<PAGE> 1
Rule 497(e)
1933 Act Reg. No. 33-11371
1940 Act File No. 811-4982
HEARTLAND WISCONSIN TAX FREE FUND
HEARTLAND NEBRASKA TAX FREE FUND
SUPPLEMENT DATED SEPTEMBER 20, 1995 TO
PROSPECTUS DATED APRIL 28, 1995
MUNICIPAL LEASE OBLIGATIONS. The following information replaces the third
paragraph under "Tax-Free Investments" on page 5 of the Prospectus:
Each Fund may invest in municipal lease obligations, which are issued
by a state or local government or authority to acquire land, equipment or
facilities and are not fully backed by the municipality's credit. These
obligations typically are secured by the municipality's obligation to make
payments under the lease, which may be subject to certain conditions,
including future appropriation of funds. If the municipality stops making
lease payments, the obligations could lose value.
<PAGE> 2
Rule 497(e)
1933 Act Reg. No. 33-11371
1940 Act File No. 811-4982
HEARTLAND WISCONSIN TAX FREE FUND
HEARTLAND NEBRASKA TAX FREE FUND
SUPPLEMENT DATED SEPTEMBER 20, 1995 TO
STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 28, 1995
MUNICIPAL LEASE OBLIGATIONS. The following information replaces the first
sentence under "State or Municipal Lease Obligations" on page 6 of the
Statement of Additional Information:
Each Fund may invest a portion of its assets in state or municipal
leases and participation interests therein.
The following information replaces the last paragraph under "State or
Municipal Lease Obligations" beginning on page 6 of the Statement of Additional
Information:
Typically, if the lease is terminated by the public body for
nonappropriation or another reason not constituting a default under the
lease, the lessor, or holder of participation interest in the lease, is
without recourse to the general credit of the public body and may be
limited to repossession of the leased property. The disposition of the
leased property by the lessor in the event of a lease termination might
prove difficult and could result in a loss to the holders of participation
interests.
<PAGE> 3
HEARTLAND WISCONSIN TAX FREE FUND
HEARTLAND NEBRASKA TAX FREE FUND
Prospectus
April 28, 1995
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Fund Expenses . . . . . . . . . . . . . . . . . 2
Financial Highlights . . . . . . . . . . . . . 3
Investment Objectives and Policies . . . . . . 4
How to Buy Shares . . . . . . . . . . . . . . . 11
Shareholder Services . . . . . . . . . . . . . 13
Dividends, Distributions and Taxes . . . . . . 15
The Funds and the Heartland
Organization . . . . . . . . . . . . . . . . . 16
Net Asset Value Calculation . . . . . . . . . . 17
Description of Fund Shares . . . . . . . . . . 17
Portfolio Transactions . . . . . . . . . . . . 18
Performance Information . . . . . . . . . . . . 19
How to Redeem Shares . . . . . . . . . . . . . 19
</TABLE>
SHARES OF THE FUNDS ARE NOT OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR ENDORSED
OR GUARANTEED BY, AND BANKING INSTITUTION, ARE NOT INSURED OR GUARANTEED BY THE
FDIC OR ANY OTHER GOVERNMENTAL AGENCY AND INVOLVE RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
INVESTMENT SUMMARY
Each Heartland Tax Free Fund's investment objective is to provide investors
with a high level of current income that is exempt from federal income tax and
the personal income tax of its respective state.
The Heartland Wisconsin Tax Free Fund and the Heartland Nebraska Tax Free Fund
(collectively, the "Funds") are separate non-diversified mutual fund portfolios
of Heartland Group, Inc. ("Heartland"). This Prospectus contains information
you should know about the Funds before you invest. Please keep it for
reference. A Statement of Additional Information for the Funds (dated
April 28, 1995) has been filed with the Securities and Exchange Commission and
is incorporated by reference into this Prospectus. It is available at no charge
by calling the Funds' investment advisor and distributor, Heartland Advisors,
Inc. ("Heartland Advisors"), at 1-800-HEARTLN or (414) 347-7777.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
1
<PAGE> 4
FUND EXPENSES
The expense summary format below was developed for use by all mutual funds to
help you make your investment decisions. Of course, you should consider this
expense information along with other important information, including each
Fund's investment objective and performance.
<TABLE>
<CAPTION>
Heartland Wisconsin Heartland Nebraska
Tax Free Fund Tax Free Fund
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases None None
Sales load imposed on reinvested dividends None None
Redemption fees None(1) None(1)
Exchange fees None None
ANNUAL FUND OPERATING EXPENSES ------------------------------
(as a percentage of average net assets)
Management fees (after fee waivers) .65% .33%(2)
Rule 12b-1 distribution plan fees None None
Other expenses .20% .48%
------------------------------
TOTAL FUND OPERATING EXPENSES .85% .81%(2)
==============================
</TABLE>
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming: (1) 5%
annual rate of return; and (2) redemption at the end of each time period in
each Fund:
<TABLE>
<S> <C> <C>
One year $9 $8
Three years $27 $26
Five years $47 $45
Ten years $105 $100
</TABLE>
(1) The Agent charges a wire fee for the return of redemption proceeds
requested by wire transfer. The fee is currently $7.50.
(2) The Management Fee shown in the table applicable to the Nebraska Fund
gives effect to the voluntary waiver by Heartland Advisors of one-half of
its management fee. Without such waiver, the Management Fees and Total Fund
Operating Expenses would have been .65% and 1.13% of average net assets,
respectively. Heartland Advisors may reinstate an additional portion or all
of the fee at any time.
The purpose of this expense information is to assist you in understanding the
various costs and expenses that you would bear directly or indirectly as an
investor in either Fund. More detailed information concerning these expenses is
set forth in the sections of this Prospectus entitled "How To Buy Shares" and
"The Funds and The Heartland Organization."
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
P R O S P E C T U S
2
<PAGE> 5
FINANCIAL HIGHLIGHTS
The following Financial Highlights table for the Heartland Wisconsin Tax Free
Fund (the "Wisconsin Fund") and the Heartland Nebraska Tax Free Fund (the
"Nebraska Fund") has been examined by Arthur Andersen LLP, independent public
accountants, whose reports on the financial statements of each Fund for the
fiscal year ended December 31, 1994 are included in the respective Fund's
Annual Report to Shareholders for such period and incorporated by reference
into the Statement of Additional Information. The table should be read in
conjunction with the audited financial statements and related notes appearing
in the Annual Reports. Additional information about the Funds' performance is
contained in their respective Annual Reports, which may be obtained without
charge by writing or calling Heartland Advisors.
<TABLE>
<CAPTION>
WISCONSIN FUND NEBRASKA FUND
FISCAL YEAR ENDED DEC. 31 4/3/92 (1) FISCAL YEAR 9/27/93 (1)
1994 1993 TO 12/31/92 ENDED 12/31/94 TO 12/31/93
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net Asset Value, Beginning of Period $10.38 $ 9.85 $ 9.70 $ 9.56 $ 9.70
-----------------------------------------------------------------
Income from Investment Operations:
Net investment income .51 .49 .37 .45 .11
Net realized and unrealized gains
on securities (1.17) .55 .15 (1.33) (.14)
---- --- --- ---- ---
Total from investment operations (.66) 1.04 .52 (.88) (.03)
----------------------------------------------------------------
Less Distributions:
Dividends from net investment income (.51) (.49) (.37) (.45) (.11)
Distributions from net realized gains (.02) - - -
Total distributions (.51) (.51) (.37) (.45) (.11)
Net asset value, end of period $ 9.21 $10.38 $ 9.85 $ 8.23 $ 9.56
-----------------------------------------------------------------
Total Return(5) (6.49)% 10.80% 7.32%(2) (9.33)% (.29)%(3)
=================================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period 101,784,818 99,349,617 36,304,163 12,526,287 8,998,266
Ratio of total expenses to
average net assets .85% .84% .82% (2) .81% (4) .13% (2) (4)
Ratio of net investment income to
average net assets 5.28% 4.81% 4.87% (2) 5.23% 4.65% (2)
Portfolio turnover rate 21.50% 6.29% 6.77% 32.69% 2.56%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Not annualized.
(4) Heartland Advisors waived the Management Fee for the Nebraska Fund in its
entirety from September 27, 1993 through December 31, 1993.
Effective January 1, 1994, Heartland Advisors partially reinstated a
portion of the fee at the rate of .325 of 1% of average daily net assets.
(5) The front-end sales charge in effect for the Funds prior to June 1, 1994
is not reflected in Total Return as set forth in the table.
P R O S P E C T U S
3
<PAGE> 6
INVESTMENT OBJECTIVES AND POLICIES
WISCONSIN FUND
The investment objective of the Wisconsin Fund is to provide investors with a
high level of current income that is exempt from federal and Wisconsin personal
income taxes. The Wisconsin Fund invests primarily in municipal securities that
are exempt from personal income tax in Wisconsin and under federal law,
including certain Wisconsin municipal securities and securities of other
entities meeting such criteria.
Only limited categories of municipal securities are exempt from Wisconsin
personal income taxes. These include higher education bonds issued by the State
of Wisconsin, public housing authority bonds issued by Wisconsin municipalities,
redevelopment authority bonds issued by Wisconsin municipalities, certain bonds
issued by the Wisconsin Housing and Economic Development Authority, Wisconsin
Housing Finance Authority bonds, certain general obligation bonds issued by the
District of Columbia, Puerto Rico, the Virgin Islands and Guam, and certain
public housing agency bonds issued by agencies located outside of Wisconsin.
Due to the limited availability and liquidity of such securities issued within
Wisconsin, it is possible that the Wisconsin Fund may invest a significant
portion of its assets in obligations issued by territories and possessions of
the United States, and the District of Columbia, their agencies or
instrumentalities. The Wisconsin Fund may invest up to 100% of its assets in tax
exempt securities of issuers outside of Wisconsin if such securities bear
interest which is exempt from federal and Wisconsin personal income taxes.
NEBRASKA FUND
The investment objective of the Nebraska Fund is to provide investors with a
high level of current income that is exempt from federal and Nebraska personal
income taxes. The Nebraska Fund invests primarily in municipal securities that
are exempt from personal income tax in Nebraska and under federal law,
including certain Nebraska municipal securities and securities of other
entities meeting such criteria.
Only limited categories of municipal securities are exempt from Nebraska
personal income taxes. These include bonds issued by Nebraska state and local
government subdivisions, including Nebraska municipal water bonds, Nebraska
Public Power District bonds, Nebraska Investment Finance Authority bonds, local
school district bond obligations, and certain general obligation bonds issued by
Puerto Rico, the Virgin Islands and Guam. Due to the limited availability and
liquidity of such securities issued within Nebraska, it is possible that the
Nebraska Fund may invest a significant portion of its assets in obligations
issued by territories and possessions of the United States, their agencies or
instrumentalities. The Nebraska Fund may invest up to 100% of its assets in tax
exempt securities of issuers outside of Nebraska if such securities bear
interest which is exempt from federal and Nebraska personal income taxes.
P R O S P E C T U S
4
<PAGE> 7
INVESTMENT POLICIES OF THE FUNDS
TAX-FREE INCOME. As a matter of fundamental policy, each Fund will seek to
invest at least 80% of its assets so that the income earned thereon will be
exempt from federal and the respective state's personal income taxes. In
practice, under normal market conditions, each Fund will seek to invest all of
its assets so that income therefrom will be exempt from federal and the
respective state's personal income tax, other than assets invested for hedging
purposes. There can be no assurance that the Funds will be successful in this
investment policy or that either Fund will achieve its investment objective.
Also as a matter of fundamental policy, each Fund will seek to invest its
assets so that at least 80% are invested so as to be exempt from the federal
alternative minimum tax. However, under abnormal conditions each Fund may
invest as much as 100% of its assets in municipal securities issued to finance
private activities whose interest is a "tax preference item" for purposes of
the federal alternative minimum tax. If you are subject to the alternative
minimum tax, a portion of your income may not be exempt from federal income
tax. Income distributions that are a tax preference item for purposes of the
federal alternative minimum tax are considered to be exempt from federal income
tax for purposes of each Fund's objective. See "Dividends, Distributions and
Taxes."
TAX-FREE INVESTMENTS. The term "municipal securities," as used in this
Prospectus, means debt obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies, and instrumentalities, the interest on
which is generally exempt from federal income tax.
Municipal securities are classified principally as either "general
obligations" or "revenue obligations." General obligation bonds are secured by
the municipality's pledge of its credit and taxing power for the payment of
principal and interest. Revenue obligations are generally payable only from the
revenues derived from a particular facility or class of facilities, or in some
cases from the proceeds of a special excise tax or other specific revenue
source. Industrial development or revenue bonds are usually bonds the credit
quality of which is related directly to the credit standing of the industrial
user involved or of any entity which has provided a guaranty or enhancement of
such credit.
Each Fund's investment policies include the ability to invest up to 5% of its
assets in state and municipal lease obligations, but neither Fund has a present
intention of investing in such obligations. A more detailed description of lease
obligations is set forth in the Statement of Additional Information under
"Investment Objectives and Policies - Tax Exempt Obligations - State or
Municipal Lease Obligations."
OTHER INVESTMENTS. Each Fund may invest temporarily in certificates of deposit,
bankers' acceptances and other time deposits. Certificates of deposit are
certificates representing the obligation of a bank to repay the funds deposited
(plus interest thereon) at a time certain after the deposit. Bankers'
acceptances are credit instruments evidencing the obligation of a bank to pay a
draft drawn on it by a customer. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Time deposits maturing in greater than seven days will be
considered illiquid securities.
Under abnormal market conditions or for defensive purposes, each Fund may
invest more than 20% of its
P R O S P E C T U S
5
<PAGE> 8
assets in fixed-income securities, the interest on which is subject to federal
and/or the Fund's respective state personal income tax. Investments in
securities subject to federal income tax will be primarily in securities issued
or guaranteed by the United States government, its agencies, instrumentalities
or authorities; corporate debt securities rated in the highest three categories
by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P"), or Fitch Investors Service, Inc. ("Fitch"); commercial paper rated in
the highest category by S&P or Moody's; unrated variable rate demand notes
which Heartland Advisors believes have investment characteristics comparable to
debt securities rated in one of the top three rating categories by Moody's, S&P
or Fitch; or certificates of deposit of the 100 largest domestic banks in terms
of assets which are subject to federal or state regulatory supervision.
INVESTMENT QUALITY
The Funds invest primarily in municipal bonds judged by Heartland Advisors to
be of investment grade quality. Such securities are considered by Heartland
Advisors to include securities rated at the time of purchase within the four
highest rating categories assigned by Moody's, S&P, or Fitch, or securities
which are unrated, provided that such securities are judged by Heartland
Advisors, at the time of purchase, to be of comparable quality to securities
rated within such four highest categories. A description of the ratings
assigned by Moody's, S&P and Fitch is contained in the Statement of Additional
Information. Investment grade bonds have adequate to strong protection of
principal and interest payments. The investment grade rating of some bonds may
result from various enhancements, such as insurance or letters of credit,
rather than the credit of the issuer. Bonds rated in the fourth highest rating
category are more sensitive to economic changes than are bonds rated in one of
the top three categories, and such bonds have speculative characteristics.
Each Fund may invest up to 25% of its assets in lower quality bonds (those
rated below the four highest categories by Moody's, S&P or Fitch or judged by
Heartland Advisors to be of comparable quality, commonly known as "junk
bonds"), provided that neither Fund may invest in bonds rated below B at the
time of purchase. Bonds rated below the top four rating categories are
regarded, on balance, as predominantly speculative with respect to the capacity
to pay interest and repay principal in accordance with the terms of the
obligation. While such bonds typically offer higher rates of return, they
involve greater risk, including greater risk of default and loss of principal.
The prices of these lower rated bonds may be less sensitive to interest rate
changes than higher rated bonds, but more sensitive to adverse economic
changes. Periods of economic uncertainty and change may cause market price
volatility in these higher yielding bonds and corresponding volatility in the
Fund's net asset value. Furthermore, higher yielding bonds may contain
redemption or call provisions which, if exercised during a declining interest
rate environment, may require a Fund to replace the security with a lower
yielding security, resulting in a decreased return to the Fund. Finally, the
secondary trading market for higher yielding bonds may not be as active as for
lower yielding bonds. As a result, it may be difficult to accurately assess
the value of such bonds (and therefore a Fund's securities portfolio), and a
Fund's ability to dispose of such bonds may be limited. For a more detailed
discussion of the risks associated with investing in lower rated securities,
see "Investment Objectives and Policies - Tax Exempt Obligations -
Non-Investment Grade Bonds" in the Statement of Additional Information.
Subsequent to their purchase by either of the Funds, particular obligations may
cease to be rated or their ratings may be reduced below the minimum rating
P R O S P E C T U S
6
<PAGE> 9
required for purchase by such Fund. Neither event will require the elimination
of an investment from the Fund's portfolio, but Heartland Advisors will
consider such an event in its determination of whether the Fund should continue
to hold an investment in its portfolio.
Rated as well as unrated municipal securities will be analyzed by Heartland
Advisors on the basis of available information as to creditworthiness and with
a view to various qualitative factors and trends effecting municipal securities
generally. It should be noted, however, that the amount of information about
the financial condition of an issuer of municipal securities or an obligor
thereon may not be as extensive or as readily available as information
regarding securities that are more actively traded.
ASSET COMPOSITION
The following table provides a summary of each Fund's debt holdings as rated by
S&P or, in the case of unrated securities, as determined by Heartland Advisors.
These figures are dollar-weighted averages of month-end portfolio holdings of
the respective Fund during the fiscal year ended December 31, 1994, presented
as a percentage of total investments. These percentages are historical and are
not necessarily indicative of the quality of current or future Wisconsin or
Nebraska Fund holdings, which may vary.
<TABLE>
<CAPTION>
S&P RATING WISCONSIN FUND NEBRASKA FUND
OR EQUIVALENT AVERAGE AVERAGE
<S> <C> <C>
AAA 24.3% 18.1%
AA 2.4% 27.2%
A 62.6% 51.7%
BBB 10.7% 2.3%
BB 0% 0.7%
B 0% 0%
</TABLE>
The dollar-weighted average of debt securities included in these figures and
not rated by S&P amounted to 22.5% for the Wisconsin Fund and 30.3% for the
Nebraska Fund. This may include securities rated by other nationally recognized
rating organizations, as well as unrated securities. Unrated securities are not
necessarily lower-quality securities. Issuers of municipal securities
frequently choose not to incur the expense of obtaining a rating. Please refer
to the Statement of Additional Information for a more complete discussion of
these ratings.
