
<PAGE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Small Cap
Contrarian Mid Cap
Fund Value Fund Value Fund
------------- ------------ ------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................................................... $ 1,582,223 $ 8,641,499 $ 325,658
Interest.................................................................... 2,895,441 23,084,192 147,975
-------------- ------------- -------------
Total investment income................................................... 4,477,664 31,725,691 473,633
-------------- ------------- -------------
EXPENSES:
Management fees............................................................. 2,109,857 14,673,206 184,843
Distribution fees........................................................... 703,286 4,891,069 61,614
Transfer agent fees......................................................... 487,102 1,496,435 30,563
Printing and communications................................................. 74,473 205,916 2,522
Registration fees........................................................... 73,229 114,083 28,443
Custodian fees.............................................................. 57,225 226,709 9,824
Postage..................................................................... 43,132 228,745 3,738
Audit fees.................................................................. 26,749 36,634 8,309
Legal fees.................................................................. 26,378 26,644 271
Amortization of organization expenses....................................... 9,861 -- 3,286
Directors' fees............................................................. 7,329 28,409 6,138
Other operating expenses.................................................... 45,707 207,014 2,927
-------------- ------------- -------------
Total operating expenses before interest expense, dividends on
short positions, and expense reimbursement and management fee waiver...... 3,664,328 22,134,864 342,478
Total interest expense and dividends on short positions..................... 139,815 -- --
-------------- ------------- -------------
Total expenses before expense reimbursement and management fee waiver....... 3,804,143 22,134,864 342,478
Less: Expense reimbursement and management fee waiver....................... -- -- (9,501)
-------------- ------------- -------------
Net expenses................................................................ 3,804,143 22,134,864 332,977
-------------- ------------- -------------
NET INVESTMENT INCOME.......................................................... 673,521 9,590,827 140,656
-------------- ------------- -------------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains (losses) on:
Long positions............................................................ 35,031,693 275,974,297 740,544
Short positions........................................................... 8,681,959 -- --
Futures contracts......................................................... 7,247,668 (2,851,675) --
Options................................................................... (27,358) 111,328 (83,484)
Net increase (decrease) in unrealized appreciation on:
Long positions............................................................ (363,972) 109,677,621 3,851,838
Short positions........................................................... (15,482,610) -- --
Futures contracts......................................................... (3,682,762) -- --
Options................................................................... -- (98,828) --
-------------- ------------- -------------
TOTAL REALIZED AND UNREALIZED GAINS ON INVESTMENTS............................. 31,404,618 382,812,743 4,508,898
-------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................... $ 32,078,139 $ 392,403,570 $ 4,649,554
============== ============= =============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
24
<PAGE>
<TABLE>
<CAPTION>
U.S.
Large Cap Value Plus Government
Value Fund Fund Securities Fund
------------- -------------- ---------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................................................... $ 97,643 $ 4,242,426 $ --
Interest.................................................................... 42,738 4,450,456 3,246,148
------------- -------------- --------------
Total investment income................................................... 140,381 8,692,882 3,246,148
------------- -------------- --------------
EXPENSES:
Management fees............................................................. 40,359 1,292,331 301,650
Distribution fees........................................................... 13,453 461,547 116,354
Transfer agent fees......................................................... 14,221 205,520 71,458
Printing and communications................................................. 1,281 28,342 10,361
Registration fees........................................................... 20,377 107,892 19,746
Custodian fees.............................................................. 2,405 31,352 7,243
Postage..................................................................... 895 18,512 6,162
Audit fees.................................................................. 8,761 10,792 12,049
Legal fees.................................................................. 101 3,450 536
Amortization of organization expenses....................................... 3,286 7,625 --
Directors' fees............................................................. 5,131 7,118 5,503
Other operating expenses.................................................... 2,192 14,164 7,150
------------- -------------- --------------
Total operating expenses before interest expense, dividends on
short positions, and expense reimbursement and management fee waiver...... 112,462 2,188,645 558,212
Total interest expense and dividends on short positions..................... -- -- --
------------- -------------- --------------
Total expenses before expense reimbursement and management fee waiver....... 112,462 2,188,645 558,212
Less: Expense reimbursement and management fee waiver....................... (36,123) -- (155,522)
------------- -------------- --------------
Net expenses................................................................ 76,339 2,188,645 402,690
------------- -------------- --------------
NET INVESTMENT INCOME.......................................................... 64,042 6,504,237 2,843,458
------------- -------------- --------------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains (losses) on:
Long positions............................................................ 419,278 23,430,738 (283,942)
Short positions........................................................... -- -- --
Futures contracts......................................................... -- -- (90,384)
Options................................................................... -- 81,847 --
Net increase (decrease) in unrealized appreciation on:
Long positions............................................................ 475,417 18,312,281 1,726,965
Short positions........................................................... -- -- --
Futures contracts......................................................... -- -- --
Options................................................................... -- -- --
------------- -------------- --------------
TOTAL REALIZED AND UNREALIZED GAINS ON INVESTMENTS............................. 894,695 41,824,866 1,352,639
------------- -------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................... $ 958,737 $ 48,329,103 $ 4,196,097
============= ============== ==============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
25
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
------------------------------
Small Cap
Contrarian Fund
------------------------------
Year Year
Ended Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss)................................................ $ 673,521 $ 375,584
Net realized gains (losses) on investments.................................. 50,933,962 11,035,747
Net increase (decrease) in unrealized appreciation on investments........... (19,529,344) 11,875,878
------------- ------------
Net increase in net assets resulting from operations...................... 32,078,139 23,287,209
------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income....................................................... (960,908) (375,584)
Net realized gains on investments........................................... (46,539,079) (11,035,749)
------------- ------------
Net distributions to shareholders......................................... (47,499,987) (11,411,333)
------------- ------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued................................................. 170,002,168 245,828,468
Reinvested dividends from net investment income and distributions
from net realized gains on investments.................................... 44,487,188 9,882,164
Cost of shares redeemed..................................................... (185,437,010) (90,123,683)
------------- ------------
Net increase in net assets derived from Fund
share activities........................................................ 29,052,346 165,586,949
------------- ------------
TOTAL INCREASE IN NET ASSETS.................................................. 13,630,498 177,462,825
NET ASSETS AT THE BEGINNING OF THE PERIOD..................................... 263,011,396 85,548,571
------------- ------------
NET ASSETS AT THE END OF THE PERIOD........................................... $ 276,641,894 $263,011,396
============= ============
UNDISTRIBUTED NET INVESTMENT LOSS............................................. $ (287,387) $ --
============= ============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
26
<PAGE>
<TABLE>
<CAPTION>
---------------------------------- ---------------------------------
Value Mid Cap
Fund Value Fund
---------------------------------- ---------------------------------
Oct. 11, 1996
Year Year Year (commencement
Ended Ended Ended of operations) to
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1996
---------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)........................ $ 9,590,827 $ 3,201,287 $ 140,656 $ (1,646)
Net realized gains (losses) on investments.......... 273,233,950 101,382,821 657,060 (3,604)
Net increase (decrease) in unrealized appreciation
on investments...................................... 109,578,793 167,734,490 3,851,838 333,274
-------------- -------------- ----------- ----------
Net increase in net assets resulting from
operations....................................... 392,403,570 272,318,598 4,649,554 328,024
-------------- -------------- ----------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... (9,680,852) (3,201,287) (140,668) --
Net realized gains on investments................... (270,393,704) (101,601,571) (712,944) --
-------------- -------------- ----------- ----------
Net distributions to shareholders................. (280,074,556) (104,802,858) (853,612) --
-------------- -------------- ----------- ----------
FUND SHARE ACTIVITIES:
Proceeds from shares issued......................... 512,410,502 482,657,821 30,209,525 6,732,455
Reinvested dividends from net investment income
and distributions
from net realized gains on investments............ 246,872,904 90,283,401 842,673 --
Cost of shares redeemed............................. (371,657,576) (304,623,134) (5,224,061) (126,517)
-------------- -------------- ----------- ----------
Net increase in net assets derived from Fund
share activities................................ 387,625,830 268,318,088 25,828,137 6,605,938
-------------- -------------- ----------- ----------
TOTAL INCREASE IN NET ASSETS......................... 499,954,844 435,833,828) 29,624,079 6,933,962
NET ASSETS AT THE BEGINNING OF THE PERIOD............ 1,626,759,836 1,190,926,008 6,933,962 --
-------------- -------------- ----------- ----------
NET ASSETS AT THE END OF THE PERIOD.................. $2,126,714,680 $1,626,759,836 $36,558,041 $6,933,962
============== ============== =========== ==========
UNDISTRIBUTED NET INVESTMENT LOSS.................... $ (90,025) $ -- $ -- $ --
============== ============== =========== ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
27
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
-----------------------------------------------
Large Cap
Value Fund
-----------------------------------------------
Oct. 11, 1996
Year (commencement
Ended of operations) to
Dec. 31, 1997 Dec. 31, 1996
---------------- --------------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss)..................................................... $ 64,042 $ (986)
Net realized gains (losses) on investments....................................... 419,278 (1,071)
Net increase (decrease) in unrealized appreciation on investments................ 475,417 79,076
---------------- ---------------
Net increase in net assets resulting from operations........................... 958,737 77,019
---------------- ---------------
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...................................................... 6,205,875 2,589,599
Reinvested dividends from net investment income and distributions
from net realized gains on investments......................................... 337,665 ---
Cost of shares redeemed.......................................................... (1,929,442) (225,143)
---------------- ---------------
Net increase (decrease) in net assets derived from Fund
share activities............................................................. 4,614,098 2,364,456
---------------- ---------------
TOTAL INCREASE (DECREASE) IN NET ASSETS............................................ 5,223,881 2,441,475
NET ASSETS AT THE BEGINNING OF THE PERIOD.......................................... 2,441,475 ---
---------------- ---------------
NET ASSETS AT THE END OF THE PERIOD................................................ $ 7,665,356 $ 2,441,475
================ ===============
UNDISTRIBUTED NET INVESTMENT INCOME................................................ $ --- $ ---
================ ===============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
28
<PAGE>
<TABLE>
<CAPTION>
----------------------------------- ------------------------------------
Value Plus U.S. Government
Fund Securities Fund
----------------------------------- ------------------------------------
Year Year Year Year
Ended Ended Ended Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C>
$ 6,504,237 $ 1,075,148 $ 2,843,458 $ 3,631,257
23,512,585 3,357,002 (374,326) 88,090
18,312,281 5,791,869 1,726,965 (3,109,011)
-------------- ------------- ------------- -------------
48,329,103 10,224,019 4,196,097 610,336
-------------- ------------- ------------- -------------
(6,491,552) (1,075,148) (2,825,690) (3,631,257)
(22,973,041) (3,357,002) --- ---
-------------- ------------- ------------- -------------
(29,464,593) (4,432,150) (2,825,690) (3,631,257)
-------------- ------------- ------------- -------------
369,805,993 54,866,412 15,023,609 9,208,348
27,702,491 4,017,651 2,054,279 2,603,735
(146,673,814) (17,216,440) (21,599,173) (23,338,997)
-------------- ------------- ------------- -------------
250,834,670 41,667,623 (4,521,285) (11,526,914)
-------------- ------------- ------------- -------------
269,699,180 47,459,492 (3,150,878) (14,547,835)
66,582,186 19,122,694 51,712,963 66,260,798
-------------- ------------- ------------- -------------
$ 336,281,366 $ 66,582,186 $ 48,562,085 $ 51,712,963
============== ============= ============= =============
$ 12,685 $ --- $ 2,197 $ ---
============== ============= ============= =============
</TABLE>
29
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION> Small Cap Contrarian Fund
----------------------------------------------------------
April 27, 1995/(1)/
For the year ended December 31, through
1997 1996 Dec. 31, 1995
---------------------------------------------------------
<S> <C> <C> <C>
Per Share Data
Net asset value, beginning of period............ $ 13.40 $ 11.79 $ 10.00
Income from investment operations:
Net investment income (loss).................. 0.04 0.02 0.03
Net realized and unrealized gains
on investments.............................. 1.77 2.20 2.05
----------- ----------- ---------
Total income from investment
operations.................................. 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.................. $ 12.64 $ 13.40 $ 11.79
=========== =========== =========
Total Return/(4)/............................... 13.7% 18.9% 20.8%/(2)/
Ratios and Supplemental Data
Net assets, end of period
(in thousands).............................. $ 276,642 $ 263,011 $ 85,549
Ratio of operating expenses to average
net assets.................................. 1.30% 1.30% 1.44%/(3)/
Ratio of interest expense and dividends on
short positions to average net assets....... 0.05% 0.02% 0.00%/(3)/
Ratio of net investment income (loss)
to average net assets....................... 0.24% 0.19% 1.01%/(3)/
Portfolio turnover rate....................... 103% 57% 45%
Average commission rate per share/(5)/........ $ 0.0445 $ 0.0464 N/A
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) The contingent deferred and initial sales charges in effect for the Value
Fund prior to June 1, 1994 are not reflected in Total Return as set forth in
the table.
(5) Disclosure of average commission rate per share was not required prior to
the year ended December 31, 1996.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
30
<PAGE>
<TABLE>
<CAPTION>
Value Fund
- --------------------------------------------------------------------------------
For the year ended December 31,
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 31.65 $ 27.95 $ 22.72 $ 23.22 $ 20.41
0.17 0.06 0.13 (0.09) (0.12)
7.09 5.78 6.63 0.47 3.95
- ------------- ----------- ------------ ----------- ----------
7.26 5.84 6.76 0.38 3.83
(0.17) (0.06) (0.13) -- --
(4.87) (2.08) (1.40) (0.88) (1.02)
- ------------- ----------- ------------ ----------- ----------
(5.04) (2.14) (1.53) (0.88) (1.02)
- ------------- ----------- ------------ ----------- ----------
$ 33.87 $ 31.65 $ 27.95 $ 22.72 $ 23.22
============= =========== ============ =========== ==========
23.2% 21.0% 29.8% 1.7% 18.8%
$ 2,126,715 $1,626,760 $ 1,190,926 $ 339,364 $ 186,518
1.12% 1.23% 1.29% 1.39% 1.51%
-- -- -- -- --
0.49% 0.22% 0.61% (0.52)% (0.71)%
55% 31% 31% 35% 51%
$ 0.0537 $ 0.0530 N/A N/A N/A
</TABLE>
31
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Mid Cap Value Fund Large Cap Value Fund
--------------------------------------------------------------------
Year Oct. 11, 1996/(1)/ Year Oct. 11, 1996/(1)/
ended through ended through
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1996
------------- ------------------ ------------- ----------------
<S> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period.... $ 10.66 $ 10.00 $ 10.50 $ 10.00
Income (loss) from investment operations:
Net investment income.................. 0.05 -- 0.11 --
Net realized and unrealized gains
(losses) on investments............... 2.38 0.66 2.28 0.50
--------- ---------- --------- --------------
Total income (loss) from investment
operations........................... 2.43 0.66 2.39 0.50
Less distributions from:
Net investment income.................. (0.05) -- (0.11) --
Net realized gains on investments...... (0.26) -- (0.48) --
--------- ---------- --------- --------------
Total distributions................... (0.31) -- (0.59) --
--------- ---------- --------- --------------
Net asset value, end of period.......... $ 12.78 $ 10.66 $ 12.30 $ 10.50
========= ========== ========= ==============
Total Return/(4)/....................... 22.8% 6.6%/(2)/ 22.9% 5.0%/(2)/
Ratios and Supplemental Data
Net assets, end of period
(in thousands)........................ $ 36,558 $ 6,934 $ 7,665 $ 2,441
Ratio of net expenses to average
net assets............................ 1.29%/(6)/ 1.94%/(3)/ 1.36%/(6)/ 2.73%/(3)/
Ratio of net investment income (loss)
to average net assets................. 0.54%/(6)/ (0.16)%/(3)/ 1.14%/(6)/ (0.25)%/(3)/
Portfolio turnover rate................ 48% 4% 30% 1%
Average commission rate per share/(5)/. $ 0.0678 $ 0.0675 $ 0.0666 $ 0.0668
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) The contingent deferred sales charge in effect for the Value Plus Fund prior
to June 1, 1994 is not reflected in Total Return as set forth in the table.
(5) Disclosure of average commission rate per share was not required prior to
the year ended December 31, 1996.
(6) 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% for the Mid Cap Value Fund and 2.00%
for the Large Cap Value Fund and the ratio of net investment income to
average net assets would have been 0.51% and 0.50%, respectively.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
32
<PAGE>
<TABLE>
<CAPTION>
Value Plus Fund
- --------------------------------------------------------------------------------
Oct. 26, 1993(1)
For the year ended December 31, through
1997 1996 1995 1994 Dec. 31, 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 13.73 $ 11.17 $ 9.53 $ 10.45 $ 10.00
0.48 0.38 0.41 0.41 0.07
3.66 3.33 1.89 (0.92) 0.45
- --------- -------- -------- -------- ---------
4.14 3.71 2.30 (0.51) 0.52
(0.48) (0.38) (0.41) (0.41) (0.07)
(1.26) (0.77) (0.25) -- --
- --------- -------- -------- -------- ---------
(1.74) (1.15) (0.66) (0.41) (0.07)
- --------- -------- -------- -------- ---------
$ 16.13 $ 13.73 $ 11.17 $ 9.53 $ 10.45
========= ======== ======== ======== =========
30.6% 33.8% 24.4% (4.9)% 5.2%(2)
$ 336,281 $ 66,582 $ 19,123 $ 9,884 $ 5,811
1.12% 1.45% 1.54% 1.80% 1.30%(3)
3.32% 3.23% 3.90% 4.39% 6.52%(3)
74% 73% 150% 127% 6%
$ 0.0657% $ 0.0573% N/A% N/A% N/A%
</TABLE>
33
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. Government Securities Fund
- ------------------------------------------------------------------------------------------------
For the year ended December 31,
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of year............ $ 9.54 $ 9.96 $ 8.91 $ 10.50 $ 9.93
Income (loss) from investment operations:
Net investment income....................... 0.58 0.59 0.60 0.59 0.56
Net realized and unrealized gains
(losses) on investments................... 0.31 (0.42) 1.05 (1.59) 1.18
------- ------- ------- ------- -------
Total income (loss) from investment
operations.............................. 0.89 0.17 1.65 (1.00) 1.74
Less distributions from:
Net investment income....................... (0.58) (0.59) (0.60) (0.59) (0.56)
Net realized gains on investments........... -- -- -- -- (0.61)
------- ------- ------- ------- -------
Total distributions....................... (0.58) (0.59) (0.60) (0.59) (1.17)
------- ------- ------- ------- -------
Net asset value, end of year.................. $ 9.85 $ 9.54 $ 9.96 $ 8.91 $ 10.50
======= ======= ======= ======= =======
Total Return(1)............................... 9.7% 2.0% 19.0% (9.6)% 17.8%
Ratios and Supplemental Data
Net assets, end of year
(in thousands)............................ $48,562 $51,713 $66,261 $64,807 $66,789
Ratio of net expenses to average
net assets(2)............................. 0.87% 1.06% 1.07% 1.07% 1.06%
Ratio of net investment income
to average net assets(2).................. 6.12% 6.36% 6.31% 6.30% 5.09%
Portfolio turnover rate..................... 143% 30% 97% 95% 200%
</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) 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 years
ended December 31, 1997, 1996, 1995, 1994, and 1993, would have been 1.20%,
1.21%, 1.22% and 1.21%, respectively, and the ratios of net
investment income to average net assets would have been 5.79%, 6.21%,
6.16%, 6.15% and 4.94%, respectively.
