<PAGE>
[LOGO APPEARS HERE]
Heartland Funds
---------------------------
AMERICA'S VALUE INVESTOR(/./)
Value Report
December 31, 1999
Notes on value investing
for investors in
Heartland Funds
Annual Report
to Shareholders
Value Fund
Value Plus Fund
Select Value Fund
Government Fund
<PAGE>
Value Report
[WILLIAM J. NASGOVITZ PHOTO APPEARS HERE]
Dear Fellow Investor
Never has Charles Dickens been so popular among value investors. His oft quoted
introduction to the book, Tale of Two Cities, has been used extensively in this
------------------
narrow, two-tier market favoring high flying technology and internet companies.
However, for those who have not seen it, we must admit that it captures the
essence of the market in 1999 - "It was the best of times, it was the worst of
times, it was the age of wisdom, it was the age of foolishness, it was the epoch
of belief, it was the epoch of incredulity."
To quote Barton Biggs, Global Strategist for Morgan Stanley Dean Witter, "The
technology, internet and telecommunications craze has gone parabolic in what is
one of the great, if not the greatest, manias of all time." The history of
manias is that they are often based upon revolutionary developments (such as the
Internet changing the way that people and businesses operate and communicate)
that profoundly impact society. However, in the rush of ebullient enthusiasm
that abounds, a bubble is built that, at least historically, has always burst
resulting in massive wealth destruction.
As value investors, we have been somewhat incredulous about the market in 1999.
We have been amazed by the soaring valuations of technology and internet stocks,
and equally astonished at the dearth of interest in quality value stocks. Given
the difficult market for low P/E stocks, in particular small caps, we believe
that our performance was quite competitive as you will find in reviewing the
specific Fund discussions found on the following pages.
With this backdrop, we think there has never been a better time for investors
who desire equity exposure to consider value stocks.
Why is this you might wonder?
Well, the disparity in returns between growth and value stocks is striking. For
example, the Russell 2000 Growth Index, an index measuring the performance of
small growth stocks, returned 43.09% for the year ended 1999 while the Russell
2000 Value Index, an index measuring the performance of small value stocks, was
actually DOWN 1.49%. We believe that this disparity is unsustainable and we feel
that the stage is being set for potential stellar performance for value stocks
over the next several years if history repeats itself. As the accompanying chart
illustrates, the markets have historically moved in cycles with value and growth
investing alternating leadership over periods of time. Most recently, growth
investing has experienced an extended period of out-performance. We believe that
the time is ripe for a reversal in leadership.
<PAGE>
VALUE REPORT
What could be the catalysts?
First -- relative valuations. Small cap value stocks are trading at 30-year
lows relative to large cap stocks based on price/earnings, price-to-book and
price/earnings to growth rates. We think that investors will again pursue the
excellent opportunities that we find existing within this area of the market.
Second -- absolute valuations. Today's stock market is offering a multitude of
large and small companies trading at less than 10 times estimated earnings and
below book value. We find ourselves in a bargain hunter's dreamland!
Third -- strategic investor interest in value stocks. Last year, 44 of our
portfolio companies received buy-out offers with most at significant premiums to
their public market price. We would not be surprised to see a continuation of
this trend in the year 2000, as strategic investors seek to invest in thriving
businesses selling at compelling valuations. Indeed, the past year has been
challenging for value investors with extremely high investor expectations and
valuations in "glamour" stocks contrasted with extreme pessimism and neglect in
the rest of the stock market. This has led to unprecedented divergence that to
us represents outstanding capital gains potential in quality, low P/E stocks.
For the patient and prudent investor, we believe that now is the time to
overweight portfolios in value stocks.
Sincerely,
/s/ Bill Nasgovitz
William J. Nasgovitz
Based on the S&P 500/BARRA Value and Growth indexes, which divide the S&P 500
into a value index and growth index based on price/book ratios. Each S&P company
is included in either the growth or value index and are rebalanced as needed.
Past performance does not guarantee future results. The performance information
presented is not intended to be indicative of any Heartland fund or product.
Source: Standard & Poor's
Value & Growth Have Historically Rotated in Style
Has Value Reached an Inflection Point?
[GRAPH]
<TABLE>
<CAPTION>
S&P Value Less S&P Growth: One-Year Rolling Return Difference
- -------------------------------------------------------------
<S> <C>
'80 0.1574
0.0874
-0.0458
0.1625
0.1305
-0.1023
-0.3762
-0.2968
-0.665
-0.7952
-1.3142
-1.0776
'81 -0.6357
-0.8032
-0.6045
-0.5069
-0.4948
-0.2778
-0.3229
-0.2024
0.2658
0.3142
1.0368
0.8095
'82 0.3774
0.761
0.829
0.2708
0.2626
0.1381
0.2411
0.2706
-0.01
0.2158
-0.0007
-0.0797
'83 0.166
-0.1696
-0.2766
0.0717
0.1198
-0.1848
0.2026
0.3845
0.3976
0.5358
0.7316
0.8612
'84 1.1141
1.3302
1.2137
1.1001
0.9768
1.1409
0.7649
0.5765
0.9133
0.6612
0.7349
0.648
'85 0.1375
-0.0333
0.0838
0.275
0.2239
0.313
0.4658
0.3882
0.2017
0.3787
-0.0408
-0.2714
'86 -0.07
-0.0508
-0.1673
-0.6201
-0.5257
-0.4966
-0.3517
-0.0166
0.24
0.0599
0.3043
0.4918
'87 0.3133
-0.1358
0.0199
0.3174
0.2799
0.3008
0.0509
-0.4342
-0.6942
-0.3667
-0.2002
-0.3292
'88 0.0868
0.5234
0.5857
0.5751
0.6727
0.63
0.7667
0.9068
0.7858
0.6542
0.6134
0.6974
'89 0.3257
0.38
0.2767
0.1884
0.0692
0.1542
-0.2216
-0.25
-0.3041
-0.5157
-0.7766
-0.6816
'90 -0.5607
-0.4824
-0.7623
-0.8591
-1.0973
-1.3132
-0.9283
-0.9498
-0.7957
-0.8248
-0.5732
-0.6441
'91 -0.7299
-0.9532
-0.9591
-0.7291
-0.3667
-0.2476
-0.4212
-0.5985
-0.5476
-0.3545
-0.6725
-1.0609
'92 -0.8159
-0.5934
-0.2916
-0.0551
-0.1792
-0.0091
0.0364
0.0327
-0.069
-0.2805
-0.139
'93 0.4218
0.4493
0.6843
0.7342
0.7668
0.6676
0.7444
1.0938
1.2625
1.3937
1.32
1.2875
'94 1.2753
1.1648
0.6573
0.5873
0.3748
0.5187
0.2843
0.0256
-0.2068
-0.5053
-0.2525
-0.1736
-0.2982
'95 -0.4888
-0.3383
-0.4122
-0.493
-0.4233
-0.6255
-0.6199
-0.3135
-0.2609
-0.4447
-0.2439
-0.0665
'96 -0.1538
-0.1501
0.1115
-0.0229
-0.2767
-0.1651
-0.1542
-0.1444
-0.2447
0.0532
-0.0684
-0.149
'97 -0.349
-0.3599
-0.4793
-0.7623
-0.552
-0.5123
-0.5378
-0.467
-0.1819
-0.3392
-0.4883
-0.4621
'98 -0.5764
-0.5212
-0.641
-0.2522
-0.2314
-0.6578
-0.8403
-1.2737
-1.3882
-1.3787
-1.3747
-1.7985
'99 -1.7566
-1.6552
-1.7973
-1.0919
-1.046
-0.7921
-0.6096
-0.6804
-0.8133
-1.1473
-1.8544
-2.7261
'00
</TABLE>
1
<PAGE>
Value Report
Heartland Value Fund
[WILLIAM J. NASGOVITZ PHOTO APPEARS HERE]
[ERIC J. MILLER, PHOTO APPEARS HERE]
"In our 38 years of combined investment experience, we believe there has never
been a better time for equity investors to consider small cap value stocks."
In 1999, the Heartland Value Fund, with a total return of 25.01%, significantly
outperformed both the Russell 2000 (21.26%) and Russell 2000 Value (-1.49%)
indices. In fourth quarter 1999, the Fund performed exceedingly well, returning
20.96% compared to the indices' 18.44% and 1.53% gains, respectively. Over the
long-term, the Fund's relative peer rankings have also been strong as indicated
by the following table:
<TABLE>
<CAPTION>
Lipper Inc. Time Period Percentile Ranking of Returns
- -------------------------------------------------------------------------------
<S> <C> <C>
1-year top 11th percentile out of 312 funds
- -------------------------------------------------------------------------------
5-year top 29th percentile out of 103 funds
- -------------------------------------------------------------------------------
10-year top 8th percentile out of 25 funds
- -------------------------------------------------------------------------------
(Based on total returns for the Small-Cap Value Category as of 12/31/99)
Morningstar, Inc. Time Period Percentile Ranking of Returns
- -------------------------------------------------------------------------------
1-year top 10th percentile out of 229 funds
- -------------------------------------------------------------------------------
5-year top 19th percentile out of 75 funds
- -------------------------------------------------------------------------------
10-year top 4th percentile out of 24 funds
- -------------------------------------------------------------------------------
15-year top 1st percentile out of 9 funds
- -------------------------------------------------------------------------------
(Based on total returns for the Small Value Category as of 12/31/99)
</TABLE>
For more information on the Fund, including top ten holdings, please see the
Fund Fact Sheet on page 10.
The Fund's technology investments performed exceptionally well in the fourth
quarter and for the year. Our healthcare holdings had a good fourth quarter and
finished the year with respectable gains. Overall, 6 of the fund's top 10
holdings were up over 30% for the fourth quarter. After big gains in the first
three quarters, our energy investments declined substantially. With demand for
oil still strong and the OPEC nations doing a good job living within their
production quotas, we believe energy stocks are just catching their breath
before making another run.
We are pleased at having outperformed the Russell 2000 and Russell 2000 Value
Indices this year, as well as exceeding the 21.04% return of the S&P 500 index.
Yet we are surprised that in this market, investors seem to be abandoning or
ignoring high quality small companies with established business models and real
earnings in favor of overvalued, growth stocks. For example, some Internet
start-ups may be nothing more
2
<PAGE>
than a good-sounding idea with a speculative business plan. We see the "smart
money" continuing to invest aggressively in the small cap value arena. This
year, 33 of the Value Fund's portfolio holdings were acquired by other
companies, most at very attractive premiums to market price. Over the longer
term, we think investors will be best served with patience, and a portfolio of
established business bargains.
For the Long Run Peabody, Massachusetts based Saucony/1/ makes premium running
shoes. The company's sales have been running at a 47% annual growth rate, and in
the last year, gross profit margins have expanded to 38%. Earnings are on the
fast track with a record $1.57 per share posted for 1999, sprinting to an
estimated $1.90 for this year. Yet the stock is trading at just 5 times this
year's estimated earnings. Clearly, investors haven't made Saucony a favorite,
despite what we expect to be great operating results. Cautionary comments from
the industry leader and general concern about the retail environment have kept
this stock from the winner's circle. Such a situation presents an exciting
opportunity for value investors -- it's an example of a company with
unrecognized inherent potential. We believe the best is yet to come for Saucony,
and for other value stocks on the same track.
Value Report
<TABLE>
<CAPTION>
Value Fund Russell 2000 Russell 2000 Value
<S> <C> <C> <C>
Dec-89 10000 10000 10000
8291 8052 7823
Dec-91 12383 11760 11085
17643 13925 14314
Dec-93 20954 16554 17728
21313 16252 17454
Dec-95 27665 20876 21948
33471 24319 26637
Dec-97 41235 29757 35104
36508 29000 32839
Dec-99 45639 35164 32350
</TABLE>
Average Annual Total
Returns as of 12/31/992
25.01% 1-year
5-year 16.45%
10-year 16.39%
15-year 15.67%
Past performance is not predictive of future results. The Fund invests in small
companies, which involves investment risks in addition to those presented by
investments in larger companies, including the potential for greater price
volatility and lower market liquidity.
The Value Fund has changed its primary benchmark index to the Russell 2000 Value
Index from the Russell 2000 Index. The new index is believed to be more
representative of the Fund for comparative purposes because of the value
orientation of the index.
/1/ On 12/31/99, the Fund held 400,000 shares of Saucony, Inc. (Class B), valued
at $5,550,000 and representing 0.46% of the Fund's net assets. Holdings
subject to change.
/2/ Includes reinvestment of all dividends and capital gains distributions.
3
<PAGE>
VALUE REPORT
[WILLIAM J. NASGOVITZ
PHOTO APPEARS HERE]
William J. Nasgovitz
Portfolio Co-Manager
[PATRICK J. RETZER,
PHOTO APPEARS HERE]
Patrick J. Retzer, CPA
Portfolio Co-Manager
"Is value investing dead? We don't think so. Over the long term, buying high
quality companies at discounted valuations has been one of the most effective
methods of generating superior returns."
Heartland Value Plus Fund
For the Heartland Value Plus Fund, 1999 was a year of varied results. Our 1.67%
return outperformed the Russell 2000 Value Index's 1.49 loss, but lagged the
Russell 2000's 21.26% gain. We showed considerable progress in the fourth
quarter, however, as the Value Plus Fund returned 8.22% compared to the indices'
1.53% and 18.44% gains, respectively.
As a benchmark, the Russell 2000 is a "small cap" index; yet the top 50
holdings, which accounted for 58% of the index's total return in 1999, had
market capitalizations of between $14 billion and $31 billion. We feel the
Russell 2000 Value Index is a much more accurate benchmark for the Value Plus
Fund. For more information on the Fund, including top ten holdings, please see
the Fund Fact Sheet on page 11.
In fourth quarter 1999, our healthcare and financial services holdings
rebounded, producing attractive returns. In the face of rising interest rates,
our utilities investments have yet to reach their potential. For the quarter and
the full year, our technology stock positions posted excellent gains.
Unfortunately, it was difficult to find many technology stocks that qualified as
true fundamental bargains. Consequently, we were significantly under-weighted in
technology relative to our market indices. Finally, our convertible securities
holdings continued to drift downward as rising interest rates restrained
returns.
We are heartened by the 4th quarter activity which helped the fund post a
positive return for 1999. If evaluated from the perspective of portfolio
companies' operating results living up to our expectations, we think we did a
very respectable job. Unfortunately, good earnings and cash flow growth was
largely ignored in the small cap value sector.
1999 produced one of the greatest disparities between small cap value indexes
and small cap growth indexes in history and was the third year in a row that
value lagged growth. Is value investing dead? We don't think so. Over the long
term, buying high quality companies at discounted valuations has been one of the
most effective methods of generating superior returns.
4
<PAGE>
VALUE REPORT
Structurally Sound
Value investors love quality technology stocks when available at an attractive
discount. Structural Dynamics Research Corp. (SDRC)/1/, a mechanical computer
aided design (MCAD) software company, is a good example. Beginning in third
quarter 1999, software industry sales slumped as customers focused on making
sure their current programs were Y2K compliant rather than buying new software.
In addition, SDRC's costs increased substantially as the company expanded
marketing operations fivefold to introduce its new Internet enabled software.
Third quarter earnings disappointed and SDRC stock was halved. Yet, SDRC has no
debt and $4.06 per share in cash. It is now trading at 90% of revenues (compared
to an industry average of 3.3 times sales), at 7 times cash flow, and under 12
times our 2000 earnings estimates of $1.00 per share. As such, we think
Structural Dynamics stock is a structurally sound technology investment, and
apparently the insiders who were buying stock in the fourth quarter agree with
us. Finding this type of discounted stock, where the price is attractive
relative to the potential rewards, is what value investing is all about.
[GRAPH APPEARS HERE]
Growth of $10,000 since inception
- ---Value Plus Fund $19,720
- ---Russell 2000 Value $18,500
- ---Russell 2000 $21,555
<TABLE>
<CAPTION>
Value Plus Russell 2000 Russell 2000 Value
<S> <C> <C> <C>
10/26/93 10000 10000 10000
10522 10147 10138
10584 9877 9999
10153 9492 9820
10263 10151 10285
Dec-94 10001 9962 9981
10672 10421 10351
11794 11398 11259
12507 12524 12195
Dec-95 12441 12796 12551
13270 13448 13101
14374 14121 13637
14983 14169 13840
Dec-96 16646 14905 15233
17219 14135 15195
18408 16426 17488
21257 18870 19742
Dec-97 21740 18238 20074
22622 20073 21750
21597 19137 20965
18736 15282 17217
Dec-98 19396 17774 18779
17831 16812 16959
21165 19427 19766
18222 18199 18220
Dec-99 19720 21555 18500
</TABLE>
Average Annual Total
Returns as of 12/31/99/2/
<TABLE>
<S> <C> <C>
1.67% 14.54% 11.62%
1-year 5-year since inception
(10/26/93)
</TABLE>
Past performance is not predictive of future results. The Fund invests in small
companies, which involves investment risks in addition to those presented by
investments in larger companies, including the potential for greater price
volatility and lower market liquidity.
The Value Plus Fund has changed its primary benchmark index to the Russell 2000
Value Index from the Russell 2000 Index. The new index is believed to be more
representative of the Fund for comparative purposes because of the value
orientation of the index.
/1/ On 12/31/99, the Fund held 202,600 shares of Structural Dynamics Research
Corporation, valued at $2,583,150 and representing 2.97% of the Fund's net
assets. Holdings subject to change.
/2/ Includes reinvestment of all dividends and capital gains distributions.
5
<PAGE>
VALUE REPORT
[M. GERARD SANDEL
PHOTO APPEARS HERE]
M. Gerard Sandel, CFA
Lead Portfolio Manager
[WILLIAM J. NASGOVITZ
PHOTO APPEARS HERE]
William J. Nasgovitz
Portfolio Co-Manager
[ERIC J. MILLER
PHOTO APPEARS HERE]
Eric J. Miller, CMA
Portfolio Co-Manager
"....as a multi-cap fund, we are now free to invest in the very best stocks we
can find in the large, mid, and small-cap arenas."
Heartland Select Value Fund
(Formerly the Heartland Large Cap Value Fund)
1999 was a year of change for the Select Value Fund. M. Gerard Sandel took over
as lead portfolio manager in mid-September and has repositioned the portfolio
substantially. We feel this reorganization will better position the Fund to more
effectively compete against its benchmark indices. The Heartland Select Value
Fund returned 1.95% in 1999 compared to the S&P Barra Midcap Value Index's 2.33%
gain and the S&P 500 Index's 21.04% gain. In fourth quarter 1999, the Fund
returned 4.93% compared to the 7.28% and 14.88% returns of the respective
indices. For more information on the Fund, including top ten holdings, please
see the Fund Fact Sheet on page 12.
As a part of the repositioning of the Fund, we have added more large cap stocks,
altered industry group weightings to get more in line with our new market index
(S&P Barra Midcap Value Index), and increased the number of total holdings to
become more diversified. Also, as a multi-cap fund, we are now free to invest in
the very best stocks we can find in the large, mid, and small-cap arenas. We
believe this investment flexibility will improve returns in the years ahead and
provide investors with a solid core value portfolio holding.
For value investors across the market capitalization spectrum, 1999 was another
extremely challenging year. Fundamentals did not seem to matter. Most of our
portfolio companies met or exceeded our earnings and cash flow projections, but
continued to languish, as investors abandoned solid value opportunities to jump
on the growth stock bandwagon.
On a positive note, our repositioning showed some good signs in the 4th quarter.
For example, our hospital management company investments performed exceptionally
well as the federal government will seek to return an estimated $15 billion in
reimbursement allowances over the next five years. With American consumers
continuing to spend liberally, our consumer stock holdings also posted good
gains. Not surprisingly, the Fund's technology investments provided generous
returns throughout the year. We intend to grow our technology exposure once we
identify more undiscovered and/or out-of-favor tech stock bargains.
6
<PAGE>
VALUE REPORT
Portfolio disappointments for the quarter include energy stocks, which retreated
after very strong performance in the first three quarters, and financial stocks,
which continued to be hurt by rising interest rates.
If the Shoe Fits, Buy It
Wolverine World Wide/1/ is one of the largest shoe manufacturers in the world.
We think it is a high-quality, well-managed company with a strong balance sheet,
solid market shares in several of its shoe categories, and efficient global
distribution. This year Wolverine's stock fell from around $30 to about $10,
when earnings stumbled as a result of an inventory glut in its Hush Puppy line.
We think the company is back on firm footing, and we are forecasting 15% annual
earnings growth over the next several years. Now trading at around 9 times
earnings, we think Wolverine is an outstanding bargain. It is through exhaustive
research that we uncover companies like Wolverine, whose potential bounceback
becomes a great value opportunity for an astute investor.
[GRAPH APPEARS HERE]
Growth of $10,000 since inception
inception date 10/11/96
- --- Select Value $13,384
- --- S&P Barra Midcap Value $15,677/2/
- --- S&P 500 $22,240
<TABLE>
<CAPTION>
Large Cap Value S&P 500 S&P Barra Midcap Value
<S> <C> <C> <C>
10/11/96 10000 10000 10000
12/31/96 10500 10714 10892
3/31/97 10660 11002 10890
6/30/97 12140 12923 12165
9/30/97 13270 13891 13886
12/31/97 12905 14289 14367
3/31/98 14542 16283 16078
6/30/98 13650 16821 15411
9/30/98 11468 15148 13258
12/31/98 13129 18372 15321
3/31/99 12396 19289 14087
6/30/99 14184 20649 16191
9/30/99 12756 19359 14614
12/31/99 13384 22240 15677
</TABLE>
Average Annual Total
Returns as of 12/31/99/3/
<TABLE>
<S> <C> <C>
1.95% 8.43% 9.48%
1-year 3-year since inception
(10/11/96)
</TABLE>
Past performance is not predictive of future results. The Fund invests in small
companies, which involves investment risks in addition to those presented by
investments in larger companies, including the potential for greater price
volatility and lower market liquidity.
The Select Value Fund has changed its primary benchmark index to the S&P Barra
Midcap Value Index from the S&P 500 Stock Index in connection with a change in
its investment policies effective December 6, 1999. Prior to that date, the Fund
was named the Heartland Large Cap Value Fund and was required to invest
primarily in large-cap stocks. Effective December 6, 1999, the Fund invests in
companies of all sizes subject to a minimum market capitalization requirement of
more than $500 million. The new index is believed to be more representative of
the Fund for comparative purposes.
/1/ On 12/31/99, the Fund held 23,100 shares of Wolverine World Wide, Inc.,
valued at $252,656 and representing 3.55% of the Fund's net assets. Holdings
subject to change. /2/ For comparison purposes, the value of the S&P Barra
Midcap Value Index on September 30, 1996 is used as the beginning value on
October 11, 1996. /3/ Includes reinvestment of all dividends and capital
gains distributions. Without fee waivers and expense reimbursements in
effect, total returns would have been lower.
7
<PAGE>
VALUE REPORT
[PATRICK J. RETZER
PHOTO APPEARS HERE]
Patrick J. Retzer, CPA
Portfolio Manager
"...we believe that most, if not all, of the risk is now out of the bond market
and that today's higher nominal and real yields once again make government bonds
a good investment."
Heartland Government Fund
In 1999, strong economic growth, higher commodities prices (particularly crude
oil), rising wages, and fears of a weaker dollar combined to send bonds sharply
lower this year. As a result, 1999 goes on the record books as one of the worst
bear markets for bonds this century.
The Heartland Government Fund declined 3.90% in 1999 versus a 2.66% loss for the
Lipper General U.S. Government Fund category and 0.41% gain for the Lehman
Intermediate Term Treasury Index. In fourth quarter 1999, the Fund declined
1.92% compared to the indices' 0.61% and 0.11% losses, respectively. For more
information on the Fund, including top ten holdings, please see the Fund Fact
Sheet on page 13.
The year was a challenging one for the Fund. Expecting ongoing Asian economic
weakness to help slow the U.S. economy and restrain inflation, we started the
year with an average portfolio duration at the high end of our 4-6 year range.
With Asia recovering faster than anticipated, the U.S. economy accelerating, and
inflation trending higher, this strategy did not impact the portfolio as we
anticipated it would. We were also under-weighted in government agency mortgage
bonds (Fannie Mae's, Ginnie Mae's, and Freddie Mac's), which rallied strongly in
January/February.
In May, we reduced average portfolio duration to the low end of our range,
helping performance as interest rates continued to advance through the summer
and fall. Toward the end of the year, we moved to a neutral 5-year duration. In
May, we also began building a much larger position in mortgages, which continued
to outperform Treasuries for the balance of the year. At year-end, 80% of the
portfolio was in mortgages, which continue to offer a yield advantage to
Treasuries.
8
<PAGE>
VALUE REPORT
Is this the beginning of a new dawn for the bond market? The construction
sector, usually a reliable leading indicator of overall economic momentum, has
slowed in recent months, giving us some confidence that Gross Domestic Product
(GDP) growth will slow in the first half of year 2000. In addition, the Federal
Reserve appears committed to raising short-term rates until the economy and
inflation cool off. This may be viewed as good news for intermediate and long
bonds. Also, a burgeoning federal budget surplus is reducing government
borrowing needs and the supply of Treasury securities. When we see demand
improve, government bond prices should firm rather quickly.
Finally, bonds are not a popular investment these days. That alone may be a good
reason to buy them, as investing with the crowd is rarely a successful long term
investment strategy. The optimum strategy for any investor is to anticipate a
market recovery rather than jumping on board after the market turns. We believe
this is an appropriate time for investors to make sure their portfolios have an
adequate weighting in bonds.
[GRAPH APPEARS HERE]
Growth of $10,000 over last 10 years
- --- Government Fund $20,856
- --- Lehman Intermediate Treasury Index $19,843
- --- Lipper Gen. U.S Government
Fund Index $18,550
<TABLE>
<CAPTION>
U.S. Government Securities Fund Lehman Intermediate Treasury Index Lipper Gen. U.S. Government Fund Index
<S> <C> <C> <C>
Dec-89 10000 10000 10000
10998 10944 10802
Dec-91 12859 12488 12382
14158 13355 13138
Dec-93 16680 14455 14231
15072 14199 13556
Dec-95 17935 16245 15853
18293 16893 16195
Dec-97 20067 18192 17671
21702 19761 19058
Dec-99 20856 19843 18550
</TABLE>
Average Annual Total
Returns as of 12/31/99/1/
<TABLE>
<S> <C> <C> <C>
- -3.90% 6.71% 7.63% 7.52%
1-year 5-year 10-year since inception
(4/9/87)
</TABLE>
Past performance is not predictive of future results.
/1/Includes reinvestment of all dividends and capital gains distributions.
Without fee waivers and expense reimbursements in effect, total returns would
have been lower.
9
<PAGE>
VALUE REPORT
Heartland Value Fund
This Fund seeks capital appreciation through investing in small company stocks
selected on a value basis.
AVERAGE ANNUAL TOTAL RETURNS/1/
1-year 5-year 10-year 15-year
- -----------------------------------------------------------------
Value Fund 25.01% 16.45% 16.39% 15.67%
- -----------------------------------------------------------------
Russell 2000 Value -1.49% 13.14% 12.45% 12.88%
- -----------------------------------------------------------------
Russell 2000 21.26% 16.69% 13.40% 13.24%
- -----------------------------------------------------------------
FUND FACTS
<TABLE>
<S> <C>
Growth of $10,000 Fund vs. Russell 2000 Value Index/2/
since inception (12/28/84).......... $88,472/1/ Alpha................................. 1.71
Median market cap..................... $ 91 mil. Beta.................................. 1.05
Share price........................... $ 36.50 R-squared............................. 0.69
Net assets............................ $ 1.2 bil. Number of holdings........................ 255
</TABLE>
COMPARATIVE VALUATIONS
Value Fund Russell 2000 Value/4/ Russell 2000/4/
- --------------------------------------------------------------------------------
Price/Earnings Ratio ('00) 12.7x/3/ 13.7x 22.7x
- --------------------------------------------------------------------------------
Price/Book Value Ratio 1.93x 1.52x 2.72x
- --------------------------------------------------------------------------------
Price/Cash Flow Ratio 8.5x 9.4x 18.8x
- --------------------------------------------------------------------------------
TOP 10 HOLDINGS
<TABLE>
<S> <C>
InterDigital Communications Corp........... 12.55% MYR Group, Inc.................. 1.23%
ICN Pharmaceuticals, Inc................... 5.30 NABI............................ 1.22
Presidential Life Corporation.............. 1.54 ShopKo Stores, Inc.............. 1.15
Sybase, Inc................................ 1.42 Associated Banc-Corporation..... 1.15
Executone Information Systems, Inc......... 1.36 Indus International, Inc........ 1.02
</TABLE>
All statistics are as of December 31, 1999.
Past performance in no guarantee of future results.
The Fund invests in small companies, which involve investment risks in addition
to those presented by investments in larger companies, including the potential
for greater price volatility and lower market liquidity.
/1/Includes reinvestment of all dividends and capital gains distributions.
/2/Based on monthly data for the 3-year period ending 12/31/99. Source:
Heartland Advisors, Inc., with data on the relevant index from Russell
Analytics.
/3/ Excluding negative earnings.
/4/ Sources: Russell Analytics, S&P Barra, and Heartland Advisors, Inc.
10
<PAGE>
VALUE REPORT
Heartland Value Plus Fund
An equity-income investment, this Fund seeks both capital appreciation and
current income, by investing primarily in income-producing equity securities of
smaller companies.
DECEMBER YIELD
- ------------------------------------------------------------------------------
Value Plus Fund.............................................. 2.49%*
- ------------------------------------------------------------------------------
*SEC yield annualized for the 30 days ended 12/31/99.
AVERAGE ANNUAL TOTAL RETURNS/1/ Since inception
1-year 5-year (10/26/93)
- ------------------------------------------------------------------------------
Value Plus Fund 1.67% 14.54% 11.62%
- ------------------------------------------------------------------------------
Russell 2000 Value -1.49% 13.14% 10.46%
- ------------------------------------------------------------------------------
Russell 2000 21.26% 16.69% 13.23%
- ------------------------------------------------------------------------------
FUND FACTS
<TABLE>
<S> <C>
Growth of $10,000 Fund vs. Russell 2000 Value Index/2/
since inception (10/26/93)............ $19,720/1/ Alpha............................ 0.41
Median market cap......................... $ 122 mil. Beta............................. 0.76
Share price............................... $ 13.57 R-squared........................ 0.69
Net assets................................ $ 87.1 mil. Number of holdings................... 33
</TABLE>
COMPARATIVE VALUATIONS
Value Plus Fund Russell 2000 Value/4/ Russell 2000/4/
- --------------------------------------------------------------------------------
Price/Earnings Ratio ('00) 10.5x/3/ 13.7x 30.8x
- --------------------------------------------------------------------------------
Price/Book Value Ratio 1.60x 1.52x 2.72x
- --------------------------------------------------------------------------------
Price/Cash Flow Ratio 8.50x 9.4x 18.8x
- --------------------------------------------------------------------------------
TOP 10 HOLDINGS
<TABLE>
<S> <C>
London Pacific Group Ltd. (ADR)................ 10.05% Southwestern Energy Company........................... 4.29%
ICN Pharmaceuticals, Inc....................... 6.54 Bolder Tech Corp. 9.00% Ser. AConv. Pfd Stock (144A).. 4.17
Lufkin Industries, Inc......................... 6.03 Insteel Industries, Inc............................... 4.16
Quantum Corp - DLT & Storage Systems Group..... 5.21 Sholodge, Inc. 7.50% 05/01/2004....................... 3.98
Flexsteel Industries, Inc...................... 4.61 K2, Inc................................................ 3.94
</TABLE>
All statistics are as of December 31, 1999.
Past performance in no guarantee of future results.
The Fund invests in small companies, which involve investment risks in addition
to those presented by investments in larger companies, including the potential
for greater price volatility and lower market liquidity
/1/Includes reinvestment of all dividends and capital gains distributions.
/2/Based on monthly data for the 3-year period ending 12/31/99. Source:
Heartland Advisors, Inc., with data on the relevant index from Russell
Analytics. /3/ Excluding negative earnings. /4/ Sources: Russell Analytics, S&P
Barra, and Heartland Advisors, Inc.
11
<PAGE>
VALUE REPORT
Heartland Select Value Fund
This fund seeks long-term capital appreciation by investing in equity securities
whose current market prices in Heartland Advisors' judgement are at significant
discounts to their intrinsic value. Using Heartland's value-investing criteria,
normally the Fund invests in common stocks of companies with market
capitalizations in excess of $500 million, but it may invest in companies of all
sizes.
AVERAGE ANNUAL TOTAL RETURNS/1/
Since inception
1-year 3-year (10/11/96)
- ------------------------------------------------------------------------------
Select Value Fund 1.95% 8.43% 9.48%
- ------------------------------------------------------------------------------
S&P Barra Midcap Value 2.33% 12.91% 14.84%
- ------------------------------------------------------------------------------
S&P 500 21.04% 27.55% 28.18%
- ------------------------------------------------------------------------------
FUND FACTS
<TABLE>
<S> <C>
Growth of $10,000 Market cap segmentation
since inception (10/11/96)....... $13,384/1/ Small (<$2.2 billion)................ 49.60%
Median market cap.................... $ 2.0 bil. Mid ($2.2 billion - $9 billion)...... 24.25%
Share price.......................... $ 11.73 Large (> $9 billion)................. 26.15%
Net assets........................... $ 7.1 mil. Number of holdings....................... 35
</TABLE>
COMPARATIVE VALUATIONS
S&P Barra
Select Value Fund Midcap Value/3/ S&P 500/3/
- -------------------------------------------------------------------------------
Price/Earnings Ratio ('99) 13.8/2/ 14.8x/2/ 31.6x
- -------------------------------------------------------------------------------
Price/Book Value Ratio 2.0x 1.8x 5.5x
- -------------------------------------------------------------------------------
Price/Cash Flow Ratio 8.6x 8.0x 19.1x
- -------------------------------------------------------------------------------
TOP 10 HOLDINGS
<TABLE>
<S> <C>
Jefferson Smurfit Group PLC (ADR)..... 5.46% Steelcase, Inc. (Class A)............. 3.46%
Liz Claiborne, Inc.................... 4.49 Union Pacific Corporation............. 3.43
Autodesk, Inc......................... 4.13 Tenet Healthcare Corporation.......... 3.40
Washington Mutual, Inc................ 3.91 Duke Energy Corporation............... 3.38
Wolverine World Wide, Inc............. 3.55 Cooper Tire & Rubber Company.......... 3.28
</TABLE>
All statistics are as of December 31, 1999.
Past performance in no guarantee of future results.
The Fund invests in small companies, which involve investment risks in addition
to those presented by investments in larger companies, including the potential
for greater price volatility and lower market liquidity.
/1/ Includes reinvestment of all dividends and capital gains distributions.
Without fee waivers and expense reimbursement in effect during the period, total
return for the Fund would have been lower. /2/ Excluding negative earnings.
/3/Sources: Russell Analytics, S&P Barra, and Heartland Advisors, Inc.