OTHER INVESTMENT PRACTICES
In addition to the investments described above for each Fund, the Funds may
invest in certain securities and employ certain investment techniques, which
may present special risks as described below. A more complete discussion of
these securities and investment techniques and their associated risks, as well
as further investment restrictions to which the Funds may be subject, is
contained in the Statement of Additional Information.
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Each Fund may
engage in transactions in options, futures contracts, and options on futures
contracts to hedge against anticipated declines in the market value of its
portfolio securities, or against increases in the market values of securities
it intends to purchase, or to manage exposure to changing interest rates. The
Funds will not use these instruments for speculation. Some options and futures
strategies, including selling futures, buying puts and writing calls, tend to
hedge a Fund's investments against price fluctuations. Other strategies,
including buying futures, writing puts, and buying calls, tend to increase
market exposure. Options and futures may be combined with each other in order
to adjust the risk and return characteristics of the Fund's overall strategy.
P R O S P E C T U S
7
<PAGE> 10
Each Fund may purchase and write put and call options that are traded on
recognized U.S. exchanges with respect to any type of security or index related
to its investments, and may enter into closing transactions with respect to
such options. Each Fund may purchase and sell futures contracts, including
interest rate futures and index futures, that are traded on a recognized U.S.
exchange, board of trade or similar entity, or quoted on an automated quotation
system. Each Fund may also purchase and write put and call options on futures
contracts and enter into closing transactions with respect to such options.
Each Fund will limit its use of these hedging instruments so that: (i) no more
than 5% of the Fund's total assets would be committed to initial margin
deposits or premiums on futures contracts; (ii) no more than 20% of the Fund's
net assets would be subject to futures contracts; (iii) no more than 5% of the
Fund's total assets would be committed to premiums paid for options; and (iv)
no more than 20% of the Fund's total assets would be subject to options. Each
of these limitations applies immediately after a purchase. A subsequent change
in the applicable percentage resulting from market fluctuations does not
require elimination of any security, option or future from a Fund's portfolio.
Consequently, a Fund's assets could be hedged in excess of the above
percentages at a date subsequent to the hedging transaction.
Options and futures can be highly volatile investments and involve
certain risks. Successful hedging strategies require the ability to predict
future movements in securities prices, interest rates and other economic
factors. Heartland Advisors' attempts to use such investments for hedging
purposes may not be successful and could result in reduction of a Fund's total
return. A Fund's potential losses from the use of futures extends beyond its
initial investment in such contracts.
Because available exchange-traded options and futures contracts will not match
a Fund's current or anticipated investments exactly, there is a risk that the
options or futures positions will not track the performance of the Fund's other
investments. Each Fund could also experience losses if the prices of its
options or futures positions were poorly correlated with its other investments,
or if it was unable to close out its positions due to disruptions in the market
or lack of liquidity.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. Each Fund may purchase
securities on a when-issued or delayed delivery basis, i.e., obligate itself to
purchase or sell securities with delivery and payment to occur at a later date
in order to secure what is considered to be an advantageous price and yield at
the time of entering into the obligation. Each Fund will make such commitments
only with the intention of actually acquiring the securities, but may sell the
securities before settlement date if it is deemed advisable for investment
reasons. At the time a Fund makes a commitment to purchase an obligation, it
will record the transaction and reflect the value of the obligation in
determining its net asset value. The Custodian will maintain on a daily basis a
separate account consisting of cash or liquid securities with a value at least
equal to the amount of the Fund's commitments to purchase when-issued
obligations.
REPURCHASE AGREEMENTS. Each Fund also may invest in collateralized repurchase
agreements, but has no present intention to do so. Such repurchase agreements
are described in the Statement of Additional Information under "Investment
Objectives and Policies - Taxable Obligations - Repurchase Agreements."
BORROWING. Each Fund may borrow from banks for temporary or emergency purposes
up to 10% of its total assets and pledge up to 10% of its total assets in
connection therewith.
P R O S P E C T U S
8
<PAGE> 11
PORTFOLIO TURNOVER AND MATURITY
While it is not the policy of either Fund to trade actively for short-term
profits, the Funds will dispose of securities without regard to the time they
have been held when such action appears advisable to Heartland Advisors.
Frequent portfolio trades may result in higher transaction and other costs. The
portfolio turnover rate for the fiscal year ended December 31, 1994 was 21.5%
for the Wisconsin Fund and 32.7% for the Nebraska Fund. The Funds experienced
higher portfolio turnover rates in 1994 as a result of sales of portfolio
securities made to facilitate Fund redemptions and purchases of portfolio
securities with more attractive terms. Neither Fund is restricted as to the
average maturity of its portfolio.
INVESTMENT LIMITATIONS
The Funds' investment policies discussed above are subject to further
restrictions which are described in the Statement of Additional Information.
Three principal investment limitations are that:
1. Under normal market conditions, each Fund will seek to invest at least
80% of its assets so that the income earned thereon will be exempt from
federal and the respective state's personal income taxes.
2. Each Fund will seek to invest its assets so that at least 80% are
invested so as to be exempt from the federal alternative minimum tax.
3. Each Fund will not purchase a security if, as a result thereof, (i) more
than 25% of its total assets would be invested in a single issuer, other
than securities issued or guaranteed by the United States government, or
a state or territory of the United States, or the District of Columbia,
or their agencies, instrumentalities, municipalities or political
subdivisions or (ii) more than 10% of its net assets would be invested in
illiquid securities.
The above "Investment Limitations" are fundamental policies of each Fund and
can be changed only by a majority vote of the respective Fund's shareholders.
However, neither the investment objective or policies of either Fund are
fundamental and they may be changed by Heartland's Board of Directors. If there
is a future change in the investment objective, shareholders should consider
whether their Fund remains an appropriate investment in light of their then
current financial position and needs.
RISK FACTORS
MARKET RISK. The principal value of each Fund's assets would be expected to
vary with changes in interest rates. It may be expected that a decline in
prevailing levels of interest rates generally will increase the value of
securities held by a Fund, and an increase in rates will generally have the
opposite effect. Each Fund may employ hedging techniques to reduce the effects
of interest rate fluctuations; however, there can be no assurance that such
techniques will be successful. Thus, interest rate fluctuations will affect a
Fund's net asset value per share, but not the income received by the Fund from
its existing portfolio securities. Because yields on securities available for
purchase by the Funds will vary over time, no specific yield on the Funds'
portfolios can be assured.
Total returns on bonds tend to fluctuate in much wider ranges than fluctuations
in interest rates because gain or loss in bond value is combined with interest
to calculate total return. The amount of increase or decrease in value and total
return will also be affected by the average maturity of a Fund, with shorter
maturities tending to minimize changes and longer maturities tending to produce
greater changes.
P R O S P E C T U S
9
<PAGE> 12
CREDIT RISK
GEOGRAPHIC CONCENTRATION. Ordinarily, an investment company concentrating its
investments in limited geographic areas, such as the Funds, would be exposed to
greater credit risks than an investment company investing in a nationally
diversified portfolio of municipal securities. The value of municipal
securities may be closely tied to local, political, and economic conditions and
developments within the state. Other risks include possible tax changes,
legislative or judicial action, environmental concerns, and differing levels of
supply and demand for debt obligations exempt from federal and state personal
income taxes.
The Funds' policies and programs seek to minimize this geographic concentration
risk in a number of ways. First, each Fund intends to comply with the
provisions of Subchapter M of the Internal Revenue Code which, in part, require
that, at the close of each quarter of the taxable year, those issues which
represent more than 5% of the Fund's total assets be limited in the aggregate
to 50% of the Fund's total assets, and that no single issue exceed 25% of the
Fund's total assets. Moreover, since each Fund's policies and programs permit
it to purchase securities issued by territories or possessions of the United
States, including Puerto Rico, the Virgin Islands, Guam and, with respect to
the Wisconsin Fund, the District of Columbia, which are exempt from federal,
and the respective state personal income taxes, the geographic concentration is
less than if the Fund was limited solely to investments in one state.
Wisconsin Economy. Wisconsin's economy, which, although fairly diverse, is
primarily concentrated in the services industry (accounting for approximately
25% of its employment) and secondarily in trade and manufacturing, has
continued to outperform the national economy. The state's unemployment rate has
been below the national average for the past seven years. The state government
has also maintained a balanced budget during that same period. As a result,
revenues and assets necessary to support and collateralize interest and
principal payments on bonds issued by Wisconsin public and private issuers in
which the Wisconsin Fund may invest remain relatively strong.
Nebraska Economy. Nebraska's economy is fairly diverse with concentrations in
agriculture, trade and service industries. The state's economy faired well
through the national recession, and overall, job, income, business, and
construction growth in recent years has been positive. The state's unemployment
rate has been among the lowest in the nation throughout the 1990's. Nebraska's
economy remains agriculturally based and could be significantly impacted by
factors affecting that sector, such as downward trends in the commodities
markets, severe weather conditions, or reductions in federal agricultural
programs.
Puerto Rico Economy. Historically, a significant portion of the Wisconsin Fund
has been invested in municipal securities issued by or on behalf of Puerto
Rico, its agencies or instrumentalities. Since the early 1970s, manufacturing
has been the primary force in Puerto Rican development. Other major sectors of
Puerto Rico's economy include government, trade and services. Puerto Rico's
unemployment rate remains relatively high at approximately 16% and per capita
income is less than half of the U.S. average. Debt ratios for the Commonwealth
are high as it assumes much of the responsibility for financing improvements in
the local infrastructure. Puerto Rico's economic base remains centered around
tax advantages offered to U.S. manufacturing firms. Legislation or other action
that would eliminate or reduce such tax incentives might give rise to economic
instability and volatility in the market for the securities.
P R O S P E C T U S
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<PAGE> 13
INDUSTRY CONCENTRATION. Each Fund may invest 25% or more of its total assets in
municipal securities whose revenue sources are from similar types of projects,
for example, community development, education, electric utilities, health care,
housing, redevelopment, transportation, or water, sewer and gas utilities.
There may be economic, business or political developments or changes that
affect all securities of a similar type, such as proposed legislation affecting
the financing of certain projects, judicial decisions relating to the validity
of certain projects or the means of financing them, shortages or price
increases of necessary materials, or declining market needs for such projects.
Therefore, developments affecting a single issuer or industry, or the
securities financing similar types of projects, could have a significant effect
on each Fund's performance.
The Wisconsin Fund historically has invested a substantial portion of its
assets in housing authority obligations. Since housing authority obligations
may be supported to a large extent by federal housing subsidy programs, the
failure of a housing authority to meet the qualifications required for coverage
under the federal programs could result in a decrease or elimination of
subsidies available for payment of principal and interest on the housing
authority's obligations. Economic developments, including fluctuations in
interest rates, failure or inability to increase rentals, and increasing
construction and operating costs, may adversely impact the revenues of housing
authorities, and adverse economic conditions may result in an increasing rate
of default by mortgagors on the underlying mortgage loans. For some housing
authorities, inability to obtain additional financing could also reduce
revenues available to pay existing obligations. In addition, certain housing
authority obligations may be subject to early redemption at par based on unused
proceeds from the issue and/or prepayment of underlying mortgage obligations.
Obligations issued to finance the operation or expansion of utilities may be
affected by various economic and other conditions which adversely impact
utility entities, including inflation, increases in financing requirements,
increases in raw material, construction and other operating costs, changes in
the demand for services and the effects of environmental and other governmental
regulations. In particular, recent laws regulating air quality standards and
future legislation regarding other environmental and toxic waste regulation may
further increase the cost of utility services.
HOW TO BUY SHARES
SHARE PRICE
The Fund's shares are sold without a sales charge. Each Fund's share price is
the net asset value per share next determined following receipt of an order in
proper form or receipt of funds by the Agent if purchase is made by wire. Net
asset value is calculated daily as described under "Net Asset Value
Calculation." Firstar Trust Company serves as the Fund's transfer and dividend
disbursing agent (the "Agent").
P R O S P E C T U S
11
<PAGE> 14
OPENING AN ACCOUNT AND PURCHASING SHARES
BY MAIL TO: BY OVERNIGHT MAIL TO:
Firstar Trust Company Firstar Trust Company
Mutual Fund Services, 3rd Floor Mutual Fund Services, 3rd Floor
P.O. Box 701 615 East Michigan Street
Milwaukee, WI 53201-0701 Milwaukee, WI 53202
To Open an Account:
Complete and sign the Account Application. Make your check payable to either
Heartland Wisconsin Tax Free Fund or Heartland Nebraska Tax Free Fund and mail
to one of the addresses above.
To Add to an Account:
Make your check payable to the Fund you are invested in, indicate your Fund
account number on your check, and mail to one of the addresses above. You may
also include an "Additional Investment Form" from a prior account statement
with your check.
BY WIRE:
Firstar National Bank
ABA #0750-00022
Firstar Trust MFS A/C #112-952-137
777 East Wisconsin Avenue, Milwaukee, WI 53202
CREDIT TO: Heartland (name of Fund), (your account number and the title of the
account)
To Open an Account:
Call the Agent at 1-800-248-1162 for an account number prior to sending the
wire. Specify Fund name, include your name, and your new account number, and
wire as described above. Then complete, sign and mail the Account Application
to one of the addresses above for mail or overnight mail.
To Add to An Account:
Specify Fund name, include your name and account number, and wire as described
above.
BY TELEPHONE TO THE AGENT:
1-800-248-1162 or 414-287-3702
To Open an Account:
Unless you have elected not to have this privilege on the Account Application,
you may call to exchange from another Heartland fund account with the same
registration, including name, address and taxpayer ID number. See "Shareholder
Services-Exchange Privilege."
To Add to an Account:
Unless you have elected not to have this privilege on the Account Application,
you may call to exchange from another Heartland fund account with the same
registration, including name, address and taxpayer ID. See "Shareholder
Services-Exchange Privilege."
P R O S P E C T U S
12
<PAGE> 15
AUTOMATICALLY:
To Open an Account:
Not available.
To Add to An Account:
Use Heartland's automatic investment plan. Sign up for this service on your
Account Application, or call 1-800-HEARTLN to add it.
THROUGH SECURITIES REPRESENTATIVES:
To Open an Account:
You may purchase shares through a broker-dealer or financial institution which
must promptly forward the order, together with payment, to the Agent. The
broker-dealer or financial institution may charge a fee for such services.
To Add to An Account:
You may purchase shares through a broker-dealer or financial institution which
must promptly forward the order, together with payment, to the Agent. The
broker-dealer or financial institution may charge a fee for such services.
CONDITIONS OF YOUR PURCHASE.
MINIMUM INVESTMENTS. The minimum initial investment for each Fund is $10,000.
The minimum additional investment, except for reinvestments of distributions
and investments under the automatic investment plan, is $1,000.
OTHER CONDITIONS. All purchases must be made in U.S. dollars and checks must be
drawn on U.S. banks. Cash will not be accepted for the purchase of shares. If a
check fails to clear, the purchase to which the check relates will be cancelled
and the prospective investor will be liable for any losses or fees incurred by
the Funds or the Funds' Agent, including without limitation a $15 fee to cover
bank handling charges for returning checks due to insufficient funds. When
purchases are made by check, a Fund can hold payment on redemption of shares so
purchased until the Fund is reasonably satisfied that the check has cleared. To
avoid such a delay, an investor can wire federal funds as described above from a
bank, which may charge a fee for that service. Wiring federal funds means that
the bank sends money to a bank account maintained by a Fund through the Federal
Reserve System.
SHAREHOLDER SERVICES
Each Fund offers a number of shareholder services designed to facilitate
investment in its shares. Full details of each of the services and instructions
as to how to participate in the various services can be obtained from the Funds
or Heartland Advisors.
AUTOMATIC DIVIDEND REINVESTMENT. You may automatically reinvest all dividends
and distributions or elect to receive them in the form of a check. If your
dividends and distributions are reinvested, they will automatically purchase
additional shares of the Fund at the net asset value determined on the dividend
or distribution payment date, without any sales charge or fees. You may change
your election at any time by writing Heartland Advisors. Heartland Advisors must
receive any change seven days prior to a payment date for it to be effective for
that payment.
AUTOMATIC INVESTMENT PLAN. The automatic investment plan of each Fund offers a
simple way to maintain a regular investment program. By completing the
automatic investment portion of the account
P R O S P E C T U S
13
<PAGE> 16
application attached to this Prospectus, you may arrange automatic transfers
(minimum $100 per transaction) from your checking account to your account in
one of the Funds on a monthly or twice-monthly basis. The application must be
accompanied by a "voided" check, and be received at least 14 business days
prior to the initial transaction. Once enrolled in the automatic investment
plan, you may change the monthly amount or terminate your participation at any
time by writing the Agent. Allow five business days for a change to become
effective. Your bank must be a member of Automated Clearing House. If the
automatic purchase cannot be made due to insufficient funds or a stop payment,
a $15 service fee will be assessed. If you stop making automatic investments
when your aggregate investment in a Fund is less than $10,000, the Fund
reserves the right to redeem your account after giving 60 days notice, unless
you make additional investments to bring your account value to $10,000. The
program will automatically be terminated upon redemption of all shares,
including an exchange of all shares to another fund. You will receive a
confirmation of each transaction from the Agent and your regular bank account
statement will show the debit transaction each month.
SYSTEMATIC WITHDRAWAL PLAN. You can set up automatic withdrawals from your
account at monthly, quarterly, or annual intervals. To begin distributions, you
must have an initial balance of $25,000 in your account and withdraw at least
$100 per payment. To establish the systematic withdrawal plan, request a form
by calling 1-800-HEARTLN. The systematic withdrawal plan may be terminated by
you or by the Funds at any time by written notice. The minimum investment
accepted while a withdrawal plan is in effect is $1,000.
EXCHANGE PRIVILEGE. Shares of a Fund which have been registered in your name
for at least 15 days may be exchanged for shares of any other Heartland fund,
or for shares in the Portico Money Market Fund, provided the fund into which
you wish to exchange is qualified for sale in the jurisdiction of residence
which you state at the time you make the exchange. Before initiating an
exchange, you should obtain from Heartland Advisors and carefully read the
prospectus relating to the fund into which you wish to exchange.
