<PAGE> 1
As filed with the Securities and Exchange Commission on June 27, 1997
Registration Nos. 33-11371
811-4982
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
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Post-Effective Amendment No. 33 [X]
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and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 35 [X]
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(Check Appropriate box or boxes)
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HEARTLAND GROUP, INC.
(Exact name of registrant as specified in charter)
790 NORTH MILWAUKEE STREET
MILWAUKEE, WISCONSIN 53202
(Address of Principal Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (414) 347-7777
WILLIAM J. NASGOVITZ, President
790 NORTH MILWAUKEE STREET
MILWAUKEE, WISCONSIN 53202
(name and Address of Agent for Service)
Copy to:
CONRAD G. GOODKIND, ESQ.
Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, WI 53202
It is proposed that this filing will become effective
(check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on June 30, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a
new effective date for a previously filed
post-effective amendment
*Registrant has elected to register an indefinite number of shares of Common
Stock, $0.01 par value, pursuant to Rule 24f-2 under the Investment Company Act
of 1940. The Registrant's 24f-2 Notice for the year ended December 31, 1996 was
filed on February 28, 1997.
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<PAGE> 2
HEARTLAND GROUP, INC.
FORM N-1A
CROSS-REFERENCE SHEET
TO POST-EFFECTIVE AMENDMENT NO. 33
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<TABLE>
<CAPTION>
Form N-1A
Item No. Prospectus Heading
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<S> <C> <C>
PART A
1. Cover Page............................................ Cover Page
2. Synopsis.............................................. Fund Expenses
3. Condensed Financial
Information........................................... Financial Highlights
4. General Description of
Registrant............................................ Description of Fund Shares; Investment Objectives
and Policies; Elements of Fixed Income
Investing; Implementation of Policies and
Risks; Appendix A -- Securities Ratings
5. Management of the Fund................................ The Funds and the Heartland Organization; How
to Buy Shares; Net Asset Value Calculation;
Portfolio Transactions
5A. Management's Discussion
of Fund Performance................................... Not applicable
6. Capital Stock and Other
Securities............................................ Description of Fund Shares; Dividends,
Capital Gains Distributions and Taxes; Shareholder Services
7. Purchase of Securities Being
Offered............................................... How to Buy Shares; Net Asset Value Calculation;
The Distribution Plan
8. Redemption or Repurchase.............................. How to Redeem Shares
9. Pending Legal Proceedings............................. None
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
PART B
10. Cover Page............................................ Cover Page
11. Table of Contents..................................... Cover Page
12. General Information and
History............................................... Introduction to the Funds
13. Investment Objectives and
Policies.............................................. Investment Policies and Practices; Investment
Risks and Considerations; Investment Restrictions
14. Management of the Fund................................ Management
15. Control Persons and Principal
Holders of Securities................................. Control Persons and Principal Holders of Securities
16. Investment Advisory and
Other Services........................................ The Investment Advisor
17. Brokerage Allocation.................................. Portfolio Transactions
18. Capital Stock and Other
Securities............................................ Description of Shares
19. Purchase, Redemption and
Pricing of Securities
Being Offered......................................... Determination of Net Asset Value Per Share
20. Tax Status............................................ Tax Status
21. Underwriters.......................................... Distribution of Shares
22. Calculation of Performance
Data.................................................. Performance Information
23. Financial Statements.................................. Financial Statements
</TABLE>
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<PAGE> 4
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
Prospectus
June 30, 1997
The Heartland Short Duration High-Yield Municipal Fund and the Heartland
High-Yield Municipal Bond Fund (collectively, the "Funds") are separate 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 June
30, 1997) 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 1-800-432-7856 or (414) 289-7000.
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.
The Funds may invest up to 100% of their net assets in lower-rated bonds,
commonly known as "junk bonds." Bonds of this type are subject to greater risks
with regard to payment of interest and return of principal, including default
risks, than are higher-rated bonds. Investors should carefully consider the
risks associated with an investment in the Funds. See "Elements of Fixed Income
Investing."
Shares of the Funds are not obligations, deposits or accounts of, or
endorsed or guaranteed by, any banking institution, are not insured or
guaranteed by the FDIC or any other governmental agency and involve risk,
including the possible loss of principal.
<PAGE> 5
INVESTMENT SUMMARY
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND'S investment objective
is a high level of federally tax-exempt current income with a low degree of
share-price fluctuation. The Fund invests primarily in short and intermediate
duration, medium and lower quality municipal obligations and maintains an
average portfolio duration of three years or less.
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND'S investment objective is to
maximize after-tax total return by investing for a high level of federally
tax-exempt current income. The Fund invests primarily in medium and lower
quality municipal obligations. While there are no duration restrictions for the
Fund's obligations, it is anticipated that the Fund will maintain an average
portfolio duration of greater than five years.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Fund Expenses ............................................. 4
Financial Highlights ...................................... 5
Investment Objectives and Policies ........................ 7
Elements of Fixed Income Investing ........................ 9
Implementation of Policies and Risks ...................... 13
How to Buy Shares ......................................... 18
Shareholder Services ...................................... 21
Dividends, Capital Gains Distributions and Taxes .......... 24
The Funds and the Heartland Organization .................. 26
The Distribution Plan ..................................... 27
Net Asset Value Calculation ............................... 28
Description of Fund Shares ................................ 28
Portfolio Transactions .................................... 30
Performance Information ................................... 31
How To Redeem Shares ...................................... 32
APPENDIX A - SECURITIES RATINGS ........................... 36
</TABLE>
<PAGE> 7
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>
SHORT DURATION HIGH-YIELD
HIGH-YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
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<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales load on purchases None None
Sales load on reinvested dividends None None
Exchange fees None None
Redemption fees (1) None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management fees (after waivers)(2) 0% 0%
Rule 12b-1 fees (after waivers)(2) 0% 0%
Other expenses (after reimbursement)(2) 0% 0%
TOTAL FUND OPERATING EXPENSES
(AFTER FEE WAIVERS AND EXPENSE REIMBURSEMENT) 0% 0%
</TABLE>
(1) The Agent charges a wire fee for the return of redemption proceeds
requested by wire transfer. The fee is currently $12.00. See "HOW TO REDEEM
SHARES."
(2) The Annual Fund Operating Expenses shown in the table for each Fund give
effect to Heartland Advisors' voluntary commitment to waive the entire
management and Rule 12b-1 fees and to reimburse all other expenses through
December 31, 1997. Effective January 1, 1998, Heartland Advisors will begin
to reduce the amount of this reimbursement and waiver each month by 0.15%
on an annualized basis, but will voluntarily reimburse the Funds to the
extent that annual Total Fund Operating Expenses would exceed 0.75% for the
Short Duration High-Yield Municipal Fund and 0.95% for the High-Yield
Municipal Bond Fund. Without these waivers and reimbursements, the
Management Fees, Rule 12b-1 fees and Other Expenses would be .40%, .25% and
.25%, respectively, for a total of .90% for the Short
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<PAGE> 8
Duration High-Yield Municipal Fund, and .60%, .25% and .30%, respectively,
for a total of 1.15% for the High-Yield Municipal Bond Fund. Other expenses
are based on management's estimates for the current fiscal year.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming: (1)
5% annual return; (2) redemption at the end of each time period; and (3) the
voluntary fee waivers and expense reimbursements discussed above:
<TABLE>
<CAPTION>
SHORT DURATION HIGH-YIELD
HIGH-YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
-------------- ---------
<S> <C> <C>
One year $0 $0
Three years $25 $30
</TABLE>
The purpose of this expense information is to assist in understanding the
various costs and expenses an investor will bear directly or indirectly in each
of the Funds. More detailed information concerning these expenses is set forth
in the sections of this Prospectus entitled "How To Buy Shares," "The
Distribution Plan" and "The Funds and the Heartland Organization." THE ABOVE
EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The financial highlights presented below cover the life of each Fund
through May 31, 1997 and are unaudited. The table should be read in conjunction
with the unaudited financial statements and related notes for the Funds
contained in the Statement of Additional Information, which may be obtained
without charge by writing or calling Heartland Advisors.