12
<PAGE>
VALUE REPORT
Heartland Government Fund
This Fund seeks a high level of current income, liquidity, and safety of
principal. It invests at least 80% of its total assets in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, or by
other U.S. Government sponsored entities and repurchase agreements for such
securities1. Although there are no duration restrictions for the Fund or its
portfolio securities, normally, the Fund seeks to maintain an average portfolio
duration of three to six years.
DECEMBER YIELD............................................. 6.33%/2/
SEC yield annualized for the 30 days ended 12/31/99.
AVERAGE ANNUAL TOTAL RETURNS/3/ Since
inception
1-year 5-year 10-year (4/9/87)
- -------------------------------------------------------------------------------
Heartland
Government Fund -3.90% 6.71% 7.63% 7.52%
- -------------------------------------------------------------------------------
Lehman Intermediate
Treasury Index 0.41% 6.92% 7.09% 7.29%
- -------------------------------------------------------------------------------
Lipper General
U.S Gov't Fund Index -2.66% 6.47% 6.37% 6.52%
- -------------------------------------------------------------------------------
FUND FACTS
<TABLE>
<S> <C>
Growth of $10,000 Avg. weighted duration.................... 6.11 yrs.
since inception (4/9/87).. $25,1783 Avg. weighted credit quality.............. AAA
Share price................... $ 9.11 Dividends....... Declared daily, distributed monthly
Net assets..................... $ 42.8 mil. Sales commission.......................... None
</TABLE>
TOP 5 HOLDINGS
FHLMC CMO-SEQ 1978 BC 6.5% 5/15/2025............................... 11.33%
GNMA GNR 1999-16D 6.50% 05/16/2013................................. 6.53
FNMA 6.19% 2/19/2009 (Callable 9/2/2002)........................... 6.43
FNMA CMO-PAC 1993 - 38L 5.0% 8/25/2022............................. 6.39
GNMA GNR 1999-15G 6.50% 05/16/2029................................. 5.85
Past performance is no guarantee of future results.
All statistics are as of December 31, 1999.
/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 5.85% and
total return would have been lower. /3/Includes reinvestment of all dividends
and capital gains distributions.
13
<PAGE>
VALUE REPORT
Definitions
PLEASE NOTE...
Defined below are the Alpha, Beta and R-Squared measurements presented for our
equity funds. These definitions were provided by Russell Analytics, a division
of the Frank Russell Company, highly regarded specialists in investment
information and statistics. When calculating these measurements for each
Heartland equity fund, we have substituted the Fund's benchmark index for a
"market return" as indicated in the presentation for each fund.
Alpha. A measure of a portfolio's return in excess of the market return, both
adjusted for risk. It is a measure of the manager's contribution to performance
due to security selection. A positive Alpha indicates that the portfolio
outperformed the market on a risk-adjusted basis, and a negative Alpha indicates
the portfolio did worse than the market.
Beta. A measure of the sensitivity of a portfolio's rates of return against
those of the market. A Beta greater than 1.00 indicates volatility greater than
that of the market.
R-Squared. A measure that indicates the extent to which fluctuations in
portfolio returns are correlated with those of the general market. An R-Squared
of 0.75 indicates that 75% of the fluctuation in a portfolio's return is
explained by the fluctuation of the market.
Lehman Intermediate Term 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.
Lipper General U.S. Government Fund Index is an equally weighted index, adjusted
for capital gains and income dividends, of the largest qualifying funds in the
investment objective, consisting of 30 funds. Qualifying funds generally consist
of those that invest at least 65% if their assets in U.S. government agency
issues.
Lipper Small-Cap Value Fund Category is an equally-weighted performance index,
adjusted for capital gains distributions and income dividends of the largest
qualifying funds in the investment objective, consisting of 30 funds. Qualifying
funds generally consist of those that invest at least 75% of their equity assets
in
14
<PAGE>
VALUE REPORT
companies with market capitalizations below 250% of the dollar weighted median
of the S&P Small Cap 600 Index and that seek long-term capital growth by
investing in companies that are considered to be undervalued.
Morningstar Small Value Category consists of funds that have a relative P/E
Style Box Score + relative P/B Style Box Score of less than 1.75. Median market
Cap is less than the top 20% of the 5,000 largest domestic stocks in
Morningstar's equity database.
Russell 2000 Index is an unmanaged index of stocks considered representative of
the small cap market.
Russell 2000 Value Index measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
Russell 2000 Growth Index measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth values.
S&P 500 Index is an unmanaged index of 500 stocks representing major U.S.
industries.
S&P Barra Midcap Value Index is an unmanaged index of companies within the S&P
Midcap 400 Index that have the lowest price-to-book ratios within the lower 50
percentile of market capitalizations
15
<PAGE>
VALUE REPORT
Value Investing the Heartland Way
Heartland Advisors' Equity Ten-Point Value Investment Grid(TM) consists of the
following criteria for selecting equity securities. We apply these ten
evaluation criteria to every company we are seriously considering for purchase
or sale in our equity funds.
1 Catalyst For Recognition. To maximize total return, we not only look for
undervalued securities, but try to anticipate events which will close the
gap between a stock's price and its intrinsic value. Such a catalyst could
be a large repurchase plan, new products, new technology, margin expansion,
or merger activity within the company's industry.
2 Low Price/Earnings Multiple We look for a stock's price/earnings ratio to
be less than the market's average. If the stock is then "discovered" by
Wall Street, the low P/E provides opportunity for a sharp price increase.
also, if the market drops, low P/E stocks have less downside risk.
3 High Cash Flow A strong cash flow allows a company to generate greater
wealth over the long term. A high discretionary cash flow, after capital
expenditures and dividends, is especially attractive.
4 Discount To Book Value The stock should be selling below its tangible book
value, which is equal to total assets minus all liabilities and goodwill.
5 Financial Soundness Long-term debt should generally be less than 25% of
total capitalization. During difficult periods, a company's cash flow
should be directed to investments in operations rather than interest
expense. A highly leveraged balance sheet can become a hindrance to
performance and endanger the company's very existence.
6 Positive Earnings Dynamics We favor companies with improving earnings or
upwardly revised estimates.
7 Business Strategy We critically evaluate management's strategy for growing
the business. How this strategy differs from their past efforts or compares
to that of their competitors. Why does management believe their strategy
will be successful, and most importantly, why do we?
8 Capable Management and Ownership Capable management will demonstrate an
ability to effectively implement business strategies. Additionally, we
believe meaningful and increasing ownership by officers and directors
validates the business plan and demonstrates their personal commitment to
achieving the designated business goals and aligns their long term interest
with the shareholders' interest.
9 Value Of The Company From the universe of stocks, why is this one a
compelling value? Utilizing traditional valuation parameters such as
comparative Price/EBITDA, Enterprise Value/EBITDA, Price/Sales and Return
on Equity determine the appreciation potential of the security.
10 Positive Technical Analysis Technical analysis should indicate that a stock
is presently attractive for investing -- without undue speculation. We
typically seek "bases" in a stock's price pattern, with a belief that
speculators will not own the stock or be interested in it at that moment.
16
<PAGE>
Heartland Funds at a Glance
Heartland Advisors offers several ways to diversify your investments. Our
focused value philosophy will complement holdings that are heavily growth
oriented, and our funds offer solid asset allocation choices for both the fixed
income and equity portions of your portfolio.
Our value style is aimed at rewarding patient, long-term investors by
discovering under-researched, under-followed and under-valued companies.
Fundamental to this approach is exhaustive proprietary analysis that seeks to
identify catalysts which could return these companies to much higher valuations.
In general, with mutual funds, as with other investments, the higher the risk,
the greater the potential return over time. Each investor should choose an
investment strategy that matches his or her particular investment goals. 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.
The Firstar Money Market Fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although the Fund
seeks to preserve the value of your investment at $1.00 per share, it is
possible to lose money by investing in the Fund.
<PAGE>
The Heartland Family of Funds
Value Fund
Value Plus Fund
Select Value Fund
Government Fund
Taxable Short Duration Municipal Fund
Short Duration High-Yield Municipal Fund
High-Yield Municipal Bond Fund
Wisconsin Tax Free Fund
(available to Wisconsin residents only)
Firstar Money Market Fund
[LOGO APPEARS HERE]
1.800.HEARTLN (1.800.432.7856)
www.heartlandfunds.com
Financial Advisor Services: 1.800.442.6391
Heartland Advisors, Inc.
789 N. Water St., Milwaukee, WI 53202
Distributor, Member SIPC.
The performance data quoted represents past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
These are not recommendations to buy or sell the securities discussed, but
rather illustrations of our value investment strategy. Statements regarding
particular securities represent the portfolio manager's views when made and are
subject to change at any time based on market and other considerations.
Income from the Wisconsin Tax Free Fund may be subject to alternative minimum
tax and income from the Short Duration High-Yield Municipal Fund and the High-
Yield Municipal Bond Fund may be subject to state, local and alternative minimum
tax.
This material may only be used when preceded or accompanied by a prospectus for
the Fund(s) listed on the front cover. If you would like more complete
information on any other Fund, including charges and expenses, please call for a
prospectus or visit Heartland's website. Read it carefully before you invest.
[RECYCLED PAPER LOGO APPEARS HERE]
<PAGE>
SCHEDULES OF INVESTMENTS
AND FINANCIAL STATEMENTS
Table of Contents
--------------------------
2 ............................................................Select Value Fund
4 ..............................................................Value Plus Fund
6 ...................................................................Value Fund
12 ..............................................................Government Fund
14 .........................................Statements of Assets and Liabilities
16 .....................................................Statements of Operations
18 ..........................................Statements of Changes in Net Assets
22 .........................................................Financial Highlights
26 ................................................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 Select Value Fund
(formerly Heartland Large Cap Value Fund), Heartland Value Plus Fund, Heartland
Value Fund and Heartland Government Fund (formerly Heartland U.S. Government
Securities Fund) (four of the eight portfolios of Heartland Group, Inc., and
hereafter referred to as the "Funds") at December 31, 1999, the results of each
of their operations, the changes in each of their net assets and the financial
highlights for each of the periods indicated, in conformity with accounting
principles generally accepted in the United States. 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 audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, 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 audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
Milwaukee, Wisconsin PricewaterhouseCoopers LLP
February 7, 2000
1
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND SELECT VALUE FUND
SCHEDULE OF INVESTMENTS . December 31, 1999
- ------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS - 98.2% Shares Industry Value Net Assets
- ------------------------------------------------------------------------------------------------
Below Average Price/Earnings Ratio
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allstate Corporation 8,500 Insurance $ 204,000 2.9%
The BF Goodrich Company 7,700 Producer Goods 211,750 3.0
Cooper Tire & Rubber Company 15,000 Tire & Rubber Goods 233,438 3.3
Host Marriott Corporation (REIT) 20,300 Real Property 167,475 2.3
Household International, Inc. 3,900 Miscellaneous Financial 145,275 2.0
IMC Global, Inc. 7,600 Food & Agriculture 124,450 1.7
LaFarge Corporation 7,700 Construction 212,713 3.0
Liz Claiborne, Inc. 8,500 Apparel 319,813 4.5
Perrigo Company (a) 20,500 Drugs & Medicine 164,000 2.3
Saucony, Inc. (Class B) (a) 14,000 Apparel 194,250 2.7
Steelcase, Inc. (Class A) 20,500 Producer Goods 246,000 3.5
Toys "R" Us, Inc. (a) 12,800 Retail 183,200 2.6
Trinity Industries, Inc. 5,000 Producer Goods 142,188 2.0
Washington Mutual, Inc. 10,700 Savings & Loans 278,200 3.9
------------ --------
$2,826,752 39.7%
- -----------------------------------------------------------------------------------------------
Low Price to Book Value
- -----------------------------------------------------------------------------------------------
American Financial Group, Inc. 2,500 Insurance $ 65,938 0.9%
CNH Global N.V. 7,700 Producer Goods 102,506 1.4
Jefferson Smurfit Group PLC (ADR) 13,400 Containers 388,600 5.5
Manor Care, Inc. (a) 7,500 Drugs & Medicine 120,000 1.7
Officemax, Inc. (a) 25,100 Retail 138,050 1.9
Pier 1 Imports, Inc. 32,800 Furniture 209,100 2.9
Stewart & Stevenson Services, Inc. 18,600 Oil Services 220,294 3.1
Union Pacific Corporation 5,600 Railroads & Shipping 244,300 3.4
Wolverine World Wide, Inc. 23,100 Apparel 252,656 3.7
------------ --------
$1,741,444 24.5%
- -----------------------------------------------------------------------------------------------
Below Average Price/Cash Flow Ratio
- -----------------------------------------------------------------------------------------------
Duke Energy Corporation 4,800 Energy & Utilities $ 240,600 3.4%
Pittston Brinks Group, Inc. 8,600 Business Services 189,200 2.7
Quantum Corporation (a) 11,800 Business Machines 178,475 2.5
Ryder System, Inc. 9,000 Trucking 219,938 3.1
Southern Company 5,900 Energy & Utilities 138,650 1.9
Steris Corporation (a) 16,600 Medical Equipment 171,188 2.4
TECO Energy, Inc. 9,200 Energy & Utilities 170,775 2.4
Tenet Healthcare Corporation (a) 10,300 Drugs & Medicine 242,050 3.4
------------ --------
$1,550,876 21.8%
- -----------------------------------------------------------------------------------------------
Special Situations
- -----------------------------------------------------------------------------------------------
Autodesk, Inc. 8,700 Software $ 293,625 4.1%
Boston Scientific Corporation (a) 8,750 Medical Equipment 191,406 2.7
Columbia/HCA Healthcare Corporation 6,700 Drugs & Medicine 196,391 2.7
Koninklijke (Royal) Philips Electronics NV 1,400 Electronics 189,000 2.7
(N.Y. Registered)
------------ --------
$ 870,422 12.2%
------------
TOTAL COMMON STOCKS (Cost $6,798,432) $6,989,494
</TABLE>
2
<PAGE>
HEARTLAND SELECT VALUE FUND
SCHEDULE OF INVESTMENTS [cont'd] . December 31, 1999
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Par Percent of
SHORT-TERM INVESTMENTS - 6.5% Amount Value Net Assets
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
VARIABLE RATE DEMAND NOTES (+) - 6.5%
Firstar Bank NA 6.16% $340,500 $340,500 4.8%
General Mills, Inc. 6.10% 70,000 70,000 1.0
Pitney Bowes Credit Corporation 6.10% 30,000 30,000 0.4
Warner-Lambert Company 6.08% 19,000 19,000 0.3
---------
TOTAL SHORT-TERM INVESTMENTS (Cost $459,500) $459,500
TOTAL INVESTMENTS (Cost $7,257,932)............................ $7,448,994 104.7%
Liabilities, less cash and receivables......................... (330,953) (4.7)
---------- -----
TOTAL NET ASSETS............................................... $7,118,041 100.0%
========== =====
</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, 1999.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
3
<PAGE>
HEARTLAND VALUE PLUS FUND
SCHEDULE OF INVESTMENTS . December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of
COMMON STOCKS - 89.4% Shares Industry Value Net Assets
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Below Average Price/Earnings Ratio
- ----------------------------------------------------------------------------------------------------------------
Bando McGlocklin Capital Corporation (REIT) 81,950 Real Property $ 711,941 0.8%
Capitol Transamerica Corporation 101,000 Insurance 1,016,312 1.2
Decorator Industries, Inc. (b) 349,600 Miscellaneous & Conglomerates 1,857,250 2.1
Hanover Foods Corporation (Class A) (b) 50,500 Food & Agriculture 3,080,500 3.5
ICN Pharmaceuticals, Inc. 225,000 Drugs & Medicine 5,695,313 6.5
Insteel Industries, Inc. (b) 400,000 Producer Goods 3,625,000 4.2
K2, Inc. 450,000 Non-Durables & Entertainment 3,431,250 3.9
London Pacific Group Ltd. (ADR) 243,100 Insurance 8,751,600 10.1
Siam Food Products Public Company Ltd. (c) 1,326,200 Food & Agriculture 2,332,230 2.7
Stone Webster, Inc. 150,000 Business Services 2,521,875 2.9
WPR Corporation (a)(b) 374,000 Drugs & Medicine 748,000 0.9
----------- ----
$33,771,271 38.8%
- ----------------------------------------------------------------------------------------------------------------
Low Price to Book Value
- ----------------------------------------------------------------------------------------------------------------
Blimpie International, Inc. 330,000 Non-Durables & Entertainment $ 618,750 0.7%
EMC Insurance Group, Inc. 114,400 Insurance 1,043,900 1.2
Flexsteel Industries, Inc. 300,000 Consumer Durables 4,012,500 4.6
International Aluminum Corporation 123,200 Producer Goods 2,895,200 3.3
Lufkin Industries, Inc. (b) 350,000 Producer Goods 5,250,000 6.0
Northland Cranberries, Inc. (Class A) 325,000 Food & Agriculture 1,950,000 2.3
Southwestern Energy Company 569,200 Energy & Raw Materials 3,735,375 4.3
St. Laurent Paperboard, Inc. 100,000 Paper & Forest Products 1,323,206 1.5
Tab Products Company (b) 500,000 Producer Goods 3,250,000 3.7
----------- ----
$24,078,931 27.6%
- ----------------------------------------------------------------------------------------------------------------
Below Average Price/Cash Flow Ratio
- ----------------------------------------------------------------------------------------------------------------
Amcol International Corporation 148,100 Energy & Raw Materials $ 2,388,113 2.7%
Arch Chemicals, Inc. 100,000 Chemicals 2,093,750 2.4
Bolder Technologies Corporation (a) 14,832 Electronics 189,108 0.2
Communications Systems, Inc. 110,000 Telecommunications 1,430,000 1.7
Kennedy-Wilson, Inc. (a) 219,100 Miscellaneous Financial 1,752,800 2.0
Oil-Dri Corporation of America (b) 100,000 Non-Durables & Entertainment 1,437,500 1.7
Structural Dynamics Research Corporation (a) 202,600 Software 2,583,150 3.0
----------- ----
$11,874,421 13.7%
- ----------------------------------------------------------------------------------------------------------------
Special Situations
- ----------------------------------------------------------------------------------------------------------------
Aceto Corporation 150,000 Chemicals $ 1,650,000 1.9%
Ansys, Inc. (a) 175,400 Software 1,929,400 2.2
Quantum Corporation - DLT &
Storage Systems Group (a) 300,000 Business Machines 4,537,500 5.2
----------- ----
$ 8,116,900 9.3%
-----------
TOTAL COMMON STOCKS (Cost $74,398,675) $77,841,523
</TABLE>
4
<PAGE>
HEARTLAND VALUE PLUS FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of
PREFERRED STOCKS - 4.2% Shares Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bolder Technologies Corporation
9.00% Ser. A Conv. (144A) (d) 85,000 Electronics $ 3,633,750 4.2%
TOTAL PREFERRED STOCKS (Cost $4,165,000)
- ------------------------------------------------------------------------------------------------------
Par Percent of
CONVERTIBLE BONDS - 5.1% Amount Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------
Sholodge, Inc. 7.50% 05/01/2004 $5,550,000 Travel & Recreation $ 3,461,812 4.0
Source Capital Corporation 7.50%
03/01/2008 (d) 1,400,000 Banks 1,004,994 1.1
------------
TOTAL CONVERTIBLE BONDS (Cost $4,960,618) $ 4,466,806
TOTAL INVESTMENTS (Cost $83,524,293)..........................................$ 85,942,079 98.7%
Cash and receivables, less liabilities........................................ 1,122,657 1.3
------------ -----
TOTAL NET ASSETS..............................................................$ 87,064,736 100.0%
============ =====
</TABLE>
(a) Non-income producing security.
(b) Affiliated company. See Note 9 in Notes to Financial Statements.
(c) Foreign-denominated security.
(d) Restricted security. See Note 2(h) in Notes to Financial Statements.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
5
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS . December 31, 1999
- -------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS -- 101.0% Shares Industry Value Net Assets
- -------------------------------------------------------------------------------------------------------------
Below Average Price/Earnings Ratio
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alabama National Bancorporation 110,000 Banks $ 2,076,250 0.2%
Ambassadors International, Inc. (a) 278,000 Business Services 3,040,625 0.2
American Physicians Service Group, Inc. (a)(b) 187,200 Miscellaneous Financial 690,300 0.1
Associated Banc-Corporation 400,000 Banks 13,700,000 1.2
Astec Industries, Inc. (a) 5,000 Construction 94,062 0.0
Atlantic American Corporation (a) 287,500 Insurance 664,843 0.1
AVTEAM, Inc. (Class A) (a) 238,200 Air Transport 1,280,325 0.1
BTG, Inc. (a)(b) 800,000 Business Services 6,500,000 0.5
Badger Meter, Inc. (b) 200,000 Electronics 6,025,000 0.5
Business Resource Group (a)(b) 500,000 Business Services 2,656,250 0.2
Cameron Ashley Building Products, Inc. (a)(b) 500,000 Construction 5,000,000 0.4
Capital Corp. of the West (a) 105,000 Banks 1,023,750 0.1
Catalina Lighting, Inc. (a)(b) 710,000 Retail 3,416,875 0.3
Cellstar Corporation (a) 275,900 Electronics 2,724,512 0.2
CHC Helicopter Corporation (Class A) (a)(b)(c) 562,000 International Oil 1,467,968 0.1
The Cherry Corporation (Class A) (a)(b) 944,800 Consumer Durables 10,038,500 0.8
Children's Comprehensive Services, Inc. (a)(b) 460,000 Business Services 2,587,500 0.2
Commercial Federal Corporation 450,000 Banks 8,015,625 0.6
Donnelly Corporation (b) 400,000 Motor Vehicles 5,600,000 0.5
Duckwall-ALCO Stores, Inc. (a)(b) 370,000 Retail 2,821,250 0.2
Engle Homes, Inc. 549,800 Construction 6,597,600 0.6
Esterline Technologies Corporation (a) 400,000 Electronics 4,625,000 0.4
EZcorp, Inc. (Class A) (b) 718,100 Miscellaneous Financial 2,917,281 0.2
Fahnestock Viner Holdings, Inc. 200,000 Miscellaneous Financial 2,987,500 0.3
FiberMark, Inc. (a)(b) 391,600 Paper & Forest Products 4,601,300 0.4
Financial Industries Corporation (a)(b) 300,000 Insurance 3,000,000 0.3
Friedman Industries, Inc. 231,525 Steel 781,396 0.1
Gehl Company (a) 270,000 Producer Goods 4,860,000 0.4
Guangshen Railway Company Ltd. (ADR) 500,000 Railroads & Shipping 2,781,250 0.2
Gundle/SLT Environmental, Inc. (a)(b) 662,800 Chemicals 2,319,800 0.2
Hallmark Capital Corporation (a) 110,000 Banks 990,000 0.1
Hallmark Financial Services, Inc. (a)(b) 1,060,000 Insurance 397,500 0.0
Hallwood Group, Inc. (a) 89,250 Domestic Oil 1,087,734 0.1
Hampshire Group Ltd. (a)(b) 252,800 Apparel 2,243,600 0.2
Health Power, Inc. (a)(b) 340,000 Drugs & Medicine 573,750 0.1
Home Federal Bancorp (b) 268,250 Banks 6,035,625 0.5
Home Products International, Inc. (a) 278,400 Retail 2,888,400 0.2
ICN Pharmaceuticals, Inc. (d) 2,500,000 Drugs & Medicine 63,281,250 5.3
In Home Health, Inc. (a)(b) 470,101 Drugs & Medicine 998,964 0.1
Intercontinental Life Corporation (a)(b) 451,600 Insurance 4,177,300 0.4
Intermet Corporation 700,000 Non-Ferrous Metals 8,137,500 0.7
International Aircraft Investors (a)(b) 430,000 Miscellaneous Financial 2,687,500 0.2
International Airline Support Group, Inc. (a)(b) 250,000 Air Transport 906,250 0.1
Invivo Corporation (a) 130,300 Medical Equipment 1,579,887 0.1
Jason, Inc. (a) 400,000 Producer Goods 2,900,000 0.2
Kaye Group, Inc. 363,600 Insurance 3,045,150 0.3
K-Tron International, Inc. (a)(b) 200,000 Electronics 2,700,000 0.2
Lindal Cedar Homes, Inc. (a)(b) 345,400 Construction 777,150 0.1
LSI Industries, Inc. 220,000 Construction 4,757,500 0.4
M/I Schottenstein Homes, Inc. 300,000 Construction 4,668,750 0.4
Marten Transport Ltd. (a)(b) 333,300 Trucking & Freight 4,291,237 0.4
Massbank Corporation 133,333 Banks 3,933,323 0.3
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1999
- -----------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS -- 101.0% [cont'd] Shares Industry Value Net Assets
- -----------------------------------------------------------------------------------------------------------------
Below Average Price/Earnings Ratio [cont'd]
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MDC Holdings, Inc. 248,700 Construction $ 3,901,481 0.3%
Meadow Valley Corporation (a)(b) 250,000 Construction 906,250 0.1
MicroTouch Systems, Inc. (a) 225,000 Business Machines 2,840,625 0.2
MMI Companies, Inc. (b) 1,400,000 Insurance 12,075,000 1.0
Motor Club of America (a)(b) 168,500 Insurance 1,390,125 0.1
MYR Group, Inc. (b) 500,000 Construction 14,687,500 1.2
Navigant Consulting, Inc. (a) 500,000 Business Services 5,437,500 0.5
Norstan, Inc. (a) 500,000 Telephone 3,187,500 0.3
Northwest Pipe Company (a) 165,500 Steel 2,317,000 0.2
Novamerican Steel, Inc. (a) 244,500 Steel 2,139,375 0.2
Nu Horizons Electronics Corporation (b) 650,000 Electronics 8,612,500 0.7
O.I. Corporation, Inc. (a)(b) 326,500 Optical & Photo Equipment 1,285,593 0.1
Patrick Industries, Inc. (b) 317,000 Construction 2,932,250 0.3
PBOC Holdings, Inc. (a) 550,000 Banks 5,190,625 0.4
Perrigo Company (a) 750,000 Drugs & Medicine 6,000,000 0.5
PremiumWear, Inc. (a)(b) 209,000 Apparel 1,149,500 0.1
Professionals Group, Inc. (a) 266,200 Insurance 6,239,062 0.5
RainForest Cafe, Inc. (a) 1,100,000 Non-Durables & Entertainment 4,365,625 0.4
Raytel Medical Corporation (a)(b) 880,000 Drugs & Medicine 2,695,000 0.2
RCM Technologies, Inc. 200,200 Business Services 3,453,450 0.3
RemedyTemp, Inc. (Class A) (a) 52,200 Business Services 991,800 0.1
RenaissanceRe Holdings Ltd. 250,000 Insurance 10,218,750 0.8
Republic Bancorp, Inc. 730,180 Banks 8,864,841 0.7
Rexall Sundown, Inc. (a) 450,000 Drugs & Medicine 4,640,625 0.4
Riviera Tool Company (a)(b) 336,262 Producer Goods 1,303,015 0.1
The Rottlund Company, Inc. (a)(b) 556,000 Construction 1,459,500 0.1
Rush Enterprises, Inc. (a) 225,000 Motor Vehicles 3,262,500 0.3
Ryan's Family Steak Houses, Inc. (a) 485,000 Non-Durables & Entertainment 4,122,500 0.3
Saucony, Inc. (Class B) (a)(b) 400,000 Apparel 5,550,000 0.5
ShopKo Stores, Inc. (a)(d) 600,000 Retail 13,800,000 1.2
Sterling Financial Corporation (a) 275,000 Banks 3,162,500 0.3
Summit Bank Corporation 35,100 Banks 412,425 0.0
Teltrend, Inc. (a)(b) 323,900 Telephone 9,797,975 0.8
The Topps Company, Inc. (a) 500,000 Non-Durables & Entertainment 5,187,500 0.4
U.S. Home Corporation 400,000 Construction 10,225,000 0.8
Washington Homes, Inc. (a) 180,300 Construction 901,500 0.1
Weyco Group, Inc. 177,000 Apparel 4,469,250 0.4
Wilsons The Leather Experts, Inc. (a) 342,500 Retail 6,314,843 0.5
WRP Corporation (a) 1,000 Drugs & Medicine 2,000 0.0
Zindart Ltd. (ADR) (a)(b) 450,000 Miscellaneous & Conglomerate 3,093,750 0.3
----------- ------
$426,539,367 35.7%
- ------------------------------------------------------------------------------------------- --------------------
Low Price to Book Value
- ------------------------------------------------------------------------------------------- --------------------
3Dfx Interactive, Inc. (a) 400,000 Electronics $ 3,925,000 0.3%
Allied Healthcare Products, Inc. (a)(b) 775,000 Drugs & Medicine 1,840,625 0.2
Amwest Insurance Group, Inc. (b) 242,000 Insurance 1,754,500 0.2
Asia Pacific Wire & Cable Corporation Ltd. (a)(b) 706,000 Telephone 2,868,125 0.2
Bay Bancshares, Inc. (b) 96,500 Banks 1,724,937 0.1
Benton Oil & Gas Company (a) 969,400 Domestic Oil 1,878,212 0.2
Buckhead America Corporation (a)(b) 184,600 Travel & Recreation 1,026,837 0.1
Bunka Shutter Company Ltd. (c) 1,500,000 Construction 3,220,454 0.3
Chofu Seisakusho Company Ltd. (c) 300,000 Consumer Durables 4,625,743 0.4
Chubu Suisan Company Ltd. (c) 443,000 Miscellaneous & Conglomerates 1,469,893 0.1
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1999
- -------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS -- 101.0% [cont'd] Shares Industry Value Net Assets
- ------------------------------------------------------------------------------------------------------------------
Low Price to Book Value [cont'd]
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ciprico, Inc. (a)(b) 353,000 Business Machines $ 4,081,562 0.3%
Crown Central Petroleum Corp. (Class B) (a)(b) 900,000 Domestic Oil 4,725,000 0.4
Cyrk International, Inc. (a)(b) 100,000 Business Services 1,187,500 0.1
DataTRAK International, Inc. (a)(b) 235,054 Business Services 852,070 0.1
Denkyosha Company (c) 463,000 Electronics 1,762,174 0.2
Denyo Company Ltd. (c) 227,000 Producer Goods 1,572,850 0.1
EDAP TMS S.A. (a)(b)(c) 840,000 Drugs & Medicine 1,155,000 0.1
Exabyte Corporation (a) 700,600 Business Machines 5,254,500 0.4
Franklin Bank National Association (b) 185,800 Banks 1,776,712 0.2
Fukuda Denshi Company Ltd. (c) 500,000 Drugs & Medicine 8,783,057 0.7
GA Financial, Inc. 100,000 Banks 1,325,000 0.1
Hallwood Energy Corporation (a)(b) 477,540 Domestic Oil 2,089,237 0.2
Harding Lawson Associates Group, Inc. (a)(b) 392,600 Business Services 3,042,650 0.3
Health Management Systems, Inc. (a) 500,000 Business Services 3,156,250 0.3
Hibiya Engineering Company Ltd. (c) 500,000 Construction 3,274,128 0.3
High Plains Corporation (a)(b) 1,500,000 Chemicals 2,859,375 0.2
HMN Financial, Inc. (b) 253,200 Banks 2,848,500 0.2
Horipro, Inc. (c) 600,000 Non-Durables & Entertainment 5,275,689 0.4
IEC Electronics Corporation (a)(b) 362,400 Electronics 860,700 0.1
Iwerks Entertainment, Inc. (a)(b) 1,100,000 Non-Durables & Entertainment 790,625 0.1
Jaco Electronics, Inc. (a)(b) 380,000 Electronics 1,971,250 0.2
John B. Sanfilippo & Son, Inc. (a)(b) 500,000 Food & Agriculture 2,000,000 0.2
Katsuragawa Electric Company (c) 500,000 Business Machines 1,439,445 0.1
Kentucky Electric Steel Company, Inc. (a)(b) 103,500 Steel 245,812 0.0
Kentucky Fried Chicken Japan (c) 500,000 Non-Durables & Entertainment 6,338,439 0.5
Kondotec, Inc. (c) 500,000 Construction 2,805,698 0.2
Kosaido Company Ltd. (c) 72,607 Media 850,281 0.1
Landry's Seafood Restaurants, Inc. (a) 540,400 Non-Durables & Entertainment 4,694,725 0.4
Magal Security Systems Ltd. (b) 650,000 Business Services 2,315,625 0.2
Manchester Equipment Company, Inc. (a) 300,000 Business Services 1,143,750 0.1
Martin Industries, Inc. (b) 450,000 Producer Goods 759,375 0.1
Matrix Service Company (a)(b) 600,000 Construction 2,737,500 0.2
Matsumoto Yushi-Seiyaku Company (c) 419,000 Chemicals 7,441,982 0.6
Maxicare Health Plans, Inc. (a)(b) 1,000,000 Drugs & Medicine 2,875,000 0.2
Mining Services International Corporation 280,000 Energy & Raw Materials 840,000 0.1
M-Wave, Inc. (a)(b) 295,000 Electronics 1,032,500 0.1
National Home Health Care Corporation (a)(b) 395,000 Drugs & Medicine 1,505,937 0.1
Network Equipment Tech, Inc. (a) 480,500 Business Machines 5,675,906 0.5
Nissui Pharmaceutical Company Ltd. (c) 776,000 Drugs & Medicine 4,914,842 0.4
Orthologic Corporation (a)(b) 1,815,000 Drugs & Medicine 4,650,937 0.4
Osmonics, Inc. (a)(b) 588,000 Producer Goods 5,402,250 0.5
Outlook Group Corporation (a)(b) 467,500 Media 1,986,875 0.2
Pico Holdings, Inc. (a) 64,000 Insurance Specialty 788,000 0.1
Planar Systems, Inc. (a)(b) 500,000 Business Machines 3,312,500 0.3
Pointe Financial Corporation 100,000 Banks 825,000 0.1
Presidential Life Corporation 1,000,000 Insurance 18,375,000 1.5
Providence and Worcester Railroad Company 200,000 Railroads & Shipping 1,600,000 0.1
Rehabilicare, Inc. (a) 312,100 Drugs & Medicine 1,248,400 0.1
Remington Oil & Gas Corporation (a)(b) 682,900 Domestic Oil 2,646,237 0.2
Roy F. Weston, Inc. (Class A) (a)(b) 990,000 Business Services 2,041,875 0.2
Salient 3 Communications, Inc. (a)(b) 402,500 Electronics 2,817,500 0.2
Sangetsu Company Ltd. (c) 500,000 Consumer Durables 10,490,874 0.9
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1999
- --------------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS -- 101.0% [cont'd] Shares Industry Value Net Assets
- --------------------------------------------------------------------------------------------------------------------
Low Price to Book Value [cont'd]
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Scan-Optics, Inc. (a)(b) 600,000 Business Machines $ 975,000 0.1%
Sholodge, Inc. (a)(b) 530,000 Travel & Recreation 2,385,000 0.2
Six Rivers National Bank (a)(b) 93,300 Banks 1,236,225 0.1
SK Kaken Company Ltd. (c) 68,000 Construction 1,214,404 0.1
SpaceLabs Medical, Inc. (a)(b) 500,000 Drugs & Medicine 9,281,250 0.8
Speizman Industries, Inc. (a)(b) 300,000 Producer Goods 1,425,000 0.1
Sunrise Medical, Inc. (a) 700,000 Drugs & Medicine 4,331,250 0.4
Tech-Sym Corporation (a)(b) 268,600 Aerospace 5,539,875 0.5
Teikoku Hormone Mfg. Company Ltd. (c) 500,000 Drugs & Medicine 3,318,044 0.3
TETRA Technologies, Inc. (a) 200,000 Oil Services 1,450,000 0.1
Toyo Tec Company Ltd. (c) 302,000 Business Services 1,900,946 0.2
Webco Industries, Inc. (a)(b) 475,500 Steel 1,664,250 0.1
Willbros Group, Inc. (a) 400,000 Oil Services 1,850,000 0.2
Yushiro Chemical Industry Company Ltd. (c) 361,000 Chemicals 1,405,669 0.1
--------------- ---------
$226,757,333 19.3%
- --------------------------------------------------------------------------------------------------------------------
Below Average Price/Cash Flow Ratio
- --------------------------------------------------------------------------------------------------------------------
AAR Corporation 481,100 AirTransport $ 8,629,731 0.7%
Akita Drilling Ltd. (Class A) (b)(c) 748,600 International Oil 4,399,594 0.4
The Alpine Group, Inc. (a)(b) 900,000 Producer Goods 11,587,500 0.9
Amcast Industrial Corporation 120,000 Electronics 1,965,000 0.2
AMERCO (a) 189,600 Non-Durables & Entertainment 4,740,000 0.4
AmerUs Life Holdings, Inc. 25,000 Insurance 575,000 0.1
Barrett Business Services, Inc. (a)(b) 383,300 Business Services 2,539,362 0.2
Beverly Enterprises, Inc. (a) 1,170,400 Drugs & Medicine 5,120,500 0.4
Bio-Rad Laboratories, Inc. (Class A) (a) 49,000 Drugs & Medicine 1,145,375 0.1
Burlington Coat Factory Warehouse Corp. 40,000 Retail 555,000 0.1
Burns International Services Corporation (a) 153,500 Business Services 1,659,718 0.1
Caretenders Health Corporation (a)(b) 308,900 Drugs & Medicine 695,025 0.1
Chronimed, Inc. (a)(b) 500,000 Drugs & Medicine 3,843,750 0.3
Clayton Williams Energy, Inc. (a)(b) 301,200 Domestic Oil 3,557,925 0.3
Comdial Corporation (a)(b) 541,200 Telephone 5,378,175 0.5
Commonwealth Industries, Inc. (b) 700,000 Non-Ferrous Metals 9,100,000 0.7
Consolidated Freightways Corporation (a) 500,000 Business Services 3,968,750 0.3
Datron Systems, Inc. (a)(b) 250,000 Business Machines 2,125,000 0.2
Digi International, Inc. (a)(b) 590,000 Business Machines 6,158,125 0.5
Dollar Thrifty Automotive Group, Inc. (a) 400,000 Travel & Recreation 9,575,000 0.8
Dynamic Materials Corporation (a)(b) 250,000 Chemicals 296,875 0.0
Encore Wire Corporation (a) 300,000 Non-Ferrous Metals 2,287,500 0.2
ESCO Electronics Corporation (a) 350,000 Producer Goods 4,068,750 0.3
Forest Oil Company (a) 325,000 Domestic Oil 4,285,937 0.4
Fuji Coca-Cola Bottling Company (c) 517,000 Food & Agriculture 6,664,945 0.6
Fuji Pharmaceutical Company Ltd. (c) 500,000 Drugs & Medicine 1,756,611 0.2
GZA GeoEnvironmental Technologies, Inc. (a)(b) 372,700 Business Services 1,677,150 0.1
Henry Schein, Inc. (a) 750,000 Medical Products 9,984,375 0.8
Hutchinson Technology, Inc. (a) 100,000 Electronics 2,125,000 0.2
Itron, Inc. (a) 547,500 Electronics 3,353,437 0.3
Judge Group, Inc. (a) 400,000 Business Services 575,000 0.1
LaCrosse Footware, Inc. (b) 500,000 Apparel 2,218,750 0.2
Maezawa Kasei Industries Company (c) 300,000 Chemicals 4,772,128 0.4
Marcus Corporation 225,000 Non-Durables & Entertainment 3,023,437 0.3
Material Sciences Corporation (a) 332,900 Producer Goods 3,391,418 0.3
MFRI, Inc. (a)(b) 400,000 Producer Goods 1,725,000 0.1
</TABLE>
9
<PAGE>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1999
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS -- 101.0% [cont'd] Shares Industry Value Net Assets
- -----------------------------------------------------------------------------------------------------------------
Below Average Price/Cash Flow Ratio [cont'd]
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Midwest Express Holdings, Inc. (a) 75,000 AirTransport $ 2,390,625 0.2%
Minntech Corporation (b) 600,000 Drugs & Medicine 5,775,000 0.5
NeoMagic Corporation (a) 450,000 Electronics 4,921,875 0.4
Networks North, Inc. (a)(b) 97,500 Media 182,812 0.0
Numac Energy, Inc. (a)(c) 1,734,900 International Oil 5,962,675 0.4
Pentech International, Inc. (a)(b) 749,900 Non-Durables & Entertainment 515,556 0.0
Powell Industries, Inc. (a) 507,400 Electronics 3,488,375 0.3
Ramsay Youth Services, Inc. (a)(b) 750,400 Drugs & Medicine 1,102,150 0.1
Reliance Steel & Aluminum Company 300,000 Non-Ferrous Metals 7,031,250 0.6
Republic Services, Inc. (a) 500,000 Energy & Utilities 7,187,500 0.6
Riken Vitamin Company Ltd. (c) 500,000 Drugs & Medicine 5,855,371 0.5
Shikoku Coca-Cola Bottling Company Ltd. (c) 400,000 Food & Agriculture 5,816,335 0.5
Shiloh Industries, Inc. (a) 211,700 Producer Goods 2,328,700 0.1
Sifco Industries, Inc. 200,000 Aerospace 1,387,500 0.1
Spacehab, Inc. (a) 499,300 Electronics 2,683,737 0.2
St. Francis Capital Corporation 225,000 Banks 4,190,625 0.3
Steel Technologies, Inc. 172,000 Steel 2,494,000 0.2
Steris Corporation (a) 300,000 Medical Equipment 3,093,750 0.3
Stifel Financial Corporation 210,000 Miscellaneous Financial 2,073,750 0.2
Strattec Security Corporation (a)(b) 297,000 Producer Goods 9,615,375 0.7
Tesoro Petroleum Corporation (a) 799,500 Domestic Oil 9,244,218 0.8
Todhunter International, Inc. (a)(b) 490,000 Liquor 4,471,250 0.4
TransCoastal Marine Services, Inc. (a)(b) 1,000,000 Domestic Oil 2,875,000 0.2
UnionBancorp, Inc. 129,300 Banks 1,842,525 0.2
Unisource Energy Corporation (a) 1,000,000 Energy & Utilities 11,187,500 0.9
United Security Bancorporation (a) 206,211 Banks 2,577,637 0.2
Urocor, Inc. (a)(b) 700,000 Drugs & Medicine 2,931,250 0.3
URS Corporation (a) 500,000 Business Services 10,843,750 0.9
Veterinary Centers of America, Inc. (a) 462,200 Drugs & Medicine 5,950,825 0.5
Vicorp Restaurants, Inc. (a) 164,475 Non-Durables & Entertainment 2,652,159 0.2
World Acceptance Corporation (a) 400,000 Miscellaneous Financial 1,925,000 0.2
------------ ----
$274,122,918 22.8%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND VALUE FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1999
- -----------------------------------------------------------------------------------------------------------------
Percent of
COMMON STOCKS -- 101.0% [cont'd] Shares Industry Value Net Assets
- -----------------------------------------------------------------------------------------------------------------
Special Situations
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Blue Wave Systems, Inc. (a) 226,800 Business Machines $ 2,097,900 0.2%
Claimsnet.com, Inc. (a) 7,900 Business Services 79,000 0.0
Eclipse Surgical Technologies, Inc. (a) 200,000 Drugs & Medicine 1,475,000 0.1
Executone Information Systems, Inc. (a)(b) 3,000,000 Business Services 16,312,500 1.4
Hotelworks.com, Inc. (a)(b) 1,000,000 Business Services 5,000,000 0.4
Indus International, Inc. (a) 1,000,000 Software 12,187,500 1.0
InterDigital Communications Corp. (a)(b) 2,000,000 Telephone 150,000,000 12.6
Interpore International, Inc. (a) 600,000 Drugs & Medicine 4,725,000 0.4
K-V Pharmaceutical Company (Class A) (a) 433,500 Drugs & Medicine 9,509,910 0.8
Mapics, Inc. (a) 100,000 Software 1,262,500 0.1
Matrix Pharmaceutical, Inc. (a)(b) 873,000 Drugs & Medicine 4,146,750 0.3
Mentor Corporation 230,000 Drugs & Medicine 5,936,875 0.5
NABI (a)(b) 3,145,000 Drugs & Medicine 14,545,625 1.2
Rainbow Technologies, Inc. (a) 400,000 Business Machines 9,300,000 0.7
RightChoice Managed Care, Inc.