Exchanges Among Heartland Funds. Under the exchange privilege, each Heartland
fund offers to exchange its shares for shares of another Heartland fund on the
basis of relative net asset value per share, without the payment of any fees or
charges. In order to qualify for the exchange privilege without further
approval of the fund, it is required that the shares being exchanged have a net
asset value of at least $1,000, but not more than $500,000. In addition, if you
have certificates for any shares being exchanged, you must surrender such
certificates in the same manner as in redemption of shares. Shares of either
Fund acquired in exchange for shares of another Heartland fund that was
purchased between February 12, 1993 and June 1, 1994 subject to a contingent
deferred sales charge will remain subject to any such charge applicable upon
ultimate redemption of the shares.
Exchanges with Portico. Shareholders may exchange all or a portion of their
shares in the Funds for shares of the Portico Money Market Fund at their
relative net asset values and may also exchange back into a Heartland fund
without the imposition of any charges or fees. These exchanges are subject to
the minimum purchase and redemption amounts set forth in the prospectus for the
Portico Money Market Fund. No charge to shareholders is imposed in connection
with this exchange; however, Heartland Advisors, as distributor, is entitled to
receive a fee from the Portico Money Market Fund for certain distribution and
support services at the annual rate of .20 of 1% of the average daily net asset
value of the shares for which it is the holder or dealer of record.
How to Exchange. To exercise the exchange privilege, you need to do one of the
following: (a) contact the Agent
P R O S P E C T U S
14
<PAGE> 17
by telephone (1-800-248-1162 or 414-287-3702) and request the exchange, unless
you have elected not to have this telephone privilege by so indicating on the
Account Application; (b) complete an Exchange Application available from the
Fund's Agent and submit it to the Agent; or (c) contact your securities
representative (either in writing or by telephone), who will advise Heartland
of the exchange, but who may charge a fee for such service. See "HOW TO REDEEM
SHARES - Telephone Redemptions" for information on transactions by telephone.
Tax and Other Considerations. An exchange between funds is treated as a sale
for federal income tax purposes and, depending upon the circumstances, a short
or long-term capital gain or loss may be realized. If you have questions as to
the tax consequences of an exchange, you should consult your tax advisor. The
exchange privilege may be modified or terminated at any time upon 60 days prior
written notice. Although an investor may make up to four exchanges in any
calendar year, Heartland reserves the right to limit the number of exchanges
beyond that.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DISTRIBUTIONS. Each Fund will accrue income dividends daily and distribute all
of its net investment income to shareholders monthly. Capital gains dividends,
if any, will be distributed annually. Dividends and capital gains distributions
will be reinvested in additional shares of the Fund, unless the shareholder has
indicated on the account application or otherwise notified the Agent in writing
that he or she elects to receive such dividends and distributions in cash.
FEDERAL TAXES. Interest earned by the Funds on municipal securities is in
general federally tax free when distributed to you as dividends. If a Fund
earns taxable income from any of its investments, it would be distributed as a
taxable dividend. Gains from a Fund's hedging transactions will be distributed
as short-term and long-term capital gains.
The Funds may invest in municipal obligations whose interest (less any related
expenses) is subject to the federal alternative minimum tax for individuals
(private activity securities). To the extent that a Fund invests in private
activity securities, individuals who are subject to the alternative minimum tax
will be required to report a portion of the Fund's dividends as a "tax
preference item" in determining their federal alternative minimum tax.
Liability for the federal alternative minimum tax will depend on each
investor's individual tax circumstances.
Distribution from the Funds' short-term capital gains are federally taxable as
dividends, and long-term capital gain distributions are federally taxable as
long-term capital gains. Distributions of long-term capital gains will be
taxable to the investor as long-term capital gains regardless of the length of
time shares have been held. The Funds' distributions are taxable when they
are paid, whether you take them in cash or reinvest them in additional shares,
except that distributions declared in December and paid in January are taxable
as if paid on December 31. You will receive information annually indicating the
tax status of the dividends received in the prior year under federal and each
Fund's respective state law.
STATE TAXES. To the extent that each Fund's distributions are derived from
obligations whose interest is tax free under Wisconsin or Nebraska law, its
dividends paid from tax exempt interest will be exempt from the respective
state personal income tax. Wisconsin and Nebraska also impose a state
alternative minimum tax dependent upon an investor's individual tax
circumstances, which is based on federal alternative minimum tax with certain
modifications and which in Nebraska is an additional rather than an alternative
tax. Distributions from short-term and long-term capital
P R O S P E C T U S
15
<PAGE> 18
gains will be taxable as dividends and as capital gains, respectively, for
state tax purposes.
"BUYING A DIVIDEND." On the record date for a distribution from capital gains
by a Fund, its share price is reduced by the amount of the distribution. If you
buy shares just before the record date ("buying a dividend"), you will pay the
full price for the shares, and then receive a portion of the price back as a
taxable distribution.
OTHER TAX INFORMATION. Under federal tax law, some investors may be subject to
a 31% withholding on reportable dividends, capital gains distributions, and
redemption payments ("backup withholding"). Generally, investors subject to
backup withholding will be those for whom a taxpayer identification number is
not on file with the Fund or who, to the Fund's knowledge, have furnished an
incorrect number. In order to avoid this withholding requirement, an investor
must certify on the account application that the taxpayer identification number
provided is correct and that the investment is not otherwise subject to backup
withholding, or is exempt from backup withholding.
The foregoing discussion relates to federal, Wisconsin and Nebraska taxation as
of the date of this Prospectus and is general in nature; each investor is
advised to consult his or her tax advisor for additional information.
Distributions from the Funds, including exempt-interest dividends, may be
subject to tax in other states.
THE FUNDS AND THE HEARTLAND ORGANIZATION
Heartland's Board of Directors provides broad supervision over the affairs of
each Fund, and the officers are responsible for its operations.
HEARTLAND ADVISORS
Heartland Advisors provides the Funds with overall investment advisory and
administrative services under an Investment Advisory Agreement with Heartland.
Subject to policies established by Heartland's Board of Directors, Heartland
Advisors makes investment decisions on behalf of each Fund, makes available
research and statistical data, and supervises the acquisition and disposition
of investments by each Fund. Heartland Advisors is also the distributor for
each Fund.
Heartland Advisors, founded in 1982, serves as the investment advisor for the
Heartland Value Fund, Small Cap Contrarian Fund, Value & Income Fund, and U.S.
Government Securities Fund, four additional series of Heartland, and also
provides investment management services for individuals, and institutional
accounts, such as pension funds and profit-sharing plans. As of March 31, 1995,
Heartland Advisors had approximately $1.1 billion in assets under management.
Heartland Advisors' principal mailing address is 790 North Milwaukee Street,
Milwaukee, Wisconsin 53202. William J. Nasgovitz, a Director and President of
Heartland and Heartland Advisors, is a controlling person of Heartland Advisors
through his ownership of a majority of its voting common stock. Hugh F. Denison
and Patrick J. Retzer are also Directors of Heartland and officers and
Directors of Heartland Advisors.
Heartland Advisors bears all of its expenses in providing services under its
Investment Advisory Agreement and pays all salaries, fees and expenses of the
officers and directors of Heartland who are affiliated with Heartland Advisors.
Each Fund bears all of its other expenses including, but not limited to,
necessary office space, telephone and other communications facilities and
personnel competent to perform administrative, clerical and shareholder
relations functions; a pro rata portion of salary, fees and expenses (including
legal fees) of those directors, officers and employees of Heartland who are not
officers, directors or employees of Heartland Advisors; interest expenses, fees
and expenses of the Custodian, Transfer and Dividend Disbursing Agent;
P R O S P E C T U S
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<PAGE> 19
taxes and governmental fees; brokerage commissions and other expenses incurred
in acquiring or disposing of portfolio securities; expenses of registering and
qualifying shares for sale with the Securities and Exchange Commission and
state securities commissions; accounting and legal costs; insurance premiums;
expenses of maintaining the Fund's legal existence and of shareholder meetings;
expenses of preparation and distribution to existing shareholders of reports,
proxies and prospectuses; and fees and expenses of membership in industry
organizations.
For the fiscal year ended December 31, 1994, the Wisconsin Fund paid advisory
fees of $704,918, or approximately 0.65 of 1% of average net assets and the
Nebraska Fund paid advisory fees of $40,930, or approximately 0.325% of average
net assets. At present, Heartland Advisors is voluntarily waiving 0.325 of 1% of
its investment advisory fee for the Nebraska Fund; had no fee waiver been in
effect, the Nebraska Fund would have paid $81,861 in advisory fees, or 0.65 of
1% of average daily net assets for the period. Heartland Advisors may reinstate
an additional portion or all of the fee at any time.
PORTFOLIO MANAGER. Patrick J. Retzer has served as portfolio manager for the
Wisconsin Fund and for the Nebraska Fund since commencement of their respective
operations. Mr. Retzer has been Vice President and Treasurer of Heartland
Advisors and Heartland since 1987, a Director of Heartland Advisors since 1988
and a Director of Heartland since 1993.
NET ASSET VALUE CALCULATION
Each Fund's net asset value per share is computed daily by dividing the total
value of the investments and other assets of the Fund, less any liabilities, by
the total outstanding shares of the Fund. The net asset value per share is
determined as of the close of the New York Stock Exchange regular trading
(generally 4:00 p.m. Eastern time) on each day the New York Stock Exchange is
opened.
Securities owned by the Funds are valued on the basis of market quotations or at
their fair value. The Funds generally use fair value, as market quotations for
most municipal bonds are not readily available on a daily basis. Fair value of
the Funds' debt securities is determined by a pricing service approved by
Heartland's Board of Directors, based primarily upon information concerning
market transactions and dealer quotations for similar securities. Debt
securities having maturities of 60 days or less may be valued at acquisition
cost, plus or minus any amortized discount or premium. Any securities or other
assets for which market quotations are not readily available will be valued in
good faith at their fair market value using methods determined by Heartland's
Board of Directors.
DESCRIPTION OF FUND SHARES
Heartland is a diversified open-end management investment company registered
under the Investment Company Act of 1940, which was organized in 1986 as a
Maryland corporation. The authorized common stock of Heartland consists of one
billion shares, $0.001 par value per share. Heartland is a series company,
which means the Board of Directors may establish additional series, and may
increase or decrease the number of shares in each series. The Funds are
separate non-diversified mutual fund series of Heartland. Currently, the
Heartland family of funds consists of the following series:
<TABLE>
<CAPTION>
COMMENCED AUTHORIZED
FUND OPERATIONS SHARES
<S> <C> <C>
Value Fund 12/28/84 100,000,000
Small Cap Contrarian Fund 4/27/95 100,000,000
Value & Income Fund 10/26/93 100,000,000
U.S. Government
Securities Fund 4/9/87 100,000,000
Wisconsin Fund 4/3/92 100,000,000
Nebraska Fund 9/27/93 100,000,000
</TABLE>
P R O S P E C T U S
17
<PAGE> 20
Each share has one vote, and when issued and paid for in accordance with the
terms of the offering will be fully paid and non-assessable. On matters
affecting an individual Heartland fund (such as approval of advisory contracts
and changes in fundamental policy of a fund) a separate vote of the shares of
that fund is required. Shares of a fund are not entitled to vote on any matter
not affecting that fund. All shares of each Heartland fund vote together in the
election of Directors at each meeting of shareholders at which directors are to
be elected and on other matters as provided by law, or Heartland's Articles of
Incorporation or Bylaws. Heartland's Bylaws do not require that meetings of
shareholders be held annually. However, special meetings of shareholders may be
called for purposes such as electing or removing directors, changing
fundamental policies or approving investment advisory contracts.
Shares of stock are redeemable at net asset value, less any applicable
contingent deferred sales charge, at the option of the shareholder. Shares
have no preemptive, cumulative voting, subscription or conversion rights and
are freely transferable. Shares can be issued as full shares or fractions of
shares. A fraction of a share has the same kind of rights and privileges as a
full share on a pro rata basis. Shareholder inquiries should be directed to
the Funds at the address shown on the back cover of the Prospectus.
PORTFOLIO TRANSACTIONS
As provided in its Investment Advisory Agreement, Heartland Advisors is
responsible for each Fund's portfolio decisions and the placing of portfolio
transactions. Purchase and sale orders for a Fund's portfolio securities may be
effected through brokers who charge a commission for their services, although
it is expected that transactions in debt securities will generally be conducted
with dealers acting as principals. In executing such transactions, Heartland
Advisors seeks to obtain the best net results for each Fund, taking into
account such factors as price (including the brokerage commission or dealer
spread), size of order, competitive commissions on similar transactions,
difficulty of execution and operation facilities of the firm involved and the
firm's risk in positioning a block of securities. While Heartland Advisors
seeks reasonably competitive rates, it does not necessarily pay the lowest
commission or spreads available. Transactions in smaller issues of municipal
securities may involve specialized services on the part of the broker and
thereby entail higher spreads than would be paid in transactions involving more
widely traded securities.
The Funds will not deal with Heartland Advisors in any transaction in which
Heartland Advisors acts as a principal. However, Heartland Advisors may serve
as broker to a Fund in over-the-counter transactions conducted on an agency
basis. Pursuant to plans adopted by Heartland's Board of Directors under, and
subject to, the provisions of Rule 10f-3 under the Investment Company Act of
1940, each Fund may purchase securities in an offering from an underwriter
which is a member of an underwriting syndicate of which Heartland Advisors is
also a member. The plans and Rule 10f-3 limit the securities that may be so
purchased, the time and manner of purchase, the underwriting discount and
amount of purchase, and require a review by the Board of Directors of any such
transactions at least quarterly.
Although Heartland Advisors may serve as a broker for the Funds, such
transactions are expected to be infrequent because the Funds will generally
effect transactions only with dealers acting as principal. In order for
Heartland Advisors to effect any portfolio transactions for the Funds, the
commissions, fees or other remuneration received by Heartland Advisors must be
reasonable and fair compared to, and will not ordinarily be larger than, the
commissions, fees or other remuneration paid to other brokers in connection
with comparable transactions involving similar securities
P R O S P E C T U S
18
<PAGE> 21
being purchased or sold in similar markets during a comparable period of time.
Allocation of transactions, including their frequency, to various dealers is
determined by Heartland Advisors, as each Fund's advisor, in its best judgment
and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt and efficient execution of orders in an effective
manner at the most favorable price. Subject to this primary consideration,
Heartland Advisors may also consider sales of the shares of Heartland funds as
a factor in the selection of broker-dealers to execute portfolio transactions.
PERFORMANCE INFORMATION
From time to time each Fund may advertise its "yield" and "total return." Yield
is based on historical earnings and total return is based on historical
distributions; neither is intended to indicate future performance. The "yield"
of a Fund refers to the income generated by an investment in the Fund over a
one-month period (which period will be stated in the advertisement). This
income is then "annualized." That is, the amount of income generated by the
investment during the month is assumed to be generated each month over a
12-month period and is shown as a percentage of the investment.
"Total return" of a Fund refers to the average annual total return for one,
five and ten-year periods (or the portion thereof during which the Fund has
been in existence). Total return is the change in redemption value of shares
purchased with an initial $1,000 investment, assuming the reinvestment of
dividends and capital gain distributions, and the redemption of the shares at
the end period. Performance information should be considered in light of the
Fund's investment objectives and policies, characteristics and quality of its
portfolio securities and the market conditions during the applicable period,
and should not be considered as a representation of what may be achieved in the
future. A Fund may also advertise total returns other than those described
above if such information is deemed informative to investors for use in
evaluating the Fund.
In connection with the standardized yield and total return quotations described
above, a Fund may also advertise a standardized tax equivalent yield which
illustrates the yield that would be required on a fully taxable investment to
result in the same net income to an investor in the Fund, after payment of
federal and the respective state taxes at the stated rate. The yield is
computed by dividing that portion of the Fund's current yield which is
tax-exempt by one minus a stated federal and respective state income tax rate,
and then adding the product to the value of any yield of the Fund which is not
tax-exempt.
Each Fund may, from time to time, compare its performance to other mutual funds
with similar investment objectives and to the industry as a whole, as quoted by
ranking services and publications, such as Lipper Analytical Services, Inc.,
CDA Technologies, Forbes, Money and Business Week. These rating services and
magazines rank the performance of the Funds against all funds over specified
periods and in specified categories. Each Fund may also compare its performance
to recognized bond market indices, such as the Lehman Brothers Municipal Bond
Index. Further information is contained in the Statement of Additional
Information.
HOW TO REDEEM SHARES
Shareholders may have any or all of their shares redeemed as described below on
any day the Funds are open for business at the next determined net asset value
(see "Net Asset Value Calculation"). Shares of a Fund acquired in exchange for
shares of a Heartland fund subject to a contingent deferred sales charge may be
redeemed at the next determined net asset value less any applicable contingent
deferred sales charge.
P R O S P E C T U S
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<PAGE> 22
BY TELEPHONE TO THE AGENT:
1-800-248-1162 You may redeem by calling the Agent, unless
or you elected not to have this privilege on
(414) 287-3702 your account application.
THROUGH SECURITIES REPRESENTATIVES:
You may redeem shares through a broker-dealer or financial institution, which
must promptly forward your instructions to the Agent. The broker-dealer or
financial institution may charge a fee for such services.
BY MAIL TO:
Firstar Trust Company Send a written request specifying the name
Mutual Fund Services, 3rd Floor of the Fund, the number of shares to be
P.O. Box 701 redeemed, your name, your account number,
Milwaukee, WI 53201-0701 and any additional documents listed below
that apply to your particular account. The
Agent cannot accept requests specifying a
particular date for redemption
BY OVERNIGHT DELIVERY TO: or other special conditions.
Firstar Trust Company
Mutual Fund Services, 3rd Floor
615 East Michigan Street
Milwaukee, WI 53202
TYPE OF
REGISTRATION REQUIREMENTS
Individual, Joint Tenants, Letter of instruction signed by all persons
Sole Proprietorship, Custodial, authorized to sign for the account, exactly
General Partners as it is registered, accompanied by
signature guarantee(s) if required.
Corporations, Associations Letter of instruction accompanied by a
corporate resolution. The letter must be
signed by at least one individual authorized
(via corporate resolution) to act on the
account. The corporate resolution must
include a corporate seal or signature
guarantee.