The accompanying Notes to Financial Statements are an integral part of this
Statement.
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
(1) Organization
Heartland Group, Inc. (the "Corporation") is registered as an open-end
management company under the Investment Company Act of 1940. The Small Cap
Contrarian Fund, Value Fund, Mid Cap Value Fund, Large Cap Value Fund,
Value Plus Fund, and U.S. Government Securities Fund (the "Funds"), each of
which is a diversified fund, are six of the nine series of funds issued by
the Corporation at December 31, 1997.
(2) Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed
by the Funds in the preparation of the financial statements:
(a) Portfolio securities which are traded on stock exchanges are valued at
the last 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 and falls within the
range of the latest bid and asked quotations is valued at that price.
All other securities traded in the over-the-counter market are valued
at the most recent bid prices. Foreign securities are valued on the
basis of quotations from the primary market in which they are traded,
and are translated from the local currency into U.S. dollars using
exchange rates as of the close of the New York Stock Exchange. Debt
securities are stated at fair value as furnished by independent
pricing services based primarily upon information concerning market
transactions and dealer quotations for similar securities, or by
dealers who make markets in such securities. Debt securities having
maturities of 60 days or less 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 Funds' policy is to comply with the requirements of the Internal
Revenue Code which are applicable to regulated investment companies
and to distribute substantially all of their taxable income to their
shareholders. The Funds accordingly paid no Federal income taxes, and
no Federal income tax provision is required.
At December 31, 1997, 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. The Mid Cap Value and Large Cap Value Funds
utilized capital loss carryforwards of $3,604 and $1,071,
respectively, in 1997.
Net realized gains or losses may differ for Federal income tax
purposes primarily as a result of post-October losses which may not be
recognized for tax purposes until the first day of the following
fiscal year, wash sales, and the marking-to-market of open futures
contracts at December 31, 1997.
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) Net investment income, if any, is distributed to each shareholder as a
dividend. Dividends from the Small Cap Contrarian, Value, Mid Cap
Value and Large Cap Value Funds are declared and paid annually.
Dividends from the Value Plus Fund are declared and paid quarterly.
Dividends from the U.S. Government Securities Fund are declared daily
and distributed monthly. Dividends are recorded on the ex-dividend
date. Net realized gains on investments, if any, are distributed
annually.
(d) 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 exchange 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.
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) 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 receives from or pays to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as "variation margin,"
and are recorded by a Fund as unrealized gains
35
<PAGE>
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 contract's price may result in a loss which could render a
portfolio's hedging strategy unsuccessful.
The Small Cap Contrarian Fund had the following open short futures
contracts at December 31, 1997:
<TABLE>
<CAPTION>
Number Expiration Unrealized
Type of Contracts Date Depreciation
---- ------------ ---- ------------
<S> <C> <C> <C>
S&P 500 (340) March 1998 ($3,682,762)
</TABLE>
(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 Small Cap Contrarian, Value, Mid Cap Value, Large Cap Value and
Value Plus Funds may each engage in "short sales against the box."
These transactions involve selling a security that a Fund owns for
delivery at a specified date in the future. Similarly, each of these
Funds may also engage in short sales of securities of an issuer
("acquiror") that has publicly announced a proposed or pending
transaction in which a portfolio security of the Fund will be
converted into securities of the acquiror.
For financial statement purposes, an amount equal to the 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 December 31, 1997,
the Small Cap Contrarian Fund had cash and liquid assets in the amount
of $115,994,277 committed as collateral for open short positions. The
Fund's receivable from securities sold short and deposits with brokers
for securities sold short are with one major securities dealer. The
Fund does 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
December 31, 1997, the Small Cap Contrarian and Value Plus Funds held
restricted securities equaling 4.0% and 7.3% of total 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.
Small Cap Contrarian Fund
<TABLE>
<CAPTION>
Acquisition
Security Shares Cost Fair Value Date
-------- ------ ---- ---------- ----
<S> <C> <C> <C> <C>
Apex Silver Mines, Ltd. 187,500 $1,500,000 $1,792,969 8/96
Convergent Communications,
Inc. (Units) 200,000 500,000 500,000 9/97
Drypers Corp. Com. Stock 168,882 188,729 898,773 2/96
Drypers Corp. Conv. Pfd. Stock 18,598 1,859,800 10,154,257 2/96
Excelsior-Henderson Motorcycle
Mfg. Co. 460,000 1,725,000 1,868,704 8/96
</TABLE>
36
<PAGE>
Value Plus Fund
<TABLE>
<CAPTION>
Acquisition
Security Shares 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. Conv. Pfd. Stock 222,222 5,555,550 5,686,661 10/97
Riviera Tool & Die Company
Conv. Pfd. Stock 11,700 1,170,000 2,037,750 9/97
</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 Value, Mid Cap Value, Large Cap Value,
Value Plus and U.S. Government Securities Funds each may write covered
call options and purchase put options that are traded on recognized
U.S. exchanges and enter into closing transactions with respect to
such options. The Funds may enter into options transactions for
hedging purposes, and will not use these instruments for speculation.
For the year ended December 31, 1997, the Small Cap Contrarian Fund
had purchased the following put options:
<TABLE>
<CAPTION>
# of
Contracts Cost
--------- ----
<S> <C> <C>
Balance at January 1, 1997 -- --
Options purchased (S&P 500 Index) 300 $1,325,660)
Options expired -- --
Options closed (S&P 500 Index) (300) (1,325,660)
------- ----------
Balance at December 31, 1997 -- $ --
======= ==========
For the year ended December 31, 1997, the Small Cap Contrarian Fund had
purchased the following call options:
# of
Contracts Cost
--------- ----
Balance at January 1, 1997 -- --
Options purchased (Iomega Corp. - 10/97) 500 $ 51,015
Options expired (Iomega Corp. - 10/97) (500) (51,015)
Options closed -- --
------- ---------
Balance at December 31, 1997 -- $ --
======= =========
For the year ended December 31, 1997, the Value, Mid Cap Value and Value Plus
Funds had the following transactions in written covered call options:
Value Fund
# of Premium
Contracts Amount
--------- ------
Balance at January 1, 1997 500 $ 111,328
Options opened -- --
Options expired (Computer Products, Inc. - Jan/97) (500) (111,328)
Options closed -- --
------ ---------
Balance at December 31, 1997 -- $ --
====== =========
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Mid Cap Value Fund
# of Premium
Contracts Amount
--------- ------
<S> <C> <C>
Balance at January 1, 1997 -- --
Options opened
(National Semiconductor Corp. - Nov/97) 186 $ 49,428
(Teradyne, Inc. - Oct/97) 170 54,739
Options expired
(Teradyne, Inc. - Oct/97) (85) (25,244)
Options closed
(Teradyne, Inc. - Oct/97) (85) (29,495)
(National Semiconductor Corp. - Nov/97) (186) (49,428)
-- --
-------- --------
Balance at December 31, 1997 -- $ --
======== ========
Value Plus Fund
# of Premium
Contracts Amount
--------- -------
Balance at January 1, 1997 -- --
Options opened
(Lawyers Title Corporation - Dec/97) 300 $ 81,847
Options expired
(Lawyers Title Corporation - Dec/97) (300) (81,847)
Options closed -- --
-------- --------
Balance at December 31, 1997 -- $ --
======== ========
</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 those estimates.
(3) Credit Facility
Firstar Trust Company has made available to the Small Cap Contrarian Fund a
$25 million credit facility pursuant to a Credit Agreement ("Agreement")
dated September 5, 1997. The Agreement terminates September 4, 1998.
Outstanding principal amounts under the credit facility bear interest at a
rate per annum equal to the prime rate or at the LIBOR rate plus 1.25%.
Advances are 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 September 5, 1997 through December 31, 1997, the
Fund had an outstanding average daily balance of $1,058,475. The maximum
amount outstanding during the year ended December 31, 1997 was $17.5
million. At December 31, 1997, the Fund had no outstanding principal
amounts under the credit facility. Interest expense amounted to $29,490 for
the year ended December 31, 1997.
(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 Small Cap Contrarian, Value, Mid Cap Value, and Large
Cap Value Funds pay the Advisor a monthly management fee at the annual rate
of .75% of the daily net asset value of the Funds; the Value Plus Fund pays
the Advisor a monthly management fee at the annual rate of .70% of the
daily net asset value of the Fund; and the U.S. Government Securities Fund
pays the Advisor a monthly management fee at the annual rate of .65% of the
first $100 million of the Fund's average daily net assets, .50% of the next
$400 million of net assets, and .40% on net assets in excess of $500
million.
Effective October 1, 1997, 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 the annual rate of .50% of the Fund's average daily net
assets for the period from January 1, 1997 though March 30, 1997 and at the
annual rate of .25% of the Fund's average daily net assets for the period
from March 31, 1997 through December 31, 1997. 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
38
<PAGE>
assets. Additionally, for the year ended December 31, 1997, the Distributor
received for the Value, Value Plus, and U.S.Government Securities Funds
$10,491, $285 and $3,268, respectively, from investors for commissions for
Fund shares redeemed and for the Small Cap Contrarian, Value, Mid Cap
Value, and Value Plus Funds, $48,716, $159,609, $306, and $12,093,
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 Small Cap Contrarian, Mid Cap Value, Large Cap Value and Value Plus
Funds, organization expenses have been deferred and are being amortized on
a straight-line basis over sixty months. Payments for these expenses were
advanced by the Advisor, who will be reimbursed by the Funds over the same
period. The proceeds of any redemption of the initial shares by the
original shareholders will be reduced by a pro-rata portion of any then
unamortized expenses. Unamortized deferred organization expenses and the
related payable to the Advisor at December 31, 1997, were $23,008, $12,321,
$12,321 and $8,258, respectively. Reimbursement 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.
(6) Investment Transactions
During the year ended December 31, 1997, purchases and sales of securities,
other than short-term obligations, were as follows (in thousands):
<TABLE>
<CAPTION>
Small Cap Mid Cap Large Cap Value U.S. Government
Contrarian Value Value Value Plus Securities
Fund Fund Fund Fund Fund Fund
---------- ----- -------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Cost of purchases $280,849 $ 921,783 $34,753 $5,912 $345,213 $65,177
Proceeds from
sales 300,190 889,784 10,512 1,379 122,373 76,336
</TABLE>
Included in these transactions were purchases and sales of U.S. obligations as
follows (in thousands):
<TABLE>
<CAPTION>
Small Cap Mid Cap Large Cap Value U.S. Government
Contrarian Value Value Value Plus Securities
Fund Fund Fund Fund Fund Fund
---------- ----- -------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Cost of purchases $ -- $ 125,737 $ -- $ -- $ 10,016 $63,412
Proceeds from
sales $ -- 85,184 -- $ -- $ 10,026 58,120
</TABLE>
At December 31, 1997, the gross unrealized appreciation and depreciation on
securities for tax purposes, excluding securities sold short, was as follows
(in thousands):
<TABLE>
<CAPTION>
Small Cap Mid Cap Large Cap Value U.S. Government
Contrarian Value Value Value Plus Securities
Fund Fund Fund Fund Fund Fund
---------- ----- -------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Appreciation $ 37,315 $ 580,526 $ 5,343 $ 822 $ 35,144 $ 1,542
Depreciation (27,110) (153,773) (1,158) (268) (10,030) (10)
-------- ---------- ------- ------ -------- -------
$ 10,205 $ 426,753 $ 4,185 $ 554 $ 25,114 $ 1,532
======== ========== ======= ====== ======== =======
</TABLE>
At December 31, 1997, the cost of securities for federal income tax purposes
was as follows (in thousands):
<TABLE>
<CAPTION>
Small Cap Mid Cap Large Cap Value U.S. Government
Contrarian Value Value Value Plus Securities
Fund Fund Fund Fund Fund Fund
---------- ----- -------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Tax cost basis $256,777 $1,717,793 $34,172 $7,128 $307,412 $47,130
</TABLE>
39
<PAGE>
(7) Fund Share Transactions
For the year ended December 31, 1997, Fund share transactions were as
follows:
<TABLE>
<CAPTION>
Small Cap Mid Cap
Contrarian Value Value
Fund Fund Fund
---------- ----- -------
<S> <C> <C> <C>
Shares issued 11,427,314 14,506,622 2,574,129
Reinvested dividends from net
investment income and distributions
from net realized gains on investments 3,558,914 7,402,442 67,511
Shares redeemed (12,721,002) (10,516,915) (430,675)
----------- ----------- ------------
Net increase in Fund shares 2,265,226 11,392,149 2,210,965
=========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Large Cap Value U.S. Government
Value Plus Securities
Fund Fund Fund
--------- ----- ---------------
<S> <C> <C> <C>
Shares issued 520,287 23,437,762 1,555,341
Reinvested dividends from net
investment income and distributions
from net realized gains on investments 28,315 1,736,643 214,422
Shares redeemed (157,719) (9,180,571) (2,258,183)
-------- ----------- ------------
Net increase (decrease) in Fund shares 390,883 15,993,834 (488,420)
======== =========== ============
</TABLE>
For the year ended December 31, 1996, Fund share transactions were as
follows:
<TABLE>
<CAPTION>
Small Cap Mid Cap
Contrarian Value Value
Fund Fund Fund
---------- ----- -------
<S> <C> <C> <C>
Shares issued 18,340,944 15,865,977 662,589
Reinvested dividends from net
investment income and distributions
from net realized gains on investments 743,593 2,886,369 --
Shares redeemed (6,717,525) (9,964,582) (12,388)
---------- ---------- --------
Net increase in Fund shares 12,367,012 8,787,764 650,201
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Large Cap Value U.S. Government
Value Plus Securities
Fund Fund Fund
--------- ----- ---------------
<S> <C> <C> <C>
Shares issued 254,625 4,188,644 976,754
Reinvested dividends from net
investment income and distributions
from net realized gains on investments -- 299,317 277,541
Shares redeemed (22,206) (1,349,351) (2,486,341)
-------- ---------- -----------
Net increase (decrease) in Fund shares 232,419 3,138,610 (1,232,046)
======== ========== ===========
</TABLE>
(8) Transactions with Affiliates
The following companies are affiliated with the Small Cap Contrarian,
Value, and Value Plus Funds; that is, the Funds held 5% or more of the
outstanding voting securities during the year ended December 31, 1997. Such
companies are defined in Section (2)(a)(3) of the Investment Company Act of
1940.
40
<PAGE>
<TABLE>
<CAPTION>
Small Cap Contrarian Fund
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1997 Purchases Sales Dec. 31, 1997 Dividends (Losses)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Advocat, Inc. 0 300,000 20,800 279,200 $ 0 $ (24,337)
Allou Health & Beauty Care, Inc. (Class A) 505,000 20,000 0 525,000 0 0
American Physicians Services Group, Inc. 0 302,500 95,300 207,200 0 (140,529)
Autonomous Technologies Corporation 500,000 25,000 10,000 515,000 0 25,623
Bio-Vascular, Inc. 500,000 26,000 0 526,000 0 0
Bitstream, Inc. 0 445,300 0 445,300 0 0
BTG, Inc. 0 610,000 0 610,000 0 0
Business Resource Group 313,500 186,500 500,000 0 0 (872,101)
Campbell Resources, Inc. 6,000,000 4,000,000 10,000,000 0 0 (5,316,357)
Catherines Stores Corporation 433,000 167,000 0 600,000 0 0
Chico's Fas, Inc. 400,000 60,000 0 460,000 0 0
Children's Discovery Centers of America, Inc. 400,000 100,000 0 500,000 0 0
Coastal Physician Group, Inc. 0 1,500,000 0 1,500,000 0 0
Compression Labs, Inc. 1,065,600 358,500 1,424,100(1) 0 0 (685,341)
Consep, Inc. 335,000 607,500 942,500 0 0 (1,071,765)
Crown Books Corporation 325,000 0 0 325,000 0 0
Donnelly Corporation 125,000(2) 175,000 0 300,000 71,786 0
Drypers Corp. 7.5% Sr. Conv. Cum. Pfd. 22,500 0 3,902(3) 18,598 46,316 0
Drypers Corporation Common 0 397,811(3) 228,929 168,882 0 1,248,895
Dynamic Materials Corporation 200,000 222,000 200,000 222,000 0 1,921,025
Excelsior-Henderson Motorcycle Mfg. Co. 460,000(4) 0 0 460,000 0 0
Executone Information Systems, Inc. 500,000 2,300,000 0 2,800,000 0 0
Family Steak Houses of Florida, Inc. 700,000 0 0 700,000 0 0
Financial Industries Corporation 200,000 100,000 300,000 0 0 298,628
Fortress Group, Inc. 0 700,000 0 700,000 0 0
Global Motorsport Group, Inc. 0 400,000 0 400,000 0 0
The GNI Group, Inc. 600,000 0 0 600,000 0 0
Gothic Energy Corporation 530,000 170,000 700,000 0 0 27,135
Harding Lawson Associates Group, Inc. 475,000 0 0 475,000 0 0
Harmony Brook, Inc. 700,000 0 0 700,000 0 0
Help at Home, Inc. 100,000 0 100,000 0 0 (344,465)
High Plains Corporation 300,000 700,000 0 1,000,000 0 0
Home Security International, Inc. 0 317,500 0 317,500 0 0
ICTS International N.V. 240,000 113,500 28,500 325,000 0 (112,570)
ICU Medical, Inc. 0 450,000 0 450,000 0 0
In Home Health, Inc. 759,000 646,000 0 1,405,000 0 0
Interpore International 600,000 0 600,000 0 0 (222,770)
Jaco Electronics, Inc. 343,500 36,500 380,000 0 0 (791,412)
Kentek Information Systems, Inc. 0 451,800 0 451,800 19,036 0
The Lion Brewery, Inc. 300,000 0 300,000 0 0 (936,838)
Luminart, Inc. 1,000,000 0 1,000,000 0 0 (739,950)
Manchester Equipment Company, Inc. 0 500,000 0 500,000 0 0
Matrix Pharmaceutical, Inc. 0 2,100,000 0 2,100,000 0 0
Moore Medical Corporation 200,000 0 0 200,000 0 0
Motor Club of America 61,500 84,500 0 146,000 0 0
M-Wave, Inc. 264,800 12,200 0 277,000 0 0
New Brunswick Scientific Company 254,217(5) 0 254,217 0 0 300,231
Norland Medical Systems, Inc. 0 595,000 55,000 540,000 0 165,983
NTN Canada, Inc. 105,000 66,500 0 171,500 0 0
O. I. Corporation 275,000 77,000 0 352,000 0 0
Personnel Management, Inc. 200,000 0 0 200,000 0 0
PIA Merchandising Services, Inc. 100,000 490,000 590,000 0 0 (1,003,845)
Point West Capital Corporation(6) 400,000 0 0 400,000 0 0
PolyVision Corporation 600,000 0 0 600,000 0 0
PremiumWear, Inc. 0 200,000 0 200,000 0 0
Programmer's Paradise, Inc. 0 251,900 0 251,900 0 0
Riveria Tool Company 0 156,400 0 156,400 0 0
Safety Components International, Inc. 0 269,300 41,800 227,500 0 160,357
</TABLE>
41
<PAGE>
Small Cap Contrarian Fund [CONT'D]
<TABLE>
<CAPTION>
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1997 Purchases Sales Dec. 31, 1997 Dividends (Losses)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Serv-Tech, Inc. 410,000 0 410,000 0 $ 0 $ 44,398
Speizman Industries, Inc. 290,000 0 0 290,000 0 0
Tipperary Corporation 1,000,000 0 62,100 937,900 0 101,119
UniComp, Inc. 300,000 0 300,000 0 0 1,060,652
Union Bankshares, Ltd. 57,500 0 17,500 40,000 0 267,436
Vectra Technologies, Inc. 650,000 0 0 650,000 0 0
-------- -----------
$137,138 $(6,640,798)
======== ===========
</TABLE>
(1) Adjusted for acquisition (1 share distributed for every .46 shares of VTEL
Corporation received).