2
<PAGE> 9
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Short Duration High-Yield
High-Yield Municipal
Municipal Fund Bond Fund
1/2/97(1) 1/2/97(1)
to 5/31/97 to 5/31/97
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<S> <C> <C>
PER SHARE DATA:
- ---------------
Net asset value, beginning of period $ 10.00 $ 10.00
Income from investment operations:
Net investment income 0.23 0.27
Net realized and unrealized gains
on investments -- 0.04
---------- ----------
Total income from investment operations 0.23 0.31
Less distributions from:
Net investment income 0.23 0.27
Net realized gains on investments -- --
---------- ----------
Total distributions 0.23 0.27
Net asset value, end of period $ 10.00 $ 10.04
========== ==========
Total Return(2) 2.4% 3.0%
RATIOS AND SUPPLEMENTAL DATA:
- -----------------------------
Net assets, end of period (in thousands) $ 38,163 $ 10,590
Ratio of net expenses to average net assets 0.00%(3)(4) 0.00%(3)(4)
Ratio of net investment income
to average net assets 4.76%(3)(4) 5.87%(3)(4)
Portfolio turnover rate 66% 46%
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) If there had been no management fee waiver or expense reimbursement by the
Advisor, the ratio of net expenses to average net assets would have been
0.90% for the Short Duration High-Yield Municipal Fund and 1.46% for the
High-Yield Municipal Bond Fund and the ratio of net investment income to
average net assets would have been 3.87% and 4.41%, respectively.
3
<PAGE> 10
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES. The Funds' investment objectives and, except as
otherwise specified, its investment policies are not fundamental, and therefore
may be changed by Heartland's Board of Directors. If there is a future change in
the investment objective, shareholders should consider whether the Funds remain
an appropriate investment in light of their then-current financial position and
needs. In view of the risks inherent in all investments in securities, there is
no assurance that the investment objectives of the Funds will be achieved.
The HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND'S investment
objective is a high level of federally tax-exempt current income with a low
degree of share-price fluctuation.
The Fund is designed for investors who are willing to accept some
fluctuation in principal in order to pursue a higher level of income than is
generally available from tax-exempt money market securities. BECAUSE ITS SHARE
PRICE WILL VARY, THE FUND IS NOT AN APPROPRIATE INVESTMENT FOR THOSE WHOSE
PRIMARY OBJECTIVE IS ABSOLUTE PRINCIPAL STABILITY.
The Fund invests primarily in medium and lower-quality municipal
obligations and maintains an average portfolio duration of three years or less.
Although there are no duration restrictions for the individual obligations in
the portfolio, it is anticipated that the Fund will emphasize investments in
short and intermediate duration obligations. See "Elements of Fixed Income
Investing - Maturity and Duration."
Under normal market conditions, the Fund invests at least 65% of its total
assets in medium and lower quality municipal obligations. Medium quality debt
obligations are those rated in the fourth highest category (e.g., bonds rated
BBB by Standard & Poor's Corporation ("S&P")) or, if unrated, determined by
Heartland Advisors to be of comparable quality. Medium quality debt obligations,
although considered investment grade, have some speculative characteristics.
Lower quality bonds, commonly referred to as "non-investment grade" bonds or
"junk" bonds, are those rated below the fourth highest category or, if unrated,
determined by Heartland Advisors to be of comparable quality. The Fund also may
invest in debt obligations that are in default, but such obligations are not
expected to exceed 10% of the Fund's net assets. The Fund also may invest
without limitation in higher quality debt obligations. Under normal market
conditions, however, the Fund is unlikely to emphasize higher quality debt
obligations, since generally they offer lower yields than medium and lower
quality bonds with similar maturities.
4
<PAGE> 11
The HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND'S objective is to maximize
after-tax total return by investing for a high level of federally tax-exempt
current income.
The Fund is designed for long term investors who want to pursue higher
income than higher quality municipal obligations generally provide, and who are
willing to accept the risk of principal fluctuation associated with medium and
lower quality debt obligations. While there are no duration restrictions for the
Fund or the individual obligations in its portfolio, under normal market
conditions, it is anticipated that the Fund will maintain an average portfolio
duration of greater than five years.
Like the Heartland Short Duration High-Yield Municipal Fund, the Heartland
High-Yield Municipal Bond Fund invests primarily in medium and lower quality
municipal obligations. Under normal market conditions, the Fund invests at least
65% of its total assets in such securities. The Fund also may invest in debt
obligations that are in default, but such obligations are not expected to exceed
10% of the Fund's net assets. The Fund also may invest without limitation in
higher quality debt obligations. Under normal conditions, however, the Fund is
unlikely to emphasize higher quality debt obligations, since generally they
offer lower yields than medium and lower quality bonds with similar maturities.
INVESTMENT LIMITATIONS. The Funds' investment policies and practices
discussed above are subject to further restrictions which are described in the
Statement of Additional Information. As a fundamental policy, each Fund will
invest at least 80% of its net assets in municipal obligations under normal
market conditions. Each Fund may invest without limitation in municipal
obligations whose interest is a tax-preference item for purposes of the federal
alternative minimum tax. Accordingly, a Fund's net return may be lower for those
taxpayers who are subject to the alternative minimum tax. In addition, as a
matter of fundamental investment policy, neither Fund may 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 15% of its net assets would be invested in
illiquid securities. Also, each Fund is a diversified mutual fund portfolio,
which means that at least 75% of the value of each Fund's total assets must be
represented by cash and cash equivalent investments, U.S. Government securities,
securities of other investment companies, and other securities limited in
respect of any one issuer to an amount not greater in value than 5% of the
Fund's total assets and to not more than 10% of the outstanding voting
securities of such issuer.
5
<PAGE> 12
HEARTLAND'S VALUE CRITERIA FOR INVESTING IN MUNICIPALS
In selecting securities for the Funds, Heartland Advisors seeks value
opportunities in municipal securities through consideration of a set of factors,
including:
<TABLE>
<S> <C>
- essential service provided - financial stake by management
- financial soundness - strong legal covenants
- strong competitive position - high yield vs. U.S. Treasuries
- high debt service coverage - catalyst for change
- experienced management - willingness to pay debt obligations
</TABLE>
ELEMENTS OF FIXED INCOME INVESTING
MARKET RISK. The principal value of the Funds' 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 the Funds, and an increase in rates will generally have the
opposite effect. The Funds 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 the
Funds' net asset value per share, but not the income received by them from their
existing portfolio securities. Because yields on securities available for
purchase by the Funds will vary over time, no specific yield on the Funds'
portfolio can be assured.
MATURITY AND DURATION. Maturity is a measure of the contractual term over
which, or at the end of which, a fixed income security must be repaid. In
general, the longer the maturity of a debt obligation, the higher its yield and
the greater its sensitivity to changes in interest rates. Conversely, the
shorter the maturity, the lower the yield but the greater the price stability.
Commercial paper is generally considered the shortest form of debt obligation.
Notes, whose original maturities are two years or less, are considered short
term obligations. The term "bond" generally refers to securities with maturities
longer than two years. Bonds with maturities of three years or less are
considered short term, bonds with maturities between three and seven years are
considered intermediate term and bonds with maturities greater than seven years
are considered long term.