(Class A) (a)(b) 670,000 Drugs & Medicine 7,705,000 0.5
SICOR, Inc. (a) 1,500,000 Drugs & Medicine 11,625,000 1.0
SITEL Corporation (a) 700,000 Business Services 4,900,000 0.4
Strategic Diagnostics, Inc. (a) 130,000 Chemicals 853,157 0.1
Sybase, Inc. (a) 1,000,000 Software 17,000,000 1.4
U.S. Global Investors, Inc. (a)(b) 600,000 Miscellaneous Financial 900,000 0.1
-------------- -----
$ 279,561,717 23.2%
-------------- -----
TOTAL COMMON STOCKS (Cost $885,390,385) $1,206,981,335 101.0%
TOTAL INVESTMENTS (Cost $885,390,385)................................................. $1,206,981,335 101.0%
Liabilities, less cash and receivables................................................ (11,914,719) (1.0)
-------------- -----
TOTAL NET ASSETS...................................................................... $1,195,066,616 100.0%
============== =====
</TABLE>
(a) Non-income producing security.
(b) Affiliated company. See Note 9 in Notes to Financial Statements.
(c) Foreign-denominated security.
(d) All or a portion of security committed to cover collateral requirements for
futures contracts.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
11
<PAGE>
HEARTLAND GOVERNMENT FUND
SCHEDULE OF INVESTMENTS . December 31, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Par Percent of
Amount LONG-TERM INVESTMENTS -- 95.5% Coupon Maturity Value Net Assets
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
U.S. TREASURY AND AGENCY SECURITIES -- 12.4%
U.S. TREASURY SECURITIES -- 1.5%
$3,000,000 U.S. Treasury Strips 0.000% 02/15/2023 $ 648,030 1.5%
AGENCY SECURITIES -- 10.9%
2,000,000 Federal National Mortgage Association (a)
(Callable 09/24/2007) 6.875 09/24/2012 1,893,320 4.4
3,000,000 Federal National Mortgage Association
(Callable 09/02/2002) 6.190 02/19/2009 2,748,810 6.4
------------
4,642,130
------------
TOTAL U.S. TREASURY AND AGENCY SECURITIES (Cost $5,662,923) 5,290,160
------------
MORTGAGE-RELATED SECURITIES -- 79.7%
PASS-THROUGH SECURITIES -- 30.2%
156,583 FHLMC #260666 8.250 03/01/2008 160,203 0.4
811,462 FHLMC #280656 9.000 06/01/2014 856,595 2.0
1,185,846 FNGL #252779 8.000 08/01/2028 1,195,108 2.8
686,006 FNMA #208578 CL 7.500 03/01/2013 684,291 1.6
265,995 FNMA #304119 CL 8.500 02/01/2025 275,220 0.6
739,710 FNMA #309494 RE 6.500 09/01/2025 715,433 1.7
1,420,908 FNMA #361493 GL 9.000 01/01/2025 1,486,170 3.5
876,256 FNMA #512238 10.000 07/01/2028 943,070 2.2
946,245 FNMA #518102 8.000 11/01/2011 964,867 2.3
1,096,982 FNMA Grantor Trust 1995 - T5A 7.000 03/17/2035 1,048,363 2.5
454,530 FNMA Pool #442639 10.000 08/01/2021 489,470 1.1
518,346 FNMA Pool #49123 9.000 12/01/2013 543,449 1.3
137,803 GNMA #293146 MHB 10.250 07/15/2005 138,492 0.3
217,913 GNMA #31652 8.500 09/15/2009 225,607 0.5
1,132,005 GNMA #443630 MHD 9.000 11/15/2017 1,186,477 2.8
2,014,598 GNMA #45322 7.500 10/15/2027 1,998,844 4.7
------------
12,911,659
COLLATERALIZED MORTGAGE OBLIGATIONS -- 49.5%
2,500,000 FHR CMO 1817 E 6.500 09/15/2023 2,365,725 5.5
5,000,000 FHLMC CMO-SEQ 1978 BC 6.500 05/15/2025 4,842,900 11.3
2,000,000 FHLMC CMO PAC 2061 PT 6.250 12/15/2027 1,772,240 4.2
2,000,000 FHLMC CMO-SEQ 2073 PJ 6.000 10/15/2023 1,834,940 4.3
1,000,000 FHR CMO 2075 PAC 6.250 08/15/2027 878,620 2.0
1,600,000 FHR GOLD CMO 2134 6.500 09/15/2019 1,461,296 3.4
3,000,000 FNMA CMO-PAC 1993-38L 5.000 08/25/2022 2,730,360 6.4
3,000,000 GNMA GNR 1999-16D 6.500 05/16/2013 2,790,570 6.5
2,858,000 GNMA GNR 1999-15G 6.500 05/16/2029 2,499,378 5.9
------------
21,176,029
------------
TOTAL MORTGAGE RELATED SECURITIES (Cost $34,675,564) 34,087,688
------------
ASSET-BACKED SECURITIES/Corporate -- 3.4%
1,500,000 Green Tree Financial Corporation
MH 1999 - 3 B1 8.370 05/07/2014 1,444,395 3.4
------------
TOTAL ASSET-BACKED SECURITIES/Corporate (Cost $1,499,884) 1,444,395
------------
TOTAL LONG-TERM INVESTMENTS (Cost $41,838,371) $ 40,822,243
------------
</TABLE>
12
<PAGE>
HEARTLAND GOVERNMENT FUND
SCHEDULE OF INVESTMENTS [CONT'D] . December 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Par Percent of
Amount SHORT-TERM INVESTMENTS -- 4.5% Coupon Maturity Value Net Assets
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities -- 4.4%
$1,900,000 U.S. Treasury Bills (a) 0.000% 01/20/2000 $ 1,895,839 4.4%
VARIABLE RATE DEMAND NOTE (+) -- 0.1%
52,500 Firstar Bank NA 6.16% 52,500 0.1
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $1,947,212) $ 1,948,339
TOTAL INVESTMENTS (Cost $43,785,583)................................. $42,770,582 100.0%
Liabilities less cash and receivables................................ (10,591) 0.0
----------- -----
TOTAL NET ASSETS..................................................... $42,759,991 100.0%
=========== =====
</TABLE>
(a) All or a portion of security committed to cover collateral requirements for
futures contracts.
(+) Variable rate demand notes are considered short-term obligations and are
payable on demand. The interest rate changes periodically on specified
dates. The rate listed is as of December 31, 1999.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
13
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1999
<TABLE>
<CAPTION>
Select
Value Fund/(1)/
--------------
<S> <C>
ASSETS:
Investments in securities, at cost............................................. $ 7,257,932
==============
Investments in securities, at value............................................ $ 7,448,994
Cash........................................................................... 2,156
Receivable from securities sold................................................ 381,920
Receivable from fund shares sold............................................... 1,428
Accrued dividends and interest................................................. 25,374
Prepaid expenses............................................................... ---
Deferred organization expenses................................................. 5,750
Receivable from Advisor for expense reimbursement.............................. 24,054
--------------
Total Assets.............................................................. 7,889,676
--------------
LIABILITIES:
Payable for securities purchased............................................... 747,518
Payable for fund shares redeemed............................................... 1,512
Variation margin on open futures contracts..................................... ---
Short-term notes payable....................................................... ---
Distributions payable.......................................................... ---
Payable to Advisor for fund accounting fee..................................... 1,062
Payable to Advisor for deferred organization expenses.......................... 5,750
Accrued interest payable....................................................... 542
Accrued expenses............................................................... 15,251
--------------
Total Liabilities......................................................... 771,635
--------------
TOTAL NET ASSETS................................................................. $ 7,118,041
==============
NET ASSETS CONSIST OF:
Paid in capital................................................................ $ 6,931,931
Accumulated undistributed net investment income (loss)......................... 6,714
Accumulated undistributed net realized gains (losses) on investments........... (11,666)
Net unrealized appreciation (depreciation) on investments...................... 191,062
--------------
TOTAL NET ASSETS................................................................. $ 7,118,041
==============
SHARES OUTSTANDING, $.001 par value (100,000,000; 100,000,000;
150,000,000; and 100,000,000 shares authorized, respectively).................. 606,827
==============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE................... $ 11.73
==============
</TABLE>
(1) Formerly the Large Cap Value Fund.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
14
<PAGE>
<TABLE>
<CAPTION>
Value Plus Government
Fund Value Fund Fund
-------------- -------------- --------------
<S> <C> <C>
$ 83,524,293 $ 885,390,385 $ 43,785,583
============== ============== ==============
$ 85,942,079 $1,206,981,335 $ 42,770,582
333,790 2,684,710 24,196
1,908,577 19,449,266 5,095,626
257,288 1,320,513 3,221
277,619 1,195,458 326,101
8,662 90,036 2,700
--- --- ---
--- --- 18,103
-------------- -------------- --------------
88,728,015 1,231,721,318 48,240,529
-------------- -------------- --------------
188,431 14,549,940 5,091,198
317,237 2,478,217 303,591
--- 219,262 15,000
1,100,000 19,100,000 ---
--- --- 44,844
1,316 7,400 1,062
--- --- ---
184 9,590 ---
56,111 290,293 24,843
-------------- -------------- --------------
1,663,279 36,654,702 5,480,538
-------------- -------------- --------------
$ 87,064,736 $1,195,066,616 $ 42,759,991
============== ============== ==============
$ 104,197,999 $ 838,187,149 $ 51,343,598
230,288 (299,572) ---
(19,781,337) 35,805,437 (7,542,557)
2,417,786 321,373,602 (1,041,050)
-------------- -------------- --------------
$ 87,064,736 $1,195,066,616 $ 42,759,991
============== ============== ==============
6,415,140 32,741,250 4,695,815
============== ============== ==============
$ 13.57 $ 36.50 $ 9.11
============== ============== ==============
</TABLE>
15
<PAGE>
STATEMENTS OF OPERATIONS
For the period from January 1, 1999 to December 31, 1999
<TABLE>
<CAPTION>
Select
Value Fund/(1)/
---------------
<S> <C>
INVESTMENT INCOME:
Dividends.................................................................... $ 112,101
Interest..................................................................... 50,923
Foreign tax withholding...................................................... (3,653)
--------------
Total investment income.................................................... 159,371
--------------
EXPENSES:
Management fees.............................................................. 57,026
Distribution fees............................................................ 19,009
Transfer agent fees.......................................................... 19,139
Interest expense............................................................. 1,614
Registration fees............................................................ 23,356
Directors' fees.............................................................. 16,590
Audit fees................................................................... 10,370
Legal fees................................................................... 9,131
Fund accounting fees......................................................... 8,391
Postage...................................................................... 7,195
Printing and communications.................................................. 5,489
Custodian fees............................................................... 1,546
Amortization of organization expenses........................................ 3,286
Other operating expenses..................................................... 11,655
--------------
Total expenses............................................................... 193,797
Less: Expense reimbursement and/or management fee waivers.................. (138,418)
--------------
Net expenses............................................................... 55,379
--------------
NET INVESTMENT INCOME (LOSS)................................................... 103,992
--------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on:
Long positions............................................................. 208,697
Short positions............................................................ ---
Futures contracts.......................................................... ---
Options.................................................................... ---
Net increase (decrease) in unrealized appreciation on:
Long positions............................................................. (164,645)
Futures contracts.......................................................... ---
--------------
TOTAL REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS.................. 44,052
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.............. $ 148,044
==============
</TABLE>
(1) Formerly the Large Cap Value Fund.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
16
<PAGE>
<TABLE>
<CAPTION>
Value Plus Government
Fund Value Fund Fund
------------ ------------- -----------
<S> <C> <C>
$ 3,866,655 $ 7,976,874 $ ---
2,154,781 114,962 3,404,960
(53,064) (271,208) ---
------------ ------------- -----------
5,968,372 7,820,628 3,404,960
------------ ------------- -----------
940,772 9,210,325 328,972
335,990 3,070,108 126,528
200,683 1,353,538 53,302
144,929 1,551,748 ---
37,505 31,428 26,643
19,835 61,579 14,452
12,913 50,531 11,142
6,169 63,165 2,137
12,541 65,434 8,427
55,386 334,842 19,136
35,559 275,713 11,936
28,501 236,315 8,047
--- --- ---
35,156 190,594 22,979
------------ ------------- -----------
1,865,939 16,495,320 633,701
--- --- (231,422)
------------ ------------- -----------
1,865,939 16,495,320 402,279
------------ ------------- -----------
4,102,433 (8,674,692) 3,002,681
------------ ------------- -----------
(14,403,190) 74,291,250 (2,407,631)
--- 28,876 ---
(2,123,913) (6,676,533) 280,158
--- 83,127 ---
12,418,206 182,991,574 (2,865,348)
--- 780,066 (29,133)
------------ ------------- -----------
(4,108,897) 251,498,360 (5,021,954)
------------ ------------- -----------
$ (6,464) $ 242,823,668 $(2,019,273)
============ ============== ===========
</TABLE>
17
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C>
OPERATIONS:
Net investment income..............................................................................................
Net realized gains (losses) on investments.........................................................................
Net increase (decrease) in unrealized appreciation on investments..................................................
Net increase (decrease) in net assets resulting from operations..................................................
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..............................................................................................
Net realized gains on investments..................................................................................
Net distributions to shareholders................................................................................
FUND SHARE ACTIVITIES:
Proceeds from shares issued........................................................................................
Reinvested dividends from net investment income and distributions from net realized gains on investments...........
Cost of shares redeemed............................................................................................
Net increase (decrease) in net assets derived from Fund share activities.........................................
TOTAL INCREASE (DECREASE) IN NET ASSETS..............................................................................
NET ASSETS AT THE BEGINNING OF THE PERIOD............................................................................
NET ASSETS AT THE END OF THE PERIOD..................................................................................
UNDISTRIBUTED NET INVESTMENT INCOME..................................................................................
</TABLE>
(1) Formerly the Large Cap Value Fund.
(2) After reduction of $38 in early redemption fees. See Note 5 in Notes to
Financial Statements.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
18
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------- ----------------------------------------
Select Value Plus
Value Fund/(1)/ Fund
---------------------------------------- ----------------------------------------
Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1999 Dec. 31, 1998
----------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
$ 103,992 $ 199,168 $ 4,102,433 $ 10,626,057
208,697 72,330 (16,527,103) (3,254,234)
(164,645) (198,786) 12,418,206 (35,114,200)
-------------- -------------- ---------------- -----------------
148,044 72,712 (6,464) (27,742,377)
-------------- -------------- ---------------- -----------------
(99,399) (197,047) (4,074,600) (10,437,624)
(138,062) (169,485) -- (539,961)
-------------- -------------- ---------------- -----------------
(237,461) (366,532) (4,074,600) (10,977,585)
-------------- -------------- ---------------- -----------------
11,020,126 5,074,757 100,255,961 225,703,596
224,429 355,161 3,393,516 9,753,798
(12,062,437) (4,776,114) (186,817,673)(2) (358,704,802)
-------------- -------------- ---------------- -----------------
(817,882) 653,804 (83,168,196) (123,247,408)
-------------- -------------- ---------------- -----------------
(907,299) 359,984 (87,249,260) (161,967,370)
8,025,340 7,665,356 174,313,996 336,281,366
-------------- -------------- ---------------- -----------------
$ 7,118,041 $ 8,025,340 $ 87,064,736 $ 174,313,996
============== ============== ================ ================
$ 6,714 $ 2,121 $ 230,288 $ 201,118
============== ============== ================ ================
</TABLE>
19
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C>
OPERATIONS:
Net investment income (loss)........................................................................................
Net realized gains (losses) on investments..........................................................................
Net increase (decrease) in unrealized appreciation on investments...................................................
Net increase (decrease) in net assets resulting from operations...................................................
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income...............................................................................................
Net realized gains on investments...................................................................................
Net distributions to shareholders.................................................................................
FUND SHARE ACTIVITIES:
Proceeds from shares issued.........................................................................................
Proceeds from Fund merger...........................................................................................
Reinvested dividends from net investment income and distributions from net realized gains on investments............
Cost of shares redeemed.............................................................................................
Net increase (decrease) in net assets derived from Fund share activities..........................................
TOTAL INCREASE (DECREASE) IN NET ASSETS...............................................................................
NET ASSETS AT THE BEGINNING OF THE PERIOD.............................................................................
NET ASSETS AT THE END OF THE PERIOD...................................................................................
UNDISTRIBUTED NET INVESTMENT INCOME...................................................................................
</TABLE>
(1) After reduction of $9,400 in early redemption fees. See Note 5 in Notes to
Financial Statements.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
20
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------- ----------------------------------------
Value Government
Fund Fund
---------------------------------------- ----------------------------------------
Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1999 Dec. 31, 1998
----------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
$ (8,674,692) $ 4,393,333 $ 3,002,681 $ 3,067,612
67,726,720 57,797,743 (2,127,473) 739,120
183,771,640 (289,725,122) (2,894,481) 321,544
-------------- -------------- ---------------- -----------------
242,823,668 (227,534,046) (2,019,273) 4,128,276
-------------- -------------- ---------------- -----------------
-- (3,004,029) (3,001,225) (3,069,809)
(3,274,636) (33,890,119) -- --
-------------- -------------- ---------------- -----------------
(3,274,636) (36,894,148) (3,001,225) (3,069,809)
-------------- -------------- ---------------- -----------------
185,666,665 343,555,971 12,100,794 26,715,684
-- 104,944,820 -- --
3,033,426 33,363,615 2,377,908 2,330,317
(778,741,064)(1) (798,592,335) (21,583,715) (23,781,051)
-------------- -------------- ---------------- -----------------
(590,040,973) (316,727,929) (7,105,013) 5,264,950
-------------- -------------- ---------------- -----------------
(350,491,941) (581,156,123) (12,125,511) 6,323,417
1,545,558,557 2,126,714,680 54,885,502 48,562,085
-------------- -------------- ---------------- -----------------
$1,195,066,616 $1,545,558,557 $ 42,759,991 $ 54,885,502
============== ============== ================ ================
$ (299,572) $ -- $ -- $ --
============== ============== ================ ================
</TABLE>
21
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Select Value Fund
(formerly the Large Cap Value Fund)
-----------------------------------------------------------
Oct. 11, 1996/(1)/
For the period ended December 31, through
1999 1998 1997 Dec. 31, 1996
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period................. $11.94 $12.30 $10.50 $10.00
Income from investment operations:
Net investment income.............................. 0.17 0.30 0.11 --
Net realized and unrealized gains (losses)
on investments.................................... 0.04 (0.10) 2.28 0.50
------ ------ ------ ------
Total income from investment
operations....................................... 0.21 0.20 2.39 0.50
Less distributions from:
Net investment income.............................. (0.17) (0.30) (0.11) --
Net realized gains on investments.................. (0.25) (0.26) (0.48) --
------ ------ ------ ------
Total distributions............................... (0.42) (0.56) (0.59) --
------ ------ ------ ------
Net asset value, end of period....................... $11.73 $11.94 $12.30 $10.50
====== ====== ====== ======
Total Return......................................... 1.95% 1.73% 22.91% 5.00%/(2)/
Ratios and Supplemental Data
Net assets, end of period
(in thousands).................................... $7,118 $8,025 $7,665 $2,441
Ratio of net expenses to average
net assets........................................ 0.74%/(4)/ 0.00%/(4)/ 1.36%/(4)/ 2.73%/(3)/
Ratio of net investment income (loss)
to average net assets............................. 1.38 /(4)/ 2.37%/(4)/ 1.14%/(4)/ (0.25)%/(3)/
Portfolio turnover rate............................ 160% 48% 30% 1%
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) If there had been no expense reimbursement or management fee waiver by the
Advisor, the ratios of net expenses to average net assets for the years
ended December 31, 1999, 1998 and 1997 would have been 2.58%, 1.92% and
2.00%, respectively, and the ratios of net investment income (loss) to
average net assets would have been (0.46)%, 0.45% and 0.50%, respectively.
The accompanying Notes to Fixed Statements are an integral part of these
Statements.
22
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Value Plus Fund
-------------------------------------------------------------
For the year ended December 31,
1999 1998 1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period................. $ 13.80 $ 16.13 $ 13.73 $ 11.17 $ 9.53
Income (loss) from investment operations:
Net investment income.............................. 0.46 0.62 0.48 0.38 0.41
Net realized and unrealized gains (losses)
on investments.................................... (0.25) (2.32) 3.66 3.33 1.89
-------- ------- ------- ------- -------
Total income from investment
operations....................................... 0.21 (1.70) 4.14 3.71 2.30
Less distributions from:
Net investment income.............................. (0.44) (0.60) (0.48) (0.38) (0.41)
Net realized gains on investments.................. -- (0.03) (1.26) (0.77) (0.25)
------- ------- ------- ------- -------
Total distributions............................... (0.44) (0.63) (1.74) (1.15) (0.66)
------- ------- ------- ------- -------
Net asset value, end of period....................... $ 13.57 $ 13.80 $ 16.13 $ 13.73 $ 11.17
======== ========= ========= ======== ========
Total Return......................................... 1.67% (10.78)% 30.60% 33.80% 24.39%
Ratios and Supplemental Data
Net assets, end of period (in thousands)........... $87,065 $174,314 $336,281 $66,582 $19,123
Ratio of net expenses to average
net assets........................................ 1.39% 1.24 % 1.12% 1.45% 1.54%
Ratio of net investment income
to average net assets............................. 3.05% 3.77 % 3.32% 3.23% 3.90%
Portfolio turnover rate............................ 82% 64 % 74% 73% 150%
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
Statement.
23
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Value Fund
-------------------------------------------------------------------------------------
For the year ended December 31,
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period........... $ 29.29 $ 33.87 $ 31.65 $ 27.95 $ 22.72
Income (loss) from investment operations:
Net investment income (loss)................ (0.21)/(1)/ 0.08 0.17 0.06 0.13
Net realized and unrealized gains
(losses) on investments................... 7.52 (3.97) 7.09 5.78 6.63
----------- ----------- ----------- ----------- -----------
Total income (loss) from investment
operations................................ 7.31 (3.89) 7.26 5.84 6.76
Less distributions from:
Net investment income....................... -- (0.06) (0.17) (0.06) (0.13)
Net realized gains on investments........... (0.10) (0.63) (4.87) (2.08) (1.40)
----------- ----------- ----------- ----------- -----------
Total distributions....................... (0.10) (0.69) (5.04) (2.14) (1.53)
----------- ----------- ----------- ----------- -----------
Net asset value, end of period................. $ 36.50 $ 29.29 $ 33.87 $ 31.65 $ 27.95
=========== =========== =========== =========== ===========
Total Return................................... 25.01% (11.46)% 23.19% 20.99% 29.80%
Ratios and Supplemental Data
Net assets, end of period (in thousands).... $ 1,195,067 $ 1,545,495 $ 2,126,715 $ 1,626,760 $ 1,190,926
Ratio of net expenses to average
net assets................................ 1.34% 1.15% 1.12% 1.23% 1.29%
Ratio of net investment income (loss)
to average net assets..................... (0.70)% 0.22% 0.49% 0.22% 0.61%
Portfolio turnover rate..................... 23% 36% 55% 31% 31%
</TABLE>
(1) Net investment loss per share is calculated using average shares
outstanding.
The accompanying Notes to Financial Statements are an integral part
of this Statement.
24
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Government Fund
-------------------------------------------------------------
For the year ended December 31,
1999 1998 1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period................. $ 10.06 $ 9.85 $ 9.54 $ 9.96 $ 8.91
Income (loss) from investment operations:
Net investment income.............................. 0.57 0.57 0.58 0.59 0.60
Net realized and unrealized gains (losses)
on investments.................................... (0.95) 0.21 0.31 (0.42) 1.05
------- ------- ------- ------- -------
Total income (loss) from investment
operations........................................ (0.38) 0.78 0.89 0.17 1.65
Less distributions from:
Net investment income.............................. (0.57) (0.57) (0.58) (0.59) (0.60)
------- ------- ------- ------- -------
Total distributions............................... (0.57) (0.57) (0.58) (0.59) (0.60)
------- ------- ------- ------- -------
Net asset value, end of period....................... $ 9.11 $ 10.06 $ 9.85 $ 9.54 $ 9.96
======= ======= ======= ======= =======
Total Return......................................... (3.90)% 8.15% 9.69% 2.00% 19.00%
Ratios and Supplemental Data
Net assets, end of period (in thousands)........... $42,760 $54,886 $48,562 $51,713 $66,261
Ratio of net expenses to average
net assets/(1)/................................... 0.80 % 0.76% 0.87% 1.06% 1.07%
Ratio of net investment income to
average net assets/(1)/........................... 5.93 % 5.73% 6.12% 6.36% 6.31%
Portfolio turnover rate............................ 185 % 90% 143% 30% 97%
</TABLE>
(1) 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, 1999, 1998, 1997, 1996 and 1995, would have been 1.25%,
1.16%, 1.20%, 1.21% and 1.22%, respectively, and the ratios of net
investment income to average net assets would have been 5.48%, 5.33%, 5.79%,
6.21% and 6.16%, respectively.
The accompanying Notes to Financial Statements are an integral part of this
Statement.
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
(1) Organization
Heartland Group, Inc. (the "Corporation") is registered as an open-end
management investment company under the Investment Company Act of 1940.
The Select Value Fund (formerly known as the Large Cap Value Fund), Value
Plus Fund, Value Fund, and Government Fund, (the "Funds"), each of which
is a diversified fund, are four of the eight series of funds issued by the
Corporation at December 31, 1999.
(2) Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Funds in the preparation of the financial statements:
(a) Portfolio securities which are traded on stock exchanges are valued at
the last sales price as of the close of business on the day the
securities are being valued, or, lacking any sales, at the latest bid
price. Each over-the-counter security for which the last sale price
on the day of valuation is available from NASDAQ is valued at that
price. All other securities traded in the over-the-counter market are
valued at the most recent bid prices. Foreign securities are valued on
the basis of quotations from the primary market in which they are
traded, and are translated from the local currency into U.S. dollars
using exchange rates as of the close of the New York Stock Exchange.