Trusts Letter of instruction signed by the
Trustee(s) (as Trustee(s)), with signature
guarantee(s). (If the Trustee's name is not
registered on the account, provide a copy
of the trust document, certified within
the last 60 days.)
If you do not fall into any of these registration categories (i.e., executors,
administrators, conservators, or guardians), please call the Agent for further
instructions.
P R O S P E C T U S
20
<PAGE> 23
TELEPHONE REDEMPTIONS. Shares may be redeemed by telephone to the Agent, unless
the shareholder elects not to have this privilege on the account application.
By establishing the telephone redemption service, the shareholder assumes some
risks for unauthorized transactions. Heartland Advisors has implemented
procedures designed to reasonably assure that telephone instructions are
genuine. These procedures include recording telephone conversations, requesting
verification of various pieces of personal information and providing written
confirmation of such transactions. If the Agent, the Funds, Heartland Advisors
or any of their employees fails to abide by these procedures, the Funds may be
liable to a shareholder for losses he or she suffers from any resulting
unauthorized transaction(s). However, none of the Agent, the Custodian, the
Funds, Heartland Advisors or any of their employees will be liable for losses
suffered by a shareholder which result from following telephone instructions
reasonably believed to be genuine after verification pursuant to these
procedures.
There is currently no charge for telephone redemptions, although a charge may
be imposed in the future. During periods of substantial economic or market
changes, telephone redemptions may be difficult to implement. If a shareholder
is unable to contact the Agent by telephone, shares may also be redeemed by
delivering the redemption request to the Agent in person or by mail as
described above. The Agent and the Funds reserve the right to change, modify or
terminate this telephone redemption service at any time.
SIGNATURE GUARANTEES. To protect your account, the Agent and the Funds from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Agent to be sure that you are the person who has
authorized a redemption from your account. Signature guarantees are required
for: (1) any redemption by mail if the proceeds are to be paid to someone other
than the person(s) or organization in whose name the account is registered or
are to be sent to an address other than the address of the registered holder of
the shares; (2) any redemptions by mail which request that the proceeds be wired
to a bank; (3) any redemptions by mail where the redemption proceeds exceed
$25,000; and (4) requests to transfer the registration of shares to another
owner. These requirements may be waived by the Funds in certain instances.
The following institutions are acceptable guarantors: (a) commercial banks,
savings and loan associations and savings banks, which are members of the
Federal Deposit Insurance Corporation; (b) credit unions; (c) trust companies;
(d) firms which are members of a domestic stock exchange; and (e) foreign
branches of any of the above. The Agent cannot accept guarantees from notaries
public.
SENDING REDEMPTION PROCEEDS. The Agent will not send redemption proceeds until
all payments for the shares being redeemed have cleared, which may take up to
15 days from the purchase date.
By Mail. The Agent mails checks for redemption proceeds typically within one or
two days, but not later than seven days, after it receives the request and all
necessary documents. The Agent will send redemption proceeds in accordance with
your instructions.
By Wire. The Agent will normally wire redemption proceeds to your bank the next
business day after receiving the redemption request and all necessary
documents. The signatures on any written request for a wire redemption must be
guaranteed. The Agent currently deducts a $7.50 wire charge from the redemption
proceeds. This charge is subject to change. You will be responsible for any
charges which your bank may make for receiving wires.
P R O S P E C T U S
21
<PAGE> 24
CERTAIN CONDITIONS. If, due to redemptions, exchanges or other transfers, a
shareholder's account drops below $10,000 for three months or more, a Fund has
the right to redeem the shareholder's account, after giving 60 days notice,
unless the shareholder makes additional investments to bring the account value
to $10,000.
A Fund may suspend the right to redeem shares for any period during which (a)
the New York Stock Exchange is closed or the Securities and Exchange Commission
determines that trading on the Exchange is restricted; (b) there is an
emergency as a result of which it is not reasonably practicable for the Fund to
sell its portfolio securities or to calculate the fair value of its net assets;
or (c) the Securities and Exchange Commission may permit for the protection of
shareholders.
HEARTLAND FUNDS
General Information:
1-800-HEARTLN or (414) 347-7777
Account/Price Information:
1-800-248-1162 (24 hrs.) or (414) 287-3702
HEARTLAND FUNDS
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
INVESTMENT ADVISOR and DISTRIBUTOR
Heartland Advisors, Inc.
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
CUSTODIAN, TRANSFER AND
DIVIDEND DISBURSING AGENT
Firstar Trust Company
Mutual Fund Services, 3rd Floor
P. O. Box 701
Milwaukee, Wisconsin 53201-0701
AUDITOR
Arthur Andersen LLP
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
COUNSEL
Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
P R O S P E C T U S
22
<PAGE> 25
[HEARTLAND LOGO]
HEARTLAND FUNDS
ACCOUNT APPLICATION
Wisconsin Tax Free Fund
Nebraska Tax Free Fund
1A. INDIVIDUAL AND JOINT ACCOUNTS
Individual Account: Use Lines 1 & 3
Joint Account: Use Lines 1, 2 & 3
1.___________________________________________________________
First Name Initial Last name
2.____________________________________________________________
Joint tenant Initial Last name
SOCIAL SECURITY NUMBER
3.____________________________________________________________
Social Security Number of Individual on Line 1
1B. UNIFORM GIFT TO MINOR ACCOUNT (UGMA)
4._____________________________________________________________
Custodian's Name
5._____________________________________________________________
Minor's Name Minor's Social Security Number
1C. CORPORATE PARTNERSHIPS, TRUSTS & OTHER
6._____________________________________________________________
Name of Corporation or Entity Tax ID Number
7. REGISTRATION TYPE: / / Unincorporated Association
/ / Corporation / / Partnership / / Trust
OVERNIGHT MAIL TO: REGULAR MAIL TO:
Firstar Trust Company Firstar Trust Company
615 E. Michigan P.O. Box 701
Milwaukee, WI 53202 Milwaukee, WI 53201-0701
__________________________________________________________________
Account/Price Information: 1-800-248-1162 (24 hrs.) or (414) 287-3702
General Information: 1-800-HEARTLN or (414) 347-7777
___________________________________________________________________
2. MAILING ADDRESS
8._____________________________________________________________
Street or P.O. Box
_____________________________________________________________
City / State / Zip
_____________________________________________________________
Home Phone (area code + number) Work Phone
3. EMPLOYER INFORMATION (REQUIRED BY THE NASD)
9._____________________________________________________________
Employer Name
_____________________________________________________________
Occupation
_____________________________________________________________
Street or P.O. Box
_____________________________________________________________
City / State / Zip
/ / Yes / / No I am an associated person of a NASD Member
Firm, other than Heartland Advisors, Inc.
If yes, name of NASD Member Firm__________________________
4. INVESTMENT
I wish to open a Heartland account in the indicated amount
(minimum initial investment of $10,000, or $100 minimum investment with the
Automatic Investment Plan):
Amount
/ / Heartland Wisconsin
Tax Free Fund $___________
/ / Heartland Nebraska
Tax Free Fund $___________
5. AUTOMATIC MONTHLY INVESTMENT PLAN
Each month on the / / 5th, / / 20th or / / 5th and 20th, please withdraw
from my checking account in the amount of $ _________ and invest in my:
($100 minimum)
/ / Wisconsin Tax Free Fund
/ / Nebraska Tax Free Fund
I (We) have read and understand the conditions of Heartland Funds Automatic
Investment Plan. I (We) also understand that the Plan may be terminated or
modified at any time without notice by Heartland Funds or Firstar Trust
Company.
AUTHORIZATION TO MY BANK
- PLEASE ATTACH VOIDED CHECK -
(Conditions on reverse side.)
__________________________________________________________________
Bank Name
__________________________________________________________________
Name(s) on your Bank Account
__________________________________________________________________
Bank Address
__________________________________________________________________
Account Number
__________________________________________________________________
City / State / Zip
__________________________________________________________________
Signature of Owner(s) - Required for Automatic Investing
<PAGE> 26
BE SURE TO COMPLETE ALL APPLICABLE SECTIONS AND SIGN!
6. DIVIDENDS AND CAPITAL GAINS
All dividends and capital gains distributions will be reinvested in the same
Heartland fund UNLESS the box below is checked.
/ / Pay dividends and capital gains distributions in cash.
7. TELEPHONE PRIVILEGES
I (We) hereby authorize the Agent to honor any telephone requests believed to
be genuine in accordance with the procedures discussed in the prospectus UNLESS
refused by checking the appropriate box below.
TO WITHHOLD SUCH AUTHORIZATION, YOU MUST CHECK THE APPROPRIATE BOX BELOW.
Telephone EXCHANGE Privilege
/ / NO telephone exchange privilege for me or my Advisor.
Telephone REDEMPTION Privilege
/ / NO telephone redemption privilege for me or my Advisor.
8. OPTIONAL INFORMATION
$ _________________ $ _____________________
Annual Income Liquid Net Worth
9. OTHER FUNDS
/ / Please send a prospectus and application for other Funds Heartland
offers.
/ / Please send a prospectus for the Portico Money Market Fund.
10. DUPLICATE STATEMENT FOR ADVISOR/PLANNER
Please send duplicate confirmation statements to the Financial Advisor, Planner
or other interested party as listed below:
_______________________________________________________
Name of Advisor/Planner/Dealer
_______________________________________________________
Company Name
_______________________________________________________
Address
_______________________________________________________
City / State / Zip
_______________________________________________________
Advisor / Planner / Dealer No.
X
_______________________________________________________
Customer Signature (authorizes duplicate statements)
11. SHAREHOLDER SIGNATURE(S)
I (We) am (are) of legal age to have received and read the Prospectus and agree
to its terms. I authorize any instruction contained herein and certify, under
penalties of perjury
1. that the social security or other taxpayer identification number is
correct, and (strike if not true)
2. that I am not subject to withholding either because I have not been notified
that I am subject to withholding as a result of a failure to report all
interest or dividends, or I was subject to withholding and the Internal
Revenue Service has notified me that I am no longer subject to withholding.
X
_______________________________________________________
Signature of Shareholder Date
X
_______________________________________________________
Signature of Co-Owner (if any) Date
SIGN HERE IF APPLICABLE TO YOUR ACCOUNT:
_______________________________________________________
Corporate Officer / Partner / Trustee Title
_______________________________________________________
Corporate Officer / Partner / Trustee Title
----------------------------------------------------------------------------
AUTOMATIC INVESTING - AUTHORIZATION TO MY BANK
(continued from reverse side)
I (We) authorize you via the ACH Network to honor all debit entries initiated
by me from time to time through Firstar Bank, Milwaukee, N.A. on behalf of the
Firstar Trust Company. All such debits are subject to sufficient collected
funds in my account to pay the debit when presented.
I (We) agree that your treatment of each entry, and your rights to respect it,
shall be the same as if it were signed personally by me (or either or both of
us as appropriate). I (We) further agree that if any such entries are
dishonored with good and sufficient cause you shall be under no liability
whatsoever.
<PAGE> 27
Rule 497(e)
1933 Act Reg. No. 33-11371
1940 Act File No. 811-4982
HEARTLAND WISCONSIN TAX FREE FUND
HEARTLAND NEBRASKA TAX FREE FUND
Each Fund's address is 790 North Milwaukee Street, Milwaukee, Wisconsin
53202, and its telephone number is 414-347-7777 or 1-800-HEARTLN.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus dated April 28, 1995. A copy of the
Prospectus may be obtained without charge by telephone or written request to
the distributor, Heartland Advisors, Inc. ("Heartland Advisors"), or
participating dealers or financial institutions. Shareholder inquiries should
be directed to the Funds in writing or by calling the Agent at 414-287-3702 or
1-800-248-1162.
________________________________________________________________________________
Statement of Additional Information
________________________________________________________________________________
Shares may be purchased directly from Heartland Advisors, 790 North Milwaukee
Street, Milwaukee, Wisconsin 53202, without a sales charge. For more complete
information, including an account application form, see the Prospectus or call
Heartland Advisors toll free at 1-800-HEARTLN. Shares may also be purchased
through a broker-dealer or financial institution who may charge a fee for such
service.
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 28, 1995.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Introduction to the Heartland Funds 2
Investment Objectives and Policies 2
Investment Restrictions 24
Management 26
Control Persons and Principal Holders of
Securities 28
The Investment Advisor 28
Performance Information 30
Determination of Net Asset Value Per Share 33
Distribution of Shares 33
Tax Status 34
Description of Shares 35
Portfolio Transactions 36
Custodian and Transfer and Dividend Disbursing
Agent 37
Counsel and Independent Public Accountants 37
Financial Statements 38
</TABLE>
<PAGE> 28
INTRODUCTION TO THE HEARTLAND FUNDS
The Heartland family of funds consists of separate series of Heartland
Group, Inc. ("Heartland"), a Maryland corporation registered as an open-end
management investment company. This Statement of Additional Information
relates only to the Heartland Wisconsin Tax Free Fund and the Heartland
Nebraska Tax Free Fund (the "Wisconsin Fund" and the "Nebraska Fund,"
respectively, collectively referred to as the "Funds"), each of which is a
non-diversified fund with distinct investment objectives and programs. A
separate Prospectus and related Statement of Additional Information for the
other Heartland funds are available from Heartland Advisors.
Heartland Wisconsin Tax Free Fund commenced operations on April 3,
1992 and, as of December 31, 1994, the Fund had total assets in excess of $100
million. Based on this information, Heartland Wisconsin Tax Free Fund is the
oldest and largest double tax free fund in the State of Wisconsin. The
Wisconsin Fund and the Nebraska Fund are the only double tax free funds that
are 100% no-load to all investors in their respective states.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The following information supplements the discussion of each Fund's
investment objective and policies discussed in the Prospectus. Unless
otherwise specified, the investment objective, policies and restrictions of
each Fund are not fundamental, and are therefore subject to change by the Board
of Directors of Heartland without shareholder approval. However, shareholders
will be notified prior to a material change in any such objective, policy or
restriction. The fundamental policies of a Fund, on the other hand, may not be
changed without the approval of at least a majority of the outstanding shares
of the Fund or, if it is less, 67% of the shares represented at a meeting of
shareholders of the Fund at which the holders of 50% or more of the shares are
represented.
TAX EXEMPT OBLIGATIONS
General. The term "Tax Exempt Obligations" as used herein refers to
debt obligations issued by or on behalf of states, territories or possessions
of the United States or, solely with respect to the Wisconsin Fund, the
District of Columbia, or their agencies, instrumentalities, municipalities and
political subdivisions, the interest payable on which is, in the opinion of
bond counsel, excludable from gross income both for purposes of federal income
taxation (except, in certain instances, the alternative minimum tax, depending
upon the shareholder's tax status) and each Fund's respective state personal
income tax. Tax Exempt Obligations are generally issued to obtain funds for
various public
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<PAGE> 29
purposes, including the construction or improvement of a wide range of public
facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Tax Exempt Obligations may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses and
lending such funds to other public institutions and facilities. In addition,
Tax Exempt Obligations may be issued by or on behalf of public bodies to obtain
funds to provide for the construction, equipping, repair or improvement of
housing facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities and certain local facilities for water
supply, gas, electricity, sewage or solid waste disposal.
The yields on Tax Exempt Obligations are dependent on a variety of
factors, including the financial condition of the issuer or other obligor
thereon or the revenue source from which debt service is payable, general
economic and monetary conditions, conditions in the relevant market, the size
of a particular issue, maturity of the obligation and the rating of the issue.
Securities in which each Fund may invest, including Tax Exempt
Obligations, are subject to the provisions of bankruptcy, insolvency,
reorganization and other laws affecting the rights and remedies of creditors,
such as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress, state legislatures or other governmental agencies extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations within constitutional limitations. There
is also the possibility that, as a result of litigation or other conditions,
the power or ability of issuers to make interest and principal payments on
their Tax Exempt Obligations may be materially impaired.
From time to time, legislation has been introduced in Congress for the
purpose of restricting the availability of or eliminating the federal income
tax exemption for interest on Tax Exempt Obligations, some of which have been
enacted. Additional proposals may be introduced in the future which, if
enacted, could affect the availability of Tax Exempt Obligations for investment
by the Funds and the value of the Funds' portfolios. In such event, management
of each Fund may discontinue the issuance of shares to new investors and may
re-evaluate the Fund's investment objective and policies and adopt and
implement possible changes to them and the investment program of the Fund.
As noted in the Prospectus, the Funds invest primarily in municipal
bonds judged by Heartland Advisors, the Fund's investment advisor, to be of
investment grade quality. Heartland Advisors considers Tax Exempt Obligations
to be investment grade if rated by Moody's, S&P or Fitch within their four
highest rating categories for municipal securities, or securities which are
unrated, provided that such securities are judged by Heartland Advisors, at the
time of purchase, to be of comparable quality to securities rated within
-3-
<PAGE> 30
such four highest categories. A description of the rating categories is
contained in Appendix A attached to this Statement of Additional Information.
Bonds rated in the fourth highest rating category are generally more sensitive
to economic changes than are those rated in one of the top three categories,
and these bonds generally have speculative characteristics.
Subsequent to being purchased by a Fund, an issue of rated Tax Exempt
Obligations may cease to be rated or its rating may be reduced below the top
four categories. Neither event will require the sale of such Tax Exempt
Obligations by a Fund, but Heartland Advisors will consider such event in
determining whether the Fund should continue to hold the Tax Exempt
Obligations. To the extent that the ratings given by Moody's, S&P or Fitch for
Tax Exempt Obligations may change as a result of changes in such organizations
or their rating systems, the Funds will attempt to use comparable ratings as
standards for their investments in accordance with the investment policies
contained in the Prospectus and this Statement of Additional Information.
The ratings of Moody's, S&P and Fitch represent their opinions as to
the quality of the Tax Exempt Obligations which they undertake to rate.
Investors should bear in mind, however, that ratings are relative and
subjective and are not absolute standards of quality. Although these ratings
are an initial consideration for selection of portfolio investments, Heartland
Advisors will subject these securities to other evaluative criteria prior to
investing in such securities, and may invest in unrated securities which it
believes, based on information available to it and its own analysis, are of
comparable quality to those securities that are rated in the top four
categories.