While the maturity of an obligation is somewhat indicative of interest-rate
risk, Heartland Advisors believes duration is a more accurate measure. Duration
incorporates a bond's yield, coupon interest payments, final maturity and call
features into a single measure. Depending on the relative magnitude of these
payments and features, the market values of debt obligations may respond
differently to changes in the level and structure of interest rates. Duration is
a measure of the approximate price
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<PAGE> 13
sensitivity of a bond or bond portfolio to a one percent rise or fall in
interest rates. The Heartland Short Duration High-Yield Municipal Fund will have
an average portfolio duration of three years or less, and thus, based on its
duration, would be expected to experience a decline in price of three percent or
less should interest rates increase one percent. In seeking higher potential
returns, the portfolio of the Heartland High-Yield Municipal Bond Fund
anticipates an effective duration of greater than five years, and thus would,
based on its duration, be expected to experience a decline in price of more than
five percent if interest rates were to rise one percent.
For any fixed-income security with interest payments occurring prior to the
payment of principal, duration is always less than maturity. In general, all
other things being equal, the lower the stated or coupon rate of interest of a
fixed-income security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a fixed-income security, the
shorter the duration of the security. Duration is not a static measure or a
complete measure of portfolio risk. Changing conditions and perceptions,
including market fluctuations and changing credit fundamentals, may modify an
obligation's duration and, independently, have other adverse or positive effects
on the value of a security.
Futures, options and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions will lengthen a Fund's duration by
approximately the same amount that holding an equivalent amount of the
underlying securities would. Short futures or put option positions have
durations roughly equal to the negative duration of the securities that underlie
these positions, and have the effect of reducing portfolio duration by
approximately the same amount that selling an equivalent amount of the
underlying securities would have. See "Implementation of Policies and Risks -
Options, Futures, Contracts and Options on Futures Contracts."
CREDIT RISKS. The values of debt obligations may also be affected by
changes in the credit rating or financial condition of their issuers. Generally,
the lower the quality rating of a security, the higher the degree of risk as to
the payment of interest and return of principal. To compensate investors for
taking on such increased risk, those issuers deemed to be less creditworthy
generally must offer their investors higher interest rates than do issuers with
better credit ratings.
In conducting its credit research and analysis, Heartland Advisors
considers both qualitative and quantitative factors to evaluate the
creditworthiness of individual issuers. Heartland Advisors also relies, in part,
on credit ratings compiled by a number of nationally recognized statistical
rating organizations. See "Appendix A - Securities Ratings" attached to this
Prospectus for a summary of ratings of three well-known rating organizations:
S&P, Moody's Investors Service, Inc. and Fitch Investors Service, Inc.
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<PAGE> 14
Investment-Grade Debt Obligations. Debt obligations rated in the highest
through the medium quality categories are commonly referred to as "investment
grade" debt obligations and include the following:
- U.S. government securities;
- bonds or bank obligations rated in one of the four highest rating
categories (e.g., BBB or higher by S&P);
- short-term notes rated in one of the two highest rating categories
(e.g., SP-2 or higher by S&P);
- short-term bank obligations rated in one of the three highest rating
categories (e.g., A-3 or higher by S&P), with respect to obligations
maturing in one year or less;
- commercial paper rated in one of the three highest rating categories
(e.g., A-3 or higher by S&P);
- unrated debt obligations determined by Heartland Advisors to be of
comparable quality; and
- repurchase agreements involving investment-grade debt obligations.
Investment grade debt obligations are generally believed to have relatively
low degrees of credit risk. However, medium quality debt obligations, while
considered investment grade, may have some speculative characteristics, since
their issuers' capacity for repayment may be more vulnerable to adverse economic
conditions or changing circumstances than that of higher rated issuers.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by Heartland Advisors to
consider what actions, if any, a Fund should take consistent with its investment
objective, but will not necessarily require the Fund to dispose of the security.
High-Yield (High-Risk) Securities. High-yield (high-risk) securities, also
referred to as "junk bonds," are those securities that are rated lower than
investment grade and unrated securities determined by Heartland Advisors to be
of comparable quality. Although these securities generally offer higher yields
than investment grade securities with similar maturities, lower quality
securities involve greater risks, including the possibility of default or
bankruptcy. In general, they are regarded to be predominantly
8
<PAGE> 15
speculative with respect to the issuer's capacity to pay interest and repay
principal. The ability of the Funds to achieve their objectives through
investing in these securities is more dependent on Heartland Advisors' credit
analysis than is the case for higher rated bonds. Other potential risks
associated with investing in high-yield securities include:
- substantial market price volatility resulting from changes in interest
rates (in this regard, zero-coupon, step-coupon and pay-in-kind
securities in which the Funds may invest may be more speculative and
subject to greater fluctuations in value due to changes in interest
rates than is the case for income-bearing junk bonds), changes in or
uncertainty about economic conditions, and changes in the actual or
perceived ability of the issuer to meet its obligations;
- greater sensitivity of higher leveraged issuers to adverse economic
changes and individual issuer developments;
- subordination to the prior claims of other creditors;
- additional Congressional attempts to restrict the use or limit the tax
and other advantages of these securities; and
- adverse publicity and changing investor perceptions about these
securities.
As with any other asset in a Fund's portfolio, any reduction in the value
of such securities as a result of the factors listed above would be reflected in
the net asset value of the Fund. In addition, a Fund that invests in lower
quality securities may incur additional expenses to the extent it is required to
seek recovery upon a default in the payment of principal and interest on its
holdings. As a result of the associated risks, successful investments in
high-yield, high-risk securities will be more dependent on Heartland Advisors'
credit analysis than generally would be the case with investments in investment
grade securities.
It is uncertain how the high-yield market will perform during a prolonged
period of rising interest rates. A prolonged economic downturn or a prolonged
period of rising interest rates could adversely affect the market for these
securities, increase their volatility, and reduce their value and liquidity. In
addition, lower quality securities tend to be less liquid than higher quality
debt securities because the market for them is not as broad or active. If market
quotations are not available, these securities will be valued in accordance with
procedures established by Heartland's Board of Directors. Judgment may,
therefore, play a greater role in valuing these securities. The lack of a
9
<PAGE> 16
liquid secondary market may have an adverse effect on market price and a Fund's
ability to sell particular securities.
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment program described above, the Funds will
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 are subject, is contained in
the Statement of Additional Information.
MUNICIPAL OBLIGATIONS. The term "municipal obligations," as used in the
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. Guam, Puerto Rico and the Virgin
Islands are among the territories of the United States that issue municipal
obligations in which the Funds may invest.
Municipal obligations 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 guarantee or enhancement of
such credit.
The Funds' investments in municipal obligations may include mortgage-backed
municipal obligations, which are a type of municipal security issued by a state,
authority or municipality to provide financing for residential housing mortgages
to target groups, generally low income individuals who are first-time home
buyers. A Fund's interest, evidenced by such obligations, is an undivided
interest in a pool of mortgages. Payments made on the underlying mortgages and
passed through to the Fund represent both regularly-scheduled principal and
interest payments. A Fund also may receive additional principal payments
representing prepayments of the underlying mortgages. While a certain level of
prepayments can be expected regardless of the interest rate environment, it is
anticipated that prepayment of the underlying mortgages will accelerate in
periods of declining interest rates. In the event a Fund receives principal
prepayments in a declining interest rate environment, the Fund may have to
invest the
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<PAGE> 17
unanticipated proceeds in lower-yielding securities. This prepayment risk causes
mortgage-backed securities to be more significantly affected by changes in
interest rates than is the case for municipal obligations that are not subject
to such prepayments.
The Funds 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. Rather than investing directly in a municipal
obligation, the Funds may from time to time invest in a participation interest
which gives the Fund an undivided interest in a municipal obligation in the
proportion that the Fund's participation interest bears to the principal amount
of the obligation. A more detailed description of lease obligations is set forth
in the Statement of Additional Information under "Investment Policies and
Practices - Municipal Obligations."