(2) Adjusted for 5 for 4 stock split.
(3) Adjusted for conversion of 3,902 shares of Drypers Corporation 7.5% Sr.
Conversion Cum. Pfd. stock into 390,200 shares of Drypers Corporation
common stock.
(4) Adjusted for 2 for 3 stock split.
(5) Adjusted for 10% stock dividend.
(6) Name changed from Dignity Partners, Inc.
42
<PAGE>
<TABLE>
<CAPTION>
Value Fund
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1997 Purchases Sales Dec. 31, 1997 Dividends (Losses)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3-D Geophysical, Inc. 500,000 315,000 0 815,000 $ 0 $ 0
ACT Manufacturing, Inc. 0 600,000 0 600,000 0 0
ACT Networks, Inc. 0 900,000 0 900,000 0 0
Align-Rite International, Inc. 300,000 0 0 300,000 0 0
Allied Healthcare Products, Inc. 503,000 272,000 0 775,000 0 0
Allwaste, Inc. 3,800,000 0 3,800,000(1) 0 0 10,169,331
The Alpine Group, Inc. 1,100,000 0 100,000 1,000,000 0 866,187
American Buildings Company 500,000 0 0 500,000 0 0
American Educational Products, Inc. 81,000(2) 0 81,000 0 0 (1,128,449)
American Oilfield Divers, Inc. 500,000 0 200,000 300,000 0 2,252,674
Amtech Corporation 300,000 1,025,000 300,000 1,025,000 0 (843,867)
Amtran, Inc. 600,000 0 0 600,000 0 0
Amwest Insurance Group, Inc. 200,000 0 0 200,000 88,000 0
Applied Films Corporation 0 190,000 0 190,000 0 0
Arden Industrial Products, Inc. 650,000 0 650,000 0 0 676,787
Asia Pacific Wire & Cable Corporation Ltd. 0 727,600 0 727,600 0 0
Astec Industries, Inc. 965,000 0 0 965,000 0 0
Badger Meter, Inc. 200,000(3) 0 0 200,000 127,590 0
Baldwin Piano & Organ Company 325,000 0 0 325,000 0 0
Barrett Business Services, Inc. 0 500,000 0 500,000 0 0
Bonded Motors, Inc. 0 200,000 0 200,000 0 0
Buckhead America Corporation 150,000 25,000 0 175,000 0 0
Business Resource Group 0 500,000 0 500,000 0 0
Cameron Ashley Building Products, Inc. 400,000 195,000 0 595,000 0 0
Campbell Resources, Inc. 0 10,000,000 0 10,000,000 0 0
Caretenders Health Corporation 308,900 0 0 308,900 0 0
Catalina Lighting, Inc. 0 500,000 0 500,000 0 0
Cavell Energy Corporation 0 1,573,200 0 1,573,200 0 0
Central Sprinkler Corporation 0 300,000 0 300,000 0 0
CHC Helicopter Corporation (Class A) 1,000,000 0 450,000 550,000 36,653 2,122,313
The Cherry Corporation (Class A) 850,100 0 0 850,100 0 0
Children's Broadcasting Corporation 410,100 179,900 0 590,000 0 0
Clayton Williams Energy, Inc. 600,000 100,000 105,000 595,000 0 1,174,120
CMAC Investment Corporation 600,000 0 600,000 0 0 12,744,585
Coastal Physicians Group, Inc. 2,000,000 0 2,000,000 0 0 (19,266,910)
Cobra Electronics Corp. 500,000 0 500,000 0 0 2,671,104
Collaborative Clinical Research, Inc. 0 600,000 0 600,000 0 0
Collagen Corporation 419,800 458,700 0 878,500 172,850 0
Comdial Corporation 650,000 0 0 650,000 0 0
Consep, Inc. 0 900,000 0 900,000 0 0
CSP, Inc. 280,000 0 0 280,000 0 0
Cyrk International, Inc. 300,000 710,200 10,200 1,000,000 0 (12,013)
C.P. Clare Corporation 467,500 190,100 407,600 250,000 0 3,246,149
Dairy Mart Convenience Stores, Inc. (Class A) 450,000 0 305,000 145,000 0 356,666
Dakotah, Inc. 300,000 0 0 300,000 0 0
Damark International, Inc. (Class A) 800,000 0 0 800,000 0 0
Datron Systems, Inc. 233,700 16,300 0 250,000 0 0
Dayton Mining Corporation 0 2,200,000 0 2,200,000 0 0
Designs, Inc. 962,000 138,000 0 1,100,000 0 0
DeVlieg-Bullard, Inc. 692,500 0 207,500 485,000 0 348,886
Digital Biometrics, Inc. 885,000 0 885,000 0 0 (788,433)
D&N Financial Corporation 440,000(4) 0 0 440,000 38,200 0
Duckwall-ALCO Stores, Inc. 330,000 30,000 0 360,000 0 0
Durakon Industries, Inc. 0 500,000 0 500,000 0 0
Eaton Vance Corporation 700,000(5) 0 0 700,000 294,000 0
ECC International Corporation 600,000 157,600 0 757,600 0 0
Effective Management Systems, Inc. 350,000 25,000 0 375,000 0 0
Eltek, Ltd. 0 300,000 38,800 261,200 0 (115,417)
</TABLE>
43
<PAGE>
Value Fund [CONT'D]
<TABLE>
<CAPTION>
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1997 Purchases Sales Dec. 31, 1997 Dividends (Losses)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Engle Homes, Inc. 581,500 0 30,000 551,500 $ 93,040 $ 240,106
ENStar, Inc. 0 233,333(6) 26,500 206,833 0 126,064
Environmental Technologies
Corporation 0 330,800 0 330,800 0 0
Eskimo Pie Corporation 344,000 0 72,500 271,500 54,300 (389,006)
Evergreen Resources, Inc. 560,000 15,000 75,000 500,000 0 667,893
EZCorp, Inc. (Class A) 532,300 167,700 0 700,000 0 0
The Female Health Company 585,100 0 414,100 171,000 0 (3,845)
Fibermark, Inc. 375,000(7) 20,000 0 395,000 0 0
Filene's Basement Corporation 0 1,200,000 0 1,200,000 0 0
Financial Industries Corporation 0 300,000 0 300,000 0 0
FLIR Systems, Inc. 354,000 0 354,000 0 0 1,181,090
Forest Oil Corporation 1,560,000 0 60,000 1,500,000 0 407,435
Fortress Group, Inc. 590,000 110,000 700,000 0 5,250 (1,886,139)
Gehl Company 401,500 8,500 117,100 292,900 0 1,646,087
Gibson Greeting, Inc. 1,200,600 0 500,600 700,000 0 4,816,430
Gish Biomedical, Inc. 275,000 0 0 275,000 0 0
Grist Mill Company 350,000 50,000 0 400,000 0 0
GZA GeoEnvironmental
Technologies, Inc. 372,700 0 0 372,700 0 0
Hallwood Consolidated
Resources Corporation 300,000(8) 0 0 300,000 0 0
Hanover Foods Corporation
(Class A) 50,500 0 0 50,500 49,503 0
Harmony Brook, Inc. 720,000 0 0 720,000 0 0
Health Power, Inc. 275,000 25,000 0 300,000 0 0
HealthRite, Inc. 403,000 0 0 403,000 0 0
Help at Home, Inc. 0 100,000 100,000 0 0 (246,387)
HMN Financial, Inc. 250,000 0 0 250,000 0 0
Home Federal Bancorp 290,250(9) 0 0 290,250 99,572 0
Home Products
International, Inc. 0 317,500 0 317,500 0 0
Hospital Staffing Services, Inc. 625,658(10) 0 0 625,658 0 0
Howell Corporation 200,000 100,000 0 300,000 44,808 0
Hyde Athletic Industries,
Inc. (Class B) 0 610,000 0 610,000 0 0
ICN Pharmaceuticals, Inc. 3,150,000 0 450,000 2,700,000 932,225 6,957,016
IEC Electronics Corporation 700,000 0 50,000 650,000 0 564,429
ImmuLogic Pharmaceutical
Corporation 0 2,000,000 0 2,000,000 0 0
Interdigital Communications
Corp. 2,990,000 1,975,000 165,000 4,800,000 0 (781,566)
International Aircraft
Investors 0 250,000 0 250,000 0 0
International Airline
Support Group, Inc. 0 220,000 0 220,000 0 0
Interpore International 0 600,000 0 600,000 0 0
Iwerks Entertainment, Inc. 856,000 244,000 0 1,100,000 0 0
Jaco Electronics, Inc. 0 380,000 0 380,000 0 0
Kaye Group, Inc. 353,600 0 0 353,600 35,360 0
Kentucky Electric Steel, Inc. 450,000 0 0 450,000 0 0
LCS Industries, Inc. 312,500 37,500 0 350,000 50,794 0
The Lion Brewery, Inc. 0 375,000 0 375,000 0 0
Magal Security Systems, Ltd. 0 600,000 0 600,000 0 0
Marten Transport, Ltd. 212,000 10,200 0 222,200 0 0
Martin Industries, Inc. 318,300 331,700 0 650,000 74,621 0
Matrix Pharmaceutical, Inc. 750,000 1,250,000 2,000,000 0 0 (3,820,476)
Maxicare Health Plans, Inc. 1,133,000 600,0000 33,000 1,700,000 0 15,142
Meadowbrook Rehabilitation
Group, Inc. (Class A) 186,666 0 0 186,666 0 0
Medical Graphics Corporation 243,700 0 0 243,700 0 0
Mednet, MPC Corporation 1,200,000 668,400 1,868,400 0 0 (1,053,433)
Mercury Air Group, Inc. 625,000(11) 8,700 0 633,700 21,929 0
MFRI, Inc. 300,000 0 0 300,000 0 0
Midwest Express Holdings, Inc. 0 500,000 0 500,000 0 0
Minntech Corporation 457,500 142,500 86,900 513,100 0 (269,256)
Mizar, Inc. 144,200 305,800 9,600 440,400 0 (3,372)
Morgan Products, Ltd. 750,000 0 0 750,000 0 0
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Value Fund [CONT'D]
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1997 Purchases Sales Dec. 31, 1997 Dividends (Losses)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MTL, Inc. 300,000 0 109,000 191,000 $ 0 $ 889,008
MYR Group, Inc. 500,000(12) 0 0 500,000 65,923 0
M/A/R/C, Inc. 375,000(13) 0 75,000 300,000 100,317 744,955
Netframe Systems, Inc. 1,000,000 0 1,000,000 0 0 (2,804,893)
New Brunswick Scientific Company, Inc. 0 254,215 0 254,215 0 0
Norstan, Inc. 552,000 0 0 552,000 0 0
North Star Universal, Inc. 700,000 0 700,000(14) 0 0 0
Northwest Equity Corporation 90,000 0 10,000 80,000 48,800 36,496
Norwood Promotional Products, Inc. 150,000 250,000 0 400,000 0 0
NTN Communications, Inc. 1,100,000 1,100,000 2,200,000 0 0 (5,321,456)
Nu Horizons Electronics Corporation 250,000 350,000 0 600,000 0 0
Nu-Kote Holding, Inc. (Class A) 0 1,100,000 0 1,100,000 0 0
Old America Stores, Inc. 345,800 104,200 450,000 0 0 (2,321,948)
Oneita Industries, Inc. 600,000 0 600,000 0 0 (3,463,797)
Osmonics, Inc. 0 734,600 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
Petsec Energy, Ltd. (ADR) 0 1,175,000 0 1,175,000 0 0
Peoples Telephone Company, Inc. 1,396,000 204,000 0 1,600,000 0 0
PIA Merchandising Services, Inc. 0 500,000 0 500,000 0 0
Pinnacle Bancorp 67,800 0 67,800 0 0 160,000
Pioneer Financial Services, Inc. 600,000 0 600,000 0 0 6,014,050
PolyMedica Corporation 550,000 0 375,800 174,200 0 3,044,031
Powell Industries, Inc. 600,000 0 0 600,000 0 0
Presidential Life Corporation 1,700,000 0 300,000 1,400,000 322,670 2,201,284
Professionals Insurance Co.
Mgt. Group 220,000 0 0 220,000 0 0
Prosource, Inc. 0 300,000 0 300,000 0 0
Quad Systems Corporation 0 400,000 0 400,000 0 0
Quixote Corporation 562,000 23,500 0 585,500 147,875 0
Ramsay Health Care, Inc. 603,333(15) 0 0 603,333 0 0
Rehabilicare, Inc. 400,000 0 87,900 312,100 0 146,920
Remington Oil & Gas Corporation(16) 800,000 760,000 0 1,560,000 0 0
Republic Automotive Parts Inc. 0 195,000 0 195,000 0 0
Rexworks, Inc. 185,500 0 185,500 0 0 81,894
Rhodes, Inc. 651,800 0 651,800(17) 0 0 0
Right Management Consultants, Inc. 0 500,000 0 500,000 0 0
RightCHOICE Mngd Care, Inc. (Cl. A) 1,000,000 2,500 0 1,002,500 0 0
The Rottlund Company, Inc. 316,000 184,000 0 500,000 0 0
Roy F. Weston, Inc. (Class A) 550,000 175,000 0 725,000 0 0
Sanfilippo John B. & Son, Inc. 0 292,500 0 292,500 0 0
Schult Homes Corporation 400,000(18) 0 40,000 360,000 72,348 335,709
Star Multi Care Services, Inc. 224,493 5,600 0 230,093 0 0
Starcraft Corporation 400,000 0 0 400,000 0 0
Steel of West Virginia, Inc. 590,000 0 390,000 200,000 0 1,482,877
Sterling Financial Corporation 275,000 0 0 275,000 0 0
Stokely USA, Inc. 640,000 0 640,000 0 0 (2,266,680)
Strattec Security Corporation 500,000 0 0 500,000 0 0
St. Mary Land & Exploration Company 460,000 110,000 570,000 0 65,750 11,003,250
Strouds, Inc. 0 485,000 0 485,000 0 0
Sullivan Dental Products, Inc. 540,000 0 540,000 0 77,000 8,963,316
Sunrise International Leasing Corp. 400,000 230,000 0 630,000 0 0
Technology Research Corporation 500,000 0 0 500,000 60,000 0
Teltrend, Inc. 0 500,000 0 500,000 0 0
Tesoro Petroleum Corporation 1,400,000 100,000 100,000 1,400,000 0 448,127
Thorn Apple Valley, Inc. 421,000 15,000 0 436,000 0 0
Timber Lodge Steakhouse, Inc. 300,000 0 0 300,000 0 0
Todhunter International, Inc. 490,000 0 0 490,000 0 0
Total-Tel USA Communications, Inc. 289,000 0 39,000 250,000 0 733,649
</TABLE>
45
<PAGE>
Value Fund [CONT'D]
<TABLE>
<CAPTION>
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1997 Purchases Sales Dec. 31, 1997 Dividends (Losses)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trak Auto Corporation 366,500 0 0 366,500 $ 0 $ 0
Transitional Hospitals Corporation 2,413,500 0 2,413,500 0 0 16,953,932
Transworld Bancorp 176,775 0 176,775 0 0 2,279,623
Trimark Holdings, Inc. 400,000 0 0 400,000 0 0
UNC, Inc. 1,100,000 0 1,100,000 0 0 10,006,503
United Federal Savings Bank 129,200 14,500 0 143,700 32,976 0
URS Corporation 860,000 0 118,300 741,700 0 433,009
U.S. Global Investors, Inc. (Cl. A) 0 502,000 0 502,000 0 0
VECTRA Technologies, Inc. 723,500 0 0 723,500 0 0
Vicorp Restaurants, Inc. 222,600 277,400 0 500,000 0 0
Westbridge Capital Corporation 500,000 200,000 700,000 0 0 (2,002,508)
World of Science, Inc. 0 470,000 0 470,000 0 0
Zindart Limited (ADR) 0 220,000 0 220,000 0 0
---------- ------------
$3,249,794 $70,419,276
========== ============
</TABLE>
(1) Adjusted for acquisition (1 share distributed for every .611 shares of
Phillips Services Corporation received).
(2) Adjusted for 1 for 5 stock split.
(3) Adjusted for 2 for 1 stock split.
(4) Adjusted for 10% stock dividend.
(5) Adjusted for 2 for 1 stock split.
(6) Adjusted for reorganization (1 share received for every 3 shares of North
Star Universal, Inc. held).
(7) Adjusted for 3 for 2 stock split; name changed from Specialty Paperboard,
Inc.
(8) Adjusted for 3 for 1 stock split.
(9) Adjusted for 3 for 2 stock split.
(10) Adjusted for shares received due to class-action litigation.
(11) Adjusted for 25% stock dividend.
(12) Adjusted for 5 for 3 stock split.
(13) Adjusted for 3 for 2 stock split.
(14) Adjusted for reorganization (3 shares distributed for every 1 share of
ENStar, Inc. received).
(15) Adjusted for merger (1 share received for every 3 shares of Ramsey Managed
Care, Inc. held).