Non-Investment Grade Bonds. Each Fund may invest up to 25% of its
assets in non-investment grade bonds (those rated below the four highest
categories by Moody's, S&P or Fitch or, if unrated, judged by Heartland
Advisors to be of comparable quality), provided that neither Fund may invest in
bonds rated below B at the time of purchase. These so-called "junk bonds" are
regarded, on balance, as predominantly speculative with respect to the capacity
of the issuer to pay interest and repay principal in accordance with the terms
of the obligation. While such bonds typically offer higher rates of return
than investment grade bonds, they also involve greater risk, including greater
risk of default. An economic downturn could severely disrupt the market for
such high yield bonds and adversely affect their value and the ability of the
issuers to repay principal and interest. The rate of incidence of default on
junk bonds is likely to increase during times of economic downturns and
extended periods of increasing interest rates. Yields on junk bonds will
fluctuate over time, and are generally more volatile than yields on investment
grade bonds.
The secondary trading market for junk bonds may be less well
established than for investment grade bonds, and such bonds may therefore be
only thinly traded. As a result, there may be no
-4-
<PAGE> 31
readily ascertainable market value of such securities, in which case it will be
more difficult for the Board of Directors of the Funds to value accurately the
securities, and consequently the investment portfolio. Under such
circumstances, the Board's subjective judgment will play a greater role in the
valuation. Additionally, adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease the values and liquidities
of junk bonds, especially in a thinly traded market. To the extent such
securities are or become "illiquid" in the judgment of the Board of Directors,
each Fund's ability to purchase and hold such securities will be subject to its
investment restriction limiting its investment in illiquid securities to 10% of
its net assets. See "Investment Restrictions."
As noted above, the Fund will not invest in junk bonds that are rated
below the fifth or sixth rating categories by any of S&P, Moody's, or Fitch (Ba
and B for Moody's and BB and B for S&P and Fitch) or, if unrated, judged
comparable by Heartland Advisors. Bonds rated in the first of those categories
have less near-term vulnerability to default than other speculative issues,
however they face major ongoing uncertainties or exposure to adverse business,
financial or economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. However, business and financial
alternatives available to obligors of such bonds can generally be identified
which could assist them in satisfying their debt service requirements. Bonds
rated in the second of these two categories are considered highly speculative.
While the issuers of such bonds must be currently meeting debt service
requirements in order to achieve this rating, adverse business, financial or
economic conditions could likely impair the issuer's capacity or willingness to
pay interest and repay principal. A detailed description of the
characteristics associated with the various debt credit ratings established by
S&P, Moody's and Fitch is set forth in Appendix A to this Statement of
Additional Information.
While rating categories help identify credit risks associated with
bonds, they do not evaluate the market value risk of junk bonds. Additionally,
the credit rating agencies may fail to promptly change the credit ratings to
reflect subsequent events. Accordingly, Heartland's Board of Directors and
Heartland Advisors continuously monitor the issuers of junk bonds held in each
Fund's portfolio to assess and determine whether the issuers will have
sufficient cash flow to meet required principal and interest payments, and to
assure the continued liquidity of such bonds so that the Fund can meet
redemption requests.
Floating and Variable Rate Demand Notes. Each Fund may purchase
floating and variable rate demand notes. Generally, such notes are secured by
letters of credit or other credit support arrangements provided by banks. Such
notes normally have a stated long-term maturity but permit the holder to tender
the note for purchase and payment of principal and accrued interest upon a
specified number of days notice. The issuer of floating and
-5-
<PAGE> 32
variable rate demand notes normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
note plus accrued interest upon a specified number of days notice to the
noteholders. The interest rate on a floating rate demand note is based on a
specified interest index, such as a bank's prime rate, and is adjusted
automatically with changes in the index. The interest rate on a variable rate
demand note is adjusted at specified intervals, based upon current market
conditions. Heartland Advisors monitors the creditworthiness of issuers of
floating and variable rate demand notes in each Fund's portfolio.
State or Municipal Lease Obligations. Each Fund may invest up to 5%
of its total assets in state or municipal leases and participation interests
therein. The leases may take the form of a lease with an option to purchase,
an installment purchase or a conditional sales contract which is entered into
by state and local governments and authorities to purchase or lease a wide array
of equipment such as fire, sanitation or police vehicles or telecommunications
equipment, buildings or other capital assets. State or municipal lease
obligations frequently have the special risks described below which are not
associated with general obligation or revenue bonds issued by public bodies.
The constitution and statutes of many states contain requirements with
which the state and municipalities must comply whenever incurring debt.
Depending on the circumstances, these requirements may include approving voter
referenda, debt limits, interest rate limits and public sale requirements.
Leases have evolved as a means for public bodies to acquire property and
equipment without needing to comply with all of the constitutional and
statutory requirements for the issuance of debt. The debt-issuance limitations
may be inapplicable for one or more of the following reasons: (i) the
inclusion in many leases or contracts of "nonappropriation" clauses that
provide that the public body has no obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis (the
"nonappropriation" clause); (ii) the exclusion of a lease or conditional sales
contract from the definition of indebtedness under relevant state law; or (iii)
the lease provides for termination at the option of the public body at the end
of each fiscal year for any reason or, in some cases, automatically if not
affirmatively renewed.
An investment in municipal lease obligations is generally less liquid
than an investment in comparable tax-exempt bonds because there is a limited
secondary trading market for such obligations. Furthermore, if the lease is
terminated by the public body for nonappropriation or other reason not
constituting a default under the lease, the lessor, or holder of a
participation interest in the lease, is limited solely to repossession of the
leased property without any recourse to the general credit of the public body.
The disposition of the leased property by the lessor in the event of
termination of the lease might, in many cases, prove difficult or
-6-
<PAGE> 33
result in loss. Accordingly, municipal lease obligations will be characterized
by each Fund as illiquid for purposes of determining whether it makes its
investment limitation with respect to illiquid securities, except where the
Fund's Board of Directors expressly determines such a municipal lease
obligation is not illiquid.
When-Issued Purchases. Each Fund may make commitments to purchase Tax
Exempt Obligations on a "when-issued" basis, that is, delivery and payment for
the obligations normally takes place at a date after the commitment to purchase
although the payment obligation and the coupon rate have been established
before the time the Fund enters into the commitment. The settlement date
usually occurs within one week of the purchase of notes and within one month of
the purchase of bonds. Each Fund intends to make commitments to purchase
obligations with the intention of actually acquiring them, but may sell the
obligations before the settlement date if such action is advisable or necessary
as a matter of investment strategy. At the time a Fund makes a commitment to
purchase an obligation, it will record the transaction and reflect the value of
the obligation in determining its net asset value. The Funds' custodian,
Firstar Trust Company (the "Custodian"), will maintain on a daily basis a
separate account consisting of cash or liquid debt securities with a value at
least equal to the amount of each Fund's commitments to purchase "when-issued"
obligations.
Obligations purchased on a "when-issued" basis or held in a Fund's
portfolio are subject to changes in market value based not only upon the
public's perception of the creditworthiness of the issuer, but also upon
changes in the level of interest rates. In the absence of a change in credit
characteristics, which would likely cause changes in value, the value of
portfolio investments can be expected to decline in periods of rising interest
rates and to increase in periods of declining interest rates.
When payment is made for "when-issued" securities, each Fund will meet
its obligation from its then available cash flow, sale of securities held in
the separate account, sale of other securities or, although it would normally
not expect to do so, from sale of the "when- issued" securities themselves
(which may have a market value greater or lesser than the Fund's obligation).
Sale of securities to meet such obligations would involve a greater potential
for the realization of capital gains, which could cause the Fund to realize
income not exempt from federal and the respective state's personal income tax.
TAXABLE OBLIGATIONS
As set forth in the Prospectus, under certain circumstances and
subject to certain limitations, each Fund may invest in obligations and
instruments, the interest on which is includable in gross income for purposes
of federal and state income taxation.
-7-
<PAGE> 34
Government Obligations. Each Fund may invest in securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities. These
securities include a variety of Treasury securities, which differ in their
interest rates, maturities and times of issuance. Treasury Bills generally
have maturities of one year or less; Treasury Notes generally have maturities
of one to ten years; and Treasury Bonds generally have maturities of greater
than ten years. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, such as Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; other obligations, such as those of the Federal
Home Loan Banks, are secured by the right of the issuer to borrow from the
Treasury; other obligations, such as those issued by the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
Government to purchase certain obligations of the agency or instrumentality;
and other obligations, such as those issued by the Student Loan Marketing
Association, are supported only by the credit of the instrumentality itself.
Although the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. Each Fund will
invest in such securities only when Heartland Advisors is satisfied that the
credit risk with respect to the issuer is minimal.
Repurchase Agreements. Each Fund may invest in repurchase agreements.
The Custodian will hold the securities underlying any repurchase agreement or
such securities will be part of the Federal Reserve Book Entry System. The
market value of the collateral underlying the repurchase agreement will be
determined on each business day. If at any time the market value of the
collateral falls below the repurchase price of the repurchase agreement
(including any accrued interest), the obligor under the agreement will promptly
furnish additional collateral to the Custodian (so the total collateral is an
amount at least equal to the repurchase price plus accrued interest).
Other Taxable Investments. As noted in the Prospectus, each Fund also
may invest temporarily in certificates of deposit, bankers' acceptances and
other time deposits.
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Writing Covered Call Options. Each Fund may write covered call
options on securities related to its investments (such as U.S. government
securities) and enter into closing transactions with respect to such options.
In writing covered call options, each Fund expects to generate additional
premium income which should serve to enhance the Fund's total return and reduce
the effect of any decline in the market price of the securities in the Fund's
portfolio.
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A call option gives the holder (buyer) the right to purchase a
specified security at a stated price (the exercise price) at any time before a
specified date (the expiration date). The term "covered" call option means
that the Fund will own the securities subject to the option or have an
unconditional right to purchase the same underlying security at a price equal
to or less than the exercise price of the "covered" option, or will establish
and maintain with its Custodian, for the term of the option, an account
consisting of cash, U.S. government securities or other liquid high-grade debt
obligations having a value equal to the fluctuating market value of the
optioned securities.
Through receipt of the option premium, a call writer mitigates the
effects of a price decline. At the same time, because a call writer must be
prepared to deliver the underlying security in return for the exercise price,
even if its current value is greater, a call writer gives up some ability to
participate in the underlying price increases. If a call option which a Fund
has written expires, the Fund will realize a gain in the amount of the premium;
however, such gain may be offset by a decline in the market value of the
underlying security during the option period. If the call option is exercised,
the Fund will realize a gain or loss from the sale of the underlying security.
The premium received is the market value of an option. The premium a
Fund receives from writing a call option reflects, among other things, the
current market price of the underlying security, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security and the length of the option period. The premium received
by a Fund for writing covered call options will be recorded as a cash asset and
a liability of the Fund. The liability will be adjusted daily with a
corresponding adjustment to the Fund's total assets, to reflect the option's
current market value, which will be the latest sale price at the time at which
the net asset value per share of the Fund is computed (close of regular trading
on the New York Stock Exchange), or, in the absence of such sale, the latest
asked price. The liability will be extinguished and the net gain or loss on
the option realized upon expiration of the option, the purchase of an identical
option in a closing transaction, or delivery of the underlying security upon
the exercise of the option. The Funds do not consider a security covered by a
call to be "pledged" as that term is used in the respective Fund's policy
limiting the pledging of its assets.
Closing transactions may be effected by purchasing a call option in
order to realize a profit on an outstanding call option, to prevent an
underlying security from being called, or to permit the sale of the underlying
security. Furthermore, effecting a closing transaction may permit a Fund to
write another call option on the underlying security with either a different
exercise price or expiration date or both. If a Fund desires to sell a
particular security from its portfolio on which it has written a call option,
it will seek to effect a closing transaction prior to, or
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concurrently with, the sale of the security. There is, of course, no assurance
that a Fund will be able to effect such closing transactions at a favorable
price. A Fund may pay transaction costs in connection with the writing or
purchase of options to close out previously written options, which costs are
normally higher than the transaction costs applicable to purchases and sales of
portfolio securities.
Writing Covered Put Options. Each Fund may write covered put options
on securities related to its investments, and may purchase options to close out
options previously written by the Fund. As the writer (seller) of a put
option, a Fund has the obligation to buy from the purchaser the underlying
security at the exercise price during the option period. In return for receipt
of the premium, a Fund assumes the obligation to pay the exercise price for the
option's underlying security if the other party to the option chooses to
exercise it. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call options.
A Fund will write put options only on a covered basis, which means
that the Fund will maintain a segregated account consisting of cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price of the option, or the Fund will own an option
to sell the underlying security subject to the option having an exercise price
equal to or greater than the exercise price of "covered" options at all times
while the put option is outstanding. A Fund may seek to terminate its position
in a put option it writes before exercise by closing out the option in the
secondary market at its current price. If the secondary market is not liquid
for a put option a Fund has written, however, the Fund must continue to be
prepared to pay the exercise price while the option is outstanding, regardless
of price changes, and must continue to segregate assets to cover its position.
If the price of the underlying security rises, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received for writing the put because it did not own the
underlying security and therefore would not benefit from the appreciation in
price. If the price of the underlying security falls, the put writer would
expect to suffer a loss, which loss could be substantial. However, the loss
should be less than the loss experienced if a Fund had purchased the underlying
security directly because the premium received for writing the option will
mitigate the effects of the decline.
Purchasing Put Options. Each Fund may purchase put options on
securities related to its investments (such as U.S. government securities). As
the holder of a put option, the Fund has the right to sell the underlying
security at the exercise price at any time during the option period. A Fund
may also enter into closing transactions with respect to such options, exercise
them or permit them to expire. A Fund may purchase a put option on a security
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related to its investments as a defensive technique in order to protect against
an anticipated decline in the value of the security. Such hedge protection is
provided only during the life of the put option when the Fund, as holder of the
put option, is able to sell the underlying security at the put exercise price
regardless of any decline in the underlying security's market price. The
premium paid for the put option and any transaction costs would reduce any gain
otherwise available for distribution when the security is eventually sold.
The premium paid by a Fund when purchasing a put option will be
recorded as an asset of the Fund. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Fund is computed (close of
regular trading on the New York Stock Exchange), or, in the absence of such
sale, the latest bid price. This asset will be extinguished upon expiration of
the option, the selling (writing) of an identical option in a closing
transaction, or the delivery of the underlying security upon the exercise of
the option.
Purchasing Call Options . Each Fund may purchase call options on
securities related to its investments. As the holder of a call option, a Fund
has the right to purchase the underlying security at the exercise price at any
time during the option period. A Fund may enter into closing sale transactions
with respect to such options, exercise them or permit them to expire. A call
buyer typically attempts to participate in potential price increases of the
underlying security with risk limited to the cost of the option if security
prices fall. At the same time, the buyer can expect to suffer a loss if
security prices do not rise sufficiently to offset the cost of the option.
Index Options. Each Fund may buy and sell options on indices related
to its investments (such as municipal bond or U.S. Treasury securities
indices), and may enter into closing transactions with respect to such options.
Options on indices would be used in a manner similar to the use of options on
securities; however, upon the exercise of an index option, settlement occurs in
cash rather than by delivery of an underlying security, with the exercising
option holder receiving the difference between the closing level of the index
upon which the option is based and the exercise price of the option. Unlike
options on specific debt instruments, gain or loss on an index option depends
on the price movements in the instruments underlying the index rather than
price movements in individual debt instruments.
Options on Futures Contracts. Each Fund may buy and sell options on
futures contracts and enter into closing transactions with respect to such
options. Options on futures contracts would be used in a manner similar to the
use of options on securities. An option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call, and a short
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position if the option is a put) at a specified exercise price at any time
during the option exercise. The writer of the option is required upon exercise
to assume an offsetting futures position at a specified exercise price at any
time during the period of the option. When writing an option on a futures
contract a Fund will be required to make margin payments as described below for
futures contracts.
Futures Contracts. Each Fund may purchase and sell futures contracts,
including interest rate and securities index futures contracts, that are traded
on a recognized U.S. exchange, board of trade or similar entity, or quoted on
an automated quotation system.
When a Fund purchases a futures contract, it agrees to purchase a
specified underlying instrument at a specified future date. When a Fund sells
a futures contract, it agrees to sell the underlying instrument at a specified
future date. The price at which the purchase and sale will take place is fixed
when the Fund enters into the contract. The purchaser or seller of a futures
contract is not required to deliver or pay for the underlying instrument unless
the contract is held until the delivery date. However, upon entering into a
futures contract, and to maintain an open position in futures contracts, a Fund
would be required to deposit "initial margin" with its Custodian in a
segregated account in the name of the executing futures commission merchant
when the contract is entered into. The margin required for a particular
futures contract is set by the exchange on which the contract is traded and may
be significantly modified from time to time by the exchange during the term of
the contract. Futures contracts are customarily purchased and sold on margins
that may range upward from less than 5% of the value of the contract being
traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss of
the futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require the payment of "variation
margin" to settle the change in value on a daily basis. If the value of a
position increases because of favorable price changes in the futures contract
so that the margin deposit exceeds the required margin, the broker will pay the
excess to the Fund. In computing daily net asset value, a Fund marks to market
the current value of its open futures contracts. The Funds expect to earn
interest income on their margin deposits.
Futures contracts can be held until their delivery dates, or can be
closed out before then if a liquid secondary market is available. Closing out
an open futures contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for the same
aggregate amount of the identical securities and the same delivery date. If a
Fund closes out an open futures contract by entering into an offsetting futures
contract, and the offsetting purchase price is less than the original sale
price, a Fund realizes a gain; if it is more, a Fund
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realizes a loss. Conversely, if the offsetting sale price is more than the
original purchase price, the Fund realizes a gain; if it is less, the Fund
realizes a loss. The transaction costs must also be included in these
calculations. There can be no assurance that a Fund will be able to enter into
an offsetting transaction with respect to a particular futures contract at a
particular time. If a Fund is not able to enter into an offsetting
transaction, the Fund will continue to be required to maintain the margin
deposits on the futures contract.
The value of a futures contract tends to increase and decrease in
tandem with the value of its underlying instrument. Therefore, purchasing
futures contracts will tend to increase a Fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When a Fund sells a futures
contract, by contrast, the value of its futures position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
A public market exists in futures contracts covering various fixed
income securities (including long-term U.S. Treasury Bonds, 10-year U.S.