ZERO-COUPON, STEP-COUPON AND PAY-IN-KIND SECURITIES. The Funds may invest
without limitation in zero-coupon, step-coupon and pay-in-kind securities. These
securities are debt securities that do not make regular cash interest payments.
Zero-coupon and step-coupon securities are sold at a deep discount to their face
value. Pay-in-kind securities pay interest through the issuance of additional
securities. Because such securities do not pay current cash income, the market
value of these securities may be subject to greater volatility than other debt
securities when interest rates fluctuate.
INVESTMENTS IN INVESTMENT COMPANIES. Each of the Funds may invest up to 10%
of its total assets in securities of other investment companies, including unit
investment trusts or closed-end management investment companies. As a
shareholder of another investment company, the Funds may bear service and other
fees which are in addition to the fees the Funds pay their service providers.
STANDBY COMMITMENTS. In order to facilitate portfolio liquidity, the Funds
may acquire standby commitments from brokers, dealers or banks with respect to
securities in their portfolio. The Funds will limit their acquisition of standby
commitments to 10% of their net assets. Standby commitments entitle the holder
to achieve same-day settlement and receive an exercise price equal to the
amortized cost of the underlying security plus accrued interest. Standby
commitments generally increase the cost of the acquisition of the underlying
security, thereby reducing the yield. Standby commitments are subject to the
issuer's ability to fulfill its obligation upon demand. Although no definitive
creditworthiness criteria are used, Heartland Advisors reviews the
creditworthiness of the brokers, dealers and banks from which the Funds obtain
standby commitments to evaluate those risks.
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ILLIQUID SECURITIES. Under the supervision of, and pursuant to guidelines
adopted by, Heartland's Board of Directors, Heartland Advisors determines which
of a Fund's investments are classified as illiquid. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments may involve time-consuming
negotiation and legal expenses, and it may be difficult or impossible to sell
such an investment promptly at an acceptable price. Each Fund may invest up to
15% of its net assets in illiquid securities. Certain restricted securities
which may be resold to institutional investors under Rule 144A under the
Securities Act of 1933, as well as commercial paper meeting the definitions set
forth in Section 4(2) of the Securities Act of 1933, may be determined to be
liquid under the guidelines. Repurchase agreements maturing in more than seven
days are deemed illiquid.
SHORT-TERM INVESTMENTS. Each Fund may invest without limitation in short-
term instruments, including variable rate demand notes, money market
instruments, certificates of deposit, commercial paper and U.S. Government
securities. Each Fund also may invest up to 5% of its net assets in
collateralized repurchase agreements and reverse repurchase agreements. See
"Investment Policies and Practices - Other Investments and Techniques" in the
Statement of Additional Information for more information on these instruments.
Variable rate demand notes are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and which are subject to
an unconditional right of demand to receive payment of the principal balance
plus accrued interest, either at any time or at specified intervals not
exceeding one year, and in either case upon no more than seven days' notice.
Commercial paper in which the Funds may invest includes paper issued without
registration under the Securities Act of 1933 in reliance on certain exemptions,
including the "private placement" exemption provided under Section 4(2) of that
Act. Resale of this paper normally is limited to sales to other institutional
investors through or with the assistance of investment dealers who make a market
in the paper, thus providing liquidity. Such "Section 4(2) paper" may be
considered illiquid unless it meets certain conditions as determined by
Heartland Advisors under guidelines adopted by Heartland's Board of Directors.
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Funds may
engage in transactions in options, futures contracts and options on futures
contracts to hedge against anticipated declines in the market value of their
portfolio securities, or against increases in the market values of securities
they intend 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 the Funds' investments against price fluctuations.
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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 Funds' overall
strategy.
The Funds 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. The Funds 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.
The Funds may also purchase and write put and call options on futures contracts
and enter into closing transactions with respect to such options.
The Funds will limit their use of these hedging instruments so that: (i) no
more than 5% of their total assets would be committed to initial margin deposits
or premiums on futures contracts; (ii) no more than 25% of their net assets
would be subject to futures contracts; (iii) no more than 5% of their total
assets would be committed to premiums paid for options; and (iv) no more than
25% of their 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, the Funds'
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 the Funds' total return. The
Funds' potential losses from the use of futures extends beyond their initial
investment in such contracts.
Because available exchange-traded options and futures contracts will not
match the Funds' current or anticipated investments exactly, there is a risk
that the options or futures positions will not track the performance of the
Funds' other investments. The Funds could also experience losses if the prices
of their options or futures positions were poorly correlated with their other
investments, or if they were unable to close out their positions due to
disruptions in the market or lack of liquidity.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Funds may purchase
securities on a when-issued or delayed delivery basis, i.e., obligate themselves
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
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into the obligation. The Funds 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 the Funds make a commitment to purchase an obligation, they will record the
transaction and reflect the value of the obligation in determining their 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 Funds' commitments to purchase when-issued obligations.
BORROWING. The Funds may borrow from banks for temporary or emergency
purposes up to 10% of their total assets and pledge up to 15% of their net
assets in connection therewith. For purposes of this borrowing restriction,
collateral arrangements for premium and margin payments in connection with a
Fund's hedging activities are not deemed to be a pledge of assets.
SECTOR CONCENTRATION. The Funds may invest 25% or more of their total
assets in municipal obligations whose revenue sources are from similar types of
projects or in related sectors, for example, community development, education,
health care, hospitals, retirement housing, single-family housing,
multiple-family housing, redevelopment, transportation, electric utilities, or
water, sewer and gas utilities. There may be economic, business or political
developments or changes that affect all obligations of a similar type, or in
related sectors, 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 industry or the securities financing similar types of projects, could
have a significant effect on the Funds' performance. In addition, each Fund may
invest 25% or more of its total assets in municipal obligations whose issuers
are located in the same state or other geographic territory. In the event a Fund
should concentrate its investments in such a geographic territory, developments
and events which have a greater effect on the economy of that geographic
territory as compared to the national or global economy may tend to have a
greater effect on the Fund's net asset value than would be the case for a less
geographically concentrated investment portfolio.
PORTFOLIO TURNOVER. The Funds may purchase or sell securities without
regard to the length of time the security has been held to take advantage of
short-term differentials in bond yields consistent with their objective of
seeking tax-exempt interest income. The Funds may engage in short-term trading
if the anticipated benefits are expected by Heartland Advisors to exceed the
transaction costs. While the annual turnover rate for the Funds is expected to
vary from year to year depending on market conditions, each Fund's annual
turnover rate is not expected to exceed 300%. A 100% turnover rate would occur,
for example, if all the securities in a Fund were replaced in a period of one
year. Municipal obligations with remaining maturities of less than one year are
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excluded in the computation of the portfolio turnover rate. Higher portfolio
turnover involves higher transaction costs and may result in realization of
short-term capital gains if securities are held for one year or less. Such gains
are taxable to shareholders as ordinary income except to the extent such gains
are offset by any capital losses. Portfolio turnover is not a limiting factor in
making portfolio decisions, except as limited by the Internal Revenue Code's
requirements for qualification as a regulated investment company.
HOW TO BUY SHARES
SHARE PRICE
The Funds' 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 if purchase is made by wire, by the Fund or
its authorized service agent or sub-agent. Net asset value is calculated daily
as described under "Net Asset Value Calculation." Firstar Trust Company serves
as the Funds' transfer and dividend disbursing agent (the "Agent").
OPENING AN ACCOUNT AND PURCHASING SHARES
By Mail To:
Firstar Trust Company
Mutual Fund Services
3rd Floor
P.O. Box 701
Milwaukee, WI 53201-0701
By Overnight Mail To:
Firstar Trust Company
Mutual Fund Services
3rd Floor
615 East Michigan Street
Milwaukee, WI 53202
To Open an Account:
Complete and sign the Account Application. Make your check payable to
either Heartland Short Duration High-Yield Municipal Fund or Heartland
High-Yield Municipal Bond Fund and mail to one of the addresses above.