(16) Name changed from Box Energy Corporation (Class B).
(17) Adjusted for acquisition (2 shares distributed for every 1 share of Heilig-
Meyers Company received).
(18) Adjusted for 20% stock dividend.
Value Plus Fund
<TABLE>
<CAPTION>
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1997 Purchases Sales Dec. 31, 1997 Dividends (Losses)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Akita Drilling, Ltd. (Class A) 0 500,000 0 500,000 $26,926 $ 0
Decorator Industries, Inc. 135,250(1) 114,750 0 250,000 44,359 0
------- ---------
$71,285 $ 0
======= =========
</TABLE>
(1) Adjusted for 5 for 4 stock split.
46
<PAGE>
(9) Federal Income Tax Information (Unaudited)
In early 1998, shareholders received information regarding all
distributions paid to them by the Funds during calendar year 1997. The
Funds hereby designate the following amounts as long-term capital gain
distributions.
<TABLE>
<CAPTION>
Small Cap Mid Cap Large Cap Value U.S. Government
Contrarian Value Value Value Plus Securities
Fund Fund Fund Fund Fund Fund
------------- --------------- --------------- -------------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Capital Gains
Taxed at 20% $ 17,733,406 $ 99,831,315 $ --- $ --- $ 3,817,185 $ ---
Capital Gains
Taxed at 28% 8,788,433 93,923,201 --- 18,209 1,431,622 ---
------------ -------------- ---------------- ---------------- ------------- ----------------
Total Long-term
Capital Gains $ 26,521,839 $ 193,754,516 $ --- $ 18,209 $ 5,248,807 $ ---
============ ============== ================ ================ ============= ================
</TABLE>
For the Small Cap Contrarian, Value, Mid Cap Value, Large Cap Value and
Value Plus Funds, the percentage of ordinary income which is eligible for
the corporate dividend received deduction for the fiscal year ended
December 31, 1997, was 2.21%, 9.79%, 30.19%, 16.92% and 12.20%,
respectively.
47
<PAGE>
END OF NOTES TO FINANCIAL STATEMENTS
Effective March 26, 1997, Arthur Andersen LLP was dismissed as the Corporation's
independent accountants. For the periods ended December 31, 1993 through
December 31, 1996, Arthur Andersen LLP expressed an unqualified opinion on the
Corporation's financial statements. There were no disagreements between the
Corporation's management and Arthur Andersen LLP prior to their dismissal. The
Board of Directors approved the dismissal of Arthur Andersen LLP and the
appointment of Price Waterhouse LLP as the Corporation's independent
accountants.
48
<PAGE>
The Heartland Family of Funds
Small Cap Contrarian Fund
(closed to new investors 11/1/97)
Value Fund
(closed to new investors 7/1/95)
Mid Cap Value Fund
Large Cap Value Fund
Value Plus Fund
U.S. Government Securities Fund
Wisconsin Tax Free Fund
Short Duration High-Yield
Municipal Fund
High-Yield Municipal Bond Fund
Firstar Money Market Fund
[Logo] Heartland Funds
------------------------
AMERICA'S VALUE INVESTOR
1-800-432-7856
These are not recommendations to buy or sell the securities discussed, but
rather illustrations of our value investment strategy. Statements regarding
particular securities represent the portfolio manager's views when made and are
subject to change at any time based on market and other considerations. Complete
portfolios for the Funds are included in the Annual and Semi-Annual Reports to
Shareholders.
The performance data quoted represents past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
This material may only be used when preceded or accompanied by the Funds'
prospectus. Please call for a prospectus if you would like more complete
information, including charges and expenses, for any Heartland fund. Read it
carefully before you invest. Heartland Advisors, Inc., distributor. Member
SIPC/NASD.
<PAGE>
[Logo] Heartland Funds
------------------------
AMERICA'S VALUE INVESTOR
Value Report
December 31, 1997
Notes on value investing
for investors in the Heartland
Municipal Funds
Annual Report
to Shareholders
<PAGE>
VALUE REPORT
Dear Tax-Free Investor
January 2, 1998 marked the first anniversary of the Short Duration High-Yield
Municipal and High-Yield Municipal Bond Funds. We believe both Funds achieved
their stated investment objectives--providing a high level of federally
tax-exempt income.* For the 30 days ending December 31, 1997, the Short Duration
High-Yield Municipal Fund had an SEC yield of 5.6% and the High-Yield Municipal
Bond Fund had an SEC yield of 6.3%.* Short Duration also displayed limited price
volatility--another important objective specific to the Fund.
With interest rates declining along the yield curve, bonds performed better in
1997 than in recent years. In addition, stock market volatility in the fourth
quarter prompted many investors to seek relative safety in the bond market,
sending prices higher and yields lower. We don't know if investors' recent
infatuation with bonds will develop into a more serious romance, but we believe
the fundamental outlook for bonds is very positive at this time. If stocks get
hit hard in 1998 and more investors gravitate to bonds, it should have a
favorable impact on bond pricing.
Regardless of what the stock market does in 1998 and beyond, we believe prudent
investors should have a balanced investment diet with meat (stocks), vegetables
(bonds) and a side of cash. Until quite recently, the majority of investors have
been gorging on stocks and pushing bonds to the side of the plate. This rich
diet could cause a touch of indigestion in the year ahead. Echoing parents
everywhere, we urge investors to Eat Your Vegetables!
As of the end of 1997, the Short Duration High-Yield Municipal Fund had 60% of
net assets in non-rated securities. High-Yield Municipal Bond had 90% in
non-rated bonds. To clear up any misunderstandings investors may have about
non-rated bonds, we want to emphasize that the lack of a rating from the major
credit rating agencies does not necessarily reflect inferior credit quality.
Smaller issues are often non-rated simply because of the costs associated with
receiving a rating. In evaluating non-rated bonds, we do our own intensive
credit analysis and internally assign a rating that we believe accurately
reflects credit quality. Most individual investors don't have the talent or time
to do this and prefer relying on the major credit rating agencies. This is one
of the reasons non-rated bonds generally offer a yield advantage over comparable
credit quality rated bonds.
As many of our shareholders may be aware, for certain investors, a portion of
the Funds' income may be subject to the alternative minimum tax. We are very
sensitive to this issue and have made substantial progress in reducing the
number of securities in the portfolio providing income subject to such
taxation.*
In closing, we are gratified by the Funds' success in their first year of
operations and look forward to continuing to serve our shareholders.
Sincerely,
Thomas J. Conlin, CFA
Greg D. Winston, CFA
Portfolio Co-Managers
<PAGE>
VALUE REPORT
INVESTMENT PERFORMANCE
Heartland Short Duration High-Yield Municipal Fund
5.6% 9.2% 7.4%
December Equivalent taxable yield Cumulative total return from
yield* at a 39.6% federal rate 1/2/97 through 12/31/97
Federal tax brackets 28.0% 31.0% 36.0% 39.6%
TAX-FREE YIELD EQUIVALENT TAXABLE YIELDS
5.6% (December yield*) 7.7% 8.1% 8.7% 9.2%
Heartland High-Yield Municipal Bond Fund
6.3% 10.5% 11.7%
December Equivalent taxable yield Cumulative total return from
yield* at a 39.6% federal rate 1/2/97 through 12/31/97
Federal tax brackets 28.0% 31.0% 36.0% 39.6%
TAX-FREE YIELD EQUIVALENT TAXABLE YIELDS
6.3% (December yield*) 8.8% 9.2% 9.9% 10.5%
These charts are for illustrative purposes only. Monthly yields will fluctuate.
* SEC annualized yield for the 30 days ending 12/31/97. The performance data
quoted reflects fee waivers in effect during the period. Without fee
waivers, the SEC yields would have been 4.7% and 5.2%, respectively, and
total return would be lower. Performance is historical. Investment returns
and principal value fluctuate, so that your shares, when redeemed, may be
worth more or less than their original cost. For certain investors, a
portion of the Funds' income may be subject to the Alternative Minimum Tax.
1
<PAGE>
VALUE REPORT
Heartland Short Duration High-Yield Municipal Fund
[Photo of Greg D. Winston]
Greg D. Winston, CFA
Portfolio Co-Manager
[Photo of Thomas J. Conlin]
Thomas J. Conlin, CFA
Portfolio Co-Manager
"We believe the Fund's focus on essential service issues helped provide high
yields while lowering credit risk."
In fourth quarter 1997, the Fund returned 1.8% compared to the Lehman Brothers
Municipal 1-3 Year Non-Investment Grade Bond Index's 1.4% advance. Since
inception on January 2, 1997, the Fund returned 7.4% compared to a 1997 return
of 7.1% for the Index. For more information on the Fund, please see the Fund
Fact Sheet on page 6.
Before reviewing Short Duration High-Yield's first year of operations, we wanted
to comment briefly on the differences between the Fund and its benchmark index.
The Fund generally holds some cash for liquidity purposes whereas the Index is
always fully invested. At year-end 1997, the Fund had an average portfolio
credit rating of BBB (with 60% in non-rated securities with equivalent credit
ratings assigned by Heartland Advisors). This is somewhat higher than the
Index's maximum credit quality of Ba1. Higher credit quality generally
translates into lower yield. The portfolio may have a longer average maturity
than the Index, giving it a modest yield advantage. All things considered, we
believe these differences will always make our benchmark index a particularly
challenging target.
We believe the Fund's focus on essential service securities (issuers providing a
vital service to a large segment of the public) helped provide high yields while
lowering credit risk. We have included an example of the kind of essential
service bond we favor below. At year-end 1997, hospital, retirement community
and nursing home issues composed nearly 50% of Fund net assets. Electric
utilities, resource recovery and essential service industrial revenue bonds
represented almost 25% and multi-family housing another 15% of Fund net assets.
In the latter part of the year, a few shareholders called to ask why the Fund's
net asset value remained largely unchanged while other bond fund NAVs were
rising as interest rates declined. Low price volatility is part of
2
<PAGE>
VALUE REPORT
our objective. This is a short duration portfolio and therefore, less sensitive
to interest rate swings than a longer term bond fund. Also, the smaller
non-rated issues we favor are generally less interest rate sensitive than
larger, more widely traded issues.
Quality Care
As the name implies, the Alzheimer's Resource Center of Connecticut, a 120-bed
facility located 15 miles southeast of Hartford, is a nursing home specifically
for patients suffering from Alzheimer's Disease. At year-end 1997, the Center
had a 100% occupancy rate and a lengthy waiting list. This unique facility was
financed by the Connecticut Development Authority. The bonds are secured by a
first lien on the net revenues of the facility and by a first mortgage lien on
all property. Additional security is provided by a debt service reserve fund
that was fully funded on June 30, 1997. As of that same date, the bonds had debt
service coverage of 1.2x. The Center is managed by C.A. Moffie, Inc., a firm
with a long and distinguished track record in the long-term care industry. At
year-end 1997, the Connecticut Development Authority bonds for the Alzheimer's
Resource Center of Connecticut produced an attractive yield for a short duration
security that we have assigned a BB+ equivalent credit rating.
[line chart illustrating performance of an assumed investment of $10,000
in the Heartland Short Duration High-Yield Fund and the Lehman 1-3yr Non
Inv. Municipal Index beginning on January 2, 1997 as follows:
Heartland Short Duration Lehman 1-3yr
High-Yield Fund Non Inv. Municipal
01/02/97 $10,000 $10,000
03/31/97 10,138 10,160
06/30/97 10,349 10,341
09/30/97 10,554 10,560
12/31/97 10,744 10,709
Legend in graph states that Past Performance is not predictive of future
results.
A box below the graph states Cumulative Total Return as of 12/31/97 as
follows:
since inception (1/2/97) 7.4%]
As of 12/31/97, the Fund's Connecticut State Development Authority bonds--6.875%
due 8/15/04 and 7.125% due 8/15/14--were respectively valued at $1,714,000 and
$4,989,219, representing 1.4% and 4.1%, respectively, of the Fund's net assets.
3
<PAGE>
VALUE REPORT
Heartland High-Yield Municipal Bond Fund
[Photo of
Greg D. Winston]
Greg D. Winston, CFA
Portfolio Co-Manager
[Photo of
Thomas J. Conlin]
Thomas J. Conlin, CFA
Portfolio Co-Manager
"Contrary to the conventional wisdom, the municipal bond market is very
inefficient. Dedicated research can uncover truly special situations."
In fourth quarter 1997, the Fund returned 3.6% compared to the Lehman Brothers
Municipal Non-Investment Grade Bond Index's 3.3% gain. Since inception on
January 2, 1997, the Fund returned 11.7% versus the benchmark index's 1997 10.9%
advance. For more information on the Fund, please see the Fund Fact Sheet on
page 7.
We are pleased to have materially exceeded our benchmark index in the Fund's
first year of operations. We did not accomplish this by making any aggressive
interest rate bets. The Fund's average duration was within a relatively tight
range and finished 1997 at 5.2. We did it by bottoms-up "bond picking". Contrary
to the conventional wisdom, we believe the municipal bond market is very
inefficient. Dedicated research can uncover truly special situations,
particularly in small, less-widely followed non-rated issues. We look at a lot
of these smaller non-rated deals and work extremely hard in our credit analysis
to try to identify solid credits with attractive yields.
As advertised, we have also focused on essential service issuers in regional and
local areas where the demographics should support these services' continued
importance. We have included an example of the kind of essential service bond we
favor below. At the close of the year, nearly 55% of the portfolio's net assets
was in hospital, retirement facility and nursing home credits, another 32% was
in multi-family housing, water and sewer, and resource recovery issues. We
believe our essential service investment themes--the aging of America, the
rebuilding of infrastructure, low cost housing development and resource
recovery--will continue to lead us to attractive, high-yield investment
opportunities.
Mercy, Mercy Me
Mitchell County Regional Health Center (MCRHC) is a full-service hospital with
related outpatient healthcare
4
<PAGE>
VALUE REPORT
services located in Mitchell County, Iowa. Mitchell County, Iowa issued a series
of revenue bonds to fund the renovation of MCRHC's hospital and the construction
of new obstetrics and surgical wings and a medical clinic. The Fund owns
$250,000 of the MCRHC 6.35%s due 12/01/14 and $1 million of MCRHC 6.5%s due
12/01/19. Interest and principal payments are secured by the pledge of revenues
from the hospital.
MCRHC is the only hospital in Mitchell County. Since becoming affiliated with
North Iowa Mercy Health Center in Mason City, Iowa in 1994, management's cost
cutting and other initiatives have led to a notable improvement of the
Hospital's financial position. In our opinion, MCRHC is in good shape
financially with no other outstanding debt aside from the $4 million issued. The
hospital and its affiliates have a $1.7 million equity interest in the
renovation/construction project and have established a $180,000 debt service
reserve. When the project is completed, we estimate debt coverage will be in
excess of 2x. While the project is subject to risk, including construction risk
and leverage, we believe this is a solid credit (we have assigned the bonds a
BBB equivalent rating) and a good example of identifying value in a small,
non-rated essential service issue.
[line chart illustrating performance of an assumed investment of $10,000 in
the Heartland High-Yield Municipal Bond and the Lehman Non Inv. Municipal
Index beginning on January 2, 1997 as follows:
Heartland High-Yield Lehman Non
Municipal Bond Inv. Municipal
01/02/97 $10,000 $10,000
03/31/97 10,167 10,083
06/30/97 10,482 10,373
09/30/97 10,778 10,737
12/31/97 11,167 11,094
Legend in graph states that Past Performance is not predictive of future
results.
A box below the graph states Cumulative Total Return as of 12/31/97 as
follows:
since inception (1/2/97) 11.7%]
As of 12/31/97, the Fund's Mitchell County, Iowa Hospital Revenue bonds--6.35%
due 12/01/14 and 6.5% due 12/01/19--were valued at $250,625 and $1,002,500,
respectively, representing 0.8% and 3.3%, respectively, of the Fund's net
assets.
5
<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.
CUMULATIVE TOTAL RETURNS
Since inception 1/2/97
Heartland Short Duration
High-Yield Municipal Fund 7.4%
Lehman Brothers Municipal
1-3 Year Non-Investment Grade Bond Index 7.1
Lehman Brothers Municipal 1-3 Year Non-Investment Grade Bond Index 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
Sales commission........................... None
Share price.............................. $10.15
Weighted average duration............... 1.1 yrs.
Net assets........................... $120.9 mil.
Number of holdings........................... 84
Inception................................ 1/2/97
<TABLE>
% OF
TOP 5 HOLDINGS COUPON MATURITY CALL NET ASSETS
<S> <C> <C> <C> <C>
Union County, NJ Utilities Authority.................... 7.2% 6/2014 6/2002 5.0%
Philadelphia, PA Hospitals & Higher Education........... 7.25 7/2018 7/2002 4.8
Independence, MO Tax Increment Revenue.................. 8.75 4/2015 4/2004 4.7
Connecticut State Development Authority................. 7.125 8/2014 8/2004 4.1
South Amboy, NJ Housing Authority....................... 6.0 8/1999 7/1998 2.9
</TABLE>
PORTFOLIO COMPOSITION
[graphic - A pie chart displays categories of the Heartland Short
Duration High-Yield Municipal Fund's portfolio as of 12/31/97:
Retirement at 17.8%; Hospital at 16.1%; Multifamily at 15.4%; Nursing
at 11.8%; Other at 38.9%. Other is further broken down as follows: IDR
at 9.9%; Resource recovery at 8.9%; GO at 5.3%; Other at 4.7%;
Electric/PCR at 3.1%; Cash & equivalents at 2.8%; Prerefunded at 1.5%;
Single family at 1.2%; Airport at 0.6%; Lease at 0.5%; Mental at 0.4%.]
6
<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.
CUMULATIVE TOTAL RETURNS
Since inception 1/2/97
Heartland High-Yield
Municipal Fund 11.7%
Lehman Brothers Municipal
Non-Investment Grade Bond Index 10.9
Lehman Brothers Municipal Non-Investment Grade Bond Index 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 at least one year, and have been issued after December 31, 1990.
FUND FACTS
Sales commission....................... None
Share price.......................... $10.45
Weighted average duration........... 5.2 yrs.
Net assets........................ $30.6 mil.