Treasury Notes, Government National Mortgage Association modified pass-through
mortgage-backed certificates, three-month U.S. Treasury Bills, and 90-day
commercial paper), as well as municipal bonds and related indices. The Funds
reserve the right to effect transactions in other securities and indices which
may be developed in the future.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS
Each Fund will engage in transactions in options, futures contracts
and options thereon only for bona fide hedging and risk management purposes, in
each case in accordance with the rules and regulations of the Commodity Futures
Trading Commission, and not for speculation.
A Fund will not enter into any futures contract or option on a futures
contract if, as a result, the sum of initial margin deposits on futures
contracts and related options and premiums paid for options on futures
contracts the Fund has purchased, after taking into account unrealized profits
and unrealized losses on such contracts, would exceed 5% of the Fund's total
assets; provided, however, that in the case of an option which is in-the-money
at the time of purchase, the in-the-money amount may be excluded in calculating
the 5% limitation. In addition to the above limitations, no Fund will: (a)
purchase or sell futures and options on futures or enter into closing
transactions with respect thereto if, as a result thereof, the then current
aggregate futures market prices and financial instruments required to be
delivered under open futures contract sales plus the then current aggregate
purchase price of financial instruments required to be purchased under open
futures contract purchases would exceed 20% of the
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Fund's net assets (taken at market value at the time of entering into the
contract and excluding the amount by which any of its options on futures are
in-the-money); (b) the aggregate value of all premiums paid for put options
purchased by the Fund would exceed 5% of the Fund's total assets (less the
amount by which any such positions are in-the-money; or (c) the aggregate
market value of all portfolio securities covering call options written by the
Fund would exceed 20% of the Fund's total assets. The above limitations on
each Fund's investments in futures contracts and options and the policies
regarding futures contracts and options discussed elsewhere in this Statement
of Additional Information are not fundamental policies of the Funds and may be
changed by Heartland's Board of Directors as permitted by applicable regulatory
authority.
Combined Positions. The Funds may purchase and write options in
combination with each other, or in combination with futures contracts, to
adjust the risk and return characteristics of the overall position. For
example, a Fund may purchase a put option and write a call option on the same
underlying instrument in order to construct a combined position whose risk and
return characteristics are similar to selling a futures contract. Another
possible combined position would involve writing a call option at one exercise
price and buying a call option at a lower price, in order to reduce the risks
of the written call option in the event of a substantial price increase.
Because combined positions involve multiple trades, they may result in higher
transaction costs and may be more difficult to open and close out.
RISKS IN OPTIONS AND FUTURES TRANSACTIONS
Options and futures can be highly volatile investments and involve
certain risks. A decision of whether, when, and how to hedge involves skill
and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior, or market or interest rate
trends. Successful hedging strategies require the ability to predict future
movements in securities prices, interest rates and other economic factors.
There can be no assurance that price movements in a hedging vehicle and in the
underlying securities will be directly correlated. Options and futures prices
are affected by such factors as current and anticipated short-term interest
rates, changes in volatility of the underlying instrument, and the time
remaining until expiration of the contract, which may not affect security
prices the same way. Imperfect correlation may also result from different
levels of demand in the options and futures markets and the securities markets,
from structural differences in how options and futures and securities are
traded, or from imposition of daily price fluctuation limits or trading halts
by an exchange. If price changes in a Fund's options or futures positions are
poorly correlated with its other investments, the positions may fail to produce
anticipated gains or result in losses that are not offset by gains in other
investments.
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The risks of poor correlation may be increased for the Funds because
available exchange-traded options and standardized futures contracts will not
match a Fund's current or anticipated investments exactly. For example, even
the use of an option or a futures contract on a municipal bond index may result
in an imperfect correlation since the index generally will be composed of a
much broader range of municipal securities then the Tax Exempt Obligations in
which the Funds will be invested, which are limited to securities exempt from
federal income tax and the personal income tax of the respective state. To the
extent that a Fund's hedging vehicles do not match its current or anticipated
investments, there is an increased risk that the options or futures positions
will not track the performance of the Fund's other investments.
Because of the low margin deposits required, futures trading involves
a high degree of leverage. A relatively small price movement in futures
contracts could result in an immediate and substantial gain or loss to a Fund.
Therefore, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract by the Fund.
There can be no assurance that a liquid secondary market will exist
for any particular options or futures contracts at any particular time. On
volatile trading days when the price fluctuation limit is reached or a trading
halt is imposed, it may be impossible for a Fund to enter into new positions or
close out existing positions. If the secondary market for a futures contract
is not liquid because of price fluctuation limits or otherwise, it could
prevent prompt liquidation of unfavorable positions, and potentially require a
Fund to continue to hold the position until delivery or expiration regardless
of changes in its value. As a result, a Fund's access to other assets held to
cover its options or futures positions could also be impaired.
DIVERSIFICATION
The number of issues of securities which meet the Fund's respective
investment objectives and criteria may be somewhat limited. As a result, a
relatively high percentage of each Fund's assets may be invested from time to
time in the obligations of a limited number of issuers, some of which may be
subject to the same economic trends and/or be located in the same geographic
area. Each Fund's portfolio securities may therefore be more susceptible to
any single economic, political or regulatory occurrence than the portfolio
securities of diversified investment companies.
Each Fund will operate as a non-diversified management investment
company under the 1940 Act, but intends to comply with the diversification
requirements contained in the Internal Revenue Code of 1986. These provisions
of the Internal Revenue Code presently require that, at the end of each quarter
of each Fund's taxable year: (i) at least 50% of the market value of the
Fund's assets must be invested in cash, government securities, the securities
of
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other regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets; and (ii)
not more than 25% of the value of the Fund's total assets can be invested in
the securities of any one issuer (other than Government securities or the
securities of other regulated investment companies).
For purposes of such diversification, the identification of the issuer
of Tax Exempt Obligations depends on the terms and conditions of the security.
If a state or territory of the United States or the District of Columbia or a
political subdivision of any of them, as the case may be, pledges its full
faith and credit to payment of a security, the guarantor is deemed the sole
issuer of the security. If the assets and revenues of an agency, authority or
instrumentality of a state or territory of the United States or the District of
Columbia, or a political subdivision of any of them, are separate from those of
the state, territory, District or political subdivision, and the security is
backed only by the assets and revenues of the agency, authority or
instrumentality, such agency, authority or instrumentality is deemed to be the
sole issuer of the security. Moreover, if the security is backed only by
revenues of an enterprise or specific projects of the state, territory or
District, or a political subdivision or agency, authority or instrumentality
thereof, such as utility revenue bonds, and the full faith and credit of the
governmental unit is not pledged to the payment of principal and interest on
the obligation, such enterprise or specific project is deemed the sole issuer.
Similarly, in the case of an industrial development bond, if that bond is
backed only by certain revenues to be received from the non-governmental user
of the project financed by the bond, then such non-governmental user is deemed
to be the sole issuer. If, however, in any of the above cases, a state,
territory or the District, or a political subdivision of any of them, or some
other entity, guarantees a security and the value of all securities issued or
guaranteed by the guarantor and owned by a Fund exceeds 10% of the value of the
Fund's total assets, the guarantee is considered a separate security and is
treated as an issue of the guarantor.
Health Care Obligations . Each Fund may invest, from time to time, 25%
or more of its total assets in obligations issued by public bodies, including
state and municipal authorities, to finance hospital or health care facilities
or equipment. The ability of any subject health care entity or hospital to make
payments in amounts sufficient to pay maturing principal and interest
obligations is dependent, among other things, upon the revenues, costs and
occupancy levels of the subject health care entity or hospital. Revenues and
expenses of hospitals and health care facilities will be affected by future
events and conditions relating generally to, among other things, demand for
health care services at the particular type of facility, increasing costs of
medical technology, utilization practices of physicians, the ability of the
facilities to provide the services required by
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patients, employee strikes and other adverse labor actions, economic
developments in the service area, demographic changes, greater longevity and
the higher medical expenses of treating the elderly, increased competition from
other health care providers and rates that can be charged for the services
provided. Additionally, a major portion of hospital revenues typically is
derived from federal or state programs such as Medicare and Medicaid and from
other insurers. The future solvency of the Medicare trust fund is periodically
subject to question. Changes in the compensation and reimbursement formulas of
these governmental programs or in the rates of insurers may reduce revenues
available for the payment of principal of or interest on hospital revenue
bonds. Governmental legislation or regulations and other factors, such as the
inability to obtain sufficient malpractice insurance, may also adversely impact
upon the revenues or costs of hospitals. Future actions by the federal
government with respect to Medicare and by the federal and state governments
with respect to Medicaid, reducing the total amount of funds available for
either or both of these programs or changing the reimbursement regulations or
their interpretation, could adversely affect the amount of reimbursement
available to hospital facilities. A number of additional legislative proposals
concerning health care are typically under review by the United States Congress
at any given time. These proposals span a wide range of topics, including cost
controls, national health insurance, incentives for competition in the
provision of health care services, tax incentives and penalties related to
health care insurance premiums and promotion of prepaid health care plans.
GEOGRAPHIC CONCENTRATIONS
The following information is a brief summary of factors affecting the
states and certain of the territories or possessions in which the Funds invest
and does not purport to be a complete description of such factors.
Factors Affecting Wisconsin. Wisconsin's economy, although fairly
diverse, is primarily concentrated in the services industry (accounting for
approximately 25% of total non-farm employment) and secondarily in the
manufacture of durable goods and retail. Federal, state and local government
in Wisconsin is also a major employer. The top five products made in Wisconsin
are dairy products, motor vehicles, paper, meat products and small engines.
Wisconsin escaped the worst of the national recession and has
continued to outperform the national economy. Wisconsin's unemployment rate
has been below the national average for the past seven years. In November
1994, the State's unemployment rate was 4.4%, compared to a national
unemployment rate in excess of 7%. The State is highly ranked in terms of job
creation, especially in the creation of manufacturing jobs. Since 1987, the
State's personal income tax rate has been reduced from 7.9% to 6.93%, and the
current Governor, Tommy G. Thompson, has expressed his desire to implement
further reductions. At the same time, state spending has been controlled, with
balanced budgets experienced in each of
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the last seven years. Personal income in Wisconsin continues to increase at a
rate above that of the national average.
Wisconsin has an extremely diverse revenue-raising structure. More
than one-third of its total revenue is derived from the various taxes levied by
the State. The remainder comes from the federal government and from various
kinds of fees, licenses, permits and service charges paid by users of specific
services, privileges or facilities. Wisconsin's tax structure has a diverse
underlying base consisting of income, general and special product sales,
transfer of wealth and property value. About one-third of all taxes collected
by the State of Wisconsin is returned to local units of government. The
remaining funds are used for state operations and aid to individuals and
organizations. The combined operations of three state agencies (Department of
Health and Social Services, Department of Public Instruction and the University
of Wisconsin System) account for more than 50% of total state expenditures.
Wisconsin has the authority to increase appropriations from or reduce
taxes below levels established in its budget. In recent years, Wisconsin has
adopted appropriation measures subsequent to passage of its budget act.
However, it has been the State's policy that supplemental appropriations
adopted by the State Legislature must be within revenue projections for the
relevant fiscal period or balanced by reductions in other appropriations. The
spending from additional appropriations historically has been matched by
reduced disbursements, increased revenues or a combination of the two.
Wisconsin has experienced and anticipates it will continue to
experience certain periods when its general fund is in a negative cash
position. State statutes provide certain administrative remedies to deal with
these periods. The Secretary of Administration may temporarily reallocate up
to $400 million of available cash in other funds to the general fund. The
Secretary of Administration may set priorities for payments from the general
fund as well as pro rate certain payments. State statutes mandate that all
payments must be in accordance with the following order of preference: (a) all
direct and indirect payments of principal and interest on Wisconsin general
obligation debt must have first priority and may not be pro rated or reduced;
(b) all direct and indirect payments of principal and interest on operating
notes must take second priority and may not be pro rated or reduced; (c) all
Wisconsin employee payrolls must take third priority, but may be pro rated or
reduced; and (d) all other payments are paid in a priority determined by the
Secretary of Administration and may be pro rated or reduced.
Governor Thompson has proposed a property tax relief plan which, if
passed by the state legislature and if his assumptions are correct, would
decrease local property taxes by as much as $1 billion by 1997. It is not
clear what effect, if any, the
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Governor's property tax relief proposal will have on the Wisconsin Fund's
investments or prospects.
Factors Affecting Nebraska . The economy of Nebraska in recent years
has demonstrated strong performance, with personal income increasing 326% from
1983 to 1993. State per capita income of about $20,000, although slightly less
than the national average, is above the average per capita income for the other
states in the plains region. The State unemployment rate remains at less than
3%, which is considerably less than the national average (over 7%). The State's
population has increased to 1,607,000 in 1993, from 1,578,385 in 1990.
Approximately 40% of the Nebraska population is concentrated in the three
metropolitan areas of Lincoln, Omaha and South Sioux City. Nebraska's economic
growth generally mirrors growth in the U.S. economy, although the State economy
tends to be less cyclical than the national economy.
Nebraska has a fairly diverse economy, with agriculture, trade and the
services industry (including health, personal and business services) dominant.
The trade (both wholesale and retail) sector accounts for more than 25% of
total non-farm employment, with the service sector and the government sector
accounting for approximately 24% and 19%, respectively. Because Nebraska has
no private power companies, utilities jobs are counted in the government
sector. The manufacturing (including durable and non-durable goods) sector
accounted for approximately 14% of total non-farm employment. Construction
activity has been high during the 1990s, and is expected to continue for the
next several years at least with respect to highway-related construction. The
State's business failure rate decreased 37% in 1993 from 1992.
Agriculture traditionally has been the backbone of Nebraska's economy,
although its strength has diminished in the last two decades compared to other
sectors. However, the continued importance of agriculture to the State's
economy was clearly demonstrated in recent years, when increasing farm credit
problems and adverse weather conditions affected other sectors interacting with
agriculture. These sectors include manufacturers of farm equipment and
supplies; feed, seed and other farm supply retailers; truckers transporting
farm products; and banks providing loans for farm operating capital. Downward
trends in the commodity markets and cutbacks in federal agricultural programs
could also significantly impact the state economy.
Although Nebraska has not experienced severe symptoms of the recent
national recession and weakened economy, the State has faced budget crises in
recent years due in part to increased spending relating to increased Medicaid
costs and the results of a 1992 state supreme court decision which decreased
revenue. The decision declared unconstitutional a legislative bill which
exempted personal property from taxation, on the basis that the bill improperly
shifted the property tax burden to owners of real property. Many local
Nebraska governments are also suffering from fiscal stress and general declines
in financial performance.
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Recessionary impacts have resulted in downturns in real estate related
receipts, declines in the growth of income tax revenues, lower cash positions
and reduced interest income. Nebraska municipalities and political
subdivisions are also not immune to budget shortfalls caused by cutbacks in
state assistance. Property and other taxes have been increased, programs have
been cut and pay raises have been curtailed to assist in controlling expenses.
Recent decisions of the Nebraska Supreme Court, the passage of certain
legislation relating to personal property taxes by the Nebraska Legislature,
and a recent challenge of the current taxation system make it difficult to
predict the effects, if any, on the ability of political subdivisions of the
State to levy and collect ad valorem taxes to support their governmental
operations. The State of Nebraska anticipates future budget deficits over the
next few years, given current revenue projections.
The State of Nebraska does not itself issue debt. Local governments
issue three basic types of debt, with varying degrees of credit risk: general
obligation bonds backed by the unlimited, and in some cased limited, taxing
power of the issuer; revenue bonds secured by specific pledged fees or charges
for a related project; and tax-exempt lease obligations secured by annual
appropriations by the issuer, usually with no implied tax or specific revenue
appropriations by the issuer. In 1992, $1.8 billion in municipal debt was
issued in Nebraska, with approximately 13% representing general obligation debt
and 87% revenue bonds, compared to 35% general obligation and 65%
revenue-backed bonds nationally.
Many agencies and other instrumentalities of the State are authorized
to borrow money under legislation which expressly provides that the loan
obligations shall not be deemed to constitute a debt or a pledge of the faith
and credit of the State of Nebraska. Representative issuers of this kind of
debt include the Nebraska Educational Facilities Authority and Nebraska
Investment Finance Authority. The principal of and interest on bonds issued by
these bodies are payable solely from various sources, principally fees
generated from the use of the facilities, enterprises financed by the bonds, or
other dedicated fees.
Factors Affecting Puerto Rico . The Funds may invest in obligations of
the Commonwealth of Puerto Rico and its political subdivisions, agencies and
instrumentalities, that qualify as Tax Exempt Obligations. The majority of
Puerto Rico's debt is issued by 10 of the major public agencies that are
responsible for many of its public functions, such as water, wastewater,
highways, telecommunications, education and public construction.
The Puerto Rico economy generally parallels the economic cycles of the
United States, as most goods are imported from the U.S. Interest rates also
generally mirror those of the United States. The Puerto Rico economy over the
past few decades has been dominated by capital-intensive manufacturing
industries such as pharmaceuticals and chemicals, instruments, electronics,
apparel,
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<PAGE> 47
food products and machinery. Additional major economic sectors include
government, trade and services. Industrial production in Puerto Rico rose by
approximately 4.7% in 1994, an increase from 4.3% in 1993. High-tech economic
sectors have shown steady growth, while labor-intensive industries are
generally declining. The unemployment rate has remained at approximately 16%
during the past few years, and is expected to remain at that level over the
short-term.
The Puerto Rico economy remains vulnerable to changes in world oil
prices (98% of Puerto Rico's oil needs are supplied by imports), American
trade, foreign policy and levels of federal assistance. Per capita income
levels, while the highest in the Caribbean at slightly more than $6,000, lag
far behind the United States.
Puerto Rico's real gross national product was forecast to grow 2.5% to
2.8% in 1994 from 2.5% in 1993. Economic expansion during the early 1990s has
been dampened by uncertainty over Section 936 tax credits and the plebescite
regarding statehood, as well as a sluggish U.S. economy. Strong growth in
tourism, car sales and shopping center development has been offset by weakness
in the manufacturing, insurance and government sectors. Construction activity
has grown in recent years, as the government has increased its spending on
public works and infrastructure improvements.