Debt securities are stated at fair value as furnished by independent
pricing services based primarily upon information concerning market
transactions and dealer quotations for similar securities, or by
dealers who make markets in such securities. Debt securities having
maturities of 60 days or less may be valued at acquisition cost, plus
or minus any amortized discount or premium. Securities and other
assets for which quotations are not readily available are valued at
their fair value using methods determined by the Board of Directors.
(b) The Funds' policy is to comply with the requirements of the Internal
Revenue Code which are applicable to regulated investment companies
and to distribute substantially all of their taxable income to their
shareholders. The Funds accordingly paid no Federal income taxes, and
no Federal income tax provision is required.
At December 31, 1999 the Value Plus Fund had Federal income tax
capital loss carryforwards of $260,654 expiring in 2006 and
$18,713,439 expiring in 2007 and the Government Fund had Federal
income tax capital loss carryforwards of $4,115,982 expiring in 2002,
$858,458 expiring in 2003, $358,754 expiring in 2005 and $1,288,202
expiring in 2007. The Funds do not intend to make distributions of any
future realized capital gains until their Federal income tax capital
loss carryforwards are completely utilized.
Statement of Position 93-2 requires that permanent financial reporting
and tax differences be reclassified to paid in capital. Net assets are
not affected by these reclassifications.
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, 1999, the Select Value, Value Plus and
Government Funds deferred, on a tax basis, post-October losses of
$18,904, $807,244 and $947,210, respectively. Such amounts may be used
to offset future capital gains.
(c) Net investment income, if any, is distributed to each shareholder as a
dividend. Dividends from the Select Value and Value Funds are declared
and paid at least annually. Dividends from the Value Plus Fund are
declared and paid quarterly. Dividends from the Government Fund are
declared daily and distributed monthly. Dividends are recorded on the
ex-dividend date. Net realized gains on investments, if any, are
distributed at least annually. During 1999, the Select Value and Value
Funds utilized earnings and profits distributed to shareholders on
redemption of shares as part of the dividends paid deduction for
income tax purposes. Accordingly, at December 31, 1999, the Select
Value and Value Funds recorded reclassifications to decrease
undistributed net realized gains on investments and increase paid in
capital by $118,438 and $20,331,293, respectively.
(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.
(e) 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.
26
<PAGE>
(f) 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.
The Fund receives from or pays to the broker on a daily basis an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as "variation margin,"
and are recorded by the Fund as unrealized gains or losses. When the
futures contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed.
The use of futures contracts involves, to varying degrees, elements of
market risk in excess of the amount recognized in the Statements of
Assets and Liabilities. The predominant risk is that the movement of 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 futures contracts at December 31, 1999:
Value Fund
Number of Expiration Unrealized Notional
Type Contracts Date Depreciation Value
---- --------- ---- ------------ -----
Nasdaq 100 (125) March 2000 $(217,349) $(46,927,500)
Government Fund
Number of Expiration Unrealized Notional
Type Contracts Date Depreciation Value
---- --------- ---- ------------ -----
U.S. Treasury 30 March 2000 $ (26,049) $ 2,728,125
(g) The Select Value, Value Plus and Value Funds may each engage in "short
sales against the box." These transactions involve selling a security
that a Fund owns for delivery at a specified date in the future.
Similarly, each of these Funds may also engage in short sales of
securities of an issuer ("acquiror") that has publicly announced a
proposed or pending transaction in which a portfolio security of the
Fund will be converted into securities of the acquiror.
For financial statement purposes, an amount equal to a short sale's
settlement amount is included in the Statements 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 Statements of Assets and Liabilities. The Fund is liable for
any dividends payable on securities while those securities are in a
short position.
(h) 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 144A under the
Act, or an exemption from the registration requirements of the Act. At
December 31, 1999, the Value Plus Fund held restricted securities
equaling 5.3% of net assets.
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.
Value Plus Fund
<TABLE>
<CAPTION>
Acquisition
Security Par Amount Cost Fair Value Date
-------- ---------- ---- ---------- -----------
<S> <C> <C> <C> <C>
Source Capital Corporation
Conv. Bond
7.50% 03/01/2008 $1,400,000 $1,400,000 $1,004,994 2/98
</TABLE>
(i) The Government Fund may enter into dollar roll transactions with
respect to mortgage securities in which the Fund sells mortgage
securities and simultaneously agrees to repurchase similar (same type,
coupon and maturity) securities at a later date at an agreed upon
price. Such transactions involve the risk that the market value of the
securities sold by the Fund may decline below the repurchase price of
those similar securities which the Fund is obligated to purchase.
(j) Each Fund 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 Select Value Fund may
also purchase call options. The Funds may enter into options
transactions for hedging purposes, and will not use these instruments
for speculation.
27
<PAGE>
For the period from January 1, 1999 through December 31, 1999, the
Funds had the following transactions in written covered call options:
Value Fund
<TABLE>
<CAPTION>
Number of Premium
Contracts Amount
--------- -------
<S> <C> <C>
Balance at January 1, 1999 -- --
Options opened (ICN Pharmaceuticals, Inc. 6/99) 420 $ 83,127
Options expired (ICN Pharmaceuticals, Inc. 6/99) (420) (83,127)
Options closed -- --
--------- ---------
Balance at December 31, 1999 -- $ --
========= =========
</TABLE>
(k) The Value Plus and Value Funds may utilize forward currency exchange
contracts for the purpose of hedging foreign currency risk. Under
these contracts, the Funds are obligated to exchange currencies at
specific future dates. Risks arise from the possible inability of
counter-parties to meet the terms of their contracts and from
movements in currency values.
(l) 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
Deutsche Bank AG made available to seven of the eight series of funds
issued by the Corporation, including the Select Value, Value Plus and Value
Funds, a $100 million credit facility pursuant to a Credit Agreement
("Agreement"), most recently amended December 29, 1998. The primary purpose
of the Agreement is to allow the applicable Funds to avoid liquidating
securities under circumstances which the Advisor believes are unfavorable
to shareholders. Outstanding principal amounts under the credit facility
bear interest at a rate per annum equal to the New York Interbank Offering
Rate plus 0.4% or the prime rate. Commitment fees are computed at a rate
per annum equal to 0.08% of the Funds' proportional daily average
unutilized credit. Commitment fees accrued for the period from January 1,
1999 through December 31, 1999 for the Select Value, Value Plus and Value
Funds amounted to $233, $3,418 and $37,045, respectively. During the period
from January 1, 1999 through December 31, 1999, the following Funds
utilized the credit facility:
<TABLE>
<CAPTION>
Outstanding Average Maximum
Average Interest Outstanding Interest
Fund Daily Balance Rate Balance Expense
---- ------------- -------- ----------- --------
<S> <C> <C> <C> <C>
Select Value Fund $ 28,219 5.64% $ 1,200,000 $ 1,614
Value Plus Fund 2,597,260 5.57 18,100,000 144,929
Value Fund 28,125,753 5.42 74,200,000 1,551,748
</TABLE>
(4) Investment Management Fees and Transactions with Related Parties
The Funds have management agreements with Heartland Advisors, Inc. (the
"Advisor") to serve as investment advisor and manager. Under the terms of
the agreement, the Select Value and Value Funds pay the Advisor a monthly
management fee at the annual rate of 0.75% of the average daily net assets
of the Funds; the Value Plus Fund pays the Advisor a monthly management fee
at the annual rate of 0.70% of the average daily net assets of the Fund;
and the Government Fund pays the Advisor a monthly management fee at the
annual rate of 0.65% of the first $100 million of the Fund's average daily
net assets, 0.50% of the next $400 million of average daily net assets, and
0.40% on average daily net assets in excess of $500 million.
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 0.25% of their daily net assets. Additionally, for the year ended
December 31, 1999, the Distributor received for the Value Plus and Value
Funds $4,500 and $145,066, respectively, for brokerage fees on the
execution of purchases and sales of portfolio investments.
Effective May 1, 1999, the Funds entered into an agreement with the Advisor
to perform certain bookkeeping and accounting services. Under the terms of
the agreement, each Fund pays the Advisor a monthly fee at an annual rate
of $12,500 plus 0.0075% of average daily net assets over $50,000,000 for
the Select Value and Value Funds; 0.0080% of average daily net assets over
$50,000,000 for the Value Plus Fund; and 0.0085% of average daily net
assets over $50,000,000 for the Government Fund.
For the Select Value Fund, the Advisor voluntarily waived the entire
management and distribution fees and reimbursed all other expenses through
March 31, 1999. For the Government Fund, the Advisor collected a
28
<PAGE>
partial management fee at an annual rate of 0.25% of the Fund's average
daily net assets through March 31, 1999. Effective April 1, 1999, the
Advisor contractually committed to waive fees paid, through April 30, 2000,
to the extent that annual fund operating expenses exceed 0.95% for the
Select Value Fund and 0.80% for the Government Fund. After that date the
Advisor may reinstate all or a portion of the Funds' fees or discontinue
waivers and reimbursements at any time. If a Fund's operating expenses fall
below the expense limitation, the Fund will begin paying the Advisor for
fees previously waived and expenses previously reimbursed. This repayment
will continue for up to three years after the end of the fiscal year in
which a fee is waived or an expense is paid, subject to any expense
limitation then in effect, until the Fund has repaid the Advisor for the
entire amount or such three-year period expires. For the period from April
1, 1999 to December 31, 1999, the Advisor waived/reimbursed expenses of
$103,217 and $178,770 for the Select Value and Government Funds,
respectively, which are subject to repayment by the Funds, expiring at
December 31, 2002.
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) Early Redemption Fee
For the Value Plus and Value Funds, certain shares purchased on or after
October 1, 1999, that are redeemed or exchanged in less than 270 days, are
assessed a fee of 1% of the current net asset value of the shares. The fee,
applied to shares redeemed or exchanged in the order in which they are
purchased, is retained by the Fund for the benefit of remaining
shareholders to defray Fund portfolio transaction expenses and facilitate
portfolio management. For financial statement purposes, these amounts are
included in the Statements of Assets and Liabilities as "paid in capital."
(6) Deferred Organization Expenses
For the Select Value Fund, organization expenses have been deferred and are
being amortized on a straight-line basis over sixty months. Payments for
these expenses were advanced by the Advisor, who will be reimbursed by the
Fund over the same period. The proceeds of any redemption of the initial
shares by the original shareholders will be reduced by a pro-rata portion
of any then unamortized expenses. Unamortized deferred organization
expenses and the related payable to the Advisor at December 31, 1999 for
the Select Value Fund were $5,750. Reimbursement to the Advisor of this
amount by the Fund will be subject to any expense limitations and
reimbursements in effect for the Fund at the time.
(7) Investment Transactions
During the period from January 1, 1999 through December 31, 1999, purchases
and sales of securities, other than short-term obligations, were as
follows (in thousands):
Select Value
Value Plus Value Government
Fund Fund Fund Fund
------- -------- -------- ----------
Cost of purchases $10,768 $110,160 $266,106 $113,528
Proceeds from sales 10,923 196,732 899,194 125,430
Included in these transactions were purchases and sales of U.S.
obligations as follows (in thousands):
Select Value
Value Plus Value Government
Fund Fund Fund Fund
------- -------- -------- ----------
Cost of purchases $ -- $ -- $ -- $103,842
Proceeds from sales -- -- -- 118,567
At December 31, 1999, the gross unrealized appreciation and depreciation on
securities for tax purposes were as follows (in thousands):
Select Value
Value Plus Value Government
Fund Fund Fund Fund
------- -------- --------- ----------
Appreciation $ 591 $ 12,042 $ 427,660 $ 152
Depreciation (400) (9,624) (107,122) (1,167)
------- -------- --------- --------
Net Unrealized $ 191 $ 2,418 $ 320,538 $ (1,015)
======= ======== ========= ========
29
<PAGE>
At December 31, 1999, the cost of securities for Federal income tax
purposes was as follows (in thousands):
<TABLE>
<CAPTION>
Select Value
Value Plus Value Government
Fund Fund Fund Fund
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Tax cost $ 7,258 $ 83,524 $ 886,443 $ 43,786
</TABLE>
(8) Fund Share Transactions
For the period from January 1, 1998 through December 31, 1999, Fund share
transactions were as follows:
<TABLE>
<CAPTION>
Select Value
Value Plus
Fund Fund
------------- ---------------
<S> <C> <C>
Shares issued 984,374 7,301,781
Reinvested dividends from net
investment income and distributions
from net realized gains on investments 20,177 259,697
Shares redeemed (1,069,670) (13,782,321)
------------- ---------------
Net decrease in Fund shares (65,119) (6,220,843)
============== ================
Value Government
Fund Fund
------------- ---------------
Shares issued 6,267,508 1,240,691
Reinvested dividends from net
investment income and distributions
from net realized gains on investments 97,413 249,068
Shares redeemed (26,397,406) (2,251,446)
------------- ---------------
Net decrease in Fund shares (20,032,485) (761,687)
============== ================
</TABLE>
For the period from January 1, 1998 through December 31, 1998, Fund share
transactions were as follows:
<TABLE>
<CAPTION>
Select Value
Value Plus
Fund Fund
------------- ---------------
<S> <C> <C>
Shares issued 401,310 14,346,157
Reinvested dividends from net
investment income and distributions
from net realized gains on investments 30,175 642,360
Shares redeemed (382,841) (23,197,247)
------------- ---------------
Net increase (decrease) in Fund shares 48,644 (8,208,730)
============== ================
Value Government
Fund Fund
------------- ---------------
Shares issued (non-merger) 10,451,409 2,677,140
Shares issued (merger related) 3,534,686 --
Reinvested dividends from net
investment income and distributions
from net realized gains on investments 1,151,769 233,351
Shares redeemed (25,157,053) (2,383,080)
------------- ---------------
Net increase (decrease) in Fund shares (10,019,189) 527,411
============== ================
</TABLE>
(9) Transactions with Affiliates
The following companies are affiliated with the Value Plus and Value Funds;
that is, the Funds held 5% or more of the outstanding voting securities
during the period from January 1, 1999 through December 31, 1999. Such
companies are defined in Section (2)(a)(3) of the Investment Company Act of
1940.
30
<PAGE>
Value Plus Fund
<TABLE>
<CAPTION>
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1999 Purchases Sales Dec. 31, 1999 Dividends (Losses)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cooker Restaurant Corporation 500,000 100,000 600,000 0 $ 50,000 $(2,594,419)
Decorator Industries, Inc. 312,500 37,500 400 349,600 95,319 (315)
Hanover Foods Corporation (Class A) 0 50,500 0 50,500 47,218 0
Insteel Industries, Inc. 430,800 0 30,800 400,000 77,118 13,991
Lufkin Industries, Inc. 80,900 269,100 0 350,000 185,490 0
Oil-Dri Corporation of America 470,000 0 370,000 100,000 135,900 (783,538)
Tab Products Company 211,100 288,900 0 500,000 81,425 0
WRP Corporation 0 400,000 26,000 374,000 0 (110,556)
-------- ------------
$672,470 $(3,474,837)
======== ============
</TABLE>
Value Fund
<TABLE>
<CAPTION>
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1999 Purchases Sales Dec. 31, 1999 Dividends (Losses)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ACT Networks, Inc. 823,100 0 823,100 0 $ 0 $ 4,372,973
Advocat, Inc. 530,500 0 530,500 0 0 (2,328,846)
Akita Drilling Ltd. (Class A) 748,600 0 0 748,600 145,862 0
Aldila, Inc. 962,300 37,700 1,000,000 0 0 (2,011,399)
Align-Rite International, Inc. 300,000 0 300,000 0 0 1,743,641
Allied Healthcare Products, Inc. 775,000 0 0 775,000 0 0
The Alpine Group, Inc. 1,008,100 0 108,100 900,000 0 1,224,743
American Buildings Company 500,000 0 500,000 0 0 4,484,155
American Physicians Service Group, Inc. 187,200 0 0 187,200 0 0
Amwest Insurance Group, Inc. 242,000/(1)/ 0 0 242,000 87,120 0
Asia Pacific Wire & Cable Corporation Ltd. 700,000 6,000 0 706,000 0 0
Badger Meter, Inc. 200,000 0 0 200,000 144,000 0
Baldwin Piano & Organ Company 331,500 0 331,500 0 0 (1,798,267)
Bay Bancshares, Inc. 124,900 1,400 29,800 96,500 36,018 35,396
Barrett Business Services, Inc. 625,000 7,400 249,100 383,300 0 (1,485,622)
Bitstream, Inc. 492,200 90,000 582,200 0 0 957,494
BTG, Inc. 800,000 0 0 800,000 0 0
Buckhead America Corporation 184,600 0 0 184,600 0 0
Business Resource Group 486,000 14,000 0 500,000 0 0
Cameron Ashley Building Products, Inc. 500,000 0 0 500,000 0 0
Campbell Resources, Inc. 12,000,000 0 12,000,000 0 0 (2,009,398)
Caretenders Health Corporation 308,900 0 0 308,900 0 0
Catalina Lighting, Inc. 710,000 0 0 710,000 0 0
Catherine Stores Corporation 500,000 0 500,000 0 0 5,329,408
CHC Helicopter Corporation (Class A) 536,000 26,000 0 562,000 0 0
The Cherry Corporation (Class A) 957,000 0 12,200 944,800 0 13,443
Chic By H.I.S., Inc. 985,000 0 985,000 0 0 (3,641,073)
Children's Broadcasting Corporation 680,000 0 680,000 0 0 (1,499,311)
Children's Comprehensive Services, Inc. 275,000 185,000 0 460,000 0 0
Chronimed, Inc. 500,000 110,000 110,000 500,000 0 49,544
Ciprico, Inc. 490,000 0 137,000 353,000 0 (216,773)
Clayton Williams Energy, Inc. 595,000 0 293,800 301,200 0 769,302
Cohesion Technologies, Inc. 878,500 0 878,500 0 0 1,029,306
Collagen Aesthetics, Inc. 878,500 0 878,500 0 0 2,976,061
Comdial Corporation 500,000 43,500 2,300 541,200 0 862
Commonwealth Industries, Inc. 963,200 0 263,200 700,000 179,520 (336,201)
Cross-Continent Auto Retailers, Inc. 859,100 0 859,100 0 0 2,491,192
Crown Central Petroleum Corp. (Class B) 800,000 100,000 0 900,000 0 0
CSP, Inc. 364,430/(2)/ 0 364,430 0 0 1,689,029
Cyrk International, Inc. 1,000,000 100,000 1,000,000 100,000 0 (4,123,558)
DataTRAK International, Inc./(3)/ 600,000 0 364,946 235,054 0 (111,813)
Datron Systems, Inc. 250,000 0 0 250,000 0 0
Davel Communications, Inc. 360,184 0 360,184 0 3,602/(4)/ (3,087,114)
</TABLE>
31
<PAGE>
Value Fund [cont'd]
<TABLE>
<CAPTION>
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1999 Purchases Sales Dec. 31, 1999 Dividends (Losses)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Diamond Home Services, Inc. 569,000 251,000 820,000 0 $ 0 $(4,164,347)
Digi International, Inc. 510,000 265,000 185,000 590,000 0 198,161
Donnelly Corporation 351,800 48,200 0 400,000 145,700 0
Duckwall-ALCO Stores, Inc. 370,000 0 0 370,000 0 0
Durakon Industries, Inc. 500,000 0 500,000 0 0 3,473,825
Dynamic Materials Corporation 250,000 0 0 250,000 0 0
ECC International Corporation 700,000 0 700,000 0 0 778,676
EDAP TMS S.A. 790,000 50,000 0 840,000 0 0
Edusoft Ltd. 373,400 0 373,400 0 0 594,130
Effective Management Systems, Inc. 375,000 0 375,000 0 0 (431,927)
Environmental Technologies Corporation 476,000 0 476,000 0 0 (3,577,017)
Executone Information Systems, Inc. 3,403,400 704,600 1,108,000 3,000,000 0 7,752,198
EZCorp, Inc. (Class A) 700,000 18,100 0 718,100 35,453 0
FiberMark, Inc. 391,600 0 0 391,600 0 0
Filene's Basement Corporation 2,000,000 0 2,000,000 0 0 (5,652,384)
Financial Industries Corporation 300,000 0 0 300,000 0 0
Flour City International, Inc. 500,000 0 500,000 0 0 (2,147,087)
Franklin Bank National Association 183,300 2,500 0 185,800 52,024 0
Gundle/SLT Environmental, Inc. 662,800 0 0 662,800 0 0
GZA GeoEnvironmental Technologies, Inc. 372,700 0 0 372,700 0 0
Hallmark Financial Services, Inc. 1,060,000 0 0 1,060,000 0 0
Hallwood Energy Corporation 477,540/(5)/ 0 0 477,540 0 0
Hampshire Group Ltd. 206,000 46,800 0 252,800 0 0
Hanover Foods Corporation (Class A) 50,500 0 50,500 0 13,888 426,938
Harding Lawson Associates Group, Inc. 327,500 73,100 8,000 392,600 0 (19,401)
Health Power, Inc. 350,000 0 10,000 340,000 0 (94,250)
HealthRite, Inc. 500,000 0 500,000 0 0 (1,167,026)
High Plains Corporation 1,500,000 0 0 1,500,000 0 0
HMN Financial, Inc. 250,500 2,700 0 253,200 80,600 0
Home Federal Bancorp 290,250 0 22,000 268,250 138,624 393,121
Home Security International, Inc. 500,000 0 500,000 0 0 (4,081,864)
Hotelworks.com, Inc./(6)/ 0 1,000,000 0 1,000,000 0 0
Howell Corporation 540,000 0 540,000 0 21,080 (3,988,603)
IEC Electronics Corporation 728,800 0 366,400 362,400 0 (2,218,481)
ImmuLogic Pharmaceutical Corp. 2,000,000 0 2,000,000 0 0 (1,309,991)
In Home Health, Inc. 533,333 0 63,232 470,101 0 9,628
Intercontinental Life Corporation 451,600/(7)/ 0 0 451,600 0 0
InterDigital Communications Corp. 4,500,000 0 2,500,000 2,000,000 0 28,894,359
International Aircraft Investors 430,000 0 0 430,000 0 0
International Airline Support Group, Inc. 250,000 0 0 250,000 0 0
Iwerks Entertainment, Inc. 1,100,000 0 0 1,100,000 0 0
Jaco Electronics, Inc. 380,000 0 0 380,000 0 0
John B. Sanfilippo & Son, Inc. 355,000 145,000 0 500,000 0 0
K-Tron International, Inc. 122,000 78,000 0 200,000 0 0
Kentucky Electric Steel Company, Inc. 450,000 0 346,500 103,500 0 (1,691,781)
LaCrosse Footwear, Inc. 447,800 52,200 0 500,000 65,000 0
LAI Worldwide, Inc. 610,000 0 610,000 0 0 283,495
Lindal Cedar Homes, Inc. 405,400 0 60,000 345,400 0 (90,005)
Magal Security Systems Ltd. 650,000 0 0 650,000 65,000 0
Marten Transport Ltd. 333,300 0 0 333,300 0 0
Martin Industries, Inc. 450,000 0 0 450,000 28,350 0
Matrix Service Company 600,000 0 0 600,000 0 0
Matrix Pharmaceutical, Inc. 2,100,000 0 1,227,000 873,000 0 5,277,208
Maxicare Health Plans, Inc. 1,000,000 0 0 1,000,000 0 0
Medical Graphics Corporation 543,450 0 543,450 0 0 (388,526)
Meadow Valley Corporation 150,000 100,000 0 250,000 0 0
MFRI, Inc. 400,000 0 0 400,000 0 0
Minntech Corporation 600,000 0 0 600,000 60,000 0
</TABLE>
32
<PAGE>
Value Fund [cont'd]
<TABLE>
<CAPTION>
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1999 Purchases Sales Dec. 31, 1999 Dividends (Losses)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MMI Companies, Inc. 400,000 1,000,000 0 1,400,000 $252,000 $ 0
Moore Medical Corporation 200,000 0 200,000 0 0 (1,260,053)
Morgan Products Ltd. 850,000 0 850,000 0 0 (1,340,874)
Motor Club of America 146,000 22,500 0 168,500 0 0
MYR Group, Inc. 501,600 0 1,600 500,000 75,120 9,991
M/A/R/C, Inc. 300,000 0 300,000 0 60,900 3,464,789
M-Wave, Inc. 300,000 0 5,000 295,000 0 6,815
NABI, Inc. 3,200,000 0 55,000 3,145,000 0 (1,155)
National Home Health Care Corp. 242,900 152,100 0 395,000 0 0
Networks North, Inc. 200,000 0 102,500 97,500 0 (10,987)
New Brunswick Scientific Company, Inc. 304,850/(8)/ 0 304,850 0 0 767,416
Northwest Equity Corporation 80,000 0 80,000 0 13,600 1,059,346
Nu Horizons Electronics Corporation 735,000/(9)/ 0 85,000 650,000 0 254,076
O.I. Corporation, Inc. 333,100 0 6,600 326,500 0 9,725
Ontro, Inc. 333,900 0 333,900 0 0 (58,514)
Orthologic Corporation 1,196,400 618,600 0 1,815,000 0 0
Osmonics, Inc. 1,275,600 0 687,600 588,000 0 (4,695,599)
Outlook Group Corporation 467,500 0 0 467,500 0 0
Patrick Industries, Inc. 312,000 5,000 0 317,000 50,250 0
PDK Labs, Inc. 380,000 0 380,000 0 0 479,260
Pentech International, Inc. 694,900 55,000 0 749,900 0 0
Petsec Energy Ltd. (ADR) 2,108,300 0 2,108,300 0 0 (13,807,166)
Planar Systems, Inc. 400,000 358,900 258,900 500,000 0 (1,318,720)
Play By Play Toys and Novelties, Inc. 400,000 340,000 740,000 0 0 (4,132,243)
PremiumWear, Inc. 200,000 9,000 0 209,000 0 0
PXRE Corporation 600,000 0 600,000 0 361,552 (6,130,270)
Ramsay Youth Services, Inc./(11)/ 700,000 753,000 702,600 750,400 0 (1,610,040)
Raytel Medical Corporation 880,000 0 0 880,000 0 0
Remington Oil & Gas Corporation 1,500,000 0 817,100 682,900 0 (2,875,097)
RightCHOICE Managed Care, Inc. (Class A) 960,500 0 290,500 670,000 0 (964,004)
Riviera Tool Company 336,262/(12)/ 0 0 336,262 0 0
The Rottlund Company, Inc. 550,000 6,000 0 556,000 0 0
Roy F. Weston, Inc. (Class A) 990,000 0 0 990,000 0 0
Salient 3 Communications, Inc. 300,000 102,500 0 402,500 0 0
Saucony, Inc. (Class B) 610,000 0 210,000 400,000 0 3,828,096
Scan-Optics, Inc. 550,000 50,000 0 600,000 0 0
The Seibels Bruce Group, Inc. 500,000 150,000 650,000 0 0 (2,234,357)
Sholodge, Inc. 550,000 0 20,000 530,000 0 (103,754)
Six Rivers National Bank 93,300 0 0 93,300 0 0
Smartflex Systems, Inc. 550,000 50,000 600,000 0 0 612,274
Southern Energy Homes, Inc. 950,000 150,000 1,100,000 0 0 (4,727,063)
SpaceLabs Medical, Inc. 0 500,000 0 500,000 0 0
Spar Group, Inc./(10)/ 545,000 0 545,000 0 0 (1,740,443)
Speizman Industries, Inc. 296,000 6,000 2,000 300,000 0 1,190
Starcraft Corporation 400,000 0 400,000 0 0 811,190
Strattec Security Corporation 497,000 0 200,000 297,000 0 3,242,414
Strouds, Inc. 700,000 0 700,000 0 0 (860,018)
Sunrise International Leasing Corporation 630,000 0 630,000 0 0 56,031
Suprema Specialties, Inc. 340,600 0 340,600 0 0 1,020,447
Technology Research Corporation 500,000 0 500,000 0 4,025 (1,687,746)
Tech-Sym Corporation 353,000 0 84,400 268,600 0 (381,273)
Teltrend, Inc. 500,000 0 176,100 323,900 0 2,145,657
Tipperary Corporation 1,300,000 0 1,300,000 0 0 (4,498,423)
Todhunter International, Inc. 490,000 0 0 490,000 0 0
Trak Auto Corporation 490,500 0 490,500 0 0 (1,006,115)
TransCoastal Marine Services, Inc. 850,000 150,000 0 1,000,000 0 0
Trimark Holdings, Inc. 400,000 0 400,000 0 0 (713,038)
</TABLE>
33
<PAGE>
Value Fund [cont'd]
<TABLE>
<CAPTION>
Share Share Realized
Balance at Balance at Gains
Security Name Jan. 1, 1999 Purchases Sales Dec. 31, 1999 Dividends (Losses)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Urocor, Inc. 500,000 200,000 0 700,000 $ 0 $ 0
U.S. Global Investors, Inc. 588,300 66,700 55,000 600,000 0 40,309
Verdant Brands, Inc. 1,311,000 0 1,311,000 0 0 (1,348,224)
Webco Industries, Inc. 300,000 175,500 0 475,500 0 0
World of Science, Inc. 286,000 14,000 300,000 0 0 (1,007,990)
Zindart Ltd. (ADR) 315,700 134,300 0 450,000 0 0
----------- -------------
$ 2,119,288 $(19,127,917)
=========== =============
</TABLE>
(1) Adjusted for 10% stock dividend.
(2) Adjusted for 10% stock dividend.
(3) Name changed from Collaborative Clinical Research, Inc.
(4) Proceeds from sale of rights $0.01/share.
(5) Adjusted for Hallwood Consolidated Resource Corporation merger into
Hallwood Energy Corp. for $1.5918/share.
(6) Name changed from Hospitality Worldwide Services, Inc. effective December
29, 1999.
(7) Adjusted for 2 for 1 stock split.
(8) Adjusted for 10% stock dividend.
(9) Adjusted for 5% stock dividend.
(10) Name changed from PIA Merchandising Services, Inc.
(11) Name changed from Ramsay Health Care, Inc.
(12) Adjusted for 5% stock dividend.
END OF NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Federal Income Tax Information (Unaudited)
In early 2000, shareholders received information regarding all distributions
paid to them by the Funds during calendar year 1999. The Funds hereby designate
the following amounts as long-term capital gain distributions.
<TABLE>
<CAPTION>
Select Value Mid Cap
Value Plus Value Government Value
Fund Fund Fund Fund Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Gains $138,062 $ -- $18,836,147 $ -- $ --
Taxed @ 20%
</TABLE>
The amounts above include $17,048,369 of earnings and profits distributed to
shareholders on redemptions for the Value Fund.
For the Select Value, Value Plus, Value, and Mid Cap Value Funds, the percentage
of ordinary income which is eligible for the corporate dividend received
deduction for the fiscal year ended December 31, 1999, is 61.07%, 53.79%, 0.00%
and 0.00%, respectively.
Shareholder Meeting Voting Results (Unaudited)
A Special Meeting of the shareholders of the Mid Cap Value Fund was held at 758
North Broadway, Milwaukee, Wisconsin, on November 30, 1999. The shareholders
cast the following vote on the proposal presented, as applicable:
Proposal - To consider and adopt a Plan of Liquidation pursuant to which the
Fund's assets will be liquidated, known liabilities satisfied and remaining
proceeds distributed to shareholders.
Yes No Abstain
--------- -------- ---------
Mid Cap Value Fund 390,530 25,153 31,236
34
<PAGE>
[LOGO APPEARS HERE]
Value Report
December 31, 1999
Notes on value investing
for investors in the Heartland
Municipal Funds
Annual Report
to Shareholders
Heartland Short Duration
High-Yield Municipal Fund
Heartland High-Yield
Municipal Bond Fund
<PAGE>
Value Report
It Was The Best of Times. It Was The Worst of Times.
We have reversed the opening lines of Charles Dickens's A Tale of Two Cities to
--------------------
describe this year's bond market. 1999 was actually the worst year for the bond
market in the last century. If you look at the numbers from the bond market peak
in October, 1998, it truly has been the worst of times. From its peak to trough
over this 14 month period, Treasury Bond futures declined 18% and municipal bond
futures dropped 17%.
In 1999, municipal bonds generally under-performed Treasuries. In general,
municipal bond credit quality remained quite good, but just about everything
else that could go wrong in the muni bond market did. Supply was strong, and the
combination of tax-loss selling, the flight of corporate capital from the
market, and municipal bond fund redemptions weakened demand considerably. Add
rising interest rates and Y2K jitters to this mix and the end result was sharply
declining muni-bond prices.
Why was 1999 also the best of times? Heartland's Short Duration High-Yield
Municipal Fund delivered positive returns and the High-Yield Municipal Bond Fund
experienced a very modest decline in this dreadful municipal bond market. The
positive 3-year track record for both funds was recognized by Morningstar Inc.
who awarded each fund its highest rating of 5-stars among 1636 municipal funds
in the Municipal Bond Category for the three year period ended 12/31/99./1/
How did we accomplish this? Primarily by reducing duration and, therefore,
interest rate exposure in anticipation of a very robust economy, and through
comprehensive fundamental research on non-rated bonds providing a material yield
advantage over rated issues of comparable credit quality.
For new cash commitments, we also view municipal bonds' outstanding value
relative to Treasuries and U.S. common stocks as a "best of times" situation. At
year-end, municipal bond yields were 96% of Treasury Bond yields. With muni and
Treasury yields almost equal, the after-tax return advantage of municipal bonds
is very near historic highs. We have seen it reach peaks like this before, but
we can't remember a time when muni yields stayed as high relative to Treasury
yields for such an extended period of time. Also, on a risk adjusted basis, we
feel after-tax municipal bond yields are quite attractive relative to historical
returns from stocks.
Looking Ahead
In the municipal bond market, we are beginning to see a modest reduction in new
issuance and dealer inventories, and with January traditionally being a very
active call month (issuers retiring or "calling in" bonds), supply should
contract further. Tax-selling for 1999 is over and Y2K is no longer an issue.
This should help stabilize demand. Also, "retail money" usually flows back into
the municipal bond market after individuals pay their taxes on April 15th. This
could positively affect the flow of funds in the municipal bond market.
<PAGE>
Value Report
Bonds Versus Stocks -- Another "Best of Times" Proposition
We are not in the business of stock market forecasting. However, with the S&P
500 Index near record highs and trading at over 26 times 2000 earnings, it is
fair to say that large cap growth equities are richly valued and that the
downside risk in the stock market has increased substantially. We would suggest
that those high-flying S&P 500 Index funds, which have performed so well over
the last four years and now comprise a big chunk of many investors' total
assets, are no longer a conservative investment.