Number of holdings....................... 29
Inception............................ 1/2/97
<TABLE>
% OF
TOP 5 HOLDINGS COUPON MATURITY CALL NET ASSETS
<S> <C> <C> <C> <C>
Vance, AL Governmental Utility Services Corp....... 7.5% 10/2018 10/2007 6.7%
Mexico Beach, FL Public Service Facilities......... 8.0 12/2027 12/2002 6.6
Tulsa County, OK Industrial Authority.............. 7.5 12/2027 12/2005 6.5
Gallatin, MO Certificates of Participation......... 7.375 1/2028 07/2007 6.1
Worth, IL Nursing Home Revenue..................... 7.25 12/2027 12/2002 5.6
</TABLE>
PORTFOLIO COMPOSITION
[graphic - A pie chart displays categories of the Heartland High-Yield
Municipal Bond Fund's portfolio as of 12/31/97: Retirement at 19.5%;
Hospital at 19.3%; Multifamily at 16.4%; Nursing at 16.2%; Other at
28.6%. Other is further broken down as follows: Resource recovery at
9.0%; Water & sewer at 6.7%; Lease at 6.1%; Single family at 4.6%;
Other at 3.2%; Cash & equivalents at (1.0%)]
7
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 97.2% COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 97.2%
ARIZONA - 0.9%
$ 1,000,000 Scottsdale, Arizona Industrial Development Authority -
Westminster Village (Callable 12/01/1999)............... 5.500% 06/01/2017 $ 1,048,750
ARKANSAS - 0.9%
1,000,000 Arkansas Development Finance Authority -
Single Family Mortgage (Callable 10/01/2007)............ 6.500 02/01/2011 1,087,500
CALIFORNIA - 2.9%
3,200,000 Sacramento, California Cogeneration Authority -
Procter & Gamble Project (Callable 07/01/2005).......... 6.500 07/01/2021 3,488,000
COLORADO - 2.0%
555,000 Denver, Colorado City & County Airport
(Callable 11/15/2000) (a)............................... 8.500 11/15/2023 623,681
105,000 Denver, Colorado City & County Airport
(Callable 11/15/2000)................................... 8.000 11/15/2025 116,682
1,500,000 Mesa County, Colorado Industrial Development Revenue -
Joy Technologies, Inc. (Callable 03/15/2002)............ 8.500 09/15/2006 1,708,125
-----------
2,448,488
CONNECTICUT - 5.5%
1,600,000 Connecticut State Development Authority -
Alzheimers Resource Center.............................. 6.875 08/15/2004 1,714,000
4,625,000 Connecticut State Development Authority -
Alzheimers Resource Center (Callable 08/15/2004)........ 7.125 08/15/2014 4,989,219
-----------
6,703,219
FLORIDA - 3.7%
1,000,000 Broward County, Florida Resource Recovery -Broward
Waste Energy - LP North (Callable 12/01/1999)........... 7.950 12/01/2008 1,088,750
300,000 Homestead, Florida Industrial Development Revenue -
Community Rehab. Providers (Callable 11/01/2003)........ 7.950 11/01/2018 324,000
1,260,000 Lee County, Florida Industrial Development Authority -
Cypress Cove at Healthpark, Florida, Inc. Project
(Callable 10/01/2002)................................... 5.625 10/01/2026 1,272,600
890,000 Lee County, Florida Industrial Development Authority -
Cypress Cove at Healthpark, Florida, Inc. Project....... 5.600 10/01/2004 901,125
585,000 Lee County, Florida Industrial Development Authority -
Cypress Cove at Healthpark, Florida, Inc. Project....... 5.700 10/01/2005 593,044
250,000 St. Petersburg, Florida Housing Authority -
Rogall Congregate-Section 8/Elderly..................... 7.500 12/01/2006 266,875
-----------
4,446,394
GEORGIA - 3.6%
2,000,000 Athens-Clarke County, Georgia Residential Care - Wesley
Woods of Athens, Inc. Project (Callable 10/01/2000)..... 5.300 10/01/2001 2,017,500
2,000,000 Clayton County, Georgia Development Authority - Outboard
Marine Corporation (Callable 04/01/1998)................ 6.000 10/01/2002 2,032,500
350,000 Georgia Residential Finance Authority - Home
Ownership Mortgage (Callable 12/01/2001)................ 7.200 12/01/2011 374,500
-----------
4,424,500
IDAHO - 1.6%
1,880,000 Idaho Health Facilities Authority - Bonner General
Hospital................................................ 5.700 10/01/2004 1,917,600
ILLINOIS - 5.1%
125,000 Carol Stream, Illinois First Mortgage Revenue -
Windsor Park Manor....................................... 5.750 12/01/1999 126,406
250,000 Carol Stream, Illinois First Mortgage Revenue -
Windsor Park Manor....................................... 6.000 12/01/2000 254,375
</TABLE>
8
<PAGE>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [CONT'D] . DECEMBER 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 97.2% [CONT'D] COUPON MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 97.2% [CONT'D]
ILLINOIS - 5.1% [CONT'D]
$ 3,000,000 Robbins, Illinois Resource Recovery Revenue - Robbins
Resource Recovery Partners (Callable 10/15/2006)... 8.375% 10/15/2016 $ 3,120,000
2,660,000 Worth, Illinois Nursing Home Revenue - Belhaven
Convalescent Center (Callable 12/15/2002).......... 6.200 12/15/2007 2,666,650
--------------
6,167,431
INDIANA - 4.3%
2,000,000 Beech Grove, Indiana Economic Development Multifamily
Housing - McGregor Woods Apts. (Callable 06/01/1998) 5.000 06/01/2037 2,007,920
2,095,000 Elkhart, Indiana Economic Development Multifamily
Mortgage - Prairie Village Apts. (Callable 07/01/1999) 5.125 07/01/2037 2,096,299
300,000 Elkhart, Indiana Economic Development Multifamily
Mortgage - Prairie Village Apts. (Callable 07/01/1999) 5.125 07/01/2012 300,186
650,000 Greensburg, Indiana Economic Development Revenue -
Prairie Village Apts. (Callable 12/01/2004)........ 7.250 06/01/2011 744,250
--------------
5,148,655
LOUISIANA - 1.9%
2,040,000 Louisiana Public Facilities Authority - Beverly
Enterprises, Incorporated (Callable 09/01/2002)..... 8.250 09/01/2008 2,251,650
MARYLAND - 1.2%
1,500,000 Frederick County, Maryland Retirement Community -
Buckingham's Office (Callable 01/01/2003)........... 5.250 01/01/2027 1,500,000
MASSACHUSETTS - 2.5%
720,000 Lawrence, Massachusetts General Obligation........... 9.750 03/15/2004 909,900
1,260,000 Massachusetts Industrial Finance Agency -
Reeds Landing Project (Callable 10/01/1999)......... 7.750 10/01/2000 1,291,058
410,000 Massachusetts Industrial Finance Agency - SEMASS Project
(Callable 07/01/2001)................................ 9.000 07/01/2015 466,888
370,000 Springfield, Massachusetts Housing Authority -
Citywide Apartment Project (Callable 05/01/2000).... 9.500 11/01/2005 406,538
--------------
3,074,384
MICHIGAN - 1.3%
1,455,000 Midland County, Michigan Economic Development Corp...
Pollution Control Revenue - Midland Cogeneration
(Callable 06/15/2000)................................ 9.500 07/23/2009 1,618,688
MINNESOTA - 1.0%
1,170,000 St. Paul, Minnesota Housing & Redevelopment Authority -
Healtheast Project.................................. 4.600 11/01/2000 1,171,463
MISSOURI - 5.5%
630,000 Gallatin, Missouri Certificates of Participation
Electric Distribution System (Callable 07/01/2007).. 7.125 01/01/2014 637,088
5,000,000 Independence, Missouri Tax Increment Revenue -
Homart Development Co. (Callable 04/01/2004)........ 8.750 04/01/2015 5,700,000
290,000 Liberty, Missouri Industrial Development Authority -
Kmart Corporation................................... 6.800 11/01/2004 311,750
--------------
6,648,838
MONTANA - 2.9%
3,220,000 Montana State Board of Housing - Single Family Mortgage
(Callable 12/01/2004)................................ 6.300 06/01/2008 3,489,675
</TABLE>
9
<PAGE>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [CONT'D] . DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 97.2% [CONT'D] COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 97.2% [CONT'D]
NEW HAMPSHIRE - 2.2%
$ 600,000 New Hampshire Industrial Development Authority -
Maryland Cup Corporation (Callable 01/01/1998)................. 6.750% 06/01/1999 $ 609,000
1,950,000 New Hampshire Higher Education & Health Facilities -
River Woods at Exeter (Callable 03/01/1998).................... 8.000 03/01/2001 1,994,460
---------------
2,603,460
NEW JERSEY - 7.9%
3,500,000 South Amboy, New Jersey Housing Authority - Shore Gate
Village Grand Project (Callable 07/15/1998).................... 6.000 08/15/1999 3,505,915
6,065,000 Union County, New Jersey Utilities Authority - Shore Gate
Village Grand Project (Callable 06/15/2002).................... 7.200 06/15/2014 6,102,906
---------------
9,608,821
NEW YORK - 3.0%
1,300,000 New York, New York General Obligation.......................... 6.750 08/15/2003 1,436,500
1,070,000 Suffolk County, New York Industrial Development Agency -
Spellman High-Voltage Electronics.............................. 5.625 12/01/2004 1,072,674
90,000 Tompkins County, New York Industrial Development
Agency - Kendal at Ithaca (Callable 06/01/1999)................ 7.250 06/01/2003 92,588
635,000 Tompkins County, New York Industrial Development
Agency - Kendal at Ithaca (Callable 06/01/1999)................ 7.625 06/01/2009 654,844
50,000 Tompkins County, New York Industrial Development
Agency - Kendal at Ithaca (Callable 06/01/2003)................ 7.875 06/01/2015 53,313
255,000 Tompkins County, New York Industrial Development
Agency - Kendal at Ithaca (Callable 06/01/2003)................ 7.875 06/01/2024 269,981
---------------
3,579,900
OHIO - 15.5%
1,105,443 Clark County, Ohio Industrial Development Revenue -
Main Associates Project (Callable 01/01/1998).................. 8.000 11/01/2005 1,106,825
2,805,000 Cuyahoga County, Ohio Multifamily Housing Revenue -
The Colonnade Apts. (Callable 05/01/1998)...................... 5.000 11/01/2028 2,805,673
330,000 Cuyahoga County, Ohio Multifamily Housing Revenue -
The Colonnade Apts. (Callable 05/01/1998)...................... 5.000 11/01/2012 330,089
235,000 Cuyahoga County, Ohio Multifamily Housing Revenue -
The Colonnade Apts. (Callable 05/01/1998)...................... 5.000 11/01/2007 235,071
130,000 Cuyahoga County, Ohio Multifamily Housing Revenue -
The Colonnade Apts. (Callable 05/01/1998)...................... 5.000 11/01/2002 130,043
640,000 Cuyahoga County, Ohio Mortgage Revenue -
Maple Care Center.............................................. 6.350 08/20/2006 690,400
2,695,000 Franklin County, Ohio Mortgage Revenue -
Gateway Apt. Homes (Callable 03/20/1999)....................... 5.375 10/20/2027 2,702,517
745,000 Franklin County, Ohio Mortgage Revenue -
Gateway Apt. Homes (Callable 03/20/1999)....................... 5.375 10/20/2010 750,118
2,000,000 Hamilton, Ohio Electric System (Callable 10/15/2002)........... 6.000 10/15/2023 2,132,500
1,000,000 Holmes County, Ohio Industrial Development Revenue -
Owens-Illinois, Incorporated (Callable 03/01/1998)............. 5.850 09/01/2007 1,000,280
1,050,000 Montgomery County, Ohio Health Care Facilities -
Friendship Village of Dayton (Callable 02/01/2002)............. 5.375 02/01/2022 1,055,250
1,025,000 Montgomery County, Ohio Health Care Facilities -
Friendship Village of Dayton (Callable 02/01/2000)............. 5.150 02/01/2003 1,027,563
1,700,000 Montgomery County, Ohio Health Care Facilities -
Friendship Village of Dayton (Callable 02/01/2003)............. 5.500 02/01/2007 1,712,750
1,200,000 Pike County, Ohio Hospital Facilities -
Pike Health Services, Incorporated............................. 6.350 07/01/2007 1,231,500
1,610,000 Summit County, Ohio Industrial Development Revenue -
Kroger Company (Callable 10/01/2002)........................... 7.650 10/01/2006 1,827,350
---------------
18,737,929
</TABLE>
10
<PAGE>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [CONT'D] . DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 97.2% [CONT'D] COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 97.2% [CONT'D]
PENNSYLVANIA - 14.0%
$ 425,000 Clarion County, Pennsylvania Hospital Authority -
Clarion Hospital................................................. 4.600% 07/01/2000 $ 426,063
640,000 Clarion County, Pennsylvania Hospital Authority -
Clarion Hospital................................................. 5.000 07/01/2003 644,000
575,000 Clarion County, Pennsylvania Hospital Authority -
Clarion Hospital................................................. 5.100 07/01/2004 579,313
120,000 Clarion County, Pennsylvania Hospital Authority -
Clarion Hospital................................................. 5.200 07/01/2005 121,050
795,000 Clarion County, Pennsylvania Industrial Development Auth. -
Beverly Enterprises, Inc. (Callable 05/01/1999).................. 10.125 05/01/2007 852,638
500,000 Delaware County, Pennsylvania Industrial Development
Auth. - Martins Run Project (Callable 12/15/2001)................ 5.750 12/15/2003 510,000
335,000 McKean County, Pennsylvania Industrial Development
Authority - Kmart Corp. (Callable 04/01/2002).................... 6.875 04/01/2004 356,775
1,000,000 Montgomery County, Pennsylvania Industrial Development
Auth. - Meadowood Corp. (Callable 12/01/2002).................... 5.500 12/01/2019 1,002,500
700,000 Montgomery County, Pennsylvania Industrial Development
Auth. - Meadowood Corp. (Callable 12/01/1999).................... 5.150 12/01/2003 700,875
3,000,000 Philadelphia Hospitals & Higher Education Facilities -
Graduate Health System (Callable 07/01/2002)..................... 7.000 07/01/2005 3,172,500
5,400,000 Philadelphia Hospitals & Higher Education Facilities -
Graduate Health System (Callable 07/01/2002)..................... 7.250 07/01/2018 5,764,500
500,000 Scranton-Lackawanna Health & Welfare Authority -
Allied Services Rehabilitation Hospitals......................... 6.600 07/15/2000 515,625
500,000 Scranton-Lackawanna Health & Welfare Authority - Allied
Services Rehabilitation Hospitals (Callable 07/15/2004).......... 7.125 07/15/2005 550,625
775,000 Scranton-Lackawanna Health & Welfare Authority - Allied
Services Rehabilitation Hospitals (Callable 07/15/2004).......... 7.375 07/15/2008 867,031
890,000 Westmoreland County, Pennsylvania Industrial Development
Auth. - Citizens General Hospital (Callable 07/01/1998).......... 6.500 07/01/2015 907,175
---------------
16,970,670
SOUTH CAROLINA - 1.5%
1,750,000 Charleston County, South Carolina Resource Recovery -
Foster Wheeler Corporation (Callable 01/02/1998)................. 9.250 01/01/2010 1,802,500
TENNESSEE - 3.0%
1,000,000 Rutherford County, Tennessee Industrial Development
Board - Kroger Company (Callable 12/01/2004)..................... 7.300 06/01/2021 1,147,500
2,450,000 Shelby County, Tennessee Health Education & Housing -
Kroger Company (Callable 11/15/2002)............................. 5.500 11/15/2027 2,450,000
---------------
3,597,500
TEXAS - 2.7%
2,000,000 Lufkin Texas Health Facilities Development Corp. - Memorial
Health System of East Texas (Callable 02/15/2006)................ 6.875 02/15/2026 2,200,000
1,000,000 San Antonio, Texas Health Facilities Development Corp. -
Beverly Enterprises, Inc. (Callable 12/01/2002).................. 8.250 12/01/2019 1,105,000
---------------
3,305,000
WEST VIRGINIA - 0.6%
700,000 Monongalia County, West Virginia Building Commission -
The Village at Heritage Point (Callable 11/15/2002).............. 5.250 11/15/2027 700,000
TOTAL MUNICIPAL BONDS (Cost $116,395,977)...............................................................$117,541,015
---------------
TOTAL LONG-TERM INVESTMENTS (Cost $116,395,977).........................................................$117,541,015
---------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND SHORT-DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [CONT'D] . DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------
PAR
AMOUNT SHORT-TERM INVESTMENT - 0.9% COUPON MATURITY VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DAILY VARIABLE RATE PUT BOND - 0.9%
NEW YORK - 0.9%
$ 1,100,000 New York State Dormitory Authority Revenue -
St. Francis Center at the Knolls............ 5.250% 07/01/2023 $ 1,100,000
TOTAL DAILY VARIABLE RATE PUT BOND (COST $1,100,000)......................$ 1,100,000
-------------
TOTAL SHORT-TERM INVESTMENT (COST $1,100,000).............................$ 1,100,000
-------------
TOTAL INVESTMENTS (COST $117,495,977).... 98.1% $118,641,015
Cash and receivables, less liabilities... 1.9 2,300,803
------ ------------
TOTAL NET ASSETS......................... 100.0% $120,941,818
====== ============
</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.