Puerto Rico's central government budget of $3.23 billion of 1994 was
approximately the same as the budget for 1993, although more funds are being
channeled to services such as law enforcement and education. Future spending
will be limited by a lack of new revenue sources, but budgetary demands are
expected to increase due to a poor infrastructure, especially in power
generation, waste disposal, roads and water and facilities. Debt ratios for
Puerto Rico are high as it assumes much of the responsibility for the local
infrastructure. The Commonwealth's general obligation debt is secured by a
first lien on all available revenues. Debt policy has sought to keep the rate
of growth of debt at or below that of the gross domestic product, although
recent substantial borrowings and general economic conditions mark a departure
from this policy. The per capita guaranteed debt burden is high at over
$1,000, of which guaranteed and tax-supported debt likely will exceed $2,000.
Debt service is more manageable relative to total expenditures at roughly 12%
of combined general and debt service fund expenditures.
Before the enactment of the Omnibus Budget Reconciliation Act of 1993
("OBRA"), under Section 936 of the Internal Revenue Code, domestic corporations
with a substantial amount of their business operations in Puerto Rico could
elect to claim a tax credit under Section 936 that effectively eliminated their
U.S. income tax on income from business operations conducted in Puerto Rico.
OBRA has now limited the amount of the Section 936 credit available to
corporations. Generally, a corporation may elect between two alternative
limitations on the amount of the credit. The first limitation is based on the
amount of the economic activity it
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<PAGE> 48
conducts in Puerto Rico (measured by compensation paid there and depreciation
claimed on property located and used in a trade or business there); the second
is based on an applicable percentage (40%, once the limitation is fully-phased
in by 1998) of the amount of the credit that would have been available to the
corporation under pre-OBRA law. It is impossible to predict with certainty
whether, or to what extent, these limitations on the Section 936 credit will
result in a decrease in the business operations of U.S. corporations in Puerto
Rico. However, further weakening of the Section 936 tax benefits would likely
erode Puerto Rico's competitive advantage. The North American Free Trade
Agreement may also cause companies to transfer their operations from Puerto
Rico to Mexico with its lower wages and transportation costs.
In August 1983, the United States enacted legislation widely known as
the Caribbean Basin Initiative ("CBI"). CBI, which is designed to encourage
economic development in the Caribbean and Central America, provides for: (a)
unilateral, duty-free access to a United States market for Caribbean Basin
products, except for a few selected commodities, for a period of 12 years; (b)
tax deductions for conventions held in the Caribbean; and (c) direct economic
assistance payments by the United States. CBI contains a number of measures
designed to maintain the competitive position of Puerto Rico and U.S. insular
possessions. Such measures include, among others, the inclusion in free trade
benefits of products that are processed in part in Puerto Rico, rebates to
Puerto Rico of excise taxes collected on rum imports and the exclusion of
processed tuna from duty-free treatment. The government of Puerto Rico
strongly supports the island's involvement in the CBI, particularly in relation
to the development of twin plants, or complementary projects. Under this
program, the labor-intensive phase of production generally occurs in a
Caribbean or Central American country, while the more sophisticated, higher
technology phases take place in Puerto Rico.
Puerto Rico has been a commonwealth of the United States since 1952.
In a plebiscite held in November 1993, 48% of Puerto Rico voters confirmed
their preference for commonwealth status, narrowly defeating the 46% who voted
for statehood. Only 4% voted for independence. Another vote on statehood is
not expected over the next several years. However, any vote on a change in
Puerto Rico's status requires the approval of the U.S. Congress. The effects
of a future decision to grant statehood or independence to Puerto Rico are
uncertain, although such a decision could result in economic instability,
volatility in the price and market for securities, and elimination or phase-out
of the Section 936 tax credit.
LIMITATION ON SIZE OF THE FUNDS
Each Fund may impose a limit on its size, which would have the effect
of limiting purchases by persons other than existing shareholders. Such a
limitation would not affect dividend reinvestments and purchases of additional
shares by persons who are already shareholders of the Fund when the limit is
imposed. Such
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<PAGE> 49
a limitation may be imposed if Heartland Advisors, as investment advisor,
believes that the available supply of securities suitable for the Fund's
portfolio is limited or for other reasons.
Heartland's Board of Directors has determined that no such limitation
will be imposed with respect to the Nebraska Fund prior to such time as its net
asset value reaches $50 million. As the Wisconsin Fund's net assets approached
$50 million, Heartland's Board of Directors determined that an adequate supply
of suitable securities existed to permit the Wisconsin Fund to continue
accepting purchases by new shareholders. The Wisconsin Fund's net assets are
currently in excess of $100 million and the Board will continue to monitor the
size of the Fund. Factors that the Board will consider in determining whether
to continue to accept purchases from new shareholders of the Funds include the
availability of an adequate supply of securities of suitable quality for each
Fund's portfolio, adequate diversification of portfolio holdings, and the
liquidity of the portfolio's holdings.
If the Board determines to discontinue accepting purchases of either
Fund's shares from persons other than existing shareholders, the Fund will mail
a written notice of that fact to its existing shareholders at least ten (10)
days prior to the effective date of the limitation. When the Board determines
to again accept purchases from new shareholders, it will mail written notice of
that fact to the Fund's existing shareholders no later than the first day it
again commences accepting such purchases. If a Fund were to close to new
investors and the amount of new money flowing into the Fund were to decrease,
there is a risk that redemptions by existing shareholders might require the
Fund to liquidate a portfolio position at an inopportune time in order to
effect the redemption.
PORTFOLIO TURNOVER
Portfolio turnover for each Fund is the ratio of the lesser of annual
purchases or sales of portfolio securities by the Fund to the average monthly
value of portfolio securities owned by the Fund, not including securities
maturing in less than 12 months. A 100% portfolio turnover rate would occur,
for example, if the lesser of the value of purchases or sales of the Fund's
portfolio securities for a particular year were equal to the average monthly
value of the portfolio securities owned by the Fund during the year. The
portfolio turnover rate for the Wisconsin Fund for each of the fiscal years
ended December 31, 1994 and 1993 was 21.5% and 6.3%, respectively. The
portfolio turnover rate for the Nebraska Fund for the fiscal year ended
December 31, 1994 was 32.7% and for the period from September 27, 1993
(commencement of operations) through December 31, 1993 was 2.6%.
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<PAGE> 50
INVESTMENT RESTRICTIONS
Each Fund has adopted the following investment restrictions, which are
fundamental policies that cannot be changed without the approval of the holders
of the lesser of: (i) a majority of the outstanding shares of the Fund; or
(ii) 67% of the shares represented at a meeting of shareholders at which the
holders of 50% or more of the outstanding shares of the Fund are represented.
Any investment restriction which involves a maximum percentage of securities or
assets will not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowing by, the Fund. Each Fund may not:
(1) Purchase more than 10% of the outstanding voting securities of
an issuer, or invest in a company to get control or manage it.
(2) Invest more than 25% of its total assets, based on current
market value at the time of purchase, in securities of issuers in any single
industry; provided that there shall be no such limitation on the purchase of
Tax-Exempt Obligations, housing obligations and securities issued or guaranteed
by the United States Government, its agencies or instrumentalities.
(3) Purchase securities of other investment companies if, as a
result, more than 10% of the value of the Fund's assets would be so invested;
provided that no investment will be made in the securities of any investment
company if, immediately after such investment, more than 3% of the outstanding
voting securities of such company would be owned by the Fund or more than 5% of
the value of the Fund's total assets would be invested in such company;
provided further, that no such restriction shall apply to a purchase of
investment company securities in connection with a merger, consolidation,
acquisition or reorganization.
(4) Borrow money or property except for temporary or emergency
purposes. If the Fund ever should borrow money it would only borrow from banks
and in an amount not exceeding 10% of the market value of its total assets (not
including the amount borrowed). The Fund will not pledge more than 10% of its
net assets to secure such borrowings. In the event the Fund's borrowings
exceed 5% of the market value of its total assets, the Fund will not invest in
any additional portfolio securities until its borrowings are reduced to below
5% of its total assets.
(5) Make loans, except that the Fund may: (i) acquire publicly
distributed bonds, debentures, notes and other debt securities in which the
Fund may invest consistent with its investment policies described in the
Prospectus; (ii) lend portfolio securities, provided that no such loan may be
made if as a result the aggregate of such loans would exceed 30% of the value
of the Fund's total assets; and (iii) through repurchase agreements.
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<PAGE> 51
(6) Underwrite the securities of other issuers except where it
might technically be deemed to be an underwriter for purposes of the Securities
Act of 1933 upon the disposition of certain securities.
(7) Issue senior securities.
(8) Buy or sell real estate.
(9) Buy or sell commodities.
(10) Invest in a security if, as a result thereof, more than 25% of
the Fund's total assets would be invested in a single issuer, other than
securities issued or guaranteed by the United States government, or a state or
territory of the United States, or the District of Columbia, or their agencies,
instrumentalities, municipalities or political subdivisions.
(11) Invest in: (i) securities which, in the opinion of Heartland
Advisors, as the Fund's advisor, are not, at the time of such investment,
readily marketable; (ii) securities the disposition of which is restricted
under federal securities laws (as described in nonfundamental restriction (c)
below); or (iii) repurchase agreements maturing in more than seven days, if, as
a result, more than 10% of the Fund's net assets (taken at current value) would
be invested in securities described in clauses (i), (ii) and (iii) of this
restriction (11).
In addition to the foregoing fundamental restrictions,
Heartland's Board of Directors has adopted the following restrictions for each
Fund, which may be changed without shareholder approval, in order to comply
with the securities laws of various states. Each Fund may not:
(a) Invest more than 5% of its total assets in securities of
companies which, including any predecessors, have a record of less than three
years of continuous operations.
(b) Buy or sell real estate investment trusts, or oil and gas
interests, but this shall not prevent the Fund from investing in securities of
companies whose business involves the purchase or sale of real estate, except
that the Fund will not invest in real estate limited partnerships.
(c) Except with respect to investments in repurchase agreements,
purchase securities with legal or contractual restrictions on resale if, as a
result of such purchase, such investments would exceed 5% of the value of the
Fund's net assets.
(d) Purchase securities on margin or effect short sales of
securities, except as required in connection with permissible options and
futures activities as described elsewhere in the Prospectus and Statement of
Additional Information.
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<PAGE> 52
(e) Purchase or retain the securities of any issuer if the
officers, directors, advisors or managers of the Fund owning beneficially more
than one and one-half of one percent of the securities of such issuer together
own beneficially 5% of such securities; provided no officer or director shall
be deemed to own beneficially securities held in other accounts managed by such
person or held in employee or similar plans for which such person acts as
trustee.
For the Funds' limitations on futures and options transactions, see
"Investment Objectives and Policies - Limitations on Futures and Options
Transactions."
MANAGEMENT
The Board of Directors of Heartland provides broad supervision over
the affairs of each Fund, and the officers are responsible for its operations.
The Directors and officers are listed below, together with their principal
occupations during the past five years. Subject to the direction of the Board
of Directors, Heartland Advisors is responsible for investment management of
the assets of each Fund. Although each Fund is offering only its own shares,
it is possible that one Fund might become liable for any misstatement in the
Prospectus about another Fund. The Board of Directors has considered this
factor in approving the use of a single combined Prospectus.
<TABLE>
<CAPTION>
Principal
Occupation
Position with During Past Five
Name and Address Heartland Years
---------------- ------------- ----------------
<S> <C> <C>
William J. Nasgovitz President and Director* President and Director, Heartland
790 N. Milwaukee St. Advisors, Inc., since 1982; Senior
Milwaukee, WI 53201 Vice President- Investments, Dain
Bosworth Incorporated from 1988 to
June 1992; Director, Rexworks, Inc.
since 1992 (manufacturer of heavy
equipment); Director of Capital
Investments, Inc., since 1989
(closed-end investment company).
</TABLE>
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<PAGE> 53
<TABLE>
<CAPTION>
Principal
Occupation
Position with During Past Five
Name and Address Heartland Years
---------------- ------------- ----------------
<S> <C> <C>
Willard H. Davidson Director Financial and business consultant
3726 N. Lake Drive since 1984; prior thereto, Chairman
Milwaukee, WI 53211 and a Director, Marine Corporation (a
bank holding company) and Marine
Bank, N.A.
Hugh F. Denison Director* Vice President and a Director,
790 N. Milwaukee St. Heartland Advisors, Inc. since 1988.
Milwaukee, WI 53201
Jon D. Hammes Director President, Great Lakes Partners,
325 N. Corporate Drive since 1991; prior thereto, Managing
Suite 115 Partner, Trammel, Crow Co.
Brookfield, WI 53045
A. Gary Shilling Director President, A. Gary Shilling &
500 Morris Avenue Company, Inc. (economic consultants
Springfield, NJ 07081 and investment advisors), since 1978.
Linda F. Stephenson Director President and Chief Executive
100 E. Wisconsin Avenue Officer, Zigman Joseph Stephenson (a
Milwaukee, WI 53202 public relations and marketing
communications firm), since 1989.
Patrick J. Retzer Vice President, Vice President and Treasurer,
790 N. Milwaukee St. Treasurer and Director* Heartland Advisors, Inc. since 1987;
Milwaukee, WI 53201 Director of Heartland Advisors, Inc.
since 1988.
Lois Schmatzhagen Secretary Secretary, Heartland
790 N. Milwaukee St. Advisors, Inc. since
Milwaukee, WI 53201 1988.
</TABLE>
-------------------
*Directors who are "Interested Persons" (as defined in the Investment
Company Act of 1940) of Heartland Advisors.
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<PAGE> 54
Heartland pays the compensation of the four Directors who are not
officers, directors or employees of Heartland Advisors. The following
compensation was paid to those Directors for their services during the fiscal
year ended December 31, 1994:
<TABLE>
<CAPTION>
TOTAL
AGGREGATE PENSION OR ESTIMATED ACTUAL COMPENSATION FROM
COMPENSATION RETIREMENT BENEFITS UPON HEARTLAND AND
DIRECTOR FROM HEARTLAND BENEFITS RETIREMENT FUND COMPLEX
-------- -------------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Willard H. Davidson $2,500 None None $2,500
Jon D. Hammes $2,000 None None $2,000
Linda F. Stephenson $2,000 None None $2,000
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of January 31, 1995, the directors and officers of Heartland, as a
group (8 persons), owned beneficially less than 1% of the shares of each Fund.
As of that date, no person was known to own, of record or beneficially, as much
as five percent (5%) of the outstanding shares of either Fund.
THE INVESTMENT ADVISOR
Each Fund is managed by Heartland Advisors pursuant to an Investment
Advisory Agreement (the "Agreement"). The Agreement was approved on behalf of
the Nebraska Fund and most recently on behalf of the Wisconsin Fund by the
Board of Directors, including a majority of the Directors who are not
interested persons of the Funds or of Heartland Advisors, on July 28, 1994.
Heartland Advisors also serves as distributor for the Funds.
Heartland Advisors is controlled by William J. Nasgovitz, the
President and a Director of Heartland, by virtue of his ownership of a majority
of its outstanding capital stock. Heartland Advisors, founded in 1982, serves
as the investment advisor for the Heartland Value, Small Cap Contrarian, Value
& Income and U.S. Government Securities Funds, four additional series of
Heartland, and also provides investment management services for individuals,
and institutional accounts, such as pension funds and profit-sharing plans. As
of January 31, 1995, Heartland Advisors had approximately $800 million in
assets under management. Mr. Nasgovitz intends to retain control of Heartland
Advisors through the continued ownership of a majority of its outstanding
voting stock.
Pursuant to the Agreement, Heartland Advisors provides each Fund with
overall investment advisory and administrative services. Subject to such
policies as the Board of Directors of Heartland may determine, Heartland
Advisors makes investment decisions on behalf of each Fund, makes available
research and statistical data in
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<PAGE> 55
connection therewith, and supervises the acquisition and disposition of
investments by the Fund, including the selection of broker-dealers to carry out
portfolio transactions. Heartland Advisors will permit any of its officers or
employees to serve without compensation from the Funds as directors or officers
of Heartland if elected to such positions.
Heartland Advisors bears all of its own expenses in providing services
under the Agreement and pays all salaries, fees and expenses of the officers
and directors of the Funds who are affiliated with Heartland Advisors. Each
Fund bears all its other expenses including, but not limited to, necessary
office space, telephone and other communications facilities and personnel
competent to perform administrative, clerical and shareholder relations
functions; a pro rata portion of salary, fees and expenses (including legal
fees) of those directors, officers and employees of Heartland who are not
officers, directors or employees of Heartland Advisors; interest expenses; fees
and expenses of the Custodian, Agent and Dividend Disbursing Agent; taxes and
governmental fees; brokerage commissions and other expenses incurred in
acquiring or disposing of portfolio securities; expenses of registering and
qualifying shares for sale with the Securities and Exchange Commission and
state securities commissions; accounting and legal costs; insurance premiums;
expenses of maintaining the Fund's legal existence and of shareholders'
meetings; expenses of preparation and distribution to existing shareholders of
reports, proxies and prospectuses; and fees and expenses of membership in
industry organizations.
Each Fund pays Heartland Advisors an annual fee (payable in monthly
installments) for its services at the rate of 0.65 of 1% of the Fund's average
daily net assets. For the fiscal years ended December 31, 1994 and 1993, and
for the period from April 3, 1992 (commencement of operations) through December
31, 1992, the Wisconsin Fund paid advisory fees of $704,918, $442,454 and
$74,008, respectively. For the fiscal year ended December 31, 1994, the
Nebraska Fund paid advisory fees of $40,930. During that period, the advisory
fee provided under the Nebraska Fund's Agreement totalled $81,861, but
Heartland Advisors voluntarily waived one-half of such fees. For the period
from September 27, 1993 (commencement of operations) through December 31, 1993,
the Nebraska Fund paid no advisory fees; during that period the advisory fee
provided under the Nebraska Fund's Agreement totalled $8,548, but Heartland
Advisors voluntarily waived all such fees.
The Agreement provides that Heartland Advisors' fee will be reduced,
or that Heartland Advisors will reimburse the Fund (up to the amount of its
fee), by an amount necessary to prevent the total expenses of each Fund
(excluding taxes, interests, brokerage commissions or transactions costs,
distribution fees and extraordinary expenses) from exceeding limits applicable
to the Fund in any state in which its shares are then qualified for sale. The
shares of the Funds are qualified for sale in their respective
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<PAGE> 56
states. None of the states in which the Funds are qualified has such an
expense limitation.