Sincerely,
/s/ Thomas J. Conlin /s/ Greg D. Winston
Tom Conlin, CFA Greg Winston, CFA
Portfolio Co-Manager Portfolio Co-Manager
INVESTMENT PERFORMANCE
Heartland Short Duration High-Yield Municipal Fund
<TABLE>
<CAPTION>
Average annual total returns
December Equivalent taxable yield as of December 31, 1999
SEC yield/2/ at a 39.6% federal rate 1-year 3-year Since Inception (1/2/97)
<S> <C> <C> <C> <C>
6.77% 11.21% 1.42% 4.15% 4.15%
</TABLE>
Heartland High-Yield Municipal Bond Fund
<TABLE>
<CAPTION>
Average annual total returns
December Equivalent taxable yield as of December 31, 1999
SEC yield/2/ at a 39.6% federal rate 1-year 3-year Since Inception (1/2/97)
<S> <C> <C> <C> <C>
7.66% 12.68% -2.45% 5.14% 5.14%
</TABLE>
/1/Morningstar proprietary ratings are based on 3-, 5-, and 10-year average
annual returns (when available) in excess of three-month Treasury bill
returns with appropriate fee adjustments and a risk factor that reflects fund
performance below the three-month Treasury bill returns. Ratings are subject
to change every month. Of all funds in each category, 10% receive 5-stars and
22.5% receive 4-stars. Highly rated funds are defined as those funds that
have a 4- or 5-star Morningstar rating.
/2/Yields shown are annualized yields for the 30 days ending 12/31/99. Total
returns include reinvestment of all dividends and capital gain distributions.
Performance data reflects fee waivers in effect during the period. Without
subsidization of fees and expenses total returns would have been lower, and
the SEC and equivalent taxable yields would have been 6.41% and 10.61% for
the Short Duration High-Yield Municipal Fund and 7.17% and 11.87% for the
High-Yield Municipal Bond Fund. Income may be subject to state, local and
alternative minimum tax.
These Funds invest primarily in medium- and lower-quality securities which have
higher yield potential but present greater investment and credit risk than
higher-quality securities. These risks may result in greater share price
volatility.
1
<PAGE>
Value Report
Heartland Short Duration High-Yield Municipal Fund
[THOMAS J. CONLIN PHOTO APPEARS HERE]
In 1999, the Fund returned 1.42% compared to the Lehman Brothers Non-Investment
Grade 1-3 Year Municipal Bond Index's 3.66% advance. In fourth quarter 1999, the
Fund returned -0.98% compared to the benchmark index's 0.69% gain.* For the one-
year period ended December 31, 1999, the Fund was rated #1 out of 58 funds
within it's Lipper High-Yield Municipal Debt Fund Category and ranked in the top
23% out of 101 funds in its Morningstar Municipal Bond Short-Term Category. For
more information on the Fund, please see the Fund Fact Sheet on page 6.
Pioneering Elderly Care
[GREG D. WINSTON PHOTO APPEARS HERE]
"We all owe a debt of gratitude to those 50 women from Holyoke, who pioneered
elderly care in western Massachusetts."
The Loomis House, Loomis Communities, and Pioneer Valley Living Center at
Amherst are residential elderly care facilities tracing their origins to a group
of 50 women in Holyoke, Massachusetts, who in 1902 began raising money for the
Holyoke Home for the Aged. The original home was built using funds raised
through card parties, strawberry festivals and donations from local
philanthropists, including William Loomis.
Today, these three facilities provide 275 elderly housing units and the
affiliated Loomis House Nursing Center provides skilled nursing care to their
residents. Occupancy rates for the facilities are in the mid to high 90% range
and demand remains strong.
The Fund owns $2 million Massachusetts Development Finance Agency 5%'s of
7/1/25, which can be put back to the issuer on 7/1/05. These bonds were issued
to
On 12/31/99, the Fund held $2,000,000 par amount of the Loomis Communities,
valued at $1,957,500 and representing 1.60% of the Fund's net assets.
*See page 3 for Fund's standardized returns.
2
<PAGE>
Value Report
refinance the debt used for acquiring Pioneer Valley Living Center and
renovating the other facilities. Interest and principal for the bonds is payable
from the revenues of all the facilities. The bonds are further secured by a
first mortgage lien on the real estate and a reserve fund equal to maximum
annual debt service.
We are pleased to help finance these quality elderly care facilities through
owning what we view as an attractively priced and solid credit. We all owe a
debt of gratitude to those 50 women from Holyoke, who pioneered elderly care in
western Massachusetts.
<TABLE>
<CAPTION>
Short Duration Lehman 1-3yr. Non-Inv. Muni
<S> <C> <C>
Jan-97 10000 10000
10138 10160
Jun-97 10349 10341
10554 10560
Dec-97 10744 10709
10832 10854
Jun-98 10995 10998
11038 11140
Dec-98 11136 11290
11302 11434
Jun-99 11322 11523
11406 11623
Dec-99 11294 11703
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns as of 12/31/99
1-year 3-year Since inception (1/2/97)
<S> <C> <C>
Short Duration High-Yield Municipal Fund
1.42% 4.15% 4.15%
Lehman Brothers Municipal 1-3yr Non-Investment Grade Bond Index
3.66% 5.39% 5.39%
</TABLE>
Past performance is not predictive of future results. 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.
3
<PAGE>
Value Report
Heartland High-Yield Municipal Bond Fund
[THOMAS J. CONLIN PHOTO APPEARS HERE]
In 1999, the Fund returned -2.45% compared to the Lehman Brothers Municipal Non-
Investment Grade Bond Index's 1.80% loss. In fourth quarter 1999, the Fund
returned -3.33% versus the benchmark index's 2.68% loss.* For the one-year
period ended December 31, 1999, the Fund was rated #13 out of 58 funds in it's
Lipper High-Yield Municipal Debt Fund Category. For more information on the
Fund, please see the Fund Fact Sheet on page 7.
A Southern Revival
[GREG D. WINSTON PHOTO APPEARS HERE]
"Given its unique commitment to the community, we think the Housing Authority of
Tupelo will do a great job taking care of its tenants and its bondholders."
The City of Tupelo, Mississippi is renovating Tupelo Apartment Homes, a low
income (primarily elderly) housing project. Built between 1973 and 1989, the
project consists of 242 air conditioned units in 26 wood-frame, brick exterior,
two story buildings on 12.4 acres in town. Project amenities include a swimming
pool and laundry facilities. The present occupancy rate is a low 63%, due to the
many units currently off the market as renovations are being completed. However,
demand appears to be strong, as evidenced by the 77% occupancy rate for the 48
units that became available on September 1, 1999.
The Fund owns $3 million of The Housing Authority of the City of Tupelo,
Mississippi -- Multi-family Housing Revenue Refunding Bonds 7.25%'s of 1/1/29.
These bonds are secured primarily by the gross revenues of the
On 12/31/99, the Fund held $3,000,000 par amount of the Tupelo Apartment Homes
bonds, valued at $2,628,750 and representing 3.35% of the Fund's net assets.
*See page 5 for the Fund's standardized returns.
4
<PAGE>
VALUE REPORT
project. Additional security comes in the form of a first mortgage lien, fund
balances, and an assignment of rents and leases. The issuer is also the manager
of the project, and brings almost 50 years experience managing low income
housing. Given its unique commitment to the community, we think the Housing
Authority of Tupelo will do a great job taking care of its tenants and its
bondholders. In addition, because of the positive demographics and the project
manager's experience we have given these non-rated bonds a BB internal
equivalent credit rating.
High Yield Muni Lehman Non-Inv Muni
Jan-97 10000 10000
10167 10083
Jun-97 10482 10373
10778 10737
Dec-97 11167 11094
11304 11335
Jun-98 11564 11568
11774 11735
Dec-98 11911 11783
12125 11950
Jun-99 12055 11933
12019 11890
Dec-99 11619 11571
- -------------------------------------------------
Average Annual Total Returns as of 12/31/99
1-year
- -------------------------------------------------
High-Yield Municipal Bond Fund
-2.45% 5.14% 5.14%
- -------------------------------------------------
Lehman Municipal Non-Investment Grade Bond Index
-1.80% 4.99% 4.99%
- -------------------------------------------------
Past performance is no guarantee of future results. 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.
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.
- --------------------------------------------------------------------------------
Heartland Short Duration High-Yield Municipal Fund
- --------------------------------------------------------------------------------
Equivalent taxable Average annual total returns as
December yield at a 39.6% of December 31, 1999
SEC yield/1/ federal rate 1-year 3-year since inception
- --------------------------------------------------------------------------------
6.77% 11.21% 1.42% 4.15% 4.15%
- --------------------------------------------------------------------------------
FUND FACTS
Sales commission................ None Net assets............ $122.2 mil.
Share price..................... $9.56 Number of holdings.... 71
Weighted average duration....... 3.00 yrs. Inception............. 1/2/97
<TABLE>
<CAPTION>
% OF
TOP 5 HOLDINGS COUPON MATURITY CALL NET ASSETS
<S> <C> <C> <C> <C>
Jefferson County, TX Health Fac. Dev. Corp............ 8.875% 06/01/2021 06/01/2000 5.26%
Tarrant Cty., TX Health Fac. Dev. Corp................ 8.250 08/01/2028 08/01/2002 5.20
Allegheny County, PA Industrial Dev. Auth............. 6.800 01/01/2005 - 5.01
Tulsa County, OK Industrial Auth...................... 8.250 03/01/2020 03/01/2002 4.33
Independence, MO Tax Increment Revenue................ 8.750 04/01/2015 04/01/2004 4.14
</TABLE>
PORTFOLIO COMPOSITION
[PIE CHART APPEARS HERE]
Nursing 27.14%
Retirement 24.04%
Multifamily 11.52%
Other 9.98%
Hospital 27.32%
Other revenue................... 8.20%
Resource recovery............... 7.82
Mental health................... 4.36
IDR............................. 2.75
Cash & equiv.................... -13.15
All information is as of December 31, 1999, and is subject to change.
/1/ Yields shown are annualized yields for the 30 days ended 12/31/99. Total
returns include reinvestment of all dividends and capital gain
distributions. Performance data reflects fee waivers in effect during the
period. Without subsidization of fees and expenses total returns would have
been lower, and the SEC and equivalent taxable yields would have been 6.41%
and 10.61%. Income may be subject to state, local and alternative minimum
tax.
This Fund invests primarily in medium- and lower-quality securities which have
higher yield potential but present greater investment and credit risk than
higher-quality securities. These risks may result in greater share price
volatility.
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.
Heartland High-Yield Municipal Bond Fund
- --------------------------------------------------------------------------------
Equivalent taxable Average annual total returns as
December yield at a 39.6% of December 31, 1999
SEC yield/1/ federal rate 1-year 3-year since inception
- --------------------------------------------------------------------------------
7.66% 12.68% -2.45% 5.14% 5.14%
- --------------------------------------------------------------------------------
FUND FACTS
<TABLE>
<S> <C> <C> <C>
Sales commission................ None Net assets........... $78.5 mil.
Share price..................... $9.50 Number of holdings... 54
Weighted average duration....... 10.40 yrs. Inception............ 1/2/97
</TABLE>
<TABLE>
<CAPTION>
% OF
TOP 5 HOLDINGS COUPON MATURITY CALL NET ASSETS
<S> <C> <C> <C> <C>
Worth, IL Nursing Home.............................. 7.250% 12/15/2027 12/15/2002 4.49%
Tarrant County, TX Health Fac. Dev. Corp............ 8.000 08/01/2025 08/01/2002 4.29
Tulsa County, OK Industrial Authority............... 7.250 03/01/2029 03/01/2002 3.91
Pike County, OH Hospital Facilities................. 7.000 07/01/2022 07/01/2007 3.48
Sumter County, FL Industrial Dev. Authority......... 6.750 04/01/2029 04/01/2009 3.45
</TABLE>
PORTFOLIO COMPOSITION
[PIE CHART APPEARS HERE]
Nursing 29.73%
Mental health 14.83%
Hospital 11.87%
Other 13.57%
Multifamily 30.00%
Retirement.............. 10.98%
Other revenue........... 6.54
Resource recovery....... 4.86
Water & sewer........... 2.45
Cash & equiv. .......... -11.26
All information is as of December 31, 1999, and is subject to change.
/1/ Yields shown are annualized yields for the 30 days ended 12/31/99. Total
returns include reinvestment of all dividends and capital gain
distributions. Performance data reflects fee waivers in effect during the
period. Without subsidization of fees and expenses total returns would have
been lower, and the SEC and equivalent taxable yields would have been 7.17%
and 11.87%. Income may be subject to state, local and alternative minimum
tax.
This Fund invests primarily in medium- and lower-quality securities which have
higher yield potential but present greater investment and credit risk than
higher-quality securities. These risks may result in greater share price
volatility.
7
<PAGE>
VALUE REPORT
Definitions
Lehman Brothers Municipal 1-3 Year Non-Investment Grade Index is an unmanaged
index and includes issues which have a maximum credit rating of Ba1, were issued
as part of an offering of at least $20 million, have an amount outstanding of at
least $3 million, have a maturity of 1 to 3 years, and were issued after
December 31, 1990.
Lehman Brothers Municipal Non-Investment Grade Index includes issues which have
a maximum credit rating of Ba1, were issued as part of an offering of at least
$20 million, have an amount outstanding of at least $3 million, have a maturity
of at least one year, and were issued after December 31, 1990.
Lipper High Yield Municipal Debt Fund Category is an equally weighted
performance index, adjusted for capital gains distributions and income dividends
of the largest qualifying funds in the investment objective, consisting of 10
funds. Qualifying funds generally consist of those that invest at least 50% of
their assets in lower rated municipal debt issues.
Morningstar Municipal Bond Short-Term Category consists of funds with an average
duration of less than 4.5 years or an average maturity of less than 5 years.
8
<PAGE>
Heartland Funds at a Glance
Heartland Advisors offers several ways to diversify your investments. Our
focused value philosophy will complement holdings that are heavily growth
oriented, and our funds offer solid asset allocation choices for both the fixed
income and equity portions of your portfolio.
Our value style is aimed at rewarding patient, long-term investors by
discovering under-researched, under-followed and under-valued companies.
Fundamental to this approach is exhaustive proprietary analysis that seeks to
identify catalysts which could return these companies to much higher valuations.
In general, with mutual funds, as with other investments, the higher the risk,
the greater the potential return over time. Each investor should choose an
investment strategy that matches his or her particular investment goals. 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.
The Firstar Money Market Fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although the Fund
seeks to preserve the value of your investment at $1.00 per share, it is
possible to lose money by investing in the Fund.
9
<PAGE>
The Heartland Family of Funds
Value Fund
Value Plus Fund
Select Value Fund
Government Fund
Taxable Short Duration Municipal Fund
Short Duration High-Yield Municipal Fund
High-Yield Municipal Bond Fund
Wisconsin Tax Free Fund
(available to Wisconsin residents only)
Firstar Money Market Fund
[LOGO APPEAR HERE] Heartland Funds
----------------------------------
AMERICA'S VALUE INVESTORS
1.800.HEARTLN (1.800.432.7856)
WWW.heartlandfunds.com
Financial Advisor Services: 1.800.442.6391
Heartland Advisors, Inc.
789 N. Water St., Milwaukee, WI 53202
Distributor, Member SIPC.
The performance data quoted represents past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
These are not recommendations to buy or sell the securities discussed, but
rather illustrations of our value investment strategy. Statements regarding
particular securities represent the portfolio manager's views when made and are
subject to change at any time based on market and other considerations. Complete
portfolios for the Funds will be included in the Annual and Semi-Annual Reports
to Shareholders. Income from the Wisconsin Tax Free Fund may be subject to
alternative minimum tax and income from the Short Duration High-Yield Municipal
Fund and the High-Yield Municipal Bond Fund may be subject to state, local and
alternative minimum tax.
This material may only be used when preceded or accompanied by a prospectus for
the Fund(s) listed on the front cover. If you would like more complete
information on any other Fund, including charges and expenses, please call for a
prospectus or visit Heartland's website. Read it carefully before you invest.
Printed on Recycled Paper
[RECYCLED PAPER LOGO APPEARS HERE]
<PAGE>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS . December 31, 1999
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 110.62% COUPON MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 110.62%
ALABAMA - 2.85%
$ 325,000 Valley, Alabama Special Care Facilities Finance Authority -
Lanier Memorial Hospital...................................... 4.650% 11/01/2002 $ 316,063
3,000,000 West Jefferson, Alabama Amusement & Public Park Authority -
Visionland Alabama (Callable 02/01/2004)(a)................... 8.000 02/01/2021 3,161,250
-----------
3,477,313
CONNECTICUT - 4.90%
1,225,000 Connecticut State Development Authority -
Alzheimer's Resource Center (a)............................... 6.875 08/15/2004 1,276,962
4,625,000 Connecticut State Development Authority -
Alzheimer's Resource Center
(Callable 08/15/2004) (a)..................................... 7.125 08/15/2014 4,705,937
-----------
5,982,899
FLORIDA - 8.86%
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 1,241,100
890,000 Lee County, Florida Industrial Development
Authority - Cypress Cove at Healthpark,
Florida, Inc. Project......................................... 5.600 10/01/2004 866,637
585,000 Lee County, Florida Industrial Development
Authority - Cypress Cove at Healthpark,
Florida, Inc. Project (a)..................................... 5.700 10/01/2005 567,450
1,745,000 Seminole County, Florida Industrial Development Authority -
RHA/Fern Park MR, Incorporated (Callable 01/01/2000).......... 9.250 04/01/2012 1,797,350
2,980,000 Sumter County, Florida Industrial Development Authority -
Wecare Nursing Center (Callable 04/01/2004)................... 8.000 04/01/2014 3,114,100
1,225,000 Tarpon Springs, Florida Health Facilities Authority -
Helen Ellis Memorial Hospital (Callable 05/01/2001)........... 7.500 05/01/2011 1,226,531
2,000,000 Tarpon Springs, Florida Health Facilities Authority -
Helen Ellis Memorial Hospital (Callable 05/01/2001)........... 7.625 05/01/2021 2,010,000
-----------
10,823,168
GEORGIA - 3.36%
1,200,000 Clayton County, Georgia Development Authority IDR -
Outboard Marine Corporation (Callable 04/01/2000)............. 6.000 10/01/2002 1,179,000
3,220,000 Houston County, Georgia Development Authority -
Emerald Coast Housing (Callable 08/01/2008)................... 6.850 08/01/2018 2,930,200
-----------
4,109,200
ILLINOIS - 6.76%
4,805,000 Granite City, Illinois Hospital Facilities Revenue -
St. Elizabeth Medical Center (Callable 01/01/2000)............ 8.125 06/01/2008 4,666,986
1,500,000 Illinois Health Facilities Authority - Bohemian Home -
Tabor Hills Health Care (Callable 11/15/2003)(a).............. 5.250 11/15/2028 1,305,000
2,430,000 Worth, Illinois Nursing Home Revenue - Belhaven
Convalescent Center (Callable 12/15/2002)..................... 6.200 12/15/2007 2,284,200
-----------
8,256,186
</TABLE>
<PAGE>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [cont'd] . December 31, 1999
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 110.62% [cont'd] COUPON MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 110.62% [cont'd]
IOWA - 6.21%
$4,000,000 Cedar Rapids, Iowa First Mortgage Revenue -
Cottage Grove Place (Callable 07/01/2005) (a)................. 5.625% 07/01/2028 $4,000,000
1,500,000 Elk Horn, Iowa Health Care Facility -
Salem Lutheran Homes (Callable 04/01/2003).................... 7.250 04/01/2018 1,460,625
1,335,000 Iowa Finance Authority Health Care Facilities -
Care Initiatives (a).......................................... 5.500 07/01/2008 1,256,569
900,000 Ottumwa, Iowa Revenue - Penn Place -
Regional Retirement Living (Callable 02/15/2003).............. 5.150 02/15/2028 867,375
----------
7,584,569
LOUISIANA - 4.60%
3,875,000 Louisiana Health Education Authority -
Lambeth House (Callable 01/01/2007) (a)....................... 5.625 01/01/2028 3,681,250
1,835,000 Louisiana Public Facilities Authority -
Beverly Enterprises, Incorporated
(Callable 09/01/2002)......................................... 8.250 09/01/2008 1,933,631
----------
5,614,881
MASSACHUSETTS - 3.05%
945,000 Massachusetts Industrial Finance Agency - Glenmeadow
Retirement Community (Callable 02/15/2003).................... 5.000 02/15/2026 923,738
970,000 Massachusetts Industrial Finance Agency - Glenmeadow
Retirement Community (Callable 02/15/2006).................... 5.250 02/15/2026 929,988
2,000,000 Massachusetts Development Finance Agency -
Loomis Communities (Callable 07/01/2005)...................... 5.000 07/01/2025 1,872,500
----------
3,726,226
MINNESOTA - 4.31%
900,000 Maplewood, Minnesota Health Care Facility -
Healtheast Care System (Callable 11/15/2001).................. 5.800 11/15/2003 871,875
2,000,000 South St. Paul, Minnesota Housing and
Redevelopment Authority - Healtheast Care System
(Callable 11/01/2004)......................................... 6.750 11/01/2009 1,952,500
2,650,000 St. Paul, Minnesota Housing and Redevelopment Authority -
Healtheast Care System (Callable 11/01/2003).................. 6.625 11/01/2017 2,434,688
----------
5,259,063
MISSOURI - 6.28%
4,740,000 Independence, Missouri Tax Increment Revenue -
Homart Development Company (Callable 04/01/2004).............. 8.750 04/01/2015 5,054,025
2,880,000 Kansas City, Missouri - Industrial Development Authority
Kingswood Project (Callable 11/15/2008)....................... 5.375 11/15/2009 2,617,200
----------
7,671,225
NEW JERSEY - 4.64%
3,485,000 New Jersey Economic Development Authority -
Sayreville Senior Living Centre (Callable 04/01/2004)......... 8.000 04/01/2014 3,711,525
2,000,000 New Jersey Health Care Facilities Finance Authority -
Trinitas Hospital (Callable 07/01/2010) (b)................... 7.375 07/01/2015 1,957,500
----------
5,669,025
NEW MEXICO - 0.80%
1,000,000 Santa Fe County, New Mexico Project Revenue -
El Castillo Retirement Residences (Callable 05/15/2000)(a).... 5.250 05/15/2028 971,250
</TABLE>
<PAGE>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [cont'd] . December 31, 1999
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 110.62% [cont'd] COUPON MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 110.62% [cont'd]
NEW YORK - 5.29%
$2,855,000 Erie County, NY Industrial Development Agency -
DePaul Properties, Incorporated (Callable 09/01/2002)......... 6.500% 09/01/2018 $ 2,794,331
3,655,000 Fulton County, NY Industrial Development Agency -
Nathan Littauer Hospital Association (Callable 11/01/2001).... 7.000 11/01/2004 3,664,137
-----------
6,458,468
OHIO - 3.46%
887,544 Clark County, Ohio Industrial Development Revenue -
Main Associates Project (Callable 01/01/2000)................. 8.000 11/01/2005 850,932
1,050,000 Montgomery County, Ohio Health Care Facilities -
Friendship Village of Dayton (Callable 02/01/2001)(a)......... 5.375 02/01/2022 1,026,375
1,700,000 Montgomery County, Ohio Health Care Facilities -
Friendship Village of Dayton (Callable 02/01/2003)............ 5.500 02/01/2007 1,619,250
745,000 Ohio Capital Corporation for Housing
Bella Vista Section 8 Assisted Project........................ 7.250 02/01/2002 731,963
-----------
4,228,520
OKLAHOMA- 5.12%
1,065,000 Tulsa County, Oklahoma Industrial Authority -
Multifamily Housing 1st Mortgage Revenue
(Callable 12/01/2005)......................................... 7.400 12/01/2017 970,481
5,135,000 Tulsa County, Oklahoma Industrial Authority -
Tulsa-American Housing Foundation Apartments
(Callable 03/01/2002)......................................... 8.250 03/01/2020 5,289,050
-----------
6,259,531
PENNSYLVANIA - 18.97%
275,000 Allegheny County, Pennsylvania Hospital Development
Authority - Allegheny Valley Hospital
(Callable 08/01/2000)......................................... 7.600 08/01/2001 271,906
295,000 Allegheny County, Pennsylvania Hospital Development
Authority - Allegheny Valley Hospital
(Callable 08/01/2000)......................................... 7.700 08/01/2002 289,837
6,400,000 Allegheny County, Pennsylvania Industrial Development
Authority - Lanchester Energy Partners........................ 6.800 01/01/2005 6,120,000
1,545,000 Cumberland County, Pennsylvania Industrial Development
Revenue - Beverly Enterprises, Incorporated................... 5.300 10/01/2003 1,490,925
2,000,000 Cumberland County, Pennsylvania Industrial Development
Revenue - Beverly Enterprises, Incorporated
(Callable 10/01/2003)......................................... 5.500 10/01/2008 1,865,000
4,270,000 Cumberland County, Pennsylvania Industrial Municipal
Authority - Carlisle Hospital and Health Services
(Callable 11/15/2004)......................................... 6.800 11/15/2014 4,227,300
586,000 Montgomery County, Pennsylvania Industrial Development
Authority Revenue - Meadowood Corporation
(Callable 01/01/2000)......................................... 5.150 12/01/2003 566,955
2,550,000 Philadelphia Authority for Industrial Development -
The Baptist Home of Philadelphia
(Callable 11/15/2000)(a)...................................... 5.250 11/15/2028 2,460,750
955,000 Scranton-Lackawanna Health & Welfare Authority -
Moses Taylor Hospital......................................... 5.550 07/01/2004 910,831
1,000,000 Scranton-Lackawanna Health & Welfare Authority -
Moses Taylor Hospital......................................... 5.650 07/01/2005 945,000
605,000 Washington County, Pennsylvania Hospital Authority -
Cannonsburg General Hospital
(Callable 06/01/2003)......................................... 7.350 06/01/2013 582,313
3,600,000 Westmoreland County, Pennsylvania Industrial Development
Authority - Lancaster Energy Partners......................... 6.800 01/01/2005 3,447,000
-----------
23,177,817
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [cont'd] . December 31, 1999
- ------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 110.62% [cont'd] COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 110.62% [cont'd]
TEXAS - 16.62%
$1,000,000 Danforth, Texas Health Facilities Corporation -
Heritage Duval Gardens (Callable 07/01/2003).................. 7.375% 07/01/2028 $ 888,750
6,405,000 Jefferson County, Texas Health Facilities Development
Corporation - Baptist Healthcare System (Callable 06/01/2000). 8.875 06/01/2021 6,421,012
190,000 Rusk County, Texas Health Facilities Corporation - Sugarland
Retirement Communities (Callable 03/01/2000).................. 6.375 03/01/2006 181,213
270,000 Rusk County, Texas Health Facilities Corporation - Sugarland
Retirement Communities (Callable 03/01/2000).................. 6.500 03/01/2007 256,163
155,000 Rusk County, Texas Health Facilities Corporation - Sugarland
Retirement Communities (Callable 03/01/2000).................. 6.625 03/01/2008 146,281
1,430,000 Rusk County, Texas Health Facilities Corporation - Sugarland
Retirement Communities (Callable 03/01/2000).................. 7.500 03/01/2014 1,322,750
1,800,000 Rusk County, Texas Health Facilities Corporation - Sugarland
Retirement Communities (Callable 03/01/2000).................. 7.750 03/01/2019 1,656,000
1,000,000 San Antonio, Texas Health Facilities Development Corporation -
Beverly Enterprises, Incorporated (Callable 12/01/2002)....... 8.250 12/01/2019 1,055,000
810,000 Tarrant County, Texas Health Facilities Development
Corporation - St. Joseph Long Term Care Facility
(Callable 05/01/2001)......................................... 6.500 05/01/2004 780,638
6,930,000 Tarrant County, Texas Health Facilities Development
Corporation - Westchester Retirement Communities
(Callable 08/01/2002)......................................... 8.250 08/01/2028 6,349,613
1,345,000 Wharton, Texas Housing Development Corporation -
University Place Apartments................................... 5.500 06/01/2010 1,242,444
------------
20,299,864
VIRGINIA - 2.48%
1,250,000 Hopewell, Virginia Industrial Development Authority -
Stone Container Corporation (Callable 06/01/2002)............. 8.250 06/01/2016 1,323,437
1,745,000 Newport News, Virginia Redevelopment & Housing Authority -
St. Michael's Apartments (Callable 11/01/2002)................ 7.625 11/01/2018 1,707,919
------------
3,031,356
WISCONSIN - 2.06%
2,455,000 Wisconsin Health & Education Facilities Authority -
Benchmark Healthcare of Wisconsin (Callable 10/15/2006)....... 8.500 10/15/2026 2,528,650
------------
TOTAL MUNICIPAL BONDS (Cost $141,224,239)............................................... $135,129,211
------------
TOTAL LONG-TERM INVESTMENTS (Cost $141,224,239)......................................... $135,129,211
------------
</TABLE>
<PAGE>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [cont'd] . December 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT SHORT-TERM INVESTMENTS - 2.53% COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 2.53%
ALABAMA - 0.30%
$ 370,000 Valley, Alabama Special Care Facilities Finance Authority -
Lanier Memorial Hospital...................................... 5.000% 11/01/2000 $ 370,477
MASSACHUSETTS - 1.04%
1,260,000 Massachusetts Industrial Finance Agency - Reeds Landing
Project (Callable 01/01/2000)................................. 7.750 10/01/2000 1,267,661
NEW JERSEY - 0.98%
1,410,396 South Amboy, New Jersey Housing Authority - Shore Gate
Village Grand Project (c)(d).................................. 6.000 12/20/1999 1,198,836
PENNSYLVANIA - 0.21%
255,000 Allegheny County, Pennsylvania Hospital Development Authority -
Allegheny Valley Hospital..................................... 7.500 08/01/2000 253,651
------------
TOTAL MUNICIPAL BONDS (Cost $3,295,699)................................................. $ 3,090,625
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $3,295,699).......................................... $ 3,090,625
------------
TOTAL INVESTMENTS (Cost $144,519,938)............... 113.15% $138,219,836
Liabilities, less cash and receivables.............. (13.15) (16,067,924)
------- ------------
TOTAL NET ASSETS.................................... 100.00% $122,151,912
======= ============
</TABLE>
(a) All or a portion of security committed to cover collateral
requirements for futures contracts and/or when-issued
securities.
(b) When-issued security.
(c) Defaulted security.