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To Add 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 1-800-443-2862 prior to sending the wire. Specify Fund
name, include your name, 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:
1-800-432-7856 or 414-289-7000
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."
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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 number. See
"Shareholder Services-Exchange Privilege." You may also make additional
investments from $100 to $25,000 by telephone from your bank checking or NOW
account into your Heartland Funds account. Sign up for this service with a
Telephone Purchase Form when you open your account, or call 1-800-432-7856 to
receive a form.
Automatically:
To Open an Account:
Complete and sign the Account Application, as well as an Automatic
Investment Plan Application, and mail to one of the addresses above. Your
purchases of Fund shares will be made automatically in accordance with the Plan.
To Add to an Account:
Use Heartland's automatic investment plan. Sign up for this service on your
Account Application, or call 1-800-432-7856 for information on how to add this
service.
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.
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CONDITIONS OF YOUR PURCHASE.
MINIMUM INVESTMENTS. The minimum initial investment for each Fund is
$1,000, except in the case of investors who elect to invest through the
automatic investment plan (see "SHAREHOLDER SERVICES"). The minimum additional
investment, except for reinvestments of distributions and investments under the
automatic investment plan, is $100.
PURCHASES THROUGH SERVICE PROVIDERS. If you purchase shares through a
program of services offered or administered by a broker-dealer, financial
institution, or other service provider, you should read the program materials
provided by the service provider, including information relating to fees, in
conjunction with this Prospectus. Certain features of a Fund may not be
available or may be modified in connection with the program of services
provided. When shares are purchased this way, the service provider, rather than
its customer, may be the shareholder of record of the shares. Certain service
providers may receive compensation from the Funds or Heartland Advisors for
providing such services.
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 $20
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 your current Fund, or shares of another Heartland
fund, as indicated on your
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<PAGE> 25
account application, 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 or calling 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 application attached to this
Prospectus, you may arrange automatic transfers (minimum $50 per transaction)
from your checking or savings 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 phoning or 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 $20 service fee will be
assessed. If you stop making automatic investments when your aggregate
investment in a Fund is less than $500, 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 $1,000. The program will automatically be
terminated upon redemption of all shares, including an exchange of all shares to
another fund. You will receive quarterly confirmations of your transactions 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. Shares redeemed under the plan will be redeemed at their net
asset value. To establish the systematic withdrawal plan, request a form by
calling 1-800-432-7856. The systematic withdrawal plan may be terminated by you
or by the Funds at any time by written notice.
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
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<PAGE> 26
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 the Funds
acquired in exchange for shares of another Heartland fund that were 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 Heartland Advisors by telephone (1-800-432-7856 or
414-289-7000) 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 Heartland Advisors and submit it to the
Agent; or (c) contact your broker-dealer or financial institution (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.
TELEPHONE TRANSACTIONS. You may add to your existing Heartland account,
exchange among Heartland funds or redeem shares by telephone to Heartland
Advisors. The exchange and redemption services are established automatically
when you sign
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<PAGE> 27
your Account Application unless you check the box which states that you do not
want these services. Telephone purchases require completion of a Telephone
Purchase Form prior to the transaction. By establishing telephone transaction
services, 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 transactions, although a charge
may be imposed in the future. During periods of substantial economic or market
changes, telephone transactions may be difficult to implement. If a shareholder
is unable to contact Heartland Advisors or the Agent by telephone, shares may
also be redeemed by delivering the redemption request to the Agent in person or
by mail. The Agent and the Funds reserve the right to change, modify or
terminate telephone transaction services at any time.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
DIVIDENDS. Dividends will be declared daily and paid monthly by each of the
Funds. Dividends may be taken in cash or additional shares at net asset value.
Dividends and capital gain distributions will be automatically reinvested in
additional shares of the same Fund or in shares of another Heartland Fund the
shareholder designates, unless the shareholder has notified Heartland Advisors
by telephone or in writing that he or she elects to receive dividends and
capital gain distributions in cash.
DISTRIBUTIONS. Capital gains distributions for each Fund, if any, will
normally be paid within 30 days before the end of the fiscal year.
TAXES. Each Fund intends to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code (the "Code") and, if so
qualified, will not be subject to federal income taxes to the extent its
earnings are timely distributed. Each Fund also intends to make distributions as
required by the Code to avoid the imposition of a 4% excise tax.
Each Fund will distribute substantially all of its net investment income
and net capital gains to investors. In general, dividends paid by each Fund from
the interest
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<PAGE> 28
earned on municipal obligations will constitute "exempt-interest dividends" and
will not be subject to federal income tax. However, the Funds may invest in
municipal obligations the interest on which is a tax preference item for
purposes of the alternative minimum tax ("AMT"). Exempt interest dividends
distributed to corporate shareholders also may be subject to the AMT regardless
of the types of municipal obligations in which a Fund invests, depending on the
corporation's tax status.
Shareholders will be subject to federal income tax at ordinary income rates
on any income dividends they received that are derived from interest on taxable
securities or from net realized short-term capital gains. Distributions by a
fund of net capital gain (the excess of net long-term capital gain over net
short-term capital loss), when designated as such, are taxable to shareholders
as long-term capital gains, regardless of how long the shareholders have held
their fund shares.
The Funds' distributions, other than exempt interest dividends ("taxable
distributions"), are taxable in the year they are paid to shareholders, whether
they are taken in cash or are reinvested in additional shares, except that
certain taxable distributions declared in the last three months of the year and
paid in January are taxable as if paid on December 31.
If a Fund's taxable distributions exceed its investment company taxable
income and net capital gain in any year, all or a portion of those distributions
may be treated as a return of capital to shareholders for tax purposes.
Distributions by the Funds may be subject to state and local taxes,
depending on the laws of a shareholder's home state and locality.
OTHER TAX INFORMATION. Under federal tax law, some shareholders 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 tax discussion is general in nature and each investor is
advised to consult his or her tax advisor for additional information.
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THE FUNDS AND THE HEARTLAND ORGANIZATION
The 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 Small Cap Contrarian, Value, Mid Cap Value, Large Cap Value, Value
Plus, U.S. Government Securities and Wisconsin Tax Free Funds, seven 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 May 31, 1997, Heartland Advisors had approximately
$3.3 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.
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; fees of
shareholder recordkeeping agents; 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.
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Under the terms of Heartland Advisors' Investment Advisory Agreement with
the Funds, Heartland Advisors is entitled to a fee for the advisory services it
provides to the Funds at an annual rate equal to 0.40 of 1% of the average daily
net assets of the Heartland Short Duration High-Yield Municipal Fund and 0.60 of
1% of the average daily net assets of the Heartland High-Yield Municipal Bond
Fund. Heartland Advisors voluntarily has agreed to waive the advisory fee for
each of the Funds until December 31, 1997.
PORTFOLIO MANAGERS. Thomas J. Conlin, CFA and Greg D. Winston, CFA serve as
co-managers of the Funds. Mr. Conlin joined Heartland Advisors in August of 1996
as a municipal bond portfolio manager. Mr. Conlin previously was managing
director of the Municipal Fixed-Income Department at Strong Capital Management,
Inc., where he co-managed the High-Yield Municipal Bond Fund, Insured Municipal
Bond Fund, Municipal Bond Fund and Short-Term Municipal Bond Fund. Prior to
joining Strong in 1991, Mr. Conlin was with Stein, Roe & Farnham, Inc. in
Chicago, Illinois, where he served both as a portfolio manager and as a director
of municipal research. Mr. Conlin holds a B.S. degree in Business Administration
from Illinois State University (1976) and an M.B.A. degree in Finance from
Indiana University (1978).