The Agreement will continue in effect from year to year, as long as it
is approved at least annually by Heartland's Board of Directors or by a vote of
the outstanding voting securities of the Fund, and in either case by a majority
of the Directors who are not parties to the Agreement or interested persons of
any such party. The Agreement terminates automatically if it is assigned and
may be terminated without penalty by either party on not more than 60 nor less
than 30 days' notice. The Agreement provides that neither Heartland Advisors
nor its personnel shall be liable for any error of judgment or mistake of law
or for any loss arising out of any investment or for any act or omission in the
execution and management of the Fund, except for willful misfeasance, bad faith
or gross negligence in the performance of its duties or by reason of reckless
disregard of its obligations and duties under the Agreement.
PERFORMANCE INFORMATION
General.
From time to time the Funds may advertise "yield," "taxable equivalent
yield," "average annual total return" and "cumulative total return." Yield is
based on historical earnings and total return is based on historical
distributions; neither is intended to indicate future performance. The "yield"
of each Fund refers to the income generated by an investment in the Fund over a
one-month period (which period will be stated in the advertisement). This
income is then "annualized." That is, the amount of income generated by the
investment during the month is assumed to be generated each month over a
twelve-month period and is shown as a percentage of the investment. "Total
return" of each Fund refers to the annual average return for 1, 5 and 10-year
periods (or the portion thereof during which the Fund has been in existence).
Total return is the change in redemption value of shares purchased with an
initial $1,000 investment, assuming the reinvestment of dividends and capital
gain distributions, after giving effect to the maximum applicable sales charge.
Performance information should be considered in light of a Fund's
investment objectives and policies, characteristics and quality of its
portfolio securities and the market conditions during the applicable period,
and should not be considered as a representation of what may be achieved in the
future. Investors should consider these factors and possible differences in
the methods used in calculating performance information when comparing each
Fund's performance to performance figures published for other investment
vehicles.
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<PAGE> 57
Yield.
Yield quotations are based on a 30-day (or one-month) period, and are
computed by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
Yield = 2[(a-b + 1)6 - 1]
---
cd
Where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends; and
d = the maximum offering price per share on the last
day of the period.
The yields for the Wisconsin Fund and the Nebraska Fund for the month
ended December 31, 1994 were 5.92% and 5.98%, respectively. When advertising
yield, the Fund will not advertise a one-month or a 30-day period which ends
more than 45 days before the date on which the advertisement is published.
Taxable Equivalent Yield.
Taxable equivalent yield is computed by dividing that portion of the
yield of the respective Fund (as computed above) which is tax- exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the yield of such Fund that is not tax-exempt. Assuming an income tax rate
of 31%, the taxable equivalent yields for the Wisconsin Fund and the Nebraska
Fund for the month ended December 31, 1994 were 9.22% and 9.31%, respectively.
Total Return.
Average annual total return is computed by finding the average annual
compounded rates of return over the 1, 5 and 10-year periods (or the portion
thereof during which the Fund has been in operation) ended on the date of the
respective Fund's balance sheet that would equate the initial amount invested
to the ending redeemable value, according to the following formula:
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<PAGE> 58
P(1 + T)n = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value for a hypothetical $1,000
payment made at the beginning of the 1, 5 and 10-year
periods at the end of the 1, 5 and 10-year period
(or fractional portion thereof).
This calculation assumes all dividends and capital gain distributions
are reinvested at net asset value on the appropriate reinvestment dates as
described in the Prospectus, and includes all recurring fees, such as
investment advisory and management fees, charged as expenses to all shareholder
accounts. A sales load of 3% was charged with respect to purchases of shares
of the Funds prior to June 1, 1994, which is not reflected in the total return
figures.
The average annual total return for the Wisconsin Fund for the
one-year period ending December 31, 1994 was -6.49%, and for the period from
April 3, 1992 (commencement of operations) to December 31, 1994 was 3.28%. The
average annual total return for the Nebraska Fund for the one-year period
ending December 31, 1994 was -9.33% and for the period from September 27, 1993
(commencement of operations) through December 31, 1994 was -7.69%.
Cumulative Total Return.
Cumulative total return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
CTR=(ERV-P) 100
---------------
P
Where:
CTR = Cumulative Total Return;
ERV = Ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of the period;
P = Initial payment of $1,000.
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<PAGE> 59
This calculation assumes all dividends and capital gain distributions
are reinvested at net asset value on the appropriate reinvestment dates as
described in the Prospectus, and includes all recurring fees, such as
investment advisory and management fees, charged as expenses to all shareholder
accounts. A sales load of 3% was charged with respect to purchases of shares
of the Funds prior to June 1, 1994, which is not reflected in the total return
figures.
The cumulative total return for the Wisconsin Fund for the one-year
period ending December 31, 1994, was -6.49% and for the period from April 3,
1992 (commencement of operations) to December 31, 1994 was 9.26%. The
cumulative total return for the Nebraska Fund for the one-year period ending
December 31, 1994 was -9.33% and for the period from September 27, 1993
(commencement of operations) through December 31, 1994 was -9.60%.
DETERMINATION OF NET ASSET VALUE PER SHARE
Each Fund's shares are sold at their next determined net asset value
per share. Each Fund determines the net asset value per share by subtracting
its liabilities (including accrued expenses and dividends payable) from its
total assets (the value of the securities the Fund holds plus cash or other
assets, including interest accrued but not yet received) and dividing the
result by the total number of shares outstanding.
The next determined net asset value per share will be calculated for
the Funds as of the close of the New York Stock Exchange regular trading
(generally 4:00 p.m. New York time) at least once every weekday, Monday through
Friday, except on: (i) customary national business holidays which result in
the closing of the New York Stock Exchange, which are New Year's Day,
Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas; (ii) days when no security is tendered for
redemption and no customer order is received; or (iii) days when changes in the
value of the investment company's portfolio securities do not affect the
current net asset value of a Fund's redeemable securities. Portfolio
securities will be valued as described in the Prospectus for the purpose of
calculating net asset value on any day.
DISTRIBUTION OF SHARES
Heartland Advisors, each Fund's investment advisor, also acts as the
distributor of the shares of all of the Heartland funds, including the Funds.
Heartland Advisors has agreed to use its "best-efforts" to distribute each
Fund's shares, but has not committed to purchase or sell any specific number of
shares. The Distribution Agreement for the Funds is renewable annually by the
vote of the directors at a meeting called for such purpose and may be
terminated upon 60 days written notice by either party. The
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Distribution Agreement will automatically terminate in the event of its
assignment. Under the Distribution Agreement, Heartland Advisors, as
distributor, will pay for the costs and expenses of preparing, printing and
distributing materials not prepared by the Funds and used by Heartland Advisors
in connection with its offering of shares for sale to the public, including the
additional costs of printing copies of the prospectus and of annual and interim
reports to shareholders other than copies required for distribution to
shareholders or for filing under the federal securities laws, and any expenses
of advertising incurred by Heartland Advisors in connection with the offering
of the shares.
For the fiscal years ended December 31, 1994 and 1993 and for the
period from April 3, 1992 (commencement of operations) to December 31, 1992,
the aggregate amount of underwriting commissions paid with respect to the
Wisconsin Fund were $403,694, $1,365,696 and $915,969, respectively, of which
Heartland Advisors retained $104,505, $316,819 and $161,075, respectively. For
the fiscal year ended December 31, 1994 and for the period from September 27,
1993 (commencement of operations) to December 31, 1993, the aggregate amount of
underwriting commissions paid with respect to the Nebraska Fund was $120,141
and $194,193, respectively, of which Heartland Advisors retained $19,989 and
$27,748, respectively.
TAX STATUS
The information in this section supplements the discussion of
applicable taxes found in the Prospectus (see "DIVIDENDS, DISTRIBUTIONS AND
TAXES").
Each series of a series company, such as Heartland, is treated as a
single entity for federal income tax purposes, so that the net realized capital
gains and losses of one series are not combined with those of another series in
the same company.
Gain or loss on the sale of securities held by the Funds for more than
one year will generally be long-term capital gain or loss. Gain or loss on the
sale of securities held for one year or less will be short-term capital gain or
loss.
If a shareholder exchanges shares of one Heartland fund for shares of
another Heartland fund, the shareholder will recognize gain or loss for federal
income tax purposes. That gain or loss will be measured by the difference
between the shareholder's basis in the shares exchanged and the value of the
shares acquired.
It is possible that each Fund's income dividends may, to the extent
such dividends consist of interest from obligations of the U.S. Government and
certain of its agencies and instrumentalities, be exempt from all state and
local income taxes, although subject to federal tax. Each Fund intends to
advise shareholders of the proportion of its dividends which consist of such
interest. Shareholders are urged to consult their tax advisers regarding the
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possible exclusion of such portion of their dividends for state and local
income tax purposes.
The Funds may enter into certain options and futures contracts which
will be treated as Section 1256 contracts or straddles under the Internal
Revenue Code. Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of a Fund's fiscal year and any gains
or losses will be recognized for tax purposes at that time. Such gains or
losses and gains or losses from the normal closing or settlement of such
transactions will be characterized as 60% long-term capital gain or loss and
40% short-term capital gain or loss regardless of the holding period of the
instrument. The Fund will be required to distribute net gains on such
transactions to shareholders even though it may not have closed the transaction
and received cash to pay such distribution.
An option or future may be considered a position in a straddle for tax
purposes, in which case a loss on any position in the straddle may be subject
to deferral to the extent of unrealized gain in an offsetting position.
In order for a Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income (i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities). Gains realized on the sale or other disposition of securities,
including options and futures contracts on securities or indices, held for less
than three months, must be limited to less than 30% of the Fund's annual gross
income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Fund may be required to defer the
closing out of option or futures contracts beyond the time when it would
otherwise be advantageous to do so. It is anticipated that unrealized gains on
Section 1256 options and futures contracts, which have been open for less than
three months, as of the end of the Fund's fiscal year and which are recognized
for tax purposes, will not be considered gains on securities held less than
three months for purposes of the 30% test.
DESCRIPTION OF SHARES
In the interest of economy and convenience, certificates representing
shares purchased are not ordinarily issued. However, such purchases are
confirmed to the investor and credited to their accounts on the books
maintained by Firstar Trust Company (the "Agent"), Milwaukee, Wisconsin. The
investor will have the same rights of ownership with respect to such shares as
if certificates had been issued. Investors may receive a certificate
representing whole shares by specifically requesting one by letter to the
Agent. If a stock certificate is requested, it will not be sent for at least
14 days. The directors require payment of any lost instrument bond premiums or
federal and state taxes due in connection
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with the replacement of certificates and may require a fee for each new stock
certificate that is issued by the Funds not connected with the purchase of new
shares.
Shareholders have the right to vote on the election of directors at
each meeting of shareholders at which directors are to be elected and on other
matters as provided by law or the Articles of Incorporation or Bylaws of
Heartland. Heartland's Bylaws do not require that meetings of shareholders be
held annually. However, special meetings of shareholders may be called for
purposes such as electing or removing directors, changing fundamental policies
or approving investment advisory contracts. Shareholders of each series of a
series company, such as Heartland, vote together with each share of each series
in the company on matters affecting all series (such as election of directors),
with each share entitled to a single vote. On matters affecting only one
series (such as an increase in that series' investment advisory fees or a
change in its fundamental investment restrictions), only the shareholders of
that series are entitled to vote. On matters relating to all the series but
affecting the series differently (such as a new Investment Advisory Agreement),
separate votes by series are required.
PORTFOLIO TRANSACTIONS
The information in this section supplements the information in the
Prospectus under "PORTFOLIO TRANSACTIONS."
Allocation of the portfolio brokerage transactions, including their
frequency, to various dealers is determined by Heartland Advisors, as
investment advisor, in its best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt and efficient
execution of orders in an effective manner at the most favorable price.
Subject to this consideration, brokers who provide supplemental investment
research, statistical or other services to Heartland Advisors may receive
orders for transactions by the Funds. Information so received will enable
Heartland Advisors to supplement its own research and analysis with the views
and information of other securities firms, and may be used for the benefit of
clients of Heartland Advisors other than one of the Funds. Research services
may include advice as to the value of securities; the advisability of investing
in, purchasing or selling securities; the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy
and performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement).
Each Fund may also consider sales of its own shares or the shares of the other
Heartland funds, or both, as a factor in the selection of broker-dealers to
execute portfolio transactions, subject to the policy of obtaining best price
and execution.
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For particular transactions, the Funds may pay higher commissions to
brokers (other than to Heartland Advisors or its affiliates) than might be
charged if a different broker had been selected, if, in Heartland Advisors'
opinion, this policy furthers the objective of obtaining best price and
execution. The allocation of orders among brokers and the commission rates
paid will be reviewed periodically by Heartland's Board of Directors.
Subject to the above considerations, Heartland Advisors may itself
occasionally effect portfolio transactions as a broker for the Funds. The
commissions, fees or other remuneration received by Heartland Advisors must be
reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange or on the
National Association of Securities Dealers Automated Quotation System during a
comparable period of time. This standard would allow Heartland Advisors to
receive no more than the remuneration which would be expected to be received by
an unaffiliated broker in a commensurate arms' length transaction.
Furthermore, the Board of Directors of Heartland, including a majority of the
directors who are not interested persons, have adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to Heartland Advisors are consistent with the foregoing standard.
Brokerage transactions with Heartland Advisors are also subject to such
fiduciary standards as may be imposed upon Heartland Advisors by applicable
law.
For the fiscal years ended December 31, 1994 and 1993, the Wisconsin
Fund paid $70 and $70, respectively, in brokerage commissions, all of which
were paid to Heartland Advisors, and for the period from April 3, 1992
(commencement of operations) to December 31, 1992, the Wisconsin Fund paid no
brokerage commissions. For the fiscal year ended December 31, 1994, the
Nebraska Fund paid $70 in brokerage commissions, all of which were paid to
Heartland Advisors, and for the period from September 27, 1993 (commencement of
operations) through December 31, 1993, the Nebraska Fund paid no brokerage
commissions.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
Firstar Trust Company acts as Custodian of each Fund's investments and
acts as Transfer and Dividend Disbursing Agent. Its address is Firstar Trust
Company, Mutual Funds Services, 3rd Floor, P.O. Box 701, Milwaukee, Wisconsin
53201-0701.
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS
Quarles & Brady serves as legal counsel for the Funds. Arthur
Andersen LLP, independent public accountants, are auditors of the Funds.
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FINANCIAL STATEMENTS
The financial statements and related reports of Arthur Andersen LLP,
independent public accountants, contained in the respective Annual Reports to
Shareholders of the Wisconsin Fund and the Nebraska Fund for the fiscal year
ended December 31, 1994 are hereby incorporated by reference. Copies of the
Annual Reports may be obtained without charge by writing to Heartland Advisors,
Inc., 790 North Milwaukee Street, Milwaukee, Wisconsin 53202, or by calling
1-800-HEARTLN or (414) 347-7777.
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APPENDIX A
SECURITIES RATINGS
GENERAL
A rating of a rating service represents the service's opinion as to
the credit quality of the security being rated. However, the ratings are
general and are not absolute standards as to the creditworthiness of an issuer.
Consequently, Heartland Advisors believes that the quality of debt securities
in which the Funds invest should be continuously reviewed and that individual
analysts give different weightings to the various factors involved in credit
analysis. A rating is not a recommendation to purchase, sell or hold a
security, because it does not take into account market value or suitability for
a particular investor. When a security has received a rating from more than
one service, each rating should be evaluated independently. Ratings are based
on current information furnished by the issuer or obtained by the rating
services from other sources which they consider reliable. Ratings may be
changed, suspended or withdrawn as a result of changes in or unavailability of
such information, or for other reasons.
The following is a description of the characteristics of ratings used
by Moody's Investors Service, Inc., Standard & Poor's Corporation and Fitch
Investors Service, Inc.
CORPORATE AND MUNICIPAL BOND RATINGS
RATINGS BY MOODY'S
Aaa -- Bonds which are rated in category Aaa are judged to be of the
best quality and carry the smallest degree of investment risk. Interest
payments are protected by a large or by an exceptionally stable margin, and
principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds which are rated in category Aa are judged to be of high
quality by all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long term risks appear somewhat larger
than in Aaa securities.
A -- Bonds which are rated in category A are judged to possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to
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principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds rated in category Baa are considered medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact may have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their futures cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of contract over any long period of time may be
small.
Moody's applies numerical modifiers "1", "2" and "3" to the Aa through
B rating classifications. The modifier "1" indicates that the security ranks
in the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
RATINGS BY STANDARD & POOR'S
AAA -- This is the highest rating category assigned by Standard &
Poor's to a debt obligation and indicates an extremely strong capacity to pay
principal and interest.
AA -- Debt rated AA has a very strong capacity to pay principal and
interest and differs from AAA issues only in small degree.
A -- Debt rated A has a strong capacity to pay principal and interest,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to
pay principal and interest. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for debt in
this category than for bonds in higher rated categories.
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BB -- Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B -- Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
Standard & Poor's ratings, other than AAA, may be modified by the
addition of a plus or minus sign to show relative standing in the major
categories.
RATINGS BY FITCH
AAA -- Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds rated
in the AAA and AA categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated F-1+.
A -- Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB -- Bonds considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
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B -- Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
Fitch applies modifiers "Plus(+)" or "Minus(-)" to the AA, A, BBB, BB
and B rating classifications. These modifiers are used to indicate the
relative position of a credit within a rating category.
MUNICIPAL NOTE RATINGS
RATINGS BY MOODY'S
MIG 1. This designation category denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG 2. This designation category denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3. This designation category denotes favorable quality. All
security elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
RATINGS BY S & P
SP-1. Notes rated SP-1 have very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics are designated as SP-1+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal
and interest.
Notes due in three years or less normally receive a note rating.
Notes maturing beyond three years normally receive a bond rating, although the
following criteria are used in making that assessment.
-Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue will be rated as a note.)
-Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be rated as a note.)
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RATINGS BY FITCH
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than issues rated
"F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of safety
is not as great as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these securities to be
rated below investment grade.
Fitch also uses the symbol "LOC" which indicates that the rating is
based on a letter of credit issued by a commercial bank.
A-5
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HEARTLAND WISCONSIN TAX FREE FUND
HEARTLAND NEBRASKA TAX FREE FUND
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Investment Advisor and Distributor
Heartland Advisors, Inc.
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Custodian, Transfer and Dividend Disbursing Agent
Firstar Trust Company
Mutual Funds Services, Third Floor
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
Counsel
Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Auditor
Arthur Andersen LLP
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