(d) Valued at fair value using methods determined by the Board of
Directors.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS . December 31, 1999
- --------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 111.26% COUPON MATURITY VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 111.26%
ALABAMA - 4.87%
$1,921,860 Mobile, Alabama Industrial Development Board -
Mobile Energy Services (Callable 01/01/2005) (a)............. 6.950% 01/01/2020 $ 845,618
1,985,000 Vance, Alabama Governmental Utility Services Corporation -
Sewer Services Revenue (Callable 10/01/2007)................. 7.500 10/01/2018 1,920,488
1,000,000 West Jefferson, Alabama Amusement and Public Park Authority -
Visionland Alabama (Callable 02/01/2004)..................... 8.000 02/01/2021 1,053,750
-----------
3,819,856
COLORADO - 1.16%
1,000,000 Colorado Health Facilities Authority -
Rocky Mountain Adventist (Callable 02/01/2003)............... 6.625 02/01/2013 911,250
FLORIDA - 8.88%
2,000,000 Mexico Beach, Florida Public Service Facilities -
Heritage House of Sarasota (Callable 12/01/2002)............. 8.000 12/01/2027 1,817,500
2,370,000 Seminole County, Florida Industrial Development Authority -
RHA/Fern Park MR, Incorporated (Callable 01/01/2000)......... 9.250 04/01/2012 2,441,100
3,135,000 Sumter County, Florida Industrial Development Authority -
Wecare Nursing Center (Callable 04/01/2009).................. 6.750 04/01/2029 2,707,856
-----------
6,966,456
GEORGIA - 2.95%
2,575,000 Houston County, Georgia Development Authority -
Grantley, Incorporated Project (Callable 04/01/2003)......... 7.375 04/01/2028 2,317,500
ILLINOIS - 12.51%
200,000 Chicago, Illinois Health Facilities -
Heritage Care of Chicago (Callable 07/01/2003)............... 7.200 07/01/2010 185,750
200,000 Chicago, Illinois Health Facilities -
Heritage Care of Chicago (Callable 07/01/2003)............... 7.300 07/01/2011 185,000
1,000,000 Chicago, Illinois Health Facilities -
Heritage Care of Chicago (Callable 07/01/2003)............... 7.625 07/01/2028 892,500
1,870,000 Granite City, Illinois Hospital Facility Revenue -
St. Elizabeth Medical Center (Callable 01/01/2000)........... 8.125 06/01/2008 1,816,238
2,000,000 Illinois Development Finance Authority -
Spring Grove Apartments (Callable 01/01/2009)................ 7.000 01/01/2029 1,747,500
2,450,000 Robbins Illinois Resource Recovery Revenue -
Robbins Resource Recovery (Callable 10/15/2006).............. 8.375 10/15/2016 1,470,000
3,950,000 Worth, Illinois Nursing Home Revenue - Belhaven
Convalescent Center (Callable 12/15/2002).................... 7.250 12/15/2027 3,520,438
-----------
9,817,426
INDIANA - 2.20%
715,000 Beech Grove, Indiana Economic Development Revenue -
Diplomat South Apartments (Callable 01/01/2003).............. 7.000 01/01/2028 656,012
1,200,000 Beech Grove, Indiana Economic Development Revenue -
Beech Grove Village Apartments (Callable 01/01/2003)......... 7.000 01/01/2028 1,074,000
-----------
1,730,012
LOUISIANA - 3.03%
2,700,000 Louisiana Housing Finance Agency -
Southside Villa Apartments (Callable 07/01/2003)............. 7.000 07/01/2028 2,376,000
MASSACHUSETTS - 3.40%
2,985,000 Massachusetts Development Finance Agency -
MCHSP Human Services Providers (Callable 07/01/2009)......... 6.750 07/01/2018 2,667,844
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS [cont'd] . December 31, 1999
- --------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 111.26% [cont'd] COUPON MATURITY VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 111.26% [cont'd]
MICHIGAN - 2.96%
$1,140,000 Redford Township, Michigan Economic Development Corporation -
The Malachi Corporation (Callable 05/01/2003) (a)............ 7.500% 05/01/2028 $1,001,775
1,500,000 Riverview, Michigan Economic Development Corporation -
The Malachi Corporation (Callable 05/01/2003) (a)............ 7.500 05/01/2028 1,318,125
----------
2,319,900
MINNESOTA - 3.18%
3,000,000 Cuyuna Range Hospital District (Callable 06/01/2007).......... 6.000 06/01/2029 2,493,750
MISSISSIPPI - 3.35%
3,000,000 Tupelo, Mississippi Housing Authority -
Tupelo Apartment Homes (Callable 01/01/2004)................. 7.250 01/01/2029 2,628,750
MISSOURI - 3.79%
1,350,000 Jackson County, Missouri Industrial Development Authority -
Santa Fe Village (Callable 07/01/2004)....................... 7.000 07/01/2019 1,215,000
150,000 Jackson County, Missouri Industrial Development Authority -
Santa Fe Village (Callable 07/01/2004)....................... 7.000 07/01/2029 132,750
1,675,000 St. Louis County, Missouri Industrial Development Authority -
Dasal Caring Centers (Callable 12/01/2007)................... 7.750 12/01/2016 1,626,844
----------
2,974,594
NEW JERSEY - 5.01%
1,500,000 New Jersey Health Care Facilities Finance Authority -
Raritan Bay Medical Center (Callable 07/01/2004)............. 7.250 07/01/2027 1,365,000
2,965,000 New Jersey Economic Development Authority -
Sayreville Senior Living Centre (Callable 04/01/2009)........ 6.375 04/01/2029 2,564,725
----------
3,929,725
NEW YORK - 1.07%
975,000 New York City Industrial Development Authority -
A Very Special Place, Inc. (Callable 07/01/2009)............. 5.750 01/01/2029 845,813
OHIO - 4.80%
435,000 Franklin County, Ohio Hospital Facilities -
Worthington Christian Village................................ 7.875 06/01/2005 413,793
675,000 Franklin County, Ohio Hospital Facilities -
Worthington Christian Village (Callable 06/01/2005).......... 8.000 06/01/2010 623,531
3,000,000 Pike County, Ohio Hospital Facilities -
Pike Health Services (Callable 07/01/2007)................... 7.000 07/01/2022 2,730,000
----------
3,767,324
OKLAHOMA - 9.58%
3,000,000 Tulsa County, Oklahoma Industrial Authority -
Multifamily Housing 1st Mortgage Revenue
(Callable 12/01/2005)........................................ 7.500 12/01/2027 2,692,500
2,000,000 Tulsa County, Oklahoma Industrial Authority -
Shadybrook Apartments (Callable 07/01/2003).................. 6.375 07/01/2028 1,762,500
3,500,000 Tulsa County, Oklahoma Industrial Authority -
Tulsa-America Housing Foundation Apartments
(Callable 03/01/2002)........................................ 7.250 03/01/2029 3,066,875
----------
7,521,875
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS [cont'd] . December 31, 1999
- --------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 111.26% [cont'd] COUPON MATURITY VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 111.26% [cont'd]
PENNSYLVANIA - 1.91%
$1,600,000 Westmoreland County, Pennsylvania Industrial Development
Authority - Lanchester Energy Partners........................ 7.000% 01/01/2008 $ 1,498,000
TENNESSEE - 2.21%
630,000 Shelby County, Tennessee Health, Education & Housing
Facilities - Winfield Village of Cordova
(Callable 08/29/2006)......................................... 8.500 07/01/2026 633,150
1,225,000 Sweetwater, Tennessee Industrial Development Board -
Wood Presbyterian Home (Callable 01/01/2006).................. 7.750 01/01/2029 1,099,437
-----------
1,732,587
TEXAS - 20.19%
2,370,000 Bexar County, Texas Housing Finance Corporation -
King's Point & Thompson Place Apartments
(Callable 07/01/2003)......................................... 7.000 07/01/2028 2,115,225
665,000 Danforth, Texas Health Facilities Corporation -
Sam Houston Long Term Care Facility
(Callable 03/01/2004)......................................... 8.250 03/01/2027 620,112
1,500,000 Danforth, Texas Health Facilities Corporation -
Heritage Duval Gardens (Callable 07/01/2003).................. 7.375 07/01/2028 1,333,125
2,405,000 Edinburg, Texas Industrial Development Corporation -
Water Park Project............................................ 7.000 09/01/2006 2,056,275
2,620,000 Edinburg, Texas Industrial Development Corporation -
Water Park Project (Callable 09/01/2008)...................... 7.500 09/01/2023 2,023,950
3,000,000 Lubbock, Texas Health Facilities Development Corporation -
Carillon, Inc. (Callable 07/01/2009).......................... 6.500 07/01/2019 2,681,250
1,095,000 Rusk County, Texas Health Facilities Corporation -
Sugarland Retirement Communities
(Callable 03/01/2000)......................................... 8.250 03/01/2028 1,000,556
3,750,000 Tarrant County, Texas Health Facilities Development
Corporation - Westchester Retirement Communities
(Callable 08/01/2002)......................................... 8.000 08/01/2025 3,365,625
685,000 Tarrant County, Texas Health Facilities Development
Corporation - St. Joseph Long Term Care Facility
(Callable 05/01/2004)......................................... 8.500 05/01/2027 653,319
-----------
15,849,437
VIRGINIA - 2.91%
2,500,000 Newport News, Virginia Redevelopment & Housing Authority -
St. Michaels Apartment (Callable 11/01/2008).................. 7.250 11/01/2028 2,281,250
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS [cont'd] . December 31, 1999
- --------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 111.26% [cont'd] COUPON MATURITY VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 111.26% [cont'd]
WISCONSIN - 11.30%
$1,535,000 Wisconsin Health & Education Facilities Authority -
Benchmark Healthcare of Wisconsin
(Callable 10/15/2006)........................................ 8.500% 10/15/2026 $ 1,581,050
2,430,000 Wisconsin Health & Education Facilities Authority -
Benchmark Healthcare of Green Bay
(Callable 05/01/2007)........................................ 7.750 05/01/2027 2,311,539
580,000 Wisconsin Health & Education Facilities Authority -
Benchmark Healthcare of Green Bay
(Callable 12/01/2008)........................................ 6.750 12/01/2028 487,200
2,000,000 Wisconsin Health & Education Facilities Authority -
Community Rehabilitation Providers
(Callable 12/01/2008)........................................ 6.875 12/01/2023 1,795,000
1,000,000 Wisconsin Health & Education Facilities Authority -
RFDF, Incorporated Project (Callable 07/15/2007)............. 7.375 07/15/2027 897,500
2,000,000 Wisconsin Health & Education Facilities Authority -
The Millennium Housing Foundation
(Callable 07/01/2008)........................................ 6.100 01/01/2028 1,797,500
-----------
8,869,789
TOTAL MUNICIPAL BONDS (Cost $95,382,260)............................................. $87,319,138
-----------
TOTAL LONG-TERM INVESTMENTS (Cost $95,382,260)....................................... $87,319,138
-----------
TOTAL INVESTMENTS (Cost $95,382,260).................. 111.26% $87,319,138
Liabilities, less cash and receivables................ (11.26) (8,835,453)
------ -----------
TOTAL NET ASSETS...................................... 100.0% $78,483,685
====== ===========
</TABLE>
(a) Defaulted security.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES . December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Short
Duration
High-Yield High-Yield
Municipal Municipal
ASSETS: Fund Bond Fund
------------ -------------
<S> <C> <C>
Investments in securities, at cost............................ $144,519,938 $ 95,382,260
============ =============
Investments in securities, at value........................... $138,219,836 $ 87,319,138
Cash.......................................................... 102,021 25,401
Receivable from securities sold............................... 989,622 -
Receivable from fund shares sold.............................. 772,925 15,973
Accrued interest.............................................. 2,726,539 2,214,467
Variation margin on open futures contracts.................... 6,523 -
Prepaid expenses.............................................. 7,492 2,937
Deferred organization expenses................................ 9,457 9,457
Receivable from Advisor for expense reimbursement............. 46,125 45,941
------------ -------------
Total Assets............................................... 142,880,540 89,633,314
------------ -------------
LIABILITIES:
Payable for securities purchased.............................. 2,986,635 -
Payable for fund shares redeemed.............................. 3,625,174 797,516
Short-term notes payable...................................... 14,000,000 10,200,000
Distributions payable......................................... 58,185 102,704
Payable to Advisor for fund accounting fee.................... 1,668 1,314
Payable to Advisor for deferred organization expenses......... 9,457 9,457
Accrued interest payable...................................... 7,029 5,121
Accrued expenses.............................................. 40,480 33,517
------------ -------------
Total Liabilities.......................................... 20,728,628 11,149,629
------------ -------------
TOTAL NET ASSETS................................................... $122,151,912 $ 78,483,685
============ =============
NET ASSETS CONSIST OF:
Paid in capital............................................... $130,140,706 $ 86,636,856
Accumulated undistributed net investment income............... 22,897 20,350
Accumulated undistributed net realized losses on investments.. (2,113,959) (110,399)
Net unrealized depreciation on investments.................... (5,897,732) (8,063,122)
------------ -------------
TOTAL NET ASSETS................................................... $122,151,912 $ 78,483,685
============ =============
SHARES OUTSTANDING, $.001 par value
(100,000,000 shares authorized for each Fund)................ 12,775,712 8,258,505
============ =============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE..... $ 9.56 $ 9.50
============ =============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
For the period from January 1, 1999 to December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Short
Duration
High-Yield High-Yield
Municipal Municipal
INVESTMENT INCOME: Fund Bond Fund
------------ ------------
<S> <C> <C>
Interest.......................................... $ 9,809,615 $ 6,780,368
------------ ------------
Total investment income....................... 9,809,615 6,780,368
------------ ------------
EXPENSES:
Management fees................................... 609,797 557,904
Distribution fees................................. 381,123 232,460
Interest expense.................................. 123,386 83,149
Transfer agent fees............................... 104,138 70,971
Registration fees................................. 34,478 40,830
Printing and communications....................... 19,008 13,738
Postage........................................... 18,281 12,797
Directors' fees................................... 17,446 15,314
Custodian fees.................................... 15,513 10,260
Audit fees........................................ 15,088 12,847
Fund accounting fees.............................. 14,174 10,958
Legal fees........................................ 10,054 3,314
Amortization of deferred organization expenses.... 4,729 4,729
Other operating expenses.......................... 31,327 23,752
------------ ------------
Total expenses................................. 1,398,542 1,093,023
Less: Fees paid indirectly..................... (7,951) (5,519)
Less: Expense reimbursement.................... (255,077) (209,087)
------------ ------------
Net expenses................................... 1,135,514 878,417
------------ ------------
NET INVESTMENT INCOME.................................. 8,674,101 5,901,951
------------ ------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on:
Securities..................................... (1,021,514) (466,219)
Futures contracts.............................. 1,658,045 558,676
Net increase (decrease) in unrealized
appreciation on:
Securities..................................... (7,288,604) (8,369,746)
Futures contracts.............................. 411,514 5,889
------------ ------------
TOTAL REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS.......................................... (6,240,559) (8,271,400)
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS...................................... $ 2,433,542 $(2,369,449)
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Short Duration High-Yield High-Yield Municipal
Municipal Fund Bond Fund
----------------------------- -----------------------------
Year Ended Year Ended Year Ended Year ended
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1999 Dec. 31, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income....................................... $ 8,674,101 $ 7,752,447 $ 5,901,951 $ 3,430,471
Net realized gains (losses) on investments.................. 636,531 (2,755,226) 92,457 151,394
Net increase (decrease) in unrealized appreciation
on investments............................................. (6,877,090) 115,052 (8,363,857) (146,572)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets resulting
from operations......................................... 2,433,542 5,112,273 (2,369,449) 3,435,293
------------- ------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income....................................... (8,684,665) (7,752,971) (5,912,027) (3,430,471)
Net realized gains on investments........................... -- -- -- (591,377)
------------- ------------- ------------- -------------
Total distributions to shareholders...................... (8,684,665) (7,752,971) (5,912,027) (4,021,848)
FUND SHARE ACTIVITIES:
Proceeds from shares issued................................. 112,656,415 160,079,181 84,344,005 91,876,973
Reinvested dividends from net investment income
and distributions from net realized gains on investments... 7,898,800 6,808,295 4,965,536 3,475,849
Cost of shares redeemed..................................... (141,795,585) (135,545,191) (75,999,185) (51,919,536)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets derived
from Fund share activities.............................. (21,240,370) 31,342,285 13,310,356 43,433,286
------------- ------------- ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS.......................... (27,491,493) 28,701,587 5,028,880 42,846,731
NET ASSETS AT THE BEGINNING OF THE PERIOD........................ 149,643,405 120,941,818 73,454,805 30,608,074
------------- ------------- ------------- -------------
NET ASSETS AT THE END OF THE PERIOD.............................. $ 122,151,912 $ 149,643,405 $ 78,483,685 $ 73,454,805
============= ============= ============= =============
UNDISTRIBUTED NET INVESTMENT INCOME.............................. $ 22,897 $ 369 $ 20,350 $ --
============= ============= ============= =============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Short Duration High-Yield High-Yield Municipal
Municipal Fund Bond Fund
------------------------------------------------- -------------------------------------------------
For the For the Jan. 2, 1997/1/ For the For the Jan. 2, 1997/1/
year ended year ended through year ended year ended through
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
------------- ------------- --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Data
Net asset value,
beginning of period....... $ 9.98 $ 10.15 $ 10.00 $ 10.38 $ 10.45 $ 10.00
Income (loss) from
investment operations:
Net investment income... 0.56 0.53 0.57 0.65 0.65 0.68
Net realized and
unrealized gains
(losses) on
investments............ (0.42) (0.17) 0.15 (0.88) 0.03 0.48
------------- ------------- --------------- ------------- ------------- -----------
Total income (loss)
from investment
operations............ 0.14 0.36 0.72 (0.23) 0.68 1.16
------------- ------------- --------------- ------------- ------------- -----------
Less distributions from:
Net investment income... (0.56) (0.53) (0.57) (0.65) (0.65) (0.68)
Net realized gains on
investments............ -- -- -- -- (0.10) (0.03)
------------- ------------- --------------- ------------- ------------- -----------
Total distributions.... (0.56) (0.53) (0.57) (0.65) (0.75) (0.71)
------------- ------------- --------------- ------------- ------------- -----------
Net asset value, end of
period.................... $ 9.56 $ 9.98 $ 10.15 $ 9.50 $ 10.38 $ 10.45
============= ============= =============== ============= ============= ===========
Total Return............... 1.42% 3.65% 7.44% (2.45)% 6.66% 11.67%
Ratios and Supplemental
Data
Net assets, end of
period
(in thousands)......... $ 122,152 $ 149,643 $ 120,942 $ 78,484 $ 73,455 $ 30,608
Ratio of net expenses
to average net assets.. 0.75%/2/ 0.62%/2/ 0.00%/2/ 0.95%/3/ 0.76%/3/ 0.00%/3/
Ratio of net investment
income to average net
assets................. 5.69%/2/ 5.26%/2/ 5.33%/2/ 6.35%/3/ 6.01%/3/ 6.01%/3/
Portfolio turnover rate. 71% 215% 175% 95% 223% 439%
</TABLE>
(1) Commencement of operations.
(2) If there had been no fees paid indirectly or expense reimbursement and
management fee waiver by the Advisor, the ratios of net expenses to average
net assets for the periods ended December 31, 1999, December 31, 1998 and
December 31, 1997 would have been 0.92%, 0.80% and 0.84%, respectively, and
the ratios of net investment income to average net assets would have been
5.52%, 5.08% and 4.49%, respectively.
(3) If there had been no fees paid indirectly or expense reimbursement and
management fee waiver by the Advisor, the ratios of net expenses to average
net assets for the periods ended December 31, 1999, December 31, 1998 and
December 31, 1997 would have been 1.18%, 1.08% and 1.25%, respectively, and
the ratios of net investment income to average net assets would have been
6.12%, 5.69% and 4.76%, respectively.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS . December 31, 1999
- --------------------------------------------------------------------------------
(1) Organization
The Heartland Group, Inc. ("the Corporation") is registered as an open-end
management investment 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
eight series of funds issued by the Corporation at December 31, 1999.
(2) Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Funds in the preparation of their 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 loss may be valued at acquisition cost, plus or minus any
amortized discount or premium. Securities 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, 1999, the Short Duration High-Yield Municipal Fund had
a Federal income tax capital loss carryforward of $27,690 expiring in
2005; $500,994 expiring in 2006; and $1,182,905 expiring in 2007. The
High-Yield Municipal Bond Fund had a Federal income tax capital less
carryforward of $110,399 expiring in 2007. The Funds do not intend to
make distributions of any future realized capital gains until their
Federal income tax capital loss carryforwards are completely utilized.
Statement of Position 93-2 requires that permanent financial reporting
and tax differences be reclassified to paid in capital. Net assets are
not affected by these reclassifications.
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.
(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 at least 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.
(e) 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.
(f) 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.
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
the 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, 1999:
Short Duration High-Yield Municipal Fund
<TABLE>
<CAPTION>
Number Expiration Unrealized Notional
Type of Contracts Date Appreciation Value
---- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C>
Municipal Bond Index (213) March 2000 $402,370 $(19,695,844)
</TABLE>
(g) The Funds entered into a fee arrangement with their custodian bank
which provided for a reduction in custody fees based upon net amounts
of uninvested cash balances. The reduction of custody expenses is shown
on the Statement of Operations as "Fees paid indirectly."
(h) 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
<PAGE>
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
Deutsche Bank AG made available to seven of the eight series of funds
issued by the Corporation, including the Short Duration High-Yield
Municipal and High-Yield Municipal Bond Funds, a $100 million credit
facility pursuant to a Credit Agreement ("Agreement"), most recently
amended December 29, 1998. The primary purpose of the Agreement is to allow
the Funds to avoid liquidating securities under circumstances which the
Advisor believes are unfavorable to shareholders. Outstanding principal
amounts under the credit facility bear interest at a rate per annum equal
to the New York Interbank Offering Rate plus 0.4% or the prime rate.
Commitment fees are computed at a rate per annum equal to .08% of the
Funds' proportional daily average unutilized credit. During the period from
January 1, 1999 through December 31, 1999, the Short Duration High-Yield
Municipal Fund had an outstanding average balance of $2,033,425 at an
average interest rate of 5.66% and a maximum outstanding balance of
$14,000,000; and the High-Yield Municipal Bond Fund had an outstanding
average balance of $1,366,301 at an average interest rate of 5.73% and a
maximum outstanding balance of $10,200,000. Interest expense and commitment
fees accrued for the period from January 1, 1999 through December 31, 1999
were $123,386 and $3,804, respectively, for the Short Duration High-Yield
Municipal Fund, and $83,149 and $3,555, respectively, for the High-Yield
Municipal Bond Fund.
(4) Investment Management Fees and Transactions with Related Parties
The Funds have management agreements with Heartland Advisors, Inc. (the
"Advisor") to serve as investment advisor and manager. Under the terms of
the agreements, the Short Duration High-Yield Municipal Fund pays the
Advisor a monthly management fee at the annual rate of 0.40% of the average
daily net assets of the Fund and the High-Yield Municipal Bond Fund pays
the Advisor a monthly management fee at the annual rate of 0.60% of the
average daily net assets of the Fund.
Effective May 1, 1999, the Funds entered into an agreement with the Advisor
to perform certain bookkeeping and accounting services. Under the terms of
the agreement, each Fund pays the Advisor a monthly fee at an annual rate
of $12,500 plus 0.0085% of average daily net assets over $50 million.
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 0.25% of their daily net assets.
The Advisor voluntarily committed to waive the entire management and Rule
12b-1 fees and to reimburse all other expenses for the Funds for the fiscal
year ending December 31, 1997. Effective January 1, 1998, the Advisor
reduced the amount of this waiver and reimbursement each month by 0.15% on
an annualized basis, but voluntarily reimbursed the Funds to the extent
that annual total fund operating expenses exceeded 0.75% for the Short
Duration High-Yield Municipal Fund and 0.95% for the High-Yield Municipal
Bond Fund.
Effective May 1, 1999, the Advisor contractually committed to waive fees
paid through April 30, 2000, to the extent that annual fund operating
expenses exceed 0.75% for the Short Duration High-Yield Municipal Fund and
0.95% for the High-Yield Municipal Bond Fund. After that date, the Advisor
may reinstate all or a portion of the Funds' fees or discontinue waivers
and reimbursements at any time. If the Funds' operating expenses fall below
the expense limitation, the Funds will begin paying the Advisor for fees
previously waived and expenses previously reimbursed. This repayment will
continue for up to three years after the end of the fiscal year in which a
fee is waived or an expense is paid, subject to any expense limitation then
in effect, until the Funds have repaid the Advisor for the entire amount or
such three-year period expires. For the period May 1, 1999 to December 31,
1999, the Advisor waived/reimbursed expenses of $191,372 and $159,963 for
the Short Duration High-Yield Municipal and High-Yield Municipal Bond
Funds, respectively, which are subject to potential repayment by the Funds,
expiring at December 31, 2002.
Officers and certain directors of the Corporation are also officers and/or
directors of Heartland Advisors, Inc.; however, they receive no
compensation from the Funds.
As permitted under Rule 10f-3 of the Investment Company Act of 1940, the
Board of Directors of the Corporation has adopted a plan which will allow
the Funds, under certain conditions described in the Rule, to acquire
newly-issued securities from syndicates in which the Distributor is a
member.
(5) Deferred Organization Expenses
Organization expenses have been deferred and are being amortized on a
straight-line basis over sixty months. Payments for these expenses were
advanced by the Advisor, who will be reimbursed by the Funds over the same
period. The proceeds of any redemption of the initial shares by the
original shareholders will be reduced by a pro-rata portion of any then
unamortized expenses. Unamortized deferred organizational expenses and the
related payable to the Advisor at December 31, 1999, were $9,457 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.
<PAGE>
(6) Investment Transactions
During the period from January 1, 1999 through December 31, 1999, purchases
and sales of securities, other than short-term obligations, were as follows
(in thousands):
<TABLE>
<CAPTION>
Short Duration High-Yield
High-Yield Municipal
Municipal Fund Bond Fund
-------------- ----------
<S> <C> <C>
Cost of purchases $ 107,954 $ 106,987
Proceeds from sales 109,881 87,166
</TABLE>
At December 31, 1999, the gross unrealized appreciation and depreciation on
securities for tax purposes were as follows (in thousands):
<TABLE>
<CAPTION>
Short Duration High-Yield
High-Yield Municipal
Municipal Fund Bond Fund
-------------- ----------
<S> <C> <C>
Appreciation $ 45 $ 417
Depreciation (6,345) (8,480)
----------- ----------
Net Unrealized Depreciation $ (6,300) $ (8,063)
=========== ==========
</TABLE>
Cost of investments is the same for financial reporting purposes and
Federal income tax purposes.
(7) Fund Share Transactions
For the period from January 1, 1999 through December 31, 1999, Fund share
transactions were as follows:
<TABLE>
<CAPTION>
Short Duration High-Yield
High-Yield Municipal
Municipal Fund Bond Fund
-------------- ----------
<S> <C> <C>
Shares issued 11,386,623 8,250,843
Reinvested dividends from net investment income 802,077 494,372
Shares redeemed (14,412,482) (7,562,899)
----------- ----------
Net increase (decrease) in Fund shares (2,223,782) 1,182,316
=========== ==========
</TABLE>
For the period from January 1, 1998 through December 31, 1998 Fund share
transactions were as follows:
<TABLE>
<CAPTION>
Short Duration High-Yield
High-Yield Municipal
Municipal Fund Bond Fund
-------------- ----------
<S> <C> <C>
Shares issued 15,872,132 8,791,614
Reinvested dividends from net investment income
and distributions from net realized gains on investments 676,603 333,153
Shares redeemed (13,467,910) (4,978,359)
----------- ----------
Net increase in Fund shares 3,080,825 4,146,408
=========== ==========
</TABLE>
END OF NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Federal Income Tax Information (Unaudited)
In early 2000, shareholders received information regarding all distributions
paid to them by the Funds during calendar year 1999. No long-term capital gain
distributions were designated. For the year ended December 31, 1999, all of the
amounts distributed were from tax-exempt income.
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 Short Duration High-
Yield Municipal Fund and the Heartland High-Yield Municipal Bond Fund (two of
the eight portfolios of Heartland Group, Inc., and hereafter referred to as the
"Funds") at December 31, 1999, the results of each of their operations, the
changes in each of their net assets and the financial highlights for each of the
periods indicated, in conformity with accounting principles generally accepted
in the United States. 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 audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States, 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
audits, which included confirmation of securities at December 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Milwaukee, Wisconsin PricewaterhouseCoopers LLP
February 7, 2000
<PAGE>
[LOGO APPEARS HERE]
AMERICA'S VALUE INVESTOR
Value Report
December 31, 1999
Notes on value investing
for investors in the Heartland
Wisconsin Tax Free Fund
Annual Report
to Shareholders
Heartland Wisconsin
Tax Free Fund
<PAGE>
Value Report
[PATRICK J. RETZER PHOTO APPEARS HERE]
A Toast to the New Millennium
Dear Fellow Shareholders,
The last year of the millennium was a difficult one for bonds in general and
municipal bonds in particular. A stronger than anticipated economy and rising
inflation took its toll on virtually all fixed income sectors, and 1999 went on
the books as the worst year for bonds in this century. Municipal bonds were hit
especially hard, as supply surged with issuers rushing to get deals done before
Y2K and demand plunged. Although the Heartland Wisconsin Tax Free Fund
outperformed its market index and finished near the top of its competitive peer
group, it still posted a modest loss for the year.
At issue today, is whether the economic and market forces that punished bonds in
1999 will persist in the year ahead. The consensus is expecting the economy to
continue to barrel along, inflation to trend higher, and additional Federal
Reserve rate hikes in the year 2000. This scenario is already fully discounted
in bond prices.
We don't agree with the consensus. New home construction, generally a very
accurate leading indicator of economic growth trends, slowed in the last two
months of 1999. We believe after this year's holiday season extravagances,
consumers will begin to tighten their purse strings and we will see further
evidence of economic deceleration. The Federal Reserve may well hike short-term
interest rates one or more times in early 2000. However, we think the Fed's
commitment to fighting inflation will be viewed as good news for intermediate
and long-term bonds, which we believe will rally in the year ahead.
Specific to the municipal bond market, we expect to see supply contract after
last years Y2K prompted surge. Demand should stabilize as inflationary concerns
diminish. The silver lining to last years muni bond market cloud is that
municipal bond yields closed the year almost at parity with Treasury Bond
yields. This gives municipal bonds an even greater after-tax return advantage
over Treasuries.
As always, we remind Wisconsin residents that the Heartland Wisconsin Tax Free
Fund is double tax-free*, providing an even greater after-tax return advantage
than general municipal bond funds. We are also pleased to point out that the
Fund outperformed the three other Wisconsin municipal
*For certain investors, a portion of the Fund's income may be subject to the
alternative minimum tax. Other fees and expenses apply to a continued
investment in the Fund and are described in the Fund's current prospectus.
<PAGE>
VALUE REPORT
[THOMAS J. CONLIN PHOTO APPEARS HERE]
bond funds currently available (all of which have sales loads/1/) for the year
ended December 31, 1999 and continues to carry a 4-Star Morningstar rating
(overall rating as of December 31, 1999, out of 1636 Municipal Bond Funds/2/).
Being the biggest, and we like to think the best managed muni bond fund in
Wisconsin, our size gives us the economies of scale the small competitors lack.
This factor continues to have its advantages.
Sincerely,
/s/ Pat Retzer /s/ Thomas J. Conlin
Patrick J. Retzer, CPA Thomas J. Conlin, CFA
Portfolio Co-Manager Portfolio Co-Manager
/1/Other single state Wisconsin tax free funds include Principal Preservation WI
Tax-exempt; Delaware Tax-Free WI (A, B, and C shares); and Nuveen Flagship WI
Muni (A, B, and C shares). This should not be construed as an offer of shares
for any other mutual fund company mentioned in this report. /2/The overall
Morningstar Rating is the weighted average of the Fund's 3- and 5-year rankings
which are 4- and 4-stars, respectively. The Morningstar ratings are based on
3-, 5-, and 10-year average annual returns (when available) with appropriate fee
adjustments and a risk factor that reflects fund performance relative to the
three-month Treasury bill returns. Of all funds in each category; 10% receive
5-stars and 22.5% receive 4-stars.
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.
As of December 31, 1999
AVERAGE ANNUAL TOTAL RETURNS 1-YEAR 5-YEAR SINCE INCEPTION (4/3/92)
Wisconsin Tax Free Fund/3/ -3.27% 6.14% 5.12%
DECEMBER SEC TAX-FREE YIELD/4/ EQUIVALENT TAXABLE YIELDS/5/
5.61% 8.52% 8.92% 9.67% 10.30%
Your Federal Rate 28.00% 31.00% 36.00% 39.60%
Maximum Effective Federal Rate/6/ 29.40 32.60 37.80 41.60
Wisconsin Tax Rate 6.77 6.77 6.77 6.77
Maximum Effective Combined Rate/7/ 34.18 37.12 42.01 45.54
/3/Past performance is no guarantee of future results. 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. Income from
the Fund may be subject to the Alternative Minimum Tax.
/4/SEC annualized yield for the 30 days ended 12/31/99. /5/Equivalent taxable
yield for the 30 days ended 12/31/99 at each applicable rate. /6/Based on
federal rates, adjusted for the maximum phase-out of itemized deductions and
personal exemptions in the applicable tax rate. /7/Based on the Wisconsin rate
and the maximum effective federal rate, adjusted to reflect the deductibility of
state taxes.
1
<PAGE>
Value Report
[PATRICK J. RETZER PHOTO APPEARS HERE]
[THOMAS J CONLIN PHOTO APPEARS HERE]
"With Waukesha County the fastest growing county in Wisconsin, we expect demand
to remain strong."
Heartland Wisconsin Tax Free Fund
In 1999, the Fund declined 3.27% versus the Lehman 20-year Municipal Bond
Index's 4.69% loss. The Fund's relative peer rankings have been strong as
indicated by the following table:
Lipper Inc. Time Period Percentile Ranking of Returns
- -----------------------------------------------------------------------------
1-year top 36th percentile out of 75 funds
- -----------------------------------------------------------------------------
5-year top 19th percentile out of 48 funds
- -----------------------------------------------------------------------------
(Based on total returns for the Other States Municipal Debt Fund category as of
12/31/99)
Morningstar, Inc. Time Period Percentile Ranking of Returns
- -----------------------------------------------------------------------------
1-year top 20th percentile out of 715 funds
- -----------------------------------------------------------------------------
5-year top 31st percentile out of 542 funds
- -------------------------------------------------------------------------------
(Based on total returns for the Municipal Bond Single State Long-Term category
as of 12/31/99)
For standardized returns, please see the Fund Fact Sheet on page 4.
A River Runs By It
The beautiful Fox River runs through downtown Waukesha, Wisconsin. Riverwalk
Apartments, 136 one and two-bedroom apartments in four separate buildings, sits
on a pristine 6.5 acre site on the banks of the Fox. Underground parking and
elevator service, and the projects close proximity to Bethesda Spring and Grede
Parks makes the Riverwalk an appealing location for senior citizens. There are
28 units reserved for low-income households interspersed evenly throughout the
project.
Completed in 1991, the Riverwalk Apartments have enjoyed occupancy rates in the
mid to high 90% range from 1992 through 1998. As of September 1999, Riverwalk
Apartments had a 97.8% occupancy rate. With Waukesha
2
<PAGE>
VALUE REPORT
County the fastest growing county in Wisconsin, we expect demand to remain
strong. Owner/Manager Urban Land Interests, Inc. has been developing and
managing real estate projects since 1976 and currently manages 551 residential
units and 10 commercial buildings.
The Fund owns $750,000 of Waukesha, Wisconsin Housing Authority Revenue
Refunding Bonds (Riverwalk Apartments) 5.625%'s of 12/01/20. Interest and
principal on these bonds is payable solely from revenues from the project. The
bonds are secured by a first mortgage lien on the real estate and there is a
debt service reserve fund equal to approximately 87% of the maximum annual debt
service. We have given these non-rated bonds a solid BBB internal equivalent
credit rating.
Riverwalk Apartments is a quality facility serving the housing needs of
Waukesha's senior citizens and low-income residents. We are pleased we've been
able to help finance this project.
WiTax Free Lehman
Apr-92 10000 10000
10546 10901
Dec-93 11686 12468
10927 11553
Dec-95 12868 13971
13359 14591
Dec-97 14436 16175
15217 17279
Dec-99 14720 16468
Average Annual Total Returns as of 12/31/99
- ----------------------------------------------------
Wisconsin Tax Free Fund
- -3.27% 6.14% 5.12%
- ----------------------------------------------------
Lehman 20 Year Municipal Bond Index
- -4.69% 7.36% 6.66%
- ----------------------------------------------------
Past performance is not indicative of future results
At December 31, 1999, the Riverwalk Apartments bonds were valued at $666,563,
representing 0.51% of the Fund's net assets.
3
<PAGE>
VALUE REPORT
Portfolio Profile
OBJECTIVE
The Heartland Wisconsin Tax Free Fund seeks a high level of current income that
is exempt from federal and Wisconsin personal income taxes.
AVERAGE ANNUAL TOTAL RETURNS 1-YEAR 5-YEAR SINCE INCEPTION (4/3/92)
Wisconsin Tax Free Fund/1/ -3.27% 6.14% 5.12%
DECEMBER SEC TAX-FREE YIELD/2/ EQUIVALENT TAXABLE YIELDS/3/
5.61% 8.52% 8.92% 9.67% 10.30%
Your Federal Rate 28.00% 31.00% 36.00% 39.60%
Maximum Effective Federal Rate/4/ 29.40 32.60 37.80 41.60
Wisconsin Tax Rate 6.77 6.77 6.77 6.77
Maximum Effective Combined Rate/5/ 34.18 37.12 42.01 45.54
FUND FACTS
Sales commission............None Weighted average duration..... 10.13 yrs.
Share price.................$9.64 Net sales.....................$131.5 mil.
Weighted average maturity...21.59 yrs. Number of holdings...................178
TOP 5 HOLDINGS COUPON MATURITY % OF NET ASSETS
Milwaukee, WI Redevelopment Auth. - WI Ave.. 5.50% 09/1/2012 8.37%
Virgin Islands Public Finance Auth.......... 5.40 10/1/2012 3.57
Virgin Islands Public Finance Auth.......... 6.00 10/1/2022 3.36
Puerto Rico Commonwealth GO................. 4.50 07/1/2023 3.06
Milwaukee, WI Redev. Auth. - Schlitz Park... 5.50 01/1/2017 2.48
PORTFOLIO COMPOSITION
<TABLE>
<S> <C>
Leasing 19.10%
Gen. obligation......... 5.29%
University.............. 4.52
Other revenue 16.83% IDR..................... 3.94
Toll road............... 2.83
Nursing................. 2.65
Retirement 13.34% Sales................... 2.23
Hospital................ 1.94
Multifamily 29.94% Mental health........... 0.46
Cash & equiv............ -3.07
Other 20.79%
</TABLE>
All information is as of December 31, 1999, and is subject to change.
/1/Past performance is no guarantee of future results. Investment return and
principal value of an investment will fluctuate so that an investors shares,
when redeemed, may be worth more or less than their original cost. Income from
the Fund may be subject to the Alternative Minimum Tax.
/2/SEC annualized yield for the 30 days ended 12/31/99. /3/Equivalent taxable
yield for the 30 days ended 12/31/99 at each applicable rate. /4/Based on
federal rates, adjusted for the maximum phase-out of itemized deductions and
personal exemptions in the applicable tax rate. /5/Based on the Wisconsin rate
and the maximum effective federal rate, adjusted to reflect the deductibility of
state taxes.
4
<PAGE>
Definitions
Lehman 20-Year Municipal Bond Index consists of bonds having a minimum credit
rating of at least Baa, an outstanding par value of at least $3 million, and
issued as part of a transaction of at least $50 million.