Mr. Winston recently joined Heartland Advisors as a municipal securities
portfolio manager. He previously was a portfolio manager with Strong Capital
Management, Inc., where he co-managed the Short-Term Municipal Bond Fund, and
also effected securities trades and conducted credit research for Strong's
High-Yield Municipal Bond Fund, Municipal Bond Fund, Municipal Money Market Fund
and Insured Municipal Bond Fund. Mr. Winston has a B.B.A. degree in Finance and
Marketing from the University of Wisconsin - Madison (1987).
THE DISTRIBUTION PLAN
Each Fund has adopted a Distribution Plan which, among other things,
requires it to pay Heartland Advisors, as distributor, a quarterly distribution
fee of up to 0.25 of 1% of its average daily net assets computed on an annual
basis. Under each Plan, the Fund is obligated to pay distribution fees only to
the extent of expenses actually incurred by Heartland Advisors, as distributor,
for the current year, and thus there will be no carry-over expenses from
previous years. These expenses may include expenses incurred for media
advertising, the printing and mailing of prospectuses to persons other than
shareholders, the printing and mailing of sales literature, answering routine
questions relating to a Fund, and payments to selling representatives,
authorized securities dealers, financial institutions, or other service
providers for providing services in assisting investors with their investments
and/or for providing administrative, accounting and other services with respect
to a Fund's shareholders. No fee paid by a Fund under the
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<PAGE> 31
Plans may be used to reimburse Heartland Advisors for expenses incurred in
connection with another Fund. Each Distribution Plan will continue in effect, if
not sooner terminated in accordance with its terms, for successive one-year
periods, provided that each such continuance is specifically approved by the
vote of the Directors, including a majority of the Directors who are not
interested persons, of Heartland. For further information regarding the
Distribution Plans, see the Statement of Additional Information.
NET ASSET VALUE CALCULATION
Each Fund's share price or 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 obligations are not readily available on a daily basis. Fair
value of any of the Funds' debt securities for which market quotations are not
readily available will be 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, or by dealers
who make markets in such securities. Debt securities having maturities of 60
days or less may be valued at acquisition cost, plus or minus any amortized
discount or premium. 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 each a
separate, diversified mutual fund series of Heartland. Currently, the Heartland
family of funds consists of the following series:
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<PAGE> 32
<TABLE>
<CAPTION>
COMMENCED
FUND OPERATIONS
- ---- ----------
<S> <C>
Small Cap Contrarian Fund 4/27/95
Value Fund 12/28/84
Mid Cap Value Fund 10/11/96
Large Cap Value Fund 10/11/96
Value Plus Fund 10/26/93
U.S. Government Securities Fund 4/09/87
Wisconsin Tax Free Fund 4/03/92
Short Duration High-Yield Municipal Fund 1/02/97
High-Yield Municipal Bond Fund 1/02/97
</TABLE>
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.
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<PAGE> 33
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 a majority of 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 operational 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.
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 for each of the
Funds under, and subject to, the provisions of Rule 10f-3 under the Investment
Company Act of 1940, the Funds 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.
Heartland Advisors may serve as a broker for any Heartland fund; however,
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 being
purchased or sold on a securities exchange or on NASDAQ during a comparable
period of time.
Allocation of transactions, including their frequency, to various dealers
is determined by Heartland Advisors 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 the provision of supplemental research services and sales of the shares
of any or all of the Heartland funds as factors in the selection of
broker-dealers to execute portfolio transactions.
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<PAGE> 34
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 that 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 a 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 of the period. Performance information should be considered in light of the
particular 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. The Funds also may advertise total returns other than
those described above if such information is deemed informative to investors for
use in evaluating the Funds.
In connection with the standardized yield and total return quotations
described above, the Funds also may 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 Funds, after a
payment of federal taxes at the stated rate. The yield is computed by dividing
that portion of the Funds' current yield which is exempt from federal income
taxes by one minus a stated federal income tax rate, and then adding the product
to the value of any yield of the Funds which is not exempt from federal income
taxes.
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., Morningstar, Inc., CDA Technologies, Forbes, Fortune, Money, Business
Week, Value Line, Inc. and The Wall Street Journal. These rating services and
magazines rank the performance of the Funds against all funds over specified
periods and in specified categories. The Heartland Short Duration High-Yield
Municipal Fund would appear in the short or high
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<PAGE> 35
yield municipal debt funds category, and the Heartland High-Yield Municipal Bond
Fund would appear in the high yield municipal debt funds category. Each Fund
also may 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").
BY TELEPHONE:
1-800-432-7856
or
(414) 289-7000
You may redeem by calling Heartland Advisors, unless you elected not to
have this privilege on your account application. The minimum amount that may be
redeemed by telephone is $1,000.
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
Mutual Fund Services
3rd Floor
P.O. Box 701
Milwaukee, WI 53201-0701
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<PAGE> 36
BY OVERNIGHT
DELIVERY TO:
Firstar Trust Company
Mutual Fund Services
615 East Michigan Street, 3rd Floor
Milwaukee, WI 53202
Send a written request specifying the name of the Mutual Fund, the number
of shares to be redeemed, your name, account number, and any additional
documents listed below that apply to your particular account. The Agent cannot
accept requests submitted by fax or requests specifying a particular date for
redemption or other special conditions. A signature guarantee is required for
certain redemptions, including written redemptions over $25,000. For further
information, see "Signature Guarantees."
<TABLE>
<CAPTION>
TYPE OF REGISTRATION REQUIREMENTS
- -------------------- ------------
<S> <C>
Individual, Joint Tenants, Letter of instruction signed by all persons
Custodial, General Partners authorized to sign for the account, exactly
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.)
</TABLE>
If you do not fall into any of these registration categories (i.e.,
executors, administrators, conservators, or guardians), please call Heartland
Advisors for further instructions.
CHECK-WRITING PRIVILEGES FOR THE HEARTLAND SHORT DURATION HIGH-YIELD
MUNICIPAL FUND. You may also redeem shares by check in an amount of not less
than
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<PAGE> 37
$250 in the Heartland Short Duration High-Yield Municipal Fund. This privilege
is not available for the Heartland High-Yield Municipal Bond Fund. There is no
charge for check-writing privileges. Redemption by check cannot be honored if
share certificates are outstanding and would need to be liquidated to honor the
check. Checks are supplied free of charge, and additional checks will be sent to
you upon your request. The Heartland Short Duration High-Yield Municipal Fund
does not return the checks you write, although copies are available upon
request.
You may place stop-payment requests on checks by calling Heartland Advisors
at 1-800-432-7856 or (414) 289-7000. A fee of $20.00 will be charged for each
stop-payment request. A stop-payment request will remain in effect for two weeks
following receipt of oral instructions (six months following written
instructions) by Heartland Advisors.
If there are insufficient cleared shares in your Heartland Short Duration
High-Yield Municipal Fund account to cover the amount of your redemption by
check, the check will be returned, marked "insufficient funds," and a fee of
$20.00 will be charged to the account.
In exercising this check-writing privilege, you should bear in mind that
you in effect are redeeming shares of the Heartland Short Duration High-Yield
Municipal Fund, and you may realize taxable gain or loss on the redemption.
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.
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<PAGE> 38
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 $12 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.
CERTAIN CONDITIONS. If, due to redemption or transfer, a shareholder's
account drops below $500 for three months or more, the Funds have 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 $1,000.
No contingent deferred sales charge will be imposed on any involuntary
redemption. Alternatively, the Funds may, after giving notice, impose a fee on
accounts maintained below the minimum investment level without an active
automatic investment plan.
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.
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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.
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<PAGE> 40
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 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.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
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.
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<PAGE> 41
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.
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.
CCC -- Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B-rating.
CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating. The C rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
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<PAGE> 42
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Standard & Poor's ratings, from AA to CCC, 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.
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.
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<PAGE> 43
CCC -- Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C -- Bonds are in imminent default in payment of interest of principal.