12
<PAGE>
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 101.0% COUPON MATURITY VALUE
- --------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS - 101.0%
<S> <C> <C> <C> <C>
ALABAMA - 6.7%
$ 2,000,000 Vance, Alabama Governmental Utility Services Corporation -
Sewer Services Revenue (Callable 10/01/2007) ............. 7.500% 10/01/2018 $ 2,045,000
CALIFORNIA - 6.6%
1,000,000 Lancaster, California Financing Authority
(Callable 09/01/2007)..................................... 6.000 09/01/2020 983,750
1,000,000 Millbrae, California Residential Facility -
Magnolia of Millbrae (Callable 09/01/2007)................ 7.375 09/01/2027 1,036,250
-------------
2,020,000
FLORIDA - 7.5%
245,000 Manatee County, Florida Housing Finance Authority - Single
Family Mortgage (Callable 05/01/2007)..................... 7.200 05/01/2028 277,769
2,000,000 Mexico Beach, Florida Public Service Facilities - Heritage
House of Sarasota (Callable 12/01/2002) (b)............... 8.000 12/01/2027 2,007,500
-------------
2,285,269
GEORGIA - 1.2%
325,000 Dekalb County, Georgia Housing Authority - Friendly Hills
Apartments Project (Callable 01/01/2008).................. 7.050 01/01/2039 364,000
ILLINOIS - 9.0%
1,000,000 Robbins, Illinois Resource Recovery Revenue - Resource
Recovery Partners (Callable 10/15/2006)................... 8.375 10/15/2016 1,040,000
1,700,000 Worth, Illinois Nursing Home Revenue - Belhaven
Convalescent Center (Callable 12/15/2002)................. 7.250 12/15/2027 1,704,250
-------------
2,744,250
INDIANA - 8.7%
1,500,000 Beech Grove, Indiana Economic Development -
Diplomat South Apts. (Callable 01/01/2003)................ 7.000 01/01/2028 1,475,625
1,200,000 Beech Grove, Indiana Economic Development -
Beech Grove Village Apts. (Callable 01/01/2003)........... 7.000 01/01/2028 1,206,000
-------------
2,681,625
IOWA - 4.1%
250,000 Mitchell County, Iowa Hospital Revenue - Mitchell
County Memorial Hospital (Callable 12/01/2002)............ 6.350 12/01/2014 250,625
1,000,000 Mitchell County, Iowa Hospital Revenue - Mitchell
County Memorial Hospital (Callable 12/01/2002)............ 6.500 12/01/2019 1,002,500
-------------
1,253,125
KANSAS - 2.6%
800,000 Wichita, Kansas Hospital Revenue - Riverside Health
System (Callable 04/01/2004).............................. 6.250 04/01/2021 805,000
MASSACHUSETTS - 4.0%
1,220,000 Massachusetts Industrial Finance Agency - TNG
Marina Bay LLC Project (Callable 12/01/2007).............. 7.500 12/01/2027 1,221,525
MINNESOTA - 5.8%
1,250,000 Dakota County, Minnesota Housing & Redevelopment
Authority - South Suburban Medical Center
(Callable 08/01/2002)..................................... 6.750 08/01/2017 1,259,375
500,000 Minneapolis, Minnesota Health Facilities Development
Revenue - Community Home Program Company Project
(Callable 12/01/2001)..................................... 7.500 12/01/2026 508,125
-------------
1,767,500
</TABLE>
13
<PAGE>
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS [CONT'D] . DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
AMOUNT LONG-TERM INVESTMENTS - 101.0% [CONT'D] COUPON MATURITY VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 101.0% [CONT'D]
MISSOURI - 8.1%
$ 1,820,000 Gallatin, Missouri Certificates of Participation - Electric
Distribution System (Callable 07/01/2007)...................... 7.375% 01/01/2028 $ 1,856,400
600,000 Missouri Housing Development Commission -
Single Family Mortgage (Callable 03/01/2007)................... 5.750 03/01/2019 621,000
-------------
2,477,400
NEW JERSEY - 2.6%
800,000 New Jersey Economic Development Authority -
Leisure Park Project (Callable 12/01/2008)..................... 5.875 12/01/2027 801,000
NORTH DAKOTA - 1.7%
500,000 North Dakota Housing Finance Agency -
Single Family Mortgage (Callable 07/01/2007) (a)............... 5.950 07/01/2017 529,375
OKLAHOMA - 6.5%
2,000,000 Tulsa County, Oklahoma Industrial Authority -
1st Mortgage Multifamily Housing (Callable 12/01/2005)......... 7.500 12/01/2027 1,977,500
PENNSYLVANIA - 5.2%
1,500,000 Philadelphia Hospitals & Higher Education Facilities -
Graduate Health System (Callable 07/01/2002)................... 7.000 07/01/2005 1,586,250
SOUTH DAKOTA - 3.3%
1,000,000 Mobridge, South Dakota Health Care Facilities -
Mobridge Regional Hospital (Callable 12/01/2008)............... 6.500 12/01/2022 1,002,500
TENNESSEE - 10.2%
1,200,000 Crossville, Tennessee Health & Education Facilities Board -
Uplands Retirement Village (Callable 10/01/2007)............... 6.875 10/01/2027 1,222,500
630,000 Shelby County, Tennessee Health, Education & Housing
Facilities - Winfield Vil. of Cordova (Callable 08/29/2006).... 8.500 07/01/2026 679,613
1,225,000 Sweetwater, Tennessee Industrial Development Board -
Wood Presbyterian Home (Callable 01/01/2006) (b)............... 7.750 01/01/2029 1,226,530
------------
3,128,643
TEXAS - 3.9%
665,000 Danforth, Texas Health Facilities Corporation - Sam Houston
Long Term Care Facility (Callable 03/01/2004).................. 8.250 03/01/2027 677,469
510,000 Tarrant County, Texas Health Facilities Development Corp. -
St. Joseph Long Term Care Fac. (Callable 05/01/2006)........... 8.500 05/01/2027 526,575
------------
1,204,044
WISCONSIN - 3.3%
1,000,000 Wisconsin Health & Education Facilities Authority -
RFDF, Incorporated Project (Callable 07/15/2007)............... 7.375 07/15/2027 1,013,750
TOTAL MUNICIPAL BONDS (COST $30,385,846)............................................... $30,907,756
------------
TOTAL LONG-TERM INVESTMENTS (COST $30,385,846)......................................... $30,907,756
------------
</TABLE>
14
<PAGE>
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS [CONT'D] . DECEMBER 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
PAR
AMOUNT SHORT-TERM INVESTMENTS - 7.2% COUPON MATURITY VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DAILY VARIABLE RATE PUT BONDS - 7.2%
TEXAS - 7.2%
$ 1,200,000 Harris County, Texas Health Facilities Development
Corporation - St. Luke's Episcopal Hospital........ 5.000% 02/15/2027 $ 1,200,000
1,000,000 Lone Star, Texas Airport Improvement Authority 5.000 12/01/2014 1,000,000
-------------
TOTAL DAILY VARIABLE RATE PUT BONDS (COST $2,200,000)............................ $ 2,200,000
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $2,200,000)................................... $ 2,200,000
-------------
TOTAL INVESTMENTS (COST $32,585,846)...... 108.2% $33,107,756
Liabilities, less cash and receivables.... (8.2) (2,499,682)
------ -------------
TOTAL NET ASSETS.......................... 100.0% $30,608,074
====== =============
</TABLE>
(a) All or a portion of security committed to cover margin
requirements for futures contracts.
(b) When-issued security.
The accompanying Notes to Financial Statements are an integral
part of this Schedule.
15
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Short
Duration
High-Yield High-Yield
Municipal Municipal
ASSETS: Fund Bond Fund
------------ ---------------
<S> <C> <C>
Investments in securities, at cost .................................................. $117,495,977 $ 32,585,846
============ ===============
Investments in securities, at value ................................................. $118,641,015 $ 33,107,756
Cash ................................................................................ 105,834 81,841
Receivable from fund shares sold .................................................... 1,528,107 364,875
Accrued interest .................................................................... 1,982,232 458,263
Deferred organization expenses ...................................................... 18,914 18,914
Receivable from Advisor for expense reimbursement
and management fee waiver .......................................................... 105,561 39,240
------------ ---------------
Total Assets ..................................................................... 122,381,663 34,070,889
------------ ---------------
LIABILITIES:
Payable for investments purchased ................................................... -- 3,237,581
Payable for fund shares redeemed .................................................... 1,238,044 146,716
Distributions payable ............................................................... 7 1,619
Payable to Advisor for management fee ............................................... 42,540 15,170
Payable to Advisor for deferred organization expenses ............................... 18,914 18,914
Variation margin on open futures contracts .......................................... 77,343 18,749
Accrued expenses .................................................................... 62,997 24,066
------------ ---------------
Total Liabilities ................................................................ 1,439,845 3,462,815
------------ ---------------
TOTAL NET ASSETS.......................................................................... $120,941,818 $ 30,608,074
============ ===============
NET ASSETS CONSIST OF:
Paid in capital...................................................................... $120,043,520 $ 29,897,943
Accumulated undistributed net investment income ..................................... 4,729 4,729
Accumulated undistributed net realized gains on investments ......................... 29,263 258,095
Net unrealized appreciation on investments .......................................... 864,306 447,307
------------ ---------------
TOTAL NET ASSETS.......................................................................... $120,941,818 $ 30,608,074
============ ===============
SHARES OUTSTANDING, $.001 par value
(100,000,000 shares authorized, respectively) ....................................... 11,918,669 2,929,781
============ ===============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE ........................... $ 10.15 $ 10.45
============ ===============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
16
<PAGE>
STATEMENTS OF OPERATIONS
For the period from January 2, 1997 (commencement of operations)
to December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Short
Duration
High-Yield High-Yield
Municipal Municipal
INVESTMENT INCOME: Fund Bond Fund
----------- -----------
<S> <C> <C>
Interest ............................................. $ 3,076,220 $ 887,447
----------- -----------
Total investment income ......................... 3,076,220 887,447
----------- -----------
EXPENSES:
Management fees ...................................... 214,608 82,569
Distribution fees .................................... 134,130 34,401
Registration fees .................................... 59,887 17,530
Transfer agent fees .................................. 25,187 15,312
Custodian fees ....................................... 15,058 8,329
Audit fees ........................................... 8,381 7,852
Directors' fees ...................................... 5,746 5,354
Amortization of deferred organization expenses ....... 4,729 4,729
Printing and communications .......................... 4,115 1,820
Legal fees ........................................... 1,101 708
Postage .............................................. 724 766
Other operating expenses ............................. 9,591 4,688
----------- -----------
Total expenses .................................. 483,257 184,058
Less: Expense reimbursement and management fee
waiver ........................................ (483,257) (184,058)
----------- -----------
Net expenses .................................... -- --
----------- -----------
NET INVESTMENT INCOME ..................................... 3,076,220 887,447
----------- -----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on:
Securities ...................................... 584,076 471,994
Futures contracts ............................... (554,813) (126,555)
Net increase (decrease) in unrealized appreciation on:
Securities ...................................... 1,145,038 521,910
Futures contracts ............................... (280,732) (74,603)
----------- -----------
TOTAL REALIZED AND UNREALIZED GAINS ON INVESTMENTS ........ 893,569 792,746
----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....... $ 3,969,789 $1,680,193
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
17
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
For the period from January 2, 1997 (commencement of operations)
to December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Short Duration High-Yield
High-Yield Municipal
OPERATIONS: Municipal Fund Bond Fund
------------- -------------
<S> <C> <C>
Net investment income ......................................................... $ 3,076,220 $ 887,447
Net realized gains on investments ............................................. 29,263 345,439
Net increase in unrealized appreciation on investments ........................ 864,306 447,307
------------- -------------
Net increase in net assets resulting from operations ..................... 3,969,789 1,680,193
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ......................................................... (3,076,220) (887,447)
Net realized gains on investments ............................................. -- (87,344)
------------- -------------
Total distributions to shareholders ...................................... (3,076,220) (974,791)
FUND SHARE ACTIVITIES:
Proceeds from shares issued ................................................... 162,747,963 34,304,367
Reinvested dividends from net investment income and
distributions from net realized gains on investments ..................... 2,700,941 858,813
Cost of shares redeemed ....................................................... (45,400,655) (5,260,508)
------------- -------------
Net increase in net assets derived from Fund share activities ............ 120,048,249 29,902,672
------------- -------------
TOTAL INCREASE IN NET ASSETS ....................................................... 120,941,818 30,608,074
NET ASSETS AT THE BEGINNING OF THE PERIOD .......................................... -- --
------------- -------------
NET ASSETS AT THE END OF THE PERIOD ................................................ $ 120,941,818 $ 30,608,074
============= =============
UNDISTRIBUTED NET INVESTMENT INCOME ................................................ $ 4,729 $ 4,729
============= =============
<CAPTION>
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------------
Short Duration High-Yield
High-Yield Municipal
Municipal Fund Bond Fund
Jan. 2, 1997(1) to Jan. 2, 1997(1) to
December 31, December 31,
1997 1997
------------------ -------------------
<S> <C> <C>
Per Share Data
Net asset value, beginning of period .......................................... $ 10.00 $ 10.00
Income from investment operations:
Net investment income ...................................................... 0.57 0.68
Net realized and unrealized gains on investments ........................... 0.15 0.48
------------------ -------------------
Total income from investment operations .................................. 0.72 1.16
Less distributions from:
Net investment income ...................................................... (0.57) (0.68)
Net realized gains on investments .......................................... -- (0.03)
------------------ -------------------
Total distributions ...................................................... (0.57) (0.71)
------------------ -------------------
Net asset value, end of period ................................................ $ 10.15 $ 10.45
================== ===================
Total Return .................................................................. 7.4% 11.7%
Ratios and Supplemental Data
Net assets, end of period (in thousands) ................................... $ 120,942 $ 30,608
Ratio of net expenses to average net assets ................................ 0.00%(2) 0.00%(2)
Ratio of net investment income to average net assets ....................... 5.33%(2) 6.01%(2)
Portfolio turnover rate .................................................... 175% 439%
</TABLE>
(1) Commencement of operations.
(2) 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 period
ended December 31, 1997 would have been 0.84% for the Short Duration
High-Yield Municipal Fund and 1.25% for the High-Yield Municipal Bond Fund
and the ratio of net investment income to average net assets would have
been 4.49% and 4.76%, respectively.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS o December 31, 1997
- --------------------------------------------------------------------------------
(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 the 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 December 31, 1997.
(2) Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Funds in the preparation of the financial statements:
(a) 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 Funds' policy is to comply with the requirements of the Internal
Revenue Code which are applicable to regulated investment companies
and to distribute substantially all of their taxable income to their
shareholders. The Funds accordingly paid no Federal income taxes, and
no Federal income tax provision is required.
At December 31, 1997, 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.
Net realized gains or losses may differ for Federal income tax
purposes primarily as a result of post-October losses which may not
be recognized for tax purposes until the first day of the following
fiscal year, wash sales, and the marking-to-market of open futures
contracts at December 31, 1997.
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) Net investment income is distributed to each shareholder as a
dividend. Dividends are declared daily and distributed monthly and are
recorded by the Funds on the ex-dividend date. Net realized gains on
investments, if any, are distributed annually.
(d) 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.
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 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 a
futures contract's 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 December
31, 1997:
Short Duration High-Yield Municipal Fund
Number Expiration Unrealized
Type of Contracts Date Depreciation
---- ------------ ---- ------------
Municipal Bond Index (165) March 1998 ($280,732)
19
<PAGE>
High-Yield Municipal Bond Fund
Number Expiration Unrealized
Type of Contracts Date Depreciation
---- ------------ ---- ------------
Municipal Bond Index (40) March 1998 ($74,603)
(f) 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 those estimates.
(3) Investment Management Fees and Transactions with Related Parties
The Funds have management agreements with Heartland Advisors, Inc. (the
"Advisor") to serve as investment advisor and manager. Under the terms of
the agreements, the 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 has 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. As a result, the Funds did not incur
any operating expenses for the period ended 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.
(4) Deferred Organization Expenses
Organization expenses have been deferred and are being amortized on a
straight-line basis over sixty months. Payments for these expenses were
advanced by the Advisor, who will be reimbursed by the Funds over the same
period. The proceeds of any redemption of the initial shares by the
original shareholders will be reduced by a pro-rata portion of any then
unamortized expenses. Unamortized deferred organization expenses and the
related payable to the Advisor at December 31, 1997, were $18,914 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.
(5) Investment Transactions
During the period ended December 31, 1997, 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 $208,086 $86,341
Proceeds from sales $91,855 $56,412
At December 31, 1997, 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 $1,283 $527
Depreciation (138) (5)
-------------- ----------
$1,145 $522
============== ==========
Cost of investments is substantially the same for financial reporting
purposes and federal income tax purposes.
20
<PAGE>
(6) Fund Share Transactions
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
========== =========
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Heartland Group, Inc.
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Heartland Short Duration High-Yield
Municipal Fund and Heartland High-Yield Municipal Bond Fund (two of the
portfolios constituting Heartland Group, Inc., hereafter referred to as the
"Funds") at December 31, 1997, the results of each of their operations, the
changes in each of their net assets and the financial highlights for the period
January 2, 1997 (commencement of operations) through December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1997 by
correspondence with the custodian and brokers and application of alternative
auditing procedures where confirmations were not received, provides a reasonable
basis for the opinion expressed above.
Milwaukee, Wisconsin Price Waterhouse LLP
February 6, 1998
<PAGE>
The Heartland Family of Funds
Small Cap Contrarian Fund
(closed to new investors 11/1/97)
Value Fund
(closed to new investors 7/1/95)
Mid Cap Value Fund
Large Cap Value Fund
Value Plus Fund
U.S. Government Securities Fund
Wisconsin Tax Free Fund
Short Duration High-Yield
Municipal Fund
High-Yield Municipal Bond Fund
Firstar Money Market Fund
[Logo] Heartland Funds
------------------------
AMERICA'S VALUE INVESTOR
1-800-432-7856
These are not recommendations to buy or sell the securities discussed, but
rather illustrations of our value investment strategy. Statements regarding
particular securities represent the portfolio manager's views when made and are
subject to change at any time based on market and other considerations. Complete
portfolios for the Funds are included in the Annual and Semi-Annual Reports to
Shareholders.
The performance data quoted represents past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
This material may only be used when preceded or accompanied by the Funds'
prospectus. Please call for a prospectus if you would like more complete
information, including charges and expenses, for any Heartland fund. Read it
carefully before you invest. Heartland Advisors, Inc., distributor. Member
SIPC/NASD.
970470-3
<PAGE>
[Logo] Heartland Funds
------------------------
AMERICA'S VALUE INVESTOR
Value Report
December 31, 1997
Notes on value investing
for investors in the Heartland
Wisconsin Tax Free Fund
Annual Report
to Shareholders
<PAGE>
VALUE REPORT
[Photo of Pat Retzer]
Dear Fellow Shareholders
Fourth quarter 1997 was full of surprises, among the most pleasant of which was
a big bond rally. As you know from the introductory letter in the Fund's Third
Quarter Value Report, my longer term outlook for interest rates and bonds was
rather bullish. However, I did not anticipate interest rates plunging the way
they did in the fourth quarter as investors, spooked by a volatile stock market,
flocked into fixed income securities. Can we expect this bond rally to carry
over into 1998? If stock market volatility persists, we may see continued
enthusiasm for bonds and even lower interest rates.
However, I am not a stock market forecaster and don't believe short-term trends
in the equity market should be the primary reason for owning bonds. I believe
income and relative safety of principal are good enough reasons in their own
right to devote a portion of your assets to fixed income securities. If you are
a Wisconsin citizen, I believe you should consider double tax-exempt Wisconsin
municipal securities.
. Wisconsin's economy is in excellent shape.
. Although the Fund has held over 200 different issues since inception, the
Fund has never held an issue that has gone into default while in its
portfolio.*
. Your investment goes to finance essential services and other worthwhile
projects for your State and its communities.
. The income from your investment is free from both federal and state income
taxes.**
We will continue to employ our experience and expertise in the Wisconsin
municipal bond market, and our size advantage over other Wisconsin tax-exempt
funds, to maintain a diversified portfolio of what we view as attractive
municipal issues.
Thank you for your continued support.
Sincerely,
Patrick J. Retzer, CPA
Portfolio Manager
* Past performance is not predictive of future results.
** For certain investors, a portion of the Fund's income may be subject to the
alternative minimum tax.
<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
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
CURRENT TAX-FREE YIELD/3/ EQUIVALENT TAXABLE YIELDS
4.8% 7.3% 7.6% 8.3% 8.8%
This chart is for illustrative purposes only, and is not intended to predict
actual yields. /1/Based on federal rates as adjusted for the maximum phase-out
of itemized deductions and personal exemptions in the applicable tax rate.