Lipper Other States Municipal Debt Funds Category is an equally-weighted
performance index, adjusted for capital gains distributions and income
dividends, of the largest qualifying funds in the investment objective,
consisting of 30 funds. Qualifying funds generally consist of those that limit
their assets to those securities that are exempt from taxation in a specified
state (double tax-exempt) or city (triple tax-exempt).
Morningstar Municipal Bond Single State Long-Term Category consists of
single-state funds with an average duration of more than seven years or an
average maturity of more than 12 years.
5
<PAGE>
The Heartland Family of Funds
Value Fund
Value Plus Fund
Select Value Fund
Government Fund
Taxable Short Duration Municipal Fund
Short Duration High-Yield Municipal Fund
High-Yield Municipal Bond Fund
Wisconsin Tax Free Fund
(available to Wisconsin residents only)
Firstar Money Market Fund
[LOGO APPEARS HERE]
-------------------
AMERICA'S VALUE INVESTOR
1.800.HEARTLN (1.800.432.7856)
www.heartlandfunds.com
Financial Advisor Services: 1.800.442.6391
Heartland Advisors, Inc.
789 N. Water St., Milwaukee, WI 53202
Distributor, Member SIPC.
The performance data quoted represents past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
These are not recommendations to buy or sell the securities discussed, but
rather illustrations of our value investment strategy. Statements regarding
particular securities represent the portfolio manager's views when made and are
subject to change at any time based on market and other considerations. Complete
portfolios for the Funds will be included in the Annual and Semi-Annual Reports
to Shareholders. Income from the Wisconsin Tax Free Fund may be subject to
alternative minimum tax and income from the Short Duration High-Yeild Municipal
Fund and the High-Yeild Municipal Bond Fund may be subject to state, local and
alternative minimum tax.
This material may only be used when preceded or accompanied by a prospectus for
the Fund(s) listed on the front cover. If you would like more complete
information on any other Fund, including charges and expenses, please call for a
prospectus or visit Heartland's website. Read it carefully before you invest.
[RECYCLED PAPER LOGO APPEARS HERE]
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS . December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS -- 103.07% COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WISCONSIN -- 81.30%
$ 20,000 Amery, WI Housing Authority - Revenue Bonds........................................ 7.375% 05/01/2005 $ 20,455
300,000 Appleton, WI Housing Authority - Industrial Park................................... 6.500 10/01/2016 282,375
1,390,000 Appleton, WI Housing Authority - Industrial Park................................... 6.750 10/01/2026 1,292,700
900,000 Bristol, WI Community Development Authority........................................ 6.125 03/01/2012 905,625
3,010,000 Brown County, WI Housing Authority - R.P. Terrace.................................. 6.500 06/01/2019 2,991,188
200,000 Brown County, WI Housing Auth. - Univ. Village Housing............................. 5.400 04/01/2017 177,000
1,930,000 Cudahy, WI Community Development Authority......................................... 5.100 06/01/2017 1,787,663
1,575,000 Cudahy, WI Community Development Authority......................................... 5.125 06/01/2019 1,437,188
75,000 Dane County, WI Housing Authority - Forest Harbor Apts............................. 5.950 07/01/2013 75,188
25,000 Dane County, WI Housing Authority - Forest Harbor Apts............................. 6.000 07/01/2014 25,063
265,000 Deforest, WI Redev. Auth. - Lease Revenue Bonds.................................... 6.200 02/01/2014 271,956
435,000 Deforest, WI Redev. Auth. - Lease Revenue Bonds.................................... 6.250 02/01/2018 442,613
685,000 Eau Claire, WI Housing Auth. - London Hill......................................... 6.250 05/01/2015 662,738
550,000 Elkhart Lake, WI Community Development Authority................................... 6.000 04/01/2015 550,000
175,000 Evansville, WI Housing Authority - Baker Block Project............................. 5.750 12/01/2016 174,125
1,000,000 Glendale, WI Community Development Authority....................................... 5.400 09/01/2018 918,750
2,805,000 Green Bay, WI Housing Authority - Pheasant Run Project............................. 6.500 09/01/2019 2,738,381
2,500,000 Green Bay, WI Housing Authority - Moraine Ridge.................................... 6.150 12/01/2030 2,453,125
1,000,000 Green Bay, WI Redevelopment Authority - Fort James Corp............................ 5.600 05/01/2019 888,750
100,000 Hartford, WI Community Development Authority....................................... 5.450 12/01/2002 102,000
200,000 Hartford, WI Community Development Authority....................................... 5.800 12/01/2005 207,250
210,000 Hartford, WI Community Development Authority....................................... 6.000 12/01/2007 218,663
225,000 Hartford, WI Community Development Authority....................................... 6.100 12/01/2008 234,563
55,000 Hudson, WI Christian Community Home................................................ 6.700 05/01/2008 54,038
75,000 Hudson, WI Christian Community Home................................................ 6.800 05/01/2009 73,500
65,000 Hudson, WI Christian Community Home................................................ 6.900 05/01/2010 63,863
250,000 Hudson, WI Christian Community Home................................................ 7.000 05/01/2023 240,938
250,000 Hudson, WI Wintergreen Apartments.................................................. 6.000 07/01/2020 222,813
725,000 Jackson, WI Community Development Authority........................................ 5.100 12/01/2017 656,125
635,000 La Crosse, WI Housing Authority - Ping Manor Project............................... 6.000 04/01/2005 620,713
1,100,000 La Crosse, WI Housing Authority - Ping Manor Project............................... 6.375 04/01/2012 1,072,500
1,760,000 La Crosse, WI Housing Authority - Forest Park Project.............................. 6.375 12/01/2018 1,676,400
350,000 La Crosse, WI Housing Authority - Washburn......................................... 6.500 10/01/2026 328,563
1,000,000 La Crosse, WI Housing Authority - Meadow Wood Project.............................. 6.250 01/01/2028 886,250
100,000 Little Chute, WI Community Development Authority................................... 5.625 03/01/2019 96,375
305,000 Madison, WI CDA - Dempsey Manor Project............................................ 6.400 10/01/2018 292,800
160,000 Madison, WI CDA - Dempsey Manor Project............................................ 6.650 10/01/2025 150,200
1,435,000 Madison, WI CDA - Edgewood College................................................. 6.250 04/01/2014 1,481,638
1,000,000 Madison, WI CDA - Meriter Retirement Project....................................... 6.125 12/01/2019 925,000
180,000 Madison, WI CDA - Second Mortgage - Revenue Bonds.................................. 5.875 07/01/2016 172,125
165,000 Markesan, WI CDA - Elderly Housing Revenue Bonds................................... 6.750 10/01/2009 163,350
190,000 Markesan, WI CDA - Elderly Housing Revenue Bonds................................... 6.900 10/01/2011 189,288
635,000 Mayville, WI Community Development Authority....................................... 5.600 04/01/2018 592,138
100,000 Menomonee Falls, WI CDA - Village Square Project................................... 5.200 09/01/2009 90,750
950,000 Menomonee Falls, WI CDA - Village Square Project................................... 5.350 09/01/2016 825,313
1,270,000 Milwaukee, WI Housing Auth. - Renaissance Apartments............................... 5.250 01/01/2025 1,125,538
215,000 Milwaukee, WI Housing Auth. - Blatz Apartments..................................... 7.500 12/01/2028 218,494
1,755,000 Milwaukee, WI Re. Auth. - Wisc. Ave./M.L. King, Jr. Dr............................. 5.600 09/01/2009 1,781,325
11,000,000 Milwaukee, WI Re. Auth. Dev. Ref - 2430 W. WI Ave Proj............................. 5.500 09/01/2012 11,013,750
3,000,000 Milwaukee, WI Redevelopment Auth. - Campus Town.................................... 5.700 11/01/2018 2,973,750
55,000 Milwaukee, WI Redevelopment Auth. - Dynapro, Inc................................... 5.300 12/01/2007 55,206
65,000 Milwaukee, WI Redevelopment Auth. - Dynapro, Inc................................... 5.350 12/01/2008 65,000
3,250,000 Milwaukee, WI Redevelopment Auth. - Multifamily.................................... 6.300 08/01/2038 3,189,063
3,400,000 Milwaukee, WI Redevelopment Auth. - Schlitz Park................................... 5.600 01/01/2015 3,115,250
3,615,000 Milwaukee, WI Redevelopment Auth. - Schlitz Park................................... 5.500 01/01/2017 3,262,538
200,000 Milwaukee, WI Redevelopment Auth. - YWCA........................................... 5.150 06/01/2019 185,250
215,000 Milwaukee, WI Redevelopment Auth. - YWCA........................................... 5.250 06/01/2019 200,219
175,000 Milwaukee, WI Redevelopment Auth. - YWCA........................................... 5.200 06/01/2029 160,563
750,000 Milwaukee, WI Redevelopment Auth. - YWCA........................................... 5.300 06/01/2029 690,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS [cont'd] . December 31, 1999
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS -- 103.07% [cont'd] COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
WISCONSIN -- 81.30% [cont'd]
$ 65,000 New Berlin, WI Housing Authority - Apple Glen...................................... 0.000% 11/01/2003 $ 53,544
65,000 New Berlin, WI Housing Authority - Apple Glen...................................... 0.000 11/01/2004 50,538
70,000 New Berlin, WI Housing Authority - Apple Glen...................................... 0.000 05/01/2005 52,850
65,000 New Berlin, WI Housing Authority - Apple Glen...................................... 0.000 11/01/2005 47,856
70,000 New Berlin, WI Housing Authority - Apple Glen...................................... 0.000 05/01/2006 49,875
65,000 New Berlin, WI Housing Authority - Apple Glen...................................... 0.000 11/01/2006 45,094
70,000 New Berlin, WI Housing Authority - Apple Glen...................................... 0.000 05/01/2007 46,988
65,000 New Berlin, WI Housing Authority - Apple Glen...................................... 0.000 11/01/2007 42,413
70,000 New Berlin, WI Housing Authority - Apple Glen...................................... 0.000 05/01/2009 40,775
65,000 New Berlin, WI Housing Authority - Apple Glen...................................... 0.000 11/01/2009 36,725
70,000 New Berlin, WI Housing Authority - Apple Glen...................................... 0.000 05/01/2010 36,313
1,210,000 New Berlin, WI Housing Authority - Apple Glen...................................... 6.700 11/01/2017 1,216,050
650,000 New Berlin, WI Housing Authority - Apple Glen...................................... 6.700 11/01/2020 653,250
125,000 New Berlin, WI Housing Authority - Pinewood Creek.................................. 6.400 05/01/2008 125,313
125,000 New Berlin, WI Housing Authority - Pinewood Creek.................................. 6.400 11/01/2008 125,313
105,000 New Berlin, WI Housing Authority - Pinewood Creek.................................. 6.500 05/01/2009 105,394
125,000 New Berlin, WI Housing Authority - Pinewood Creek.................................. 6.600 05/01/2010 125,781
150,000 New Berlin, WI Housing Authority - Pinewood Creek.................................. 6.700 05/01/2011 151,313
155,000 New Berlin, WI Housing Authority - Pinewood Creek.................................. 6.700 11/01/2011 156,356
165,000 New Berlin, WI Housing Authority - Pinewood Creek.................................. 6.800 11/01/2012 166,856
160,000 New Berlin, WI Housing Authority - Pinewood Creek.................................. 6.850 05/01/2013 161,800
165,000 New Berlin, WI Housing Authority - Pinewood Creek.................................. 6.850 11/01/2013 166,856
135,000 New Berlin, WI Housing Authority - Pinewood Creek.................................. 6.900 05/01/2014 136,519
190,000 New Berlin, WI Housing Authority - Pinewood Creek.................................. 6.900 11/01/2014 192,138
1,015,000 New Berlin, WI Housing Authority - Pinewood Creek.................................. 7.125 05/01/2024 1,032,763
1,000,000 New Richmond, WI Com. Dev. Auth. - Senior Housing.................................. 5.850 10/01/2020 865,000
3,000,000 New Richmond, WI Com. Dev. Auth. - Senior Housing.................................. 6.000 10/01/2032 2,568,750
80,000 Oak Creek, WI Housing Authority - Country Oaks II.................................. 6.000 08/01/2010 76,500
1,440,000 Oak Creek, WI Housing Authority - Country Oaks II.................................. 6.200 08/01/2017 1,357,200
2,980,000 Oak Creek, WI Housing Authority - Country Oaks II.................................. 6.300 08/01/2028 3,024,700
50,000 Oak Creek, WI Housing Authority - Wood Creek....................................... 0.000 07/20/2007 33,188
125,000 Oak Creek, WI Housing Authority - Wood Creek....................................... 0.000 01/20/2011 67,188
125,000 Oak Creek, WI Housing Authority - Wood Creek....................................... 0.000 07/20/2011 65,313
65,000 Oak Creek, WI Housing Authority - Wood Creek....................................... 0.000 01/20/2012 32,825
125,000 Oak Creek, WI Housing Authority - Wood Creek....................................... 0.000 01/20/2013 59,531
125,000 Oak Creek, WI Housing Authority - Wood Creek....................................... 0.000 07/20/2013 57,500
60,000 Oak Creek, WI Housing Authority - Wood Creek....................................... 0.000 01/20/2014 26,775
1,000,000 Oak Creek, WI Housing Authority - Wood Creek....................................... 5.500 07/20/2019 960,000
2,130,000 Oak Creek, WI Housing Authority - Wood Creek....................................... 5.625 07/20/2029 2,023,500
2,900,000 Oconto Falls, WI Community Development Authority................................... 7.750 12/01/2022 2,823,875
1,500,000 Oconto Falls, WI Community Development Authority................................... 8.125 12/01/2022 1,466,250
50,000 Omro, WI CDA - Revenue Bonds....................................................... 5.750 12/01/2006 51,625
335,000 Omro, WI CDA - Revenue Bonds....................................................... 5.875 12/01/2011 344,213
200,000 Outagamie, WI Housing Authority - First Mortgage................................... 5.000 11/15/2003 193,250
5,000 Racine, WI Elderly Housing Authority - Lincoln Lutheran............................ 7.100 10/01/2004 5,000
10,000 Racine, WI Elderly Housing Authority - Lincoln Lutheran............................ 7.150 10/01/2005 10,000
200,000 River Falls, WI Housing Authority - Lutheran Home Project.......................... 5.750 4/01/2028 171,500
105,000 St. Croix Falls, WI CDA Lease Revenue.............................................. 5.900 12/01/2006 106,838
115,000 St. Croix Falls, WI CDA Lease Revenue.............................................. 6.000 12/01/2007 117,156
1,190,000 St. Croix Falls, WI CDA Lease Revenue.............................................. 6.400 12/01/2014 1,200,413
170,000 Schofield, WI CDA - Lease Revenue.................................................. 6.000 10/01/2012 171,913
500,000 Schofield, WI CDA - Lease Revenue.................................................. 6.200 10/01/2017 500,625
315,000 Sheboygan, WI Housing Authority - Multifamily Housing.............................. 6.900 02/01/2024 320,119
175,000 Sheboygan, WI Housing Authority - Rocky Knoll Project.............................. 5.250 12/01/2013 159,688
125,000 Sheboygan, WI Housing Authority - Rocky Knoll Project.............................. 5.300 12/01/2016 116,875
970,000 SE WI Professional Baseball Park District.......................................... 0.000 12/15/2015 372,238
1,000,000 SE WI Professional Baseball Park District.......................................... 0.000 12/15/2017 332,500
3,000,000 SE WI Professional Baseball Park District.......................................... 6.100 12/15/2029 2,936,250
250,000 Sparta, WI Housing Authority - Morrow Memorial Home................................ 5.750 06/01/2022 207,813
</TABLE>
<PAGE>
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS [cont'd] . December 31, 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS -- 103.07% [CONT'D] COUPON MATURITY VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WISCONSIN -- 81.30% [CONT'D]
$ 100,000 Stevens Point, WI CDA - Mrtge. Refunding - Edgewater............................... 6.500% 09/01/2006 $ 103,250
560,000 Stevens Point, WI CDA - Mrtge. Refunding - Edgewater............................... 6.625 09/01/2009 575,400
310,000 Superior, WI Housing Authority - St. Francis Project............................... 6.000 01/20/2022 303,800
270,000 Two Rivers, WI CDA - Arch Forest Project........................................... 6.350 12/15/2012 256,500
2,800,000 Waukesha, WI HA - The Arboretum Project............................................ 5.250 12/01/2021 2,467,500
500,000 Waukesha, WI HA - Multifamily - Brookfield Woods................................... 6.750 12/01/2034 479,375
405,000 Waukesha, WI HA - Multifamily - The Court Apartments............................... 5.800 04/01/2025 401,963
1,000,000 Waukesha, WI HA - Multifamily - The Court Apartments............................... 6.000 04/01/2036 946,250
1,500,000 Waukesha, WI HA - Multifamily - Oak Hill Terrace Project........................... 5.450 06/01/2027 1,366,875
750,000 Waukesha, WI HA - Riverwalk Apartments............................................. 5.625 12/01/2020 666,563
715,000 Waukesha, WI HA - Westgrove Woods.................................................. 6.750 02/01/2027 664,950
1,000,000 Waukesha, WI HA - Westgrove Woods.................................................. 6.000 12/01/2031 961,250
530,000 Waupun, WI Hsg Auth Christian Home & Rehab Center.................................. 5.875 08/01/2014 498,863
705,000 Waupun, WI Hsg Auth Christian Home & Rehab Center.................................. 6.000 08/01/2019 654,769
2,000,000 Waupun, WI Hsg Auth Christian Home & Rehab Center.................................. 6.250 08/01/2029 1,847,500
75,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 05/01/2003 63,375
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 11/01/2003 82,375
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 05/01/2004 83,869
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 11/01/2004 77,750
70,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 05/01/2005 52,763
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 11/01/2005 73,500
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 05/01/2006 74,813
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 11/01/2006 69,375
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 05/01/2007 70,481
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 11/01/2007 65,375
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 05/01/2008 65,625
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 11/01/2008 60,750
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 05/01/2009 61,294
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 11/01/2009 56,750
105,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 05/01/2010 57,619
100,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 0.000 11/01/2010 53,250
1,200,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 6.700 11/01/2015 1,173,000
1,060,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 6.700 11/01/2019 1,028,200
615,000 Wauwatosa, WI HA - Hawthorne Terrace Project....................................... 6.700 11/01/2022 595,013
2,720,000 West Allis, WI CDA - Poblocki Investments Project.................................. 6.100 05/01/2007 2,760,800
100,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds............................... 5.625 05/01/2005 97,375
105,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds............................... 5.625 05/01/2006 98,831
115,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds............................... 5.625 05/01/2007 106,806
120,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds............................... 5.625 05/01/2008 109,800
125,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds............................... 5.625 05/01/2009 112,656
135,000 Winnebago County, WI HA - 1st Mortgage Revenue Bonds............................... 5.625 05/01/2010 125,044
10,000 Winnebago County, WI Housing Authority - Series A.................................. 6.100 03/01/2000 10,016
10,000 Winnebago County, WI Housing Authority - Series A.................................. 6.200 03/01/2001 10,038
15,000 Winnebago County, WI Housing Authority - Series A.................................. 6.300 03/01/2012 15,094
195,000 Winnebago County, WI Housing Authority - Series A.................................. 6.875 03/01/2012 195,000
380,000 Winnebago County, WI Housing Authority - Series A.................................. 7.125 03/01/2022 380,950
2,500,000 Wisconsin Center - Revenue Bond - Public Improvements.............................. 0.000 12/15/2026 459,375
200,000 Wrightstown, WI Community Development Authority.................................... 5.950 06/01/2014 197,500
600,000 Wrightstown, WI Community Development Authority.................................... 6.000 06/01/2019 588,725
------------
106,940,764
------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND WISCONSIN TAX FREE FUND
SCHEDULE OF INVESTMENTS [cont'd] . December 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT MUNICIPAL BONDS - 103.07% [cont'd] COUPON MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PUERTO RICO - 11.04%
$ 5,000,000 Puerto Rico Commonwealth G.O...................................................... 4.500% 07/01/2023 $ 4,018,750
3,500,000 Puerto Rico Commonwealth G.O...................................................... 5.000 07/01/2028 2,935,625
2,000,000 Puerto Rico Highway & Transportation Authority.................................... 5.000 07/01/2028 1,677,500
2,250,000 Puerto Rico Highway & Transportation Authority.................................... 5.500 07/01/2036 2,039,063
1,000,000 Puerto Rico Industrial Tourist
Educational Medical Facilities.................................................. 5.375 02/01/2029 871,250
3,000,000 Puerto Rico Industrial Tourist
Educational Medical Facilities.................................................. 5.750 06/01/2029 2,516,250
500,000 Puerto Rico Industrial Tourist
Educational Medical Facilities.................................................. 5.375 02/01/2029 448,125
----------
14,506,563
----------
VIRGIN ISLANDS - 10.73%
5,000,000 Virgin Islands Public Finance Authority........................................... 5.400 10/01/2012 4,700,000
3,245,000 Virgin Islands Public Finance Authority........................................... 5.500 10/01/2013 3,034,075
4,840,000 Virgin Islands Public Finance Authority........................................... 6.000 10/01/2022 4,422,550
2,260,000 Virgin Islands Public Finance Authority........................................... 5.625 10/01/2025 1,963,375
----------
14,120,000
----------
TOTAL INVESTMENTS (Cost $141,263,809) 103.07% $135,567,327
Liabilities, less cash and receivables.................................... (3.07) (4,034,259)
------- -------------
TOTAL NET ASSETS.......................................................... 100.00% $131,533,068
======= =============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
<TABLE>
<CAPTION>
HEARTLAND WISCONSIN TAX FREE FUND
STATEMENT OF ASSETS AND LIABILITIES . December 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments in securities, at cost............................................................................. $141,263,809
============
Investments in securities, at value............................................................................ $135,567,327
Cash........................................................................................................... 28,823
Receivable from fund shares sold............................................................................... 1,461
Accrued interest............................................................................................... 2,217,007
Prepaid expenses............................................................................................... 7,094
------------
Total Assets............................................................................................... 137,821,712
------------
LIABILITIES:
Payable for fund shares redeemed............................................................................... 299,783
Distributions payable.......................................................................................... 149,398
Short-term notes payable....................................................................................... 5,800,000
Payable to Advisor for fund accounting fee..................................................................... 1,699
Accrued interest payable....................................................................................... 971
Accrued expenses............................................................................................... 36,793
------------
Total Liabilities.......................................................................................... 6,288,644
------------
TOTAL NET ASSETS.................................................................................................... $131,533,068
============
NET ASSETS CONSIST OF:
Paid in capital................................................................................................ $138,669,632
Accumulated undistributed net realized losses on investments................................................... (1,440,082)
Net unrealized depreciation on investments..................................................................... (5,696,482)
------------
TOTAL NET ASSETS.................................................................................................... $131,533,068
============
SHARES OUTSTANDING, $.001 par value (100,000,000 shares authorized)............................................ 13,646,871
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE...................................................... $ 9.64
============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
Statement.
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND WISCONSIN TAX FREE FUND
STATEMENT OF OPERATIONS
For the period from January 1, 1999 to December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest............................................................................................... $ 8,429,792
-----------------
Total investment income............................................................................. 8,429,792
-----------------
EXPENSES:
Management fees........................................................................................ 939,834
Transfer agent fees.................................................................................... 66,468
Printing and communications............................................................................ 38,868
Postage................................................................................................ 22,721
Audit fees............................................................................................. 16,694
Directors' fees........................................................................................ 16,234
Fund accounting fees................................................................................... 13,795
Custodian fees......................................................................................... 13,690
Legal fees............................................................................................. 5,082
Registration fees...................................................................................... 4,738
Interest expense....................................................................................... 1,993
Other operating expenses............................................................................... 56,174
-----------------
Total expenses before fees paid indirectly.......................................................... 1,196,291
Less: Fees paid indirectly.......................................................................... (13,690)
-----------------
Net expenses........................................................................................ 1,182,601
-----------------
NET INVESTMENT INCOME.................................................................................. 7,247,191
-----------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on:
Securities.......................................................................................... (1,129,567)
Futures contracts................................................................................... 422,330
Net decrease in unrealized appreciation on:
Securities.......................................................................................... (11,394,489)
-----------------
TOTAL REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS............................................ (12,101,726)
-----------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................... $ (4,854,535)
=================
HEARTLAND WISCONSIN TAX FREE FUND
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended
Dec. 31, Dec. 31,
1999 1998
----------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income............................................................... $ 7,247,191 $ 6,721,922
Net realized gains (losses) on investments.......................................... (707,237) 584,768
Net decrease in unrealized appreciation on investments.............................. (11,394,489) (36,485)
----------------- -----------------
Net increase (decrease) in net assets resulting from operations.................. (4,854,535) 7,270,205
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................... (7,247,191) (6,721,922)
----------------- -----------------
Total distributions to shareholders.............................................. (7,247,191) (6,721,922)
----------------- -----------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued......................................................... 25,786,278 25,777,610
Reinvested dividends from net investment income..................................... 5,497,147 4,871,431
Cost of shares redeemed............................................................. (31,065,721) (19,128,276)
----------------- -----------------
Net increase in net assets derived from Fund share activities.................... 217,704 11,520,765
----------------- -----------------
TOTAL INCREASE (DECREASE) IN NET ASSETS..................................................... (11,884,022) 12,069,048
NET ASSETS AT THE BEGINNING OF THE PERIOD................................................... 143,417,090 131,348,042
----------------- -----------------
NET ASSETS AT THE END OF THE PERIOD......................................................... $ 131,533,068 $ 143,417,090
================= =================
UNDISTRIBUTED NET INVESTMENT INCOME......................................................... $ -- $ --
================= =================
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
Statements.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Heartland Wisconsin Tax Free Fund
-----------------------------------------------------------------------
For the year ended December 31,
1999 1998 1997 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period............. $ 10.48 $ 10.44 $ 10.16 $ 10.30 $ 9.21
Income (loss) from investment operations:
Net investment income.......................... 0.51 0.51 0.52 0.51 0.51
Net realized and unrealized gains (losses)
on investments................................ (0.84) 0.04 0.28 (0.14) 1.09
-------- -------- -------- -------- --------
Total income (loss) from investment operations (0.33) 0.55 0.80 0.37 1.60
Less distributions from:
Net investment income.......................... (0.51) (0.51) (0.52) (0.51) (0.51)
-------- -------- -------- -------- --------
Total distributions......................... (0.51) (0.51) (0.52) (0.51) (0.51)
-------- -------- -------- -------- --------
Net asset value, end of period................... $ 9.64 $ 10.48 $ 10.44 $ 10.16 $ 10.30
======== ======== ======== ======== ========
Total Return..................................... (3.27)% 5.41% 8.06% 3.81% 17.78%
Ratios and Supplemental Data
Net assets, end of period (in thousands)....... $131,533 $143,417 $131,348 $124,545 $118,513
Ratio of net expenses to average net assets.... 0.82%/1/ 0.78%/1/ 0.81%/1/ 0.80%/1/ 0.84%
Ratio of net investment income
to average net assets......................... 5.01%/1/ 4.90%/1/ 5.05%/1/ 5.12%/1/ 5.23%
Portfolio turnover rate........................ 78% 16% 8% 14% 11%
</TABLE>
(1) The ratio does not include fees paid indirectly. If the Fund did not have
fees paid indirectly, the net expense ratios for the years ended December
31, 1999, 1998, 1997 and 1996 would have been 0.83%, 0.80%, 0.82% and 0.81%,
respectively, and the net investment income ratios would have been 5.00%,
4.88%, 5.04%, and 5.11%, respectively.
The accompanying Notes to Financial Statements are an integral part of this
Statement.
<PAGE>
HEARTLAND WISCONSIN TAX FREE FUND
NOTES TO FINANCIAL STATEMENTS . December 31, 1999
- --------------------------------------------------------------------------------
(1) Organization
Heartland Group, Inc. (the "Corporation") is registered as an open-end
management investment 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 eight series of funds issued by the Corporation at
December 31, 1999.
(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 may be valued at
acquisition cost, plus or minus any amortized discount or premium.
Securities 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, 1999, the Fund had Federal income tax capital loss
carryforwards of $399,536 expiring in 2003; $333,310 expiring in
2005; and $376,887 expiring in 2007. The Fund does not intend to
make a distribution of any future realized capital gains until its
Federal income tax capital loss carryforward is completely
utilized.
Statement of Position 93-2 requires that permanent financial
reporting and tax differences be reclassified to paid in capital.
Net assets are not affected by these reclassifications.
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, 1999, the Fund deferred, on a tax basis,
post-October losses of $29,811. This amount may be used to offset
future capital gains.
(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 at least 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.
(e) The Fund is charged for those expenses that are directly
attributable to it. 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.
(f) 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. The Fund receives from or pays to the broker on a
daily basis an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as
"variation margin," and are recorded by the Fund as unrealized
gains or losses. When the futures contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at
the time it was closed.
The use of futures contracts involves, to varying degrees, elements
of market risk in excess of the amount recognized in the Statement
of Assets and Liabilities. The predominant risk is that the
movement of the futures contract's price may result in a loss which
could render a portfolio's hedging strategy unsuccessful. The Fund
had no open futures contracts as of December 31, 1999.
(g) The Fund entered into a fee arrangement with its custodian bank
which provided for a reduction in custody fees based upon net
amounts of uninvested cash balances. The reduction of custody
expenses is shown on the Statement of Operations as "Fees paid
indirectly."
(h) 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
Deutsche Bank AG made available to seven of the eight series of funds
issued by the Corporation, including the Wisconsin Tax Free Fund, a $100
million credit facility pursuant to a Credit Agreement ("Agreement"),
most recently amended December 29, 1998. The primary purpose of the
Agreement is to allow the Fund to avoid liquidating securities under
circumstances which the Advisor believes are unfavorable to
shareholders. Outstanding principal amounts under the credit facility
bear interest at a rate per annum equal to the New York Interbank
Offering Rate plus 0.40% or the prime rate. Commitment fees are computed
at a rate per annum equal to 0.08% of the Fund's proportional daily
average unutilized credit. During the period from
<PAGE>
January 1, 1999 through December 31, 1999, the Fund had an outstanding
average balance of $16,438, at an average interest rate of 6.04%, and a
maximum outstanding balance of $5,800,000. Interest expense and
commitment fees accrued during the period from January 1, 1999 through
December 31, 1999 were $1,993 and $2,293, respectively.
(4) Investment Management Fees and Transactions with Related Parties
The Fund has a management agreement with Heartland Advisors, Inc. (the
"Advisor") to serve as investment advisor and manager. Under the terms
of the agreement, the Fund pays the Advisor a monthly management fee at
the annual rate of 0.65% of the average daily net assets of the Fund.
Effective May 1, 1999, the Fund entered into an agreement with the
Advisor to perform certain bookkeeping and accounting services. Under
the terms of the agreement, the Fund pays the Advisor a monthly fee at
an annual rate of $12,500 plus 0.0085% of average daily net assets over
$50 million.
Officers and certain directors of the Corporation are also officers
and/or directors of the Advisor; however, they receive no compensation
from the Fund.
As permitted under Rule 10f-3 of the Investment Company Act of 1940, the
Board of Directors of the Corporation has adopted a plan which will
allow the Fund, under certain conditions described in the Rule, to
acquire newly-issued securities from syndicates in which the Advisor is
a member.
(5) Investment Transactions
During the period from January 1, 1999 through December 31, 1999, the
cost of purchases and proceeds from sales of securities, other than
short-term obligations, were $116,511,875 and $110,148,100,
respectively.
At December 31, 1999, the gross unrealized appreciation and depreciation
on securities for tax purposes were $704,343 and ($6,701,364),
respectively, netting to ($5,997,021).
At December 31, 1999, the cost of securities for Federal income tax
purposes was $141,564,348.
(6) Fund Share Transactions
For the period from January 1, 1999 through December 31, 1999, Fund
share transactions were as follows:
Shares issued............................................. 2,520,059
Reinvested dividends from net investment income........... 540,898
Shares redeemed........................................... (3,096,969)
-----------
Net decrease in Fund shares............................... (36,012)
===========
For the period from January 1, 1998 through December 31, 1998, Fund
share transactions were as follows:
Shares issued............................................. 2,462,970
Reinvested dividends from net investment income........... 465,350
Shares redeemed........................................... (1,827,845)
-----------
Net increase in Fund shares............................... 1,100,475
===========
END OF NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Federal Income Tax Information (Unaudited)
In early 2000, shareholders received information regarding all distributions
paid to them by the Fund during calendar year 1999. No long-term capital gain
distributions were designated. For year ended December 31, 1999, all of the
amounts distributed were from tax-exempt income.
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 eight portfolios of Heartland Group, Inc., and hereafter
referred to as the "Fund") at December 31, 1999, the results of its operations,
the changes in its net assets and the financial highlights for each of the
periods indicated, in conformity with accounting principles generally accepted
in the United States. 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 audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States, 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
audits, which included confirmation of securities at December 31, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
Milwaukee, Wisconsin PricewaterhouseCoopers LLP
February 7, 2000
<PAGE>
[LOGO APPEARS HERE]
Value Report
December 31, 1999
Notes on value investing
for investors in the Heartland
Taxable Short Duration
Municipal Fund
Annual Report
to Shareholders
Heartland Taxable
Short Duration
Municipal Fund
<PAGE>
VALUE REPORT
It Was The Best of Times. It Was The Worst of Times.
We have reversed the opening lines of Charles Dickens' A Tale of Two Cities to
--------------------
describe this year's bond market. 1999 was actually the worst year of the last
century for the bond market. And if you look at the numbers from the bond market
peak in October 1998, it truly has been the worst of times. From peak to trough
over this 14 month period, Treasury Bond futures declined 18% and municipal bond
futures dropped 17%.
In 1999, municipal bonds generally under-performed Treasuries. In general,
municipal bond credit quality remained quite good, but just about everything
else that could go wrong in the muni bond market did. Supply was strong, and the
combination of tax-loss selling, the flight of corporate capital from the
market, and municipal bond fund redemptions weakened demand considerably. Add
rising interest rates and Y2K jitters to this mix and the end result was sharply
declining muni-bond prices.
Why was 1999 also the best of times? Despite the extremely difficult market
conditions, the Heartland Taxable Short Duration Municipal Fund delivered
positive total returns, beating its benchmark, the Merrill Lynch High Yield,
U.S. Corporates, Cash Pay, BB Rated, 1-3 Year Index.
While the fund lagged the Heartland Customized Short-Term Bond Index for 1999,
this was due to the fact that a certain segment of the index performed well. The
corporate, B-rated portion of the index had high returns because of select
credit turnarounds, whereas the Heartland Taxable Short Duration Municipal Fund
focuses primarily on taxable munis.
Our positive performance against the Merrill Lynch High Yield, U.S. Corporates,
Cash Pay, BB Rated, 1-3 Year Index was accomplished in large part by reducing
duration and, therefore, interest rate exposure in anticipation of a very robust
economy. Further, our fundamental research on non-rated bonds provided a
material yield advantage over rated issues of comparable credit quality.