DDD, DD, and D -- Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization of the
obligor. `DDD' represents the highest potential for recovery on these bonds and
`D' represents the lowest potential for recovery.
Fitch applies modifiers "Plus(+)" or "Minus(-)" to the AA, A, BBB, BB, B,
CCC, CC and C 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+.
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<PAGE> 44
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.)
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.
COMMERCIAL PAPER RATINGS
Ratings by Duff & Phelps
Category 1: Top Grade
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<PAGE> 45
Duff 1+. Highest certainty of timely payment. Short-Term liquidity,
including internal operating factors and/or ready access to alternative sources
of funds, is clearly outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor.
Duff 1-. High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Category 2: Good Grade
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Category 3: Satisfactory Grade
Duff 3. Satisfactory liquidity and other protection factors qualify issue
as to investment grade. Risk factors are larger and subject to more variation.
Nevertheless timely payment is expected.
Ratings by Moody's
Moody's commercial paper ratings are opinions of the ability to repay
punctually promissory obligations. Moody's employs the following three category
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: Prime 1 - highest quality; Prime 2 - higher
quality; Prime 3 - high quality.
Ratings by Standard & Poor's
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment. Ratings are graded into four categories, ranging
from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating category, A, are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A"+" designation is applied to those issues
rated "A-1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
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<PAGE> 46
carrying the designation A-3 have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
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<PAGE> 47
HEARTLAND FUNDS
General Information and Account/Price Information (24 hrs.):
1-800-432-7856 or (414)289-7000
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
Price Waterhouse LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
COUNSEL
Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
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HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
Each Fund's address is 790 North Milwaukee Street, Milwaukee, Wisconsin
53202, and its telephone number is 414-289-7000 or 1-800-432-7856.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus dated June 30, 1997. A copy of the
Prospectus may be obtained without charge by telephone or written request to the
distributor, Heartland Advisors, Inc. ("Heartland Advisors"). Shareholder
inquiries should be directed to the Funds in writing or by telephone.
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Statement of Additional Information
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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 1-800-432-7856. Shares may also be
purchased through broker-dealers or financial institutions, which may charge a
fee for such service.
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS JUNE 30, 1997.
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INTRODUCTION TO THE 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 Short Duration High-Yield Municipal Fund and the Heartland
High-Yield Municipal Bond Fund (the "Funds"), each of which is a 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.
INVESTMENT POLICIES AND PRACTICES
GENERAL
The following information supplements the discussion of each Fund's
investment objectives and policies discussed in the Prospectus. Unless otherwise
specified, the investment policies and restrictions of each Fund are not
fundamental policies 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 policy or restriction. The
fundamental policies of a Fund 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.
MUNICIPAL OBLIGATIONS
GENERAL. The term "municipal obligations" as used herein refers to debt
obligations issued by or on behalf of states, territories or possessions of the
United States or their agencies, instrumentalities, municipalities and political
subdivisions, the interest payable on which is, in the opinion of bond counsel,
excludable from gross income for purposes of federal income taxation (except, in
certain instances, the alternative minimum tax, depending upon the shareholder's
tax status). Municipal obligations are generally issued to obtain funds for
various public 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 municipal 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, municipal 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.
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The yields on municipal 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, the general economic and
monetary environment, conditions in the relevant market, the size of a
particular issue, maturity of the obligation and the rating of the issue.
Securities in which the Funds may invest, including municipal 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 municipal
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 municipal obligations, some of which have been
enacted. Additional proposals may be introduced in the future which, if enacted,
could affect the availability of municipal obligations for investment by the
Funds and the value of the Funds' portfolios. In such event, management of the
Funds may discontinue the issuance of shares to new investors and may
re-evaluate the Funds' investment objectives and policies and adopt and
implement possible changes to them and the investment programs of the Funds.
As discussed in the Prospectus, the Funds may invest without limit 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). 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. See
the section of this Statement of Additional Information captioned "Investment
Risks and Considerations - High-Yield (High-Risk) Securities" for a discussion
of investment risks associated with these securities.
STATE AND MUNICIPAL LEASE OBLIGATIONS. The Funds may invest 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.
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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.
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.
OTHER INVESTMENTS AND TECHNIQUES
GOVERNMENT OBLIGATIONS. The Funds 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.
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INDEXED SECURITIES. The Funds may purchase securities whose prices are
indexed to the prices of other securities, securities indices, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. For example, certain debt
securities in which the Funds may invest may include securities whose interest
rates are determined by reference to one or more specific financial indicators,
such as LIBOR, resulting in a security whose interest payments tend to rise and
fall together with the financial indicator. Indexed securities may be positively
or negatively indexed; that is, their maturity value may increase when the
specified underlying instrument's value increases, resulting in a security that
performs similarly to the underlying instrument, or their maturity value may
decline when the underlying instrument increases, resulting in a security whose
price characteristics are similar to a put on the underlying instrument.
The performance of indexed securities depends to a great extent on the
performance of the security or other instrument to which they are indexed, and
may also be influenced by interest rate changes in the U.S. and abroad. At the
same time, indexed securities are subject to the credit risks associated with
the issuer of the security, and their values may decline substantially if the
issuer's creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. government agencies.
The market for indexed securities may be thinner and less active than the
market for securities in general, which can adversely affect the prices at which
indexed securities are sold. If market quotations are not available, indexed
securities will be valued in accordance with procedures established by the Board
of Directors of Heartland, including the use of outside pricing services.
Judgment plays a greater role in valuing certain indexed securities than is the
case for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services to value indexed securities
and the Fund's ability to dispose of these securities.
ZERO-COUPON, STEP-COUPON AND PAY-IN-KIND SECURITIES. The Funds may invest
in zero-coupon, step-coupon and pay-in-kind securities. These securities are
debt securities that do not make regular cash interest payments. Zero-coupon and
step-coupon securities are sold at a deep discount to their face value.
Pay-in-kind securities pay interest through the issuance of additional
securities. Because such securities do not pay current cash income, the price of
these securities can be volatile when interest rates fluctuate. While these
securities do not pay current cash income, federal income tax law requires the
holders of the zero-coupon, step-coupon and pay-in-kind securities to include in
income each year the portion of the original issued discount (or deemed
discount) and other non-cash income on such securities accrued during that year.
In order to continue to qualify for treatment as a "regulated investment
company" under the Internal Revenue Code and avoid a certain excise tax, the
Funds may be required to distribute a portion of such discount and income and
may
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be required to dispose of other portfolio securities, which could occur in
periods of adverse market conditions, in order to generate cash to meet these
distribution requirements.
WHEN-ISSUED AND DELAYED-DELIVERY PURCHASES. The Funds may make commitments
to purchase obligations on a "when-issued" or "delayed-delivery 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. The Funds intend 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 the 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 Fund's
custodian, Firstar Trust Company (the "Custodian"), will maintain on a daily
basis a separate account consisting of cash or liquid assets with a value at
least equal to the amount of the Fund's commitments to purchase "when-issued" or
"delayed-delivery" obligations.
Obligations purchased on a "when-issued" or "delayed-delivery" basis or
held in the Funds' portfolios 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" or "delayed-delivery" securities,
the 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" or
"delayed-delivery" 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
personal income tax.
FLOATING AND VARIABLE RATE DEMAND NOTES. The Funds 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 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.
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Interest rates on a variable rate demand note are based on a specified
interest index, such as a bank's prime rate, and are adjusted automatically with
changes in the index at specified intervals which may range from daily (floating
rate) to a period of time up to one year. Variable rate demand notes are subject
to a risk of nonpayment upon demand by the issuer, and, therefore, generally are
secured by letters of credit or other credit support arrangements provided by
banks. To minimize the nonpayment risk, Heartland Advisors monitors the
creditworthiness of issuers of floating and variable rate demand notes in the
Funds' portfolios.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements with
certain banks or nonbank dealers. In a repurchase agreement, a Fund buys a
security at one price, and at the time of sale the seller agrees to repurchase
the obligation at a mutually-agreed upon time and price (usually within seven
days). The repurchase agreement thereby determines the yield during the
purchaser's holding period, while the seller's obligation to repurchase is
secured by the value of the underlying security. Heartland Advisors will
monitor, on an ongoing basis, the value of the underlying securities to ensure
that the value equals or exceeds the repurchase price plus accrued interest.