/2/Based on the Wisconsin rate and the maximum effective federal rate, adjusted
to reflect the deductibility of state taxes. /3/SEC yield for the 30 days ending
December 31, 1997.
If you wish to make an additional investment, use the reinvestment slip and
postate-paid envelope we have enclosed for your convenience.
1
<PAGE>
VALUE REPORT
Heartland Wisconsin Tax Free Fund
In fourth quarter 1997, the Fund returned 2.4% compared to the Lehman 10 Year
Municipal Bond and 20 Year Municipal Bond Indices' 2.6% and 3.4% respective
gains. In full year 1997, the Fund returned 8.1% versus the two benchmark
indices' 9.2% and 10.8% advances. For the year, the Fund's share price rose from
$10.16 to $10.44 while paying dividends of $.52 per share. Dividends were 100%
exempt from both Wisconsin and federal income tax.* For additional information
on the Fund, please see the Fund Fact Sheet on page 4.
Although our long-term outlook for bonds was relatively bullish, concerns about
a very strong economy and rising wage costs led us to shorten the portfolio's
average duration by hedging to protect against the potential for rising interest
rates in the second half of 1997. This restrained returns as long rates plunged
and long bonds soared. We did not foresee two rather extraordinary events: the
problems in Asia, which will very probably take inflationary pressure off the
U.S. economy, and equity investors' renewed enthusiasm for bonds. At year end,
the Fund's weighted average portfolio duration was 9.7 years.
As we have discussed in the past, since the Fund's portfolio consists of only
bonds exempt from federal and Wisconsin income tax, its performance can be
expected to differ from the unmanaged benchmarks, which consist of municipal
bonds from across the country. Given the high demand and limited supply of
double-exempt bonds in Wisconsin, our state's municipal bonds are generally less
sensitive to a volatile interest rate environment than some of the more widely-
held securities in the bench-mark. While this factor may have contributed to our
under-performance in the second half of 1997, in our view, it can also work in
our favor when rising interest rates are on the horizon. In light of the Fund's
Wisconsin double tax-exempt nature, we are pleased with the results we were able
to achieve for our shareholders in 1997.
[Photo of Patrick J. Retzer]
Patrick J. Retzer, CPA
Portfolio Co-Manager
"Wisconsin municipal bonds are generally not as interest rate sensitive as more
liquid Treasuries."
2
<PAGE>
VALUE REPORT
Bringing Something to the Table
The Community Development Authority of the City of Oconto Falls, Wisconsin,
7.75%s due 12/1/22, are financing a portion of the costs for the acquisition,
construction, and start up of a tissue mill. The mill, which uses 100% recycled
fiber, will produce a unique, high quality product for use in decorative colored
paper napkins and table covers. Management is experienced and financially
committed to the project, with the owner and its members having put up $11.6
million in cash and letters of credit, comprising 31% of the project's cost.
They have a long-term sales contract for 26,000 tons of tissue per year, which
is 100% of the planned initial output. Cash flow from the project is projected
to cover interest expenses at an average rate of 12.2x over the life of the
bonds. While the project is subject to risks, including construction risks and
leverage, in our opinion, this strong projected debt coverage ratio along with
10 years of stable tissue pricing should insulate this project from many risks
on a short-and long-term basis. We feel this is a good example of how we seek to
bring value to the Fund's table and look forward to what we believe will be
decorative returns.
* For 1997, 11.47% of the Fund's income was an item of tax preference for
purposes of computing the federal alternative minimum tax.
On December 31, 1997 the Fund's City of Oconto Falls Community Development
Authority bonds-- 7.75% due 12/1/22-- were valued at $3,030,000 representing
2.3% of the Fund's net assets.
[line chart illustrating performance of an assumed investment of $10,000 in the
Heartland Wisconsin Tax Free Fund and the Lehman 20 Year Municipal Bond Index
beginning on April 3, 1992 as follows:
Heartland Wisconsin Lehman 20 Year
Tax Free Fund Municipal Bond Index
04/03/92 $10,000 $10,000
12/31/92 10,546 10,900
12/31/93 11,685 12,467
12/31/94 10,926 11,553
12/31/95 12,869 13,972
12/31/96 13,359 14,593
12/31/97 14,436 16,175
Legend in graph states that Past Performance is not predictive of future
results.
A box below the graph states Average Annual Total Returns as of 12/31/97 as
follows:
1-year 8.1%
5-year 6.5%
since inception 6.6%]
3
<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.
AVERAGE ANNUAL TOTAL RETURNS
Since inception
1-year 5-year 4/3/92
Heartland
Wisconsin Tax Free Fund 8.1% 6.5% 6.6%
Lehman 20-Year
Municipal Bond Index 10.8 8.2 8.7
The Lehman 20-Year Municipal Bond Index is an unmanaged index of certain
investment grade municipal securities with maturities between 17 and 22 years.
GENERAL INFORMATION
Inception......................4/3/92
Net assets.................$131.3 mil
Share price....................$10.44
Number of issues..................224
Weighted average maturity...14.0 yrs.
Weighted average duration....9.7 yrs.
December yield...................4.8%
SEC yield annualized for the
30 days ending 12/31/97.
Sales commission.................None
TOP 5 HOLDINGS COUPON MATURITY % OF NET ASSETS
Milw. RDA - WI Ave./M.L. King Jr. Dr........5.5% 09/01/2012 8.7%
Wisconsin Center - Rev. Bnds. - Pub. Imp....5.7 12/15/2020 7.6
SE WI Professional Baseball Park District...5.8 12/15/2021 3.0
Guam Power Authority - Series A.............6.3 10/01/2012 2.8
Milwaukee RDA - Multifamily Revenue.........6.3 08/01/2038 2.6
PORTFOLIO COMPOSITION
[graphic - A pie chart displays categories of the Heartland Wisconsin Tax Free
Fund's Portfolio as of 12/31/97: Education at 19.0%; Housing at 42.8%; Public
facility at 12.6%; Industrial development at 13.4%; Other at 12.2%. Other is
further broken down as follows: G.O. state at 5.0%; Utilities at 4.4%;
Transportation at 3.2%; Health care at 0.8%; Cash & equivalent at (1.2%)]
All statistics are as of December 31, 1997.
4
<PAGE>
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS . December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS - 101.2% COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WISCONSIN - 87.4%
$ 20,000 Amery, WI Housing Authority - Revenue Bonds ...................... 7.375% 05/01/2005 $ 21,250
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 1,405,638
125,000 Barron, WI Housing Authority - Maplecroft Project ................ 0.000 10/01/2004 87,344
130,000 Barron, WI Housing Authority - Maplecroft Project ................ 0.000 10/01/2008 71,175
35,000 Barron, WI Housing Authority - Maplecroft Project ................ 0.000 10/01/2005 23,100
520,000 Barron, WI Housing Authority - Maplecroft Project ................ 5.375 10/01/2011 520,650
130,000 Barron, WI Housing Authority - Maplecroft Project ................ 0.000 10/01/2006 80,600
85,000 Barron, WI Housing Authority - Maplecroft Project ................ 0.000 10/01/2007 49,725
1,000,000 Bristol, WI Community Development Authority ...................... 6.125 03/01/2012 1,050,000
3,155,000 Brown County, WI Housing Authority - R.P. Terrace ................ 6.500 06/01/2019 3,304,863
200,000 Brown County, WI Housing Auth. - Univ. Village Housing ........... 5.400 04/01/2017 202,500
75,000 Dane County, WI Housing Authority - Forest Harbor Apts ........... 5.950 07/01/2013 78,000
25,000 Dane County, WI Housing Authority - Forest Harbor Apts ........... 6.000 07/01/2014 26,125
435,000 Deforest, WI Redev. Auth. - Lease Revenue Bonds .................. 6.250 02/01/2018 458,381
265,000 Deforest, WI Redev. Auth. - Lease Revenue Bonds .................. 6.200 02/01/2014 283,550
685,000 Eau Claire, WI Housing Auth. - London Hill ....................... 6.250 05/01/2015 703,838
550,000 Elkhart Lake, WI Community Development Authority ................. 6.000 04/01/2015 568,563
195,000 Evansville, WI Housing Authority - Baker Block Project ........... 5.750 12/01/2016 195,267
250,000 Franklin, WI Community Development Authority ..................... 6.150 04/01/2012 260,625
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 263,125
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 382,375
2,940,000 Green Bay, WI Housing Authority - Pheasant Run Project ........... 6.500 09/01/2019 3,057,600
200,000 Hartford, WI Community Development Authority ..................... 5.800 12/01/2005 214,750
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 242,156
10,000 Hudson, WI Christian Community Home .............................. 8.000 07/01/2005 10,000
75,000 Hudson, WI Christian Community Home .............................. 6.800 05/01/2009 76,500
65,000 Hudson, WI Christian Community Home .............................. 6.900 05/01/2010 66,381
250,000 Hudson, WI Christian Community Home .............................. 7.000 05/01/2023 254,688
55,000 Hudson, WI Christian Community Home .............................. 6.700 05/01/2008 56,100
390,000 Jackson, WI Community Development Authority ...................... 7.000 12/01/2013 431,438
500,000 Jackson, WI Community Development Authority ...................... 7.000 12/01/2017 553,125
515,000 Jackson, WI Community Development Authority ...................... 7.000 12/01/2016 567,788
430,000 Jackson, WI Community Development Authority ...................... 7.000 12/01/2014 477,300
345,000 Jackson, WI Community Development Authority ...................... 7.000 12/01/2015 382,950
350,000 Jackson, WI Community Development Authority ...................... 7.000 12/01/2012 388,063
285,000 Jackson, WI Community Development Authority ...................... 6.900 12/01/2010 316,706
180,000 Jackson, WI Community Development Authority ...................... 6.700 12/01/2008 200,250
105,000 Jackson, WI Community Development Authority ...................... 6.600 12/01/2007 116,681
160,000 Jackson, WI Community Development Authority ...................... 6.500 12/01/2006 177,400
260,000 Jackson, WI Community Development Authority ...................... 6.800 12/01/2009 289,250
1,760,000 La Crosse, WI Housing Authority - Forest Park Project ............ 6.375 12/01/2018 1,815,000
1,100,000 La Crosse, WI Housing Authority - Ping Manor Project ............. 6.375 04/01/2012 1,146,750
800,000 La Crosse, WI Housing Authority - Ping Manor Project ............. 6.000 04/01/2005 822,000
350,000 La Crosse, WI Housing Authority - Washburn ....................... 6.500 10/01/2026 362,250
1,000,000 La Crosse, WI Housing Authority - Meadow Wood Project ............ 6.250 01/01/2028 1,002,500
100,000 Little Chute, WI Community Development Authority ................. 5.625 03/01/2019 104,000
305,000 Madison, WI CDA - Dempsey Manor Project........................... 6.400 10/01/2018 315,675
160,000 Madison, WI CDA - Dempsey Manor Project.......................... 6.650 10/01/2025 164,200
1,435,000 Madison, WI CDA - Edgewood College ............................... 6.250 04/01/2014 1,517,513
95,000 Madison, WI CDA - Greentree Project - Series A ................... 7.300 09/01/2032 97,494
1,000,000 Madison, WI CDA - Meriter Retirement Project ..................... 6.125 12/01/2019 1,083,750
45,000 Madison, WI CDA - Monticello Apartments Project .................. 7.125 04/01/2009 46,744
195,000 Madison, WI CDA - Second Mortgage - Revenue Bonds ................ 5.875 07/01/2016 207,431
100,000 Marinette, WI Housing Authority - Multifamily - Series A ......... 6.750 02/01/2024 104,875
165,000 Markesan, WI CDA - Elderly Housing Revenue Bonds ................. 6.750 10/01/2009 172,838
</TABLE>
5
<PAGE>
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS - 101.2% [CONT'D] COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WISCONSIN - 87.4% [CONT'D]
$ 190,000 Markesan, WI CDA - Elderly Housing Revenue Bonds ........................ 6.900% 10/01/2011 $ 199,738
100,000 Menomonee Falls, WI CDA - Village Square Project ........................ 5.200 09/01/2009 97,250
950,000 Menomonee Falls, WI CDA - Village Square Project ........................ 5.350 09/01/2016 913,188
215,000 Milwaukee, WI Housing Authority - Blatz Apartments ...................... 7.500 12/01/2028 224,944
50,000 Milwaukee, WI New Public Housing Authority .............................. 5.000 09/01/2010 50,625
100,000 Milwaukee, WI Redevelopment Auth. - Campus Town ......................... 5.550 11/01/2012 103,750
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 56,925
65,000 Milwaukee, WI Redevelopment Auth. - Dynapro, Inc. ....................... 5.350 12/01/2008 67,194
55,000 Milwaukee, WI Redevelopment Auth. - Dynapro, Inc. ....................... 5.400 12/01/2010 56,306
225,000 Milwaukee, WI Redevelopment Auth. - Dynapro, Inc. ....................... 5.500 12/01/2013 229,219
1,955,00 Milwaukee, WI Redevelopment Authority - MSOE ............................ 6.000 10/01/2017 2,008,763
1,385,000 Milwaukee, WI Redevelopment Authority - MSOE ............................ 6.000 10/01/2017 1,417,894
3,250,00 Milwaukee, WI Redevelopment Auth. - Multifamily ......................... 6.300 08/01/2038 3,408,438
500,000 Milwaukee, WI Redevelopment Auth. - Schlitz Park II ..................... 5.000 01/01/2015 508,125
10,000 Milwaukee, WI Redevelopment Auth. - School Improve ...................... 0.000 03/01/2004 6,925
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. .................. 5.500 09/01/2012 11,385,000
1,705,000 Milwaukee, WI Re. Auth. - Wisc. Ave/M.L. King, Jr. Dr. .................. 5.600 03/01/2009 1,798,775
1,300,000 Milwaukee, WI Re. Auth. - Wisc. Ave/M.L. King, Jr. Dr. .................. 5.500 03/01/2008 1,371,500
650,000 New Berlin, WI Housing Authority - Apple Glen ........................... 6.700 11/01/2020 693,875
1,210,000 New Berlin, WI Housing Authority - Apple Glen ........................... 6.700 11/01/2017 1,291,675
65,000 New Berlin, WI Housing Authority - Apple Glen ........................... 0.000 11/01/2007 37,863
70,000 New Berlin, WI Housing Authority - Apple Glen ........................... 0.000 05/01/2010 34,563
65,000 New Berlin, WI Housing Authority - Apple Glen ........................... 0.000 11/01/2009 32,988
70,000 New Berlin, WI Housing Authority - Apple Glen ........................... 0.000 05/01/2009 36,400
70,000 New Berlin, WI Housing Authority - Apple Glen ........................... 0.000 05/01/2005 47,250
70,000 New Berlin, WI Housing Authority - Apple Glen ........................... 0.000 05/01/2007 41,913
65,000 New Berlin, WI Housing Authority - Apple Glen ........................... 0.000 11/01/2004 45,256
65,000 New Berlin, WI Housing Authority - Apple Glen ........................... 0.000 11/01/2006 40,138
65,000 New Berlin, WI Housing Authority - Apple Glen ........................... 0.000 11/01/2003 47,938
65,000 New Berlin, WI Housing Authority - Apple Glen ........................... 0.000 11/01/2005 42,737
70,000 New Berlin, WI Housing Authority - Apple Glen ........................... 0.000 05/01/2006 44,450
165,000 New Berlin, WI Housing Authority - Pinewood Creek ....................... 6.800 11/01/2012 170,569
190,000 New Berlin, WI Housing Authority - Pinewood Creek ....................... 6.900 11/01/2014 202,112
135,000 New Berlin, WI Housing Authority - Pinewood Creek ....................... 6.900 05/01/2014 139,556
165,000 New Berlin, WI Housing Authority - Pinewood Creek ....................... 6.850 11/01/2013 178,200
160,000 New Berlin, WI Housing Authority - Pinewood Creek ....................... 6.850 05/01/2013 165,400
105,000 New Berlin, WI Housing Authority - Pinewood Creek ....................... 6.500 05/01/2009 107,625
155,000 New Berlin, WI Housing Authority - Pinewood Creek ....................... 6.700 11/01/2011 159,844
150,000 New Berlin, WI Housing Authority - Pinewood Creek ....................... 6.700 05/01/2011 154,687
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 128,125
125,000 New Berlin, WI Housing Authority - Pinewood Creek ....................... 6.400 05/01/2008 128,125
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 82,300
2,980,000 Oak Creek, WI Housing Authority - Country Oaks II ....................... 6.300 08/01/2028 3,192,325
1,440,000 Oak Creek, WI Housing Authority - Country Oaks II ....................... 6.200 08/01/2017 1,481,400
10,000 Oak Creek, WI Housing Authority - Multifamily ........................... 7.750 03/01/2031 10,412
125,000 Oak Creek, WI Housing Authority - Wood Creek ............................ 0.000 01/20/2013 52,187
2,130,000 Oak Creek, WI Housing Authority - Wood Creek ............................ 5.625 07/20/2029 2,164,612
1,000,000 Oak Creek, WI Housing Authority - Wood Creek ............................ 5.500 07/20/2019 1,015,000
60,000 Oak Creek, WI Housing Authority - Wood Creek ............................ 0.000 01/20/2014 23,475
125,000 Oak Creek, WI Housing Authority - Wood Creek ............................ 0.000 07/20/2013 50,312
65,000 Oak Creek, WI Housing Authority - Wood Creek ............................ 0.000 01/20/2012 28,762
125,000 Oak Creek, WI Housing Authority - Wood Creek ............................ 0.000 07/20/2011 57,344
125,000 Oak Creek, WI Housing Authority - Wood Creek ............................ 0.000 01/20/2011 59,062
35,000 Oak Creek, WI Housing Authority - Wood Creek ............................ 0.000 01/20/2010 17,587
50,000 Oak Creek, WI Housing Authority - Wood Creek ............................ 0.000 07/20/2007 29,437
100,000 Oak Creek, WI Housing Authority - Wood Creek ............................ 27.750 07/20/1998 112,301
</TABLE>
6
<PAGE>
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS - 101.2% [CONT'D] COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WISCONSIN - 87.4% [CONT'D]
$3,000,000 Oconto Falls, WI Community Development Authority ................. 7.750% 12/01/2022 $3,030,000
335,000 Omro, WI CDA - Revenue Bonds ..................................... 5.875 12/01/2011 357,194
50,000 Omro, WI CDA - Revenue Bonds ..................................... 5.750 12/01/2006 53,937
200,000 Outagamie, WI Housing Authority - First Mortgage ................. 5.000 11/15/2003 199,750
10,000 Racine, WI Elderly Housing Authority - Lincoln Lutheran .......... 7.150 10/01/2005 10,000
5,000 Racine, WI Elderly Housing Authority - Lincoln Lutheran .......... 7.100 10/01/2004 5,000
50,000 Reedsville, WI - New Public Housing Authority .................... 5.125 04/01/2011 51,059
170,000 Schofield, WI CDA - Lease Revenue ................................ 6.000 10/01/2012 178,712
500,000 Schofield, WI CDA - Lease Revenue ................................ 6.200 10/01/2017 523,750
970,000 SE WI Professional Baseball Park District ........................ 0.000 12/15/2015 386,787
1,000,000 SE WI Professional Baseball Park District ........................ 0.000 12/15/2017 356,250
3,700,000 SE WI Professional Baseball Park District ........................ 5.750 12/15/2021 3,894,250
1,315,000 SE WI Professional Baseball Park District ........................ 5.700 12/15/2017 1,385,681
315,000 Sheboygan, WI Housing Authority - Multifamily Housing ............ 6.900 02/01/2024 327,994
125,000 Sheboygan, WI Housing Authority - Rocky Knoll Project ............ 5.300 12/01/2016 125,312
175,000 Sheboygan, WI Housing Authority - Rocky Knoll Project ............ 5.250 12/01/2013 173,250
35,000 Slinger, WI Redevelopment Auth. Lease Revenue .................... 5.800 09/01/2007 36,137
95,000 Slinger, WI Redevelopment Auth. Lease Revenue .................... 5.850 09/01/2008 97,969
540,000 Slinger, WI Redevelopment Auth. Lease Revenue .................... 6.250 09/01/2017 558,900
560,000 Stevens Point, WI CDA - Mrtge. Refunding - Edgewater ............. 6.625 09/01/2009 595,700
100,000 Stevens Point, WI CDA - Mrtge. Refunding - Edgewater ............. 6.500 09/01/2006 107,125
435,000 Sturtevant, WI CDA - Redevelopment Lease ......................... 5.700 12/01/2009 452,944
375,000 Sturtevant, WI CDA - Redevelopment Lease ......................... 5.800 12/01/2010 391,406
200,000 Sturtevant, WI CDA - Redevelopment Lease ......................... 5.900 12/01/2011 208,750