Looking Ahead
In the municipal bond market, we are beginning to see a modest reduction in new
issuance and dealer inventories, and with January traditionally being a very
active call month (issuers retiring or "calling in" bonds), supply should
contract further. Tax-selling for 1999 is over and Y2K is no longer an issue.
This should help stabilize demand. Also, "retail money" usually flows back into
the municipal bond market after individuals
This Fund invests primarily in medium- and lower-quality securities which have
higher yield potential but present greater investment and credit risk than
higher-quality securities. These risks may result in greater share price
volatility.
<PAGE>
VALUE REPORT
pay their taxes on April 15th. This could positively affect the flow of funds in
the municipal bond market.
Bonds Versus Stocks -- Another "Best of Times" Proposition
We are not in the business of stock market forecasting. However, with the S&P
500 Index near record highs and trading at over 26 times 2000 earnings, it is
fair to say that large cap growth equities are richly valued and that the
downside risk in the stock market has increased substantially. We would suggest
that those high-flying S&P 500 Index funds, which have performed so well over
the last four years and now comprise a big chunk of many investors' total
assets, are no longer a conservative investment.
Bear in mind (pun intended) over the last 70 years, stocks have returned on
average about 11% per year with considerably greater price volatility (risk)
than bonds. At December 31, the Heartland Taxable Short Duration Municipal Fund
offers a 10.1% yield from a 3-year duration portfolio with modest interest rate
risk and, we believe, moderate credit risk. Therefore, it appears to us that
this fund and our other municipal bond funds offer better risk adjusted
investment opportunities than an S&P 500 index fund.
Sincerely,
/s/ Thomas J. Conlin /s/ Greg D. Winston
Tom Conlin, CFA Greg Winston, CFA
Portfolio Co-Manager Portfolio Co-Manager
INVESTMENT PERFORMANCE/1/
Heartland Taxable Short Duration Municipal Fund
Average annual total returns
December as of December 31, 1999/2/
SEC yield/2/ 1-Year Since Inception (12/29/98)
10.13% 5.51% 6.69%
/1/ Past performance is no guarantee of future results. 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.
/2/ Yield is for the 30 days ended 12/31/99. Total returns include reinvestment
of all dividends and capital gains distributions. Performance data reflects
fee waivers in effect during the period. Without subsidization of fees and
expenses, total returns would have been lower, and the SEC yield would have
been 9.13%.
1
<PAGE>
Value Report
Heartland Taxable Short Duration Municipal Fund
[THOMAS J. CONLIN PHOTO APPEARS HERE]
In 1999, the Fund returned 5.51% compared to the Merrill Lynch High Yield, U.S.
Corporate, Cash Pay, BB Rated, 1-3 Year Index's 3.90% gain. In fourth quarter
1999, the Fund returned 1.14% versus the benchmark index's 0.64% advance*. For
the one-year period ending December 31, 1999, the Fund closed the year #1 in the
Lipper General Bond Fund category and in the top 3% of the Morningstar Short-
Term Bond Category out of 46 and 215 funds, respectively. For more information
on the Fund, please see the Fund Fact Sheet on page 4.
[GREG D. WINSTON PHOTO APPEARS HERE]
Children in Need
Founded as an orphanage in 1851, Children's Village (CV), head-quartered in
Dobbs Ferry, New York, has earned a national reputation as one of America's best
multi-service facilities for emotionally disturbed children. The organization's
entire focus is on children, as it also provides a shelter program for runaway
and homeless youth, pre-adoption and foster care services, and intensive in-home
services. CV's main campus houses 300 children in 22 individual houses. This
innovative approach to treating young boys within a campus setting has given CV
a distinct competitive advantage. CV also owns or leases 10 other facilities in
the New York City metropolitan area. Demand for CV's services are strong and
there is currently a waiting list for all its facilities.
Most of the funding for Children's Village comes from New York City's
Administration for Children's Services. Additional funding comes from state
agencies. From a political standpoint, we believe a funding reduction for
"We are pleased to be helping children in need in the New York City area and our
shareholders."
At December 31, 1999, the Fund owned $210,000 of the Children's Village Project
Bonds, valued at $208,162 and representing 0.95% of the Fund's net assets.
*See page 3 for the Fund's standardized returns.
2
<PAGE>
VALUE REPORT
CV'S services would be extremely unlikely given the demographics of the
population being served, and the essential nature and increasing demand for its
services. Unlike many human service providers, Children's Village has an
exceptionally strong balance sheet, with a cash to debt ratio of approximately
150%. Pro-forma maximum annual debt service coverage remains exceptionally
strong at 4.1X.
The Fund owns $210,000 of the Westchester County, New York Industrial
Development Agency Revenue Bonds, (The Children's Village Project) Taxable 9%'s
of 3/15/01. We have given this security an internal equivalent BBB credit
rating. We are pleased to be helping children in need in the New York City area
and our shareholders.
Growth of $10,000 since inception
inception date 12/29/98
- -- Taxable Short Duration Municipal Fund $10,672
- -- Merrill Lynch High Yield, U.S. Corporate, Cash Pay, BB Rated, 1-3 Year Index
$10,414
- -- Heartland Customized Short-Term Bond Index $10,665
Taxable Short BB Rated Blended
12/29/98 10000 10000 10000
10115 10023 10000
10211 9940 10049
10257 9969 10056
Mar-98 10287 10070 10157
10361 10148 10254
10381 10156 10281
Jun-98 10424 10214 10340
10476 10257 10402
10499 10292 10459
Sep-98 10552 10348 10528
10574 10324 10555
10679 10308 10592
Dec-99 10672 10414 10665
Average Annual Total Returns as of 12/31/99
Since Inception
1-Year (12/29/98)
Taxable Short Duration
Municipal Fund 5.51% 6.69%
Merrill Lynch High Yield, U.S. Corporate,
Cash Pay, BB Rated, 1-3 Year Index 3.90% 4.12%
Heartland Customized
Short-Term Bond Index 6.65% 6.62%
Past performance is no guarantee of future results. 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.
3
<PAGE>
VALUE REPORT
Heartland Taxable Short Duration Municipal Fund
This Fund seeks a high level of current income with a low degree of share price
fluctuation. It invests primarily in medium and lower quality municipal
obligations and maintains an average portfolio duration of three years or
less./1/
AVERAGE ANNUAL TOTAL RETURNS/2/
Since inception
4Q99* 1-Year (12/29/98)
Heartland Taxable Short Duration
Municipal Fund 1.14% 5.51% 6.69%
*Not annualized.
FUND FACTS
Sales commission..................... None Net assets............ $21.9 mil.
Share price......................... $9.76 Number of holdings............ 57
Weighted average duration....... 2.93 yrs. Inception............... 12/29/98
<TABLE>
<CAPTION>
% of Net
TOP 5 HOLDINGS/4/ Coupon Maturity Call Assets
<S> <C> <C> <C> <C>
Venator Group, Inc........................................ 7.00% 06/01/2000 - 10.22%
Health Insurance Plan of Greater NY....................... 11.25 07/01/2010 07/01/2000 8.18
Lakeland, FL Retirement Community......................... 11.00 01/01/2005 - 7.92
Stone Container........................................... 10.75 04/01/2002 01/01/2000 5.32
Reeves County, TX Certificates of Participation........... 7.25 06/01/2011 06/01/2006 5.29
</TABLE>
PORTFOLIO COMPOSITION/4/
<TABLE>
<S> <C>
Multifamily 17.52%
IDR 17.41%
Retirement 14.74%
Retail apparel 10.22%
Other 40.11%
</TABLE>
<TABLE>
<S> <C>
Nursing...................................... 8.38%
Industrial................................... 5.32
Lease........................................ 5.29
Hotel........................................ 5.19
Mental health................................ 4.45
Other revenue................................ 4.40
Resource recovery............................ 2.59
University................................... 1.96
Gov't guaranteed............................. 1.76
Hospital..................................... 1.48
Escrow to maturity-Gov't..................... 0.34
Cash & equiv................................. -1.05
</TABLE>
All information is as of December 31, 1999, and is subject to change.
/1/ The Fund invests primarily in medium- and lower-quality securities which
have higher yield potential but present greater investment and credit risk
than high-quality securities. These risks may result in greater share price
volatility.
/2/ Past performance is no guarantee of future results. 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.
Includes reinvestment of all dividends and capital gains distributions.
/3/ As a percentage of total net assets as of 12/31/99
4
<PAGE>
VALUE REPORT
Definitions
Heartland Customized Short-Term Bond Index is an equally-weighted index
developed by Heartland Advisors, Inc. consisting of equal allocations of the
Merrill Lynch High Yield, U.S. Corporate, Cash Pay, 1-3 Year BBB Rated, BB
Rated, and B Rated indexes, respectively.
Lipper General Bond Fund Category is an equally-weighted performance index,
adjusted for capital gains distributions and income dividends of the largest
qualifying funds in the investment objective, consisting of 10 funds. Qualifying
funds generally consist of those that do not have any quality or maturity
restrictions and that intend to keep a bulk of their assets in corporate and
government debt issues.
Merrill Lynch High Yield, U.S. Corporate, Cash Pay, BB Rated, 1-3 Year Index is
a market capitalization weighted index including U.S. Domestic and Yankee, cash
pay, high-yield bonds. Qualifying bonds must have at least $100 million par
amount outstanding, and a remaining term to maturity greater than or equal to
one year, but less than three years. The quality range is BB3 - BB1 based on the
composite rating of Moody's and S&P. Structured-Note issues, DIBs (deferred
interest bonds), and PIKs (pay in kind bonds) are excluded.
Morningstar Short-Term Bond Category consists of funds that focus on corporate
and other investment-grade issues with an average duration of more than one but
less than 3.5 years or an average effective maturity of more than one, but less
than four years.
5
<PAGE>
The Heartland Family of Funds
Value Fund
Value Plus Fund
Select Value Fund
Government Fund
Taxable Short Duration Municipal Fund
Short Duration High-Yield Municipal Fund
High-Yield Municipal Bond Fund
Wisconsin Tax Free Fund
(available to Wisconsin residents only)
Firstar Money Market Fund
[LOGO APPEARS HERE]
1.800.HEARTLAND (1.800.432.7856)
www.heartlandfunds.com
Financial Advisor Services: 1.800.442.6391
Heartland Advisors, Inc.
789 N. Water St., Milwaukee, WI 53202
Distributor, Member SIPC.
The performance data quoted represents past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
These are not recommendations to buy or sell the securities discussed, but
rather illustrations of our value investment strategy. Statements regarding
particular securities represent the portfolio manager's views when made and are
subject to change at any time based on market and other considerations. Complete
portfolios for the Funds will be included in the Annual and Semi-Annual Reports
to Shareholders. Income from the Wisconsin Tax Free Fund may be subject to
alternative minimum tax and income from the Short Duration High-Yield Municipal
Fund and the High-Yield Municipal Bond Fund may be subject to state, local and
alternative minimum tax.
This material may only be used when preceded or accompanied by a prospectus for
the Fund(s) listed on the front cover. If you would like more complete
information on any other Fund, including charges and expenses, please call for a
prospectus or visit Heartland's website. Read it carefully before you invest.
[RECYCLED PAPER LOGO APPEARS HERE]
<PAGE>
HEARTLAND TAXABLE SHORT DURATION MUNICIPAL FUND
SCHEDULE OF INVESTMENTS . December 31, 1999
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 85.33% COUPON MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TAXABLE MUNICIPAL BONDS - 71.36%
ALABAMA - 1.25%
$ 300,000 Russellville, Alabama Industrial Development Board -
Spiral Industry, Incorporated............................... 10.000% 02/01/2006 $ 274,125
CALIFORNIA - 7.23%
250,000 Desert Hot Springs, California Public Finance Authority -
Heritage Hospital (Callable 08/01/2002)..................... 10.000 08/01/2017 242,813
595,000 San Jose, California Multifamily Housing -
Helzer Courts............................................... 7.125 12/01/2004 573,431
800,000 San Mateo, California Redevelopment Agency -
(Callable 08/01/2000) (b)................................... 7.125 08/01/2008 769,000
----------
1,585,244
CONNECTICUT - 0.15%
35,000 Connecticut Health & Education Facilities Authority -
New Opportunities for Waterbury............................. 9.500 07/01/2003 33,644
FLORIDA - 12.93%
600,000 Florida Housing Finance Corporation -
Spring Harbor Apartments (b)................................ 7.000 08/01/2009 568,500
1,805,000 Lakeland, Florida Retirement Community -
Carpenter's Home Estates.................................... 11.000 01/01/2005 1,735,056
60,000 Mexico Beach, Florida Public Service Facilities -
Heritage House of Seminole (Callable 12/01/2003)............ 9.400 12/01/2006 55,725
500,000 Sumter County, Florida Industrial Development Authority -
Wecare Nursing Center....................................... 10.000 04/01/2004 475,000
----------
2,834,281
GEORGIA - 3.46%
600,000 Conyers, Georgia Housing Authority -
RHA Housing Project (Mandatory tender 10/01/2009)........... 8.100 10/01/2039 577,500
180,000 Dekalb, Georgia Residential Care Facilities -
King's Bridge Retirement Corporation........................ 10.000 07/01/2001 181,125
----------
758,625
ILLINOIS - 0.75%
165,000 Moline, Illinois U.S. Government Guaranteed Notes -
(Callable 08/01/2002)....................................... 7.900 08/01/2012 165,000
INDIANA - 3.94%
2,810,000 Michigan City, Indiana Economic Development Revenue -
Building Materials Manufacturing Corporation................ 0.000 02/01/2011 864,075
KANSAS - 1.38%
340,000 Wyandotte, Kansas Unified Government Multifamily -
Brookstone Apartments (Callable 05/01/2008)................. 8.000 11/01/2009 301,325
MARYLAND - 1.02%
225,000 Maryland Economic Development Corporation -
Collegiate Housing Foundation - Salisbury Project........... 8.750 06/01/2001 222,750
MASSACHUSETTS - 3.53%
560,000 Massachusetts Industrial Finance Agency -
SEMASS Project (Callable 07/01/2001)........................ 11.250 07/01/2003 567,700
220,000 Massachusetts Development Finance Agency -
Eastern Nazarene College.................................... 8.000 04/01/2011 205,700
----------
773,400
MINNESOTA - 3.27%
250,000 Minneapolis, Minnesota Revenue -
Benchmark Healthcare of Minneapolis......................... 9.000 12/01/2006 234,063
495,000 Minneapolis, Minnesota Multifamily Housing - Grant Street
Commons Apartments (Callable 11/01/2009).................... 9.500 05/01/2011 482,006
----------
716,069
</TABLE>
<PAGE>
HEARTLAND TAXABLE SHORT DURATION MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [cont'd] . December 31, 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 85.33% [cont'd] COUPON MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TAXABLE MUNICIPAL BONDS - 71.36% [cont'd]
NEVADA - 1.80%
$ 400,000 Director of the State of Nevada Dept. of Business & Industry
IDR - Wheeling-Pittsburgh Steel Corporation................. 10.500% 09/01/2002 $ 394,000
NEW JERSEY - 2.99%
565,000 New Jersey Economic Development Authority -
Sayreville Senior Living Centre............................. 9.250 04/01/2003 540,281
120,000 New Jersey Economic Development Authority -
Kapkowski Road Landfill Reclamation......................... 9.500 04/01/2004 115,650
----------
655,931
NEW YORK - 13.87%
2,000,000 Health Insurance Plan of Greater New York -
(Callable 07/01/2000)....................................... 11.250 07/01/2010 1,792,500
15,000 Lakeside Village, New York Housing Corporation -
Multifamily Housing Revenue................................. 8.500 08/01/2001 14,869
60,000 Monroe County, New York Industrial Development Agency -
DePaul Community Facility, Incorporated..................... 8.500 08/01/2002 57,375
245,000 Monroe County, New York Industrial Development Agency -
DePaul Community Facility, Incorporated..................... 9.000 02/01/2003 237,344
180,000 Monroe County, New York Industrial Development Agency -
DePaul Properties........................................... 9.750 09/01/2003 176,400
45,000 Monroe County, New York Industrial Development Agency -
Empire Sports Centre........................................ 9.500 03/01/2005 45,900
245,000 New York City Industrial Development Agency -
A Very Special Place, Incorporated.......................... 9.250 01/01/2004 235,813
180,000 Riverhead, New York Multifamily Housing Corporation -
Doctors Path Apartments..................................... 8.500 08/01/2002 173,025
100,000 Suffolk County, New York Industrial Development Agency -
Spellman High Voltage Electronics Corporation............... 9.000 12/01/2002 97,625
210,000 Westchester County, New York Industrial Development
Agency - The Children's Village Project..................... 9.000 03/15/2001 208,162
----------
3,039,013
NORTH CAROLINA - 0.71%
175,000 Fletcher, North Carolina First Mortgage Housing Revenue -
Avery's View Retirement Facilities (a)...................... 9.500 03/01/2008 155,313
OHIO - 1.01%
110,000 Lorain, Ohio U.S. Government Guaranteed Notes -
(Callable 08/01/2002)....................................... 7.720 08/01/2009 109,862
110,000 Lorain, Ohio U.S. Government Guaranteed Notes -
(Callable 08/01/2002)....................................... 7.900 08/01/2012 110,275
----------
220,137
PENNSYLVANIA - 1.98%
365,000 Cumberland County, Pennsylvania Industrial Development
Authority - The Woods at Cedar Run.......................... 8.500 11/01/2002 352,681
85,000 Philadelphia, Pennsylvania Hospitals & Higher Education
Facilities - North Philadelphia Health System............... 10.000 07/01/2003 81,919
----------
434,600
TEXAS - 7.12%
1,240,000 Reeves County, Texas Certificates of Participation -
Law Enforcement Center (Callable 06/01/2006)................ 7.250 06/01/2011 1,159,400
25,000 Tarrant County, Texas Health Facilities Development
Corporation - Westchester Retirement Communities
(Callable 08/01/2002)....................................... 8.750 08/01/2003 23,813
195,000 Tarrant County, Texas Health Facilities Development
Corporation - St. Joseph Long Term Care Facility
(Callable 05/01/2000)....................................... 10.000 05/01/2004 186,712
</TABLE>
<PAGE>
HEARTLAND TAXABLE SHORT DURATION MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [cont'd] . December 31, 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - 85.33% [cont'd] COUPON MATURITY VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TAXABLE MUNICIPAL BONDS - 71.36% [cont'd]
TEXAS - 7.12% [cont'd]
$ 25,000 Tarrant County, Texas Health Facilities Development
Corporation - Westchester Retirement Communities
(Callable 08/01/2002).............................. 9.000% 08/01/2004 $ 23,656
120,000 Tarrant County, Texas Health Facilities Development
Corporation - Heritage Valley Gardens
(Callable 03/01/2004).............................. 10.250 03/01/2012 110,850
60,000 Tarrant County, Texas Health Facilities Development
Corporation - Heritage Eastwood Gardens
(Callable 12/01/2003).............................. 10.000 12/01/2013 55,125
-----------
1,559,556
UTAH - 0.36%
85,000 Davis County, Utah Housing Authority -
Country Crossing................................... 10.000 02/01/2005 79,688
VIRGINIA - 1.80%
170,000 Alleghany-Highlands Economic Development Authority.. 10.500 09/15/2004 168,512
50,000 Brunswick County, Virginia Industrial Development
Authority - Extraction Technologies of Virginia
(Callable 07/01/2000).............................. 10.000 07/01/2005 46,937
180,000 Greensville County, Virginia Industrial Development
Authority - Wheeling-Pittsburgh Steel Corporation.. 9.500 04/01/2001 177,975
-----------
393,424
WISCONSIN - 0.81%
185,000 Wisconsin Health & Education Facilities Authority -
Benchmark Healthcare of Wisconsin.................. 8.250 12/01/2003 176,444
-----------
TOTAL TAXABLE MUNICIPAL BONDS (Cost $16,073,217)............................. $15,636,644
-----------
CORPORATE BONDS - 8.78%
255,000 Carillon, Incorporated.............................. 9.250 07/01/2002 250,219
530,000 RHA Assisted Living of Buckhead, Incorporated....... 10.875 07/01/2009 508,138
1,158,000 Stone Container Corporation (Callable 01/01/2000)... 10.750 04/01/2002 1,166,685
-----------
TOTAL CORPORATE BONDS (Cost $1,944,254)...................................... $ 1,925,042
-----------
CONVERTIBLE BOND - 5.19%
1,822,000 Sholodge, Incorporated.............................. 7.500 05/01/2004 1,136,472
-----------
TOTAL CONVERTIBLE BOND (Cost $1,161,317)..................................... $ 1,136,472
-----------
TOTAL LONG-TERM INVESTMENTS (Cost $19,178,788)............................... $18,698,158
-----------
</TABLE>
<PAGE>
HEARTLAND TAXABLE SHORT DURATION MUNICIPAL FUND
SCHEDULE OF INVESTMENTS [cont'd] . December 31, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
PAR
AMOUNT SHORT-TERM INVESTMENTS - 15.72% COUPON MATURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS - 15.01%
$ 2,290,000 Venator Group, Incorporated........................ 7.000% 06/01/2000 $ 2,238,475
1,050,500 CHC Highview, LLC - Highview Commons Project (c)... 10.000 02/18/2000 1,050,500
-----------
TOTAL CORPORATE BONDS (Cost $3,316,959)....................................... $ 3,288,975
-----------
TAXABLE MUNICIPAL BONDS - 0.71%
ILLINOIS - 0.35%
75,000 Illinois Development Finance Authority -
Community Rehabilitation Providers................ 8.500 03/01/2000 75,172
MASSACHUSETTS - 0.36%
60,000 Massachusetts Development Finance Agency -
MCHSP Human Service Providers..................... 9.750 07/01/2000 59,740
20,000 Springfield/Garand Court Development Corporation -
Garand Court Apartments........................... 7.000 02/01/2000 19,974
-----------
TOTAL TAXABLE MUNICIPAL BONDS (Cost $154,886)................................. $ 154,886
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $3,471,845)................................ $ 3,443,861
-----------
TOTAL INVESTMENTS (Cost $22,650,633)......101.05% $22,142,019
Liabilities, less cash and receivables.... (1.05) (229,267)
------- -----------
TOTAL NET ASSETS..........................100.00% $21,912,752
======= ===========
</TABLE>
(a) Coupon payment periodically increases over the life of the
security. Rate stated is in effect on December 31, 1999.
(b) All or a portion of security committed to cover collateral
requirements for futures contracts.
(c) Restricted security. See Note 2(g) in Notes to Financial
Statements.
The accompanying Notes to Financial Statements are an integral
part of this Schedule.
<PAGE>
HEARTLAND TAXABLE SHORT DURATION MUNICIPAL FUND
STATEMENT OF ASSETS AND LIABILITIES . December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at cost.................................. $22,650,633
===========
Investments in securities, at value................................. $22,142,019
Cash................................................................ 29,313
Receivable from fund shares sold.................................... 411,491
Accrued interest.................................................... 677,696
Variation margin on open futures contracts.......................... 5,000
Prepaid expenses.................................................... 142
Receivable from Advisor for expense reimbursement................... 26,115
-----------
Total Assets..................................................... 23,291,776
-----------
LIABILITIES:
Short-term notes payable............................................ 1,300,000
Distributions payable............................................... 17,641
Accrued interest payable............................................ 653
Payable for fund shares redeemed.................................... 41,113
Accrued expenses.................................................... 19,617
-----------
Total Liabilities................................................ 1,379,024
-----------
TOTAL NET ASSETS......................................................... $21,912,752
===========
NET ASSETS CONSIST OF:
Paid in capital..................................................... $22,417,536
Accumulated undistributed net realized losses on investments........ (1,195)
Net unrealized depreciation on investments.......................... (503,589)
-----------
TOTAL NET ASSETS......................................................... $21,912,752
===========
SHARES OUTSTANDING, $.001 par value (100,000,000 shares authorized). 2,245,889
-----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE........... $ 9.76
===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
Statement.
<PAGE>
HEARTLAND TAXABLE SHORT DURATION MUNICIPAL FUND
STATEMENT OF OPERATIONS
For the period from January 1, 1999 to December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest....................................................... $1,074,890
----------
Total investment income..................................... 1,074,890
----------
EXPENSES:
Management fees................................................ 48,505
Registration fees.............................................. 46,662
Distribution fees.............................................. 26,947
Transfer agent fees............................................ 18,707
Administrative fees............................................ 16,168
Directors' fees................................................ 15,478
Audit fees..................................................... 15,409
Fund accounting fees........................................... 12,593
Interest expense............................................... 10,725
Legal fees..................................................... 10,459
Printing and communications.................................... 4,514
Custodian fees................................................. 4,321
Postage........................................................ 1,303
Other expenses................................................. 12,553
----------
Total expenses before expense reimbursement................. 244,344
Less: Expense reimbursement................................. (141,582)
----------
Net expenses................................................ 102,762
----------
NET INVESTMENT INCOME............................................... 972,128
----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on:
Securities.................................................. (74,941)
Futures contracts........................................... 73,746
Net increase (decrease) in unrealized appreciation on:
Securities.................................................. (522,143)
Futures contracts........................................... 5,257
----------
TOTAL REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS......... (518,081)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................ $ 454,047
==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
Statement.
<PAGE>
HEARTLAND TAXABLE SHORT DURATION MUNICIPAL FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
period from
January 1, 1999 Dec. 29, 1998/(1)/
through through
Dec. 31, 1999 Dec. 31, 1998
--------------- ------------------
<S> <C> <C>
OPERATIONS:
Net investment income............................................... $ 972,128 $ 422
Net realized losses on investments.................................. (1,195) --
Net increase (decrease) in unrealized appreciation on investments... (516,886) 13,297
------------ ------------
Net increase in net assets resulting from operations............. 454,047 13,719
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................... (972,128) (422)
------------ ------------
Total distributions to shareholders.............................. (972,128) (422)
------------ ------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued......................................... 36,090,426 1,219,509
Reinvested dividends from net investment income..................... 829,911 396
Cost of shares redeemed............................................. (15,716,725) (5,981)
------------ ------------
Net increase in net assets derived from Fund share activities.... 21,203,612 1,213,924
------------ ------------
TOTAL INCREASE IN NET ASSETS............................................. 20,685,531 1,227,221
NET ASSETS AT THE BEGINNING OF THE PERIOD................................ 1,227,221 --
------------ ------------
NET ASSETS AT THE END OF THE PERIOD...................................... $ 21,912,752 $ 1,227,221
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME...................................... $ -- $ --
============ ============
</TABLE>
(1) Commencement of operations.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
<PAGE>
HEARTLAND TAXABLE SHORT DURATION MUNICIPAL FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
period from
January 1, 1999 Dec. 29, 1998/(1)/
through through
Per Share Data Dec. 31, 1999 Dec. 31, 1998
--------------- ------------------
<S> <C> <C>
Net asset value, beginning of period................................... $ 10.11 $ 10.00
Income from investment operations:
Net investment income............................................... 0.89 0.00
Net realized and unrealized gains (losses) on investments........... (0.35) 0.11
------------- -----------------
Total income from investment operations.......................... 0.54 0.11
------------- -----------------
Less distributions from:
Net investment income............................................... (0.89) 0.00
Net realized gains on investments................................... -- --
------------- -----------------
Total distributions.............................................. (0.89) 0.00
------------- -----------------
Net asset value, end of period......................................... $ 9.76 $ 10.11
============= =================
Total Return........................................................... 5.51% 1.15%/(2)/
Ratios and Supplemental Data
Net assets, end of period (in thousands).......................... $ 21,913 $ 1,227
Ratio of net expenses to average net assets/(4)/.................. 0.95% 0.48%/(3)/
Ratio of net investment income to average net assets/(4)/......... 9.02% 6.36%/(3)/
Portfolio turnover rate........................................... 43% 0%
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) If there had been no expense reimbursement by the Advisor, the ratios of
annualized net expenses to average net assets for the periods ended December
31, 1999 and 1998 would have been 2.27% and 4.80%, respectively, and the
ratios of annualized net investment income to average net assets would have
been 7.70% and 2.04%, respectively.
The accompanying Notes to Financial Statements are an integral part of this
Statement.
<PAGE>
HEARTLAND TAXABLE SHORT DURATION MUNICIPAL FUND
NOTES TO FINANCIAL STATEMENTS . December 31, 1999
- -------------------------------------------------------------------------------
(1) Organization
The Heartland Group, Inc. (the "Corporation") is registered as an open-end
management investment company under the Investment Company Act of 1940. On
December 29, 1998, the Heartland Taxable Short Duration Municipal Fund (the
"Fund") commenced operations. The Fund, which is a diversified fund, is one
of the eight series of funds issued by the Corporation at December 31,
1999.
(2) Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Fund in the preparation of the financial statements:
(a) Debt securities are stated at fair value as furnished by independent
pricing services based primarily upon information concerning market
transactions and dealer quotations for similar securities, or by
dealers who make markets in such securities. Debt securities having
maturities of 60 days or less may be valued at acquisition cost, plus
or minus any amortized discount or premium. Securities 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.
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.
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.
(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 discount on investments
utilizing the effective interest method.
(e) The Fund is charged for those expenses that are directly attributable
to it. 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.
(f) 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.
The Fund receives from or pays to the broker on a daily basis an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as "variation margin,"
and are recorded by the Fund as unrealized gains or losses. When the
futures contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed.
The use of futures contracts involves, to varying degrees, elements of
market risk in excess of the amount recognized in the Statements of
Assets and Liabilities. The predominant risk is that the movement of
the futures contract's price may result in a loss which could render a
portfolio's hedging strategy unsuccessful. The Fund had the following
open short futures contracts at December 31, 1999:
<TABLE>
<CAPTION>
Number Expiration Unrealized Notional
Type of Contracts Date Appreciation Value
---- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Treasury Bond Index (10) March 2000 $5,025 ($909,375)
</TABLE>
(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 144A under the
Act, or an exemption from the registration requirements of the Act. At
December 31, 1999, the Fund held restricted securities equaling 4.8%
of net assets.
Restricted securities that are eligible for resale to qualified
institutional buyers pursuant to Rule 144A under the Act, provided
that such securities have been determined to be liquid pursuant to the
guidelines adopted by the Board of Directors, are valued at fair value
as furnished by independent pricing services. All other restricted
securities are identified below.
<TABLE>
<CAPTION>
Security Par Value Cost Fair Value Acquisition Date
-------- --------- ---- ---------- ----------------
<S> <C> <C> <C> <C>
CHC Highview, LLC --
Highview Commons Project
10.0% 2/18/2000 $1,050,500 $1,050,500 $1,050,500 7/99
</TABLE>
(h) 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
<PAGE>
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
Deutsche Bank AG made available to seven of the eight series of funds
issued by the Corporation, including the Taxable Short Duration Municipal
Fund, a $100 million credit facility pursuant to a Credit Agreement
("Agreement"), most recently amended December 29, 1998. The primary purpose
of the agreement is to allow the Fund to avoid liquidating securities under
circumstances which the Advisor believes are unfavorable to shareholders.
Outstanding principal amounts under the credit facility bear interest at a
rate per annum equal to the New York Interbank Offering Rate plus 0.40% or
the prime rate. Commitment fees are computed at a rate per annum equal to
0.08% of the Fund's proportional daily average unutilized credit. During
the period from January 1, 1999 through December 31, 1999, the Fund had an
outstanding average balance of $180,548, at an average interest rate of
5.62%, and a maximum outstanding balance of $4,400,000. Interest expense
and commitment fees accrued during the period from January 1, 1999 through
December 31, 1999 were $10,725 and $2,494, respectively.
(4) Investment Management Fees and Transactions with Related Parties
The Fund has a management agreement with Heartland Advisors, Inc. (the
"Advisor") to serve as investment advisor and manager. Under the terms of
the agreement, a total annual fee of 0.60 of 1% of average net assets has
two parts - a management fee in the amount of 0.45 of 1% of average daily
net assets and an administrative fee in the amount of 0.15 of 1% of average
daily net assets.
The Fund has an agreement with the Advisor to perform certain bookkeeping
and accounting services. Under the terms of the agreement, the Fund pays
the Advisor a monthly fee at an annual rate of $12,500 plus 0.0085% of
average daily net assets over $50 million.
The Fund has 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 Fund to
pay to the Distributor a quarterly distribution fee on an annual basis up
to 0.25% of its daily net assets.
The Advisor contractually committed through April 30, 2000, to reimburse
the Fund to the extent that annual total fund operating expenses exceed
0.95%. After that date, the Advisor may reinstate all or a portion of the
Fund's fees or discontinue waivers and reimbursements at any time. If the
Fund's operating expenses fall below the expense limitation, the Fund will
begin paying the Advisor for fees previously waived and expenses previously
reimbursed. This repayment will continue for up to three years after the
end of the fiscal year in which a fee is waived or an expense is paid,
subject to any expense limitation then in effect, until the Fund has repaid
the Advisor for the entire amount or such three-year period expires. For
the period December 29, 1998 to December 31, 1998 and for the period
January 1, 1999 to December 31, 1999, the Advisor waived/reimbursed
expenses of $287 and $141,582, respectively, which are subject to potential
repayment by the Fund, expiring at December 31, 2001 and December 31, 2002,
respectively.
Officers and certain directors of the Corporation are also officers and/or
directors of Heartland Advisors, Inc.; 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 Distributor is a member.
(5) Investment Transactions
During the period from January 1, 1999 through December 31, 1999, the cost
of purchases and proceeds from sales of securities, other than short-term
obligations, were $22,471,146 and $4,363,570, respectively.
At December 31,1999, the gross unrealized appreciation and depreciation on
securities for tax purposes were as follows:
Appreciation $ 9,100
Depreciation (520,346)
-----------
Net Unrealized Depreciation $ (511,246)
===========
At December 31, 1999, the cost of securities for Federal income tax
purposes was $22,653,265.
(6) Fund Share Transactions
For the period from January 1, 1999 through December 31, 1999, Fund share
transactions were as follows:
Shares issued 3,631,050
Reinvested dividends from net investment income 83,879
Shares redeemed (1,590,432)
-----------
Net increase in Fund shares 2,124,497
===========
For the period from December 29, 1998 through December 31, 1998, Fund share
transactions were as follows:
Shares issued 121,945
Reinvested dividends from net investment income 39
Shares redeemed (592)
-----------
Net increase in Fund shares 121,392
===========
<PAGE>
END OF NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Federal Income Tax Information (Unaudited)
In early 2000, shareholders received information regarding all distributions
paid to them by the Fund during calendar year 1999. No long-term capital gain
distributions were designated.
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 Taxable Short
Duration Municipal Fund (one of the eight portfolios constituting Heartland
Group, Inc., and hereafter referred to as the "Fund") at December 31, 1999, the
results of its operations, the changes in its net assets and the financial
highlights for each of the periods indicated, in conformity with accounting
principles generally accepted in the United States. 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 audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, 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 audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
Milwaukee, Wisconsin PricewaterhouseCoopers LLP
February 7, 2000