1,000,000 Sturtevant, WI CDA - Redevelopment Lease ......................... 6.000 12/01/2015 1,050,000
200,000 Sturtevant, WI CDA - Redevelopment Lease ......................... 6.500 12/01/2015 216,250
1,190,000 St. Croix Falls, WI CDA Lease Revenue ............................ 6.400 12/01/2014 1,249,500
115,000 St. Croix Falls, WI CDA Lease Revenue ............................ 6.000 12/01/2007 121,325
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 322,400
305,000 Superior, WI RA - Superior Memorial Hospital Mortgage ............ 5.700 05/01/2009 320,631
195,000 Sussex, WI CDA - Revenue Bond .................................... 5.700 04/01/2007 203,531
1,900,000 Sussex, WI CDA - Revenue Bond .................................... 6.100 04/01/2015 1,992,625
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 512,500
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 415,125
10,000 Waukesha, WI HA - Multifamily - The Court Apartments ............. 6.300 12/01/2013 10,000
1,000,000 Waukesha, WI HA - Multifamily - The Court Apartments ............. 6.000 04/01/2036 1,011,250
1,000,000 Waukesha, WI HA - Westgrove Woods - A ............................ 6.000 12/01/2031 1,048,750
715,000 Waukesha, WI HA - Westgrove Woods - C ............................ 6.750 02/01/2027 734,662
5,000 Waukesha, WI RA - Barstow Associates ............................. 4.875 08/01/2010 5,000
95,000 Waupaca, WI CDA - Series A ....................................... 6.100 10/01/2008 99,156
100,000 Waupaca, WI CDA - Series A ....................................... 6.200 10/01/2010 104,125
110,000 Waupaca, WI CDA - Series A ....................................... 6.200 10/01/2011 114,125
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 104,000
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project ..................... 0.000 05/01/2010 51,450
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project ..................... 0.000 05/01/2009 54,731
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ..................... 0.000 11/01/2009 50,750
1,060,000 Wauwatosa, WI HA - Hawthorne Terrace Project ..................... 6.700 11/01/2019 1,103,725
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ..................... 0.000 11/01/2010 47,625
1,200,000 Wauwatosa, WI HA - Hawthorne Terrace Project ..................... 6.700 11/01/2015 1,252,500
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project ..................... 0.000 05/01/2008 58,800
615,000 Wauwatosa, WI HA - Hawthorne Terrace Project ..................... 6.700 11/01/2022 640,369
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ..................... 0.000 11/01/2008 54,375
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ..................... 0.000 11/01/2006 61,750
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ..................... 0.000 11/01/2007 58,250
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project ..................... 0.000 05/01/2004 75,075
75,000 Wauwatosa, WI HA - Hawthorne Terrace Project ..................... 0.000 05/01/2003 56,812
</TABLE>
7
<PAGE>
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS - 101.2% [CONT'D] COUPON MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WISCONSIN - 87.4% [CONT'D]
$ 100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ........ 0.000% 11/01/2003 $ 73,750
70,000 Wauwatosa, WI HA - Hawthorne Terrace Project ........ 0.000 05/01/2005 47,075
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ........ 0.000 11/01/2004 69,625
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project ........ 0.000 05/01/2007 62,869
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project ........ 0.000 11/01/2005 65,500
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project ........ 0.000 05/01/2006 66,675
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 154,312
100,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds. 5.625 05/01/2005 102,250
115,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds. 5.625 05/01/2007 112,556
120,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds. 5.625 05/01/2008 116,400
125,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds. 5.625 05/01/2009 120,000
135,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds. 5.625 05/01/2010 134,831
105,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds. 5.625 05/01/2006 103,687
10,000 Winnebago County, WI Housing Authority - Series A ... 6.200 03/01/2001 10,387
15,000 Winnebago County, WI Housing Authority - Series A ... 6.300 03/01/2003 15,712
10,000 Winnebago County, WI Housing Authority - Series A ... 6.000 03/01/1999 10,150
10,000 Winnebago County, WI Housing Authority - Series A ... 6.100 03/01/2000 10,275
380,000 Winnebago County, WI Housing Authority - Series A ... 7.125 03/01/2022 394,725
195,000 Winnebago County, WI Housing Authority - Series A ... 6.875 03/01/2012 202,069
9,650,000 Wisconsin Center - Revenue Bond - Public Improvements 5.700 12/15/2020 10,011,875
10,000 WHEDA Home Ownership ................................ 7.375 09/01/2017 10,253
100,000 WHEDA Home Ownership ................................ 0.000 12/01/2007 38,250
60,000 Wittenberg, WI HA - Multifamily - Forest Park ....... 7.200 06/20/2030 61,200
200,000 Wrightstown, WI Community Development Authority ..... 5.950 06/01/2014 207,500
600,000 Wrightstown, WI Community Development Authority ..... 6.000 06/01/2019 621,000
------------
114,882,260
------------
PUERTO RICO - 6.0%
420,000 Puerto Rico Commonwealth - Public Improvement ....... 5.500 07/01/2013 429,975
400,000 Puerto Rico Commonwealth - Public Improvement ....... 5.850 07/01/2011 419,000
1,205,000 Puerto Rico Commonwealth Hwy./Transportation ........ 5.500 07/01/2017 1,227,594
2,915,000 Puerto Rico Commonwealth Hwy./Transportation ........ 5.750 07/01/2018 2,976,944
990,000 Puerto Rico Electric Power Authority - Series O ..... 0.000 07/01/2017 362,588
280,000 Puerto Rico Electric Power Authority - Series P ..... 7.000 07/01/2021 311,850
135,000 Puerto Rico Housing Finance Corporation - Multifamily 7.500 10/01/2015 142,088
250,000 Puerto Rico Industrial, Medical & Environmental Auth. 6.000 06/01/2000 259,375
1,625,000 Puerto Rico Municipal Finance Agency - Series A (a).. 5.875 07/01/2007 1,716,406
------------
7,845,820
------------
GUAM - 7.8%
3,400,000 Guam Power Authority - Series A ..................... 6.300 10/01/2012 3,608,250
250,000 Guam Power Authority - Series A ..................... 7.100 11/15/2009 268,750
250,000 Guam Power Authority - Series A ..................... 5.250 10/01/2013 247,813
1,000,000 Guam Power Authority - Series A ..................... 6.400 10/01/2005 1,092,500
1,000,000 Guam Power Authority - Series A ..................... 5.250 10/01/2023 986,250
1,000,000 Guam Government G.O. - Series A ..................... 5.375 11/15/2013 1,001,250
3,000,000 Guam Government G.O. - Series A ..................... 5.400 11/15/2018 2,996,250
------------
10,201,063
------------
NEW PUBLIC HOUSING AUTHORITIES - 0.0%
35,000 Burleigh County, ND - New Public Housing Authority... 4.875 01/01/2011 35,219
------------
TOTAL INVESTMENTS (Cost $127,286,658) ........ 101.2% $132,964,362
Liabilities, less receivables ................ (1.2) (1,616,320)
-------- -------------
TOTAL NET ASSETS.............................. 100.0% $131,348,042
======== =============
</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 . December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at cost .......................... $ 127,286,658
==============
Investments in securities, at value ......................... $ 132,964,362
Receivable from fund shares sold ............................ 10,942
Accrued interest ............................................ 1,740,001
--------------
Total Assets .......................................... 134,715,305
--------------
LIABILITIES:
Payable for fund shares redeemed ............................ 242,058
Payable to custodian ........................................ 2,898,841
Payable to Advisor for management fee ....................... 76,752
Variation margin on open futures contracts .................. 92,842
Accrued expenses ............................................ 56,770
--------------
Total Liabilities ..................................... 3,367,263
==============
TOTAL NET ASSETS .............................................. $ 131,348,042
==============
NET ASSETS CONSIST OF:
Paid in capital ............................................. $ 126,931,163
Accumulated undistributed net realized losses on investments (1,317,613)
Net unrealized appreciation on investments .................. 5,734,492
--------------
TOTAL NET ASSETS .............................................. $ 131,348,042
==============
SHARES OUTSTANDING, $.001 par value
(100,000,000 shares authorized) .............................. 12,582,408
--------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE.. $ 10.44
==============
<CAPTION>
STATEMENT OF OPERATIONS
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
<S> <C>
Interest ................................................. $ 7,391,498
--------------
Total investment income ............................. 7,391,498
--------------
EXPENSES:
Management fees............................................ 819,186
Transfer agent fees ....................................... 92,923
Printing and communications ............................... 22,387
Custodian fees ............................................ 15,058
Audit fees ................................................ 13,998
Postage ................................................... 10,397
Directors' fees ........................................... 6,601
Registration fees ......................................... 5,092
Legal fees................................................. 4,323
Amortization of organization expense ...................... 1,517
Other operating expenses .................................. 40,251
--------------
Total expenses ....................................... 1,031,733
Less: Fees paid indirectly ........................... (11,577)
--------------
Net expenses ......................................... 1,020,156
--------------
NET INVESTMENT INCOME ..................................... 6,371,342
--------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on:
Securities .......................................... 287,599
Futures contracts ................................... (1,070,534)
Net increase in unrealized appreciation on:
Securities .......................................... 4,146,986
Futures contracts ................................... 56,788
--------------
TOTAL REALIZED AND UNREALIZED GAINS ON INVESTMENTS ....... 3,420,839
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ..... $ 9,792,181
==============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
9
<PAGE>
HEARTLAND WISCONSIN TAX FREE FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended Dec. 31,
1997 1996
-----------------------------
OPERATIONS:
<S> <C> <C>
Net investment income ....................................... $ 6,371,342 $ 6,199,073
Net realized gains (losses) on investments .................. (782,935) 370,748
Net increase (decrease) in unrealized appreciation on
investments................................................ 4,203,774 (1,867,241)
------------ ------------
Net increase in net assets resulting from operations ...... 9,792,181 4,702,580
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ....................................... (6,371,342) (6,199,073)
------------ ------------
Total distributions to shareholders ....................... (6,371,342) (6,199,073)
------------ ------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued ................................. 18,773,769 21,604,140
Reinvested dividends from net investment income ............. 4,507,242 4,374,986
Cost of shares redeemed ..................................... (19,898,571) (18,450,990)
------------ ------------
Net increase in net assets derived from Fund share
activities ............................................. 3,382,440 7,528,136
------------ ------------
TOTAL INCREASE IN NET ASSETS .................................... 6,803,279 6,031,643
NET ASSETS AT THE BEGINNING OF THE YEAR ......................... 124,544,763 118,513,120
------------ ------------
NET ASSETS AT THE END OF THE YEAR ............................... $131,348,042 $124,544,763
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME ............................. $ -- $ --
============ ============
</TABLE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended December 31,
1997 1996 1995 1994 1993
------------------------------------------------------------------
Selected Per Share Data
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ........... $ 10.16 $ 10.30 $ 9.21 $ 10.38 $ 9.85
Income from investment operations:
Net investment income ..................... .52 .51 .51 .51 .49
Net realized and unrealized gains (losses)
on investments ........................... .28 (.14) 1.09 (1.17) .55
-------- -------- -------- -------- --------
Total income from investment operations . .80 .37 1.60 (.66) 1.04
Less distributions from:
Net investment income ..................... (.52) (.51) (.51) (.51) (.49)
Net realized gains on investments ......... -- -- -- -- (.02)
-------- -------- -------- -------- --------
Total distributions ..................... (.52) (.51) (.51) (.51) (.51)
-------- -------- -------- -------- --------
Net asset value, end of year ................. $ 10.44 $ 10.16 $ 10.30 $ 9.21 $ 10.38
======== ======== ======== ======== ========
Total Return/1/ .............................. 8.1% 3.8% 17.8% (6.5%) 10.8%
Ratios and Supplemental Data
Net assets, end of year (in thousands) .... $131,348 $124,545 $118,513 $101,749 $ 99,350
Ratio of net expenses to average net assets 0.81%/2/ 0.80%/2/ 0.84% 0.85% 0.84%
Ratio of net investment income
to average net assets .................... 5.05% 5.12% 5.23% 5.28% 4.81%
Portfolio turnover rate ................... 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) 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.
10
<PAGE>
HEARTLAND WISCONSIN TAX FREE FUND
NOTES TO FINANCIAL STATEMENTS . December 31, 1997
- --------------------------------------------------------------------------------
(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 December 31, 1997.
(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 December 31, 1997, 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.
Net realized gains or losses may differ for Federal income tax
purposes primarily as a result of post-October losses which may not be
recognized for tax purposes until the first day of the following
fiscal year, wash sales, and the marking-to-market of open futures
contracts at December 31, 1997.
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) Net investment income is distributed to each shareholder as a
dividend. Dividends are declared daily and distributed monthly and are
recorded by the Fund on the ex-dividend date. Net realized gains on
investments, if any, are distributed annually.
(d) The Fund records security and shareholder transactions 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.
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
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 a
futures contract's price may result in a loss which could render a
portfolio's hedging strategy unsuccessful.
11
<PAGE>
The Fund had the following open short futures contracts at December
31, 1997:
Number Expiration Unrealized
Type of Contracts Date Appreciation
---- ------------ ---------- ------------
U.S. Treasury Bond Index (200) March 1998 $ 56,788
(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 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 those estimates.
(3) Investment Management Fees and Transactions with Related Parties
The Fund has a management agreement with Heartland Advisors, Inc. (the
"Advisor") to serve as investment advisor and manager. Under the terms of
the agreement, the Fund pays the Advisor a monthly management fee at the
annual rate of .65% of the daily net asset value of the Fund.
Officers and certain directors of the 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.
(4) Deferred Organization Expenses
Organization expenses have been deferred and were amortized on a
straight-line basis over sixty months. Payments for these expenses were
advanced by the Advisor, who was reimbursed by the Fund over the same
period. As of December 31, 1997 all organization expenses have been
amortized.
(5) Investment Transactions
During the year ended December 31, 1997, cost of purchases and proceeds
from sales of securities, other than short-term obligations, were
$14,705,016 and $9,772,893, respectively.
At December 31, 1997, the gross unrealized appreciation and depreciation on
securities for tax purposes were $5,753,072 and $75,368, respectively,
netting to $5,677,704.
Cost of investments is substantially the same for financial reporting
purposes and federal income tax purposes.
(6) Fund Share Transactions
<TABLE>
<S> <C>
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
===========
For the year ended December 31, 1996, Fund share transactions were as follows:
Shares issued...................................................................... 2,158,376
Reinvested dividends from net investment income.................................... 434,964
Shares redeemed.................................................................... (1,840,299)
-----------
Net increase in Fund shares........................................................ 753,041
===========
</TABLE>
12
<PAGE>
END OF NOTES TO FINANCIAL STATEMENTS
Effective March 26, 1997, Arthur Andersen LLP was dismissed as the Corporation's
independent accountants. For the years ended December 31, 1993 through December
31, 1996, Arthur Andersen LLP expressed an unqualified opinion on the
Corporation's financial statements. There were no disagreements between the
Corporation's management and Arthur Andersen LLP prior to their dismissal. The
Board of Directors approved the dismissal of Arthur Andersen LLP and the
appointment of Price Waterhouse LLP as the Corporation's independent
accountants.
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Heartland Group, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Heartland Wisconsin Tax Free
Fund (one of the portfolios constituting Heartland Group, Inc., hereafter
referred to as the "Fund") at December 31, 1997, the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at December
31, 1997 by correspondence with the custodian and brokers and application of
alternative auditing procedures where confirmations were not received, provides
a reasonable basis for the opinion expressed above. The financial statements of
the Fund for the four years ended December 31, 1996 were audited by other
independent accountants whose report dated February 7, 1997 expressed an
unqualified opinion on those statements.
Milwaukee, Wisconsin Price Waterhouse LLP
February 6, 1998
<PAGE>
The Heartland Family of Funds
Small Cap Contrarian Fund
(closed to new investors 11/1/97)
Value Fund
(closed to new investors 7/1/95)
Mid Cap Value Fund
Large Cap Value Fund
Value Plus Fund
U.S. Government Securities Fund
Wisconsin Tax Free Fund
Short Duration High-Yield
Municipal Fund
High-Yield Municipal Bond Fund
Firstar Money Market Fund
[Logo] Heartland Funds
-------------------------
AMERICA'S VALUE INVESTOR
1-800-432-7856
These are not recommendations to buy or sell the securities discussed, but
rather illustrations of our value investment strategy. Statements regarding
particular securities represent the portfolio manager's views when made and are
subject to change at any time based on market and other considerations. Complete
portfolios for the Funds are included in the Annual and Semi-Annual Reports to
Shareholders.
The performance data quoted represents past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
This material may only be used when preceded or accompanied by the Funds'
prospectus. Please call for a prospectus if you would like more complete
information, including charges and expenses, for any Heartland fund. Read it
carefully before you invest. Heartland Advisors, Inc., distributor. Member
SIPC/NASD.