Repurchase agreements could involve certain risks in the event of a default or
insolvency of the other party to the agreement, including possible delays or
restrictions upon a Fund's ability to dispose of the underlying securities.
Although no definitive creditworthiness criteria are used, Heartland Advisors
reviews the creditworthiness of the banks and nonbank dealers with which the
Funds enter into repurchase agreements to evaluate those risks. A Fund may,
under certain circumstances, deem repurchase agreements collateralized by U.S.
government securities to be investments in U.S. government securities.
REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements with banks and broker-dealers, under which a Fund sells a portfolio
security to such party in return for cash and agrees to repurchase the
instrument at a particular price and time. While a reverse repurchase agreement
is outstanding, the Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its obligations under the agreement. To the extent
the value of the security that a Fund agrees to repurchase declines, the Fund
may experience a loss. Reverse repurchase transactions may increase fluctuations
in the market value of a Fund's assets and may be viewed as a form of leverage.
In determining whether to enter into a reverse repurchase agreement, a Fund will
take into account the creditworthiness of the counterparty.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. Each of the Funds may invest in
the securities of other investment companies as permitted under the 1940 Act. At
present, the 1940 Act provisions limit each Fund so that (a) no more than 10% of
its total assets may be invested in securities of other investment companies,
(b) it may not own securities of any one investment company having a value in
excess of 5% of the Fund's total assets, and (c) it may not own more than 3% of
the total outstanding voting stock of any one investment company. As a
shareholder of another investment company, each Fund would bear, along with
other
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shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory and
other expenses of the Fund.
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 or
otherwise involved in the option.
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, for the
term of the option, a segregated account consisting of cash, or other liquid
assets 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.
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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 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
any type of security related to its investments (such as U.S. Government
securities) and may purchase options to close out options previously written by
the Fund. As the writer (seller) of a put option, the 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, the 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, or other liquid
assets 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 the 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 the Fund had purchased the
underlying security
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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 any type of
security 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 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 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 any type
of security related to its investments. As the holder of a call option, the 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.
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
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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 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 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. The Funds will engage in transactions in futures
contracts solely for bona fide hedging purposes as described in the Prospectus.
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" 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
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the offsetting purchase price is less than the original sale price, a Fund
realizes a gain; if it is more, a Fund 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, however,
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, ten-year U.S. Treasury
Notes, Government National Mortgage Association modified pass-through
mortgage-backed certificates, three-month U.S. Treasury Bills, and ninety-day
commercial paper), as well as municipal bonds and related indices. Each Fund
reserves 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 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, neither 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 25% of the respective Fund's net assets (taken at market
value at the time of entering
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<PAGE> 60
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
and call 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 put and call
options written by the Fund would exceed 25% of the Fund's total assets. The
above limitations on the Funds' investments in futures contracts and options and
the respective Fund's 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 or forward
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
hedging vehicles and in the underlying instruments 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 prices of the underlying instruments the same way. Imperfect
correlation may also result from different levels of demand in the options and
futures markets and the markets for the underlying instruments, 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.
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match a Fund's current or anticipated investments exactly. The Fund may
invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the
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<PAGE> 61
securities in which it typically invests, which involves a risk that the options
or futures positions will not track the performance of the Fund's other
investments. 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 obligations than
the securities in which the Fund likely is to be invested. 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
performance of the Fund's other investments. Moreover, the Funds may purchase or
sell options and futures contracts with a greater or lesser value than the
securities it wishes to hedge or intends to purchase in order to attempt to
compensate for differences in volatility between the contract and the
securities, although this may not be successful in all cases.
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.
FEDERAL TAX TREATMENT OF OPTIONS, FUTURES CONTRACTS, AND FORWARD FOREIGN
EXCHANGE CONTRACTS. 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 options or futures contract 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.
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<PAGE> 62
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 or currencies). Gains realized on the sale or other disposition of
securities, including options and futures contracts on securities or securities
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 held less than three months, a Fund may be required to defer the
closing out of options 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 or 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.
INVESTMENT RISKS AND CONSIDERATIONS
HIGH-YIELD (HIGH-RISK) SECURITIES
GENERAL. The Funds may invest without limitation in non-investment grade
debt obligations. Non-investment grade debt obligations, sometimes referred to
as "junk bonds" (hereinafter referred to as "lower quality securities") include
(a) bonds rated as low as C by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P"), or Fitch Investors Service, Inc.
("Fitch"), or CCC by Duff & Phelps, Inc. ("D&P"); (b) commercial paper rated as
low as C by S&P, Not Prime by Moody's, or Fitch 4 by Fitch; and (c) unrated debt
obligations of comparable quality. Lower quality securities, while generally
offering higher yields than investment grade securities with similar maturities,
involve greater risks, including the possibility of default or bankruptcy. They
are regarded as predominately speculative with respect to the issuer's capacity
to pay interest and repay principal. The special risk considerations in
connection with investments in these securities are discussed below. Refer to
Appendix A attached to the Prospectus for a discussion of the securities
ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower quality and
comparable unrated security market is relatively new and its growth has
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such conditions
could severely disrupt the market for, and adversely affect the value of, such
securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of lower quality and comparable unrated securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Lower quality and comparable unrated securities also tend to be
more
15
<PAGE> 63
sensitive to economic conditions than are higher rated securities. As a result,
they generally involve more credit risk than securities in the higher rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower quality and comparable unrated
securities may experience financial stress and may not have sufficient revenues
to meet their payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. The risk of loss due to default by an
issuer of the securities is significantly greater than issues of higher rated
securities because such securities are generally unsecured and are often
subordinated to their creditors. Further, if the issuer of a lower quality or
comparable unrated security defaulted, a Fund might incur additional expenses to
seek recovery. Periods of economic uncertainty and changes would also generally
result in increased volatility in the market prices of these securities and thus
in a Fund's net asset value.
As previously noted, the value of a lower quality or comparable unrated
security generally will decrease in a rising interest rate market, and a Fund's
net asset value will decline correspondingly. If a Fund experiences unexpected
net redemptions in such a market, the Fund may be forced to liquidate a portion
of its portfolio securities without regard to their investment merits. Due to
the limited liquidity of lower-quality and comparable unrated securities
(discussed below), a Fund may be forced to liquidate these securities at a
substantial discount. Any such liquidation could force the Fund to sell the more
liquid portion of its portfolio.
CREDIT RATINGS. Credit ratings issued by credit rating agencies are
designed to evaluate the safety of principal and interest payments of rated
securities. They do not, however, evaluate the market value risk of lower
quality securities, and therefore may not fully reflect the true risks of an
investment. In addition, credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of the
issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in lower quality and comparable unrated obligations will be more
dependent on Heartland Advisors' credit analysis than would be the case with
investments in investment-grade debt obligations. Accordingly, Heartland's Board
of Directors and Heartland Advisors monitor the issuers of junk bonds held in
the Funds' portfolios 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.
LIQUIDITY AND VALUATION. A Fund may have difficulty disposing of certain
lower quality and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets in
all lower quality and comparable unrated securities, there is no established
retail secondary market for many of these securities. The Funds anticipate that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market does
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<PAGE> 64
exist, it generally is not as liquid as the secondary market for higher-rated
securities. The lack of a liquid secondary market may have an adverse impact on
the market price of the security. As a result, a Fund's net asset value and
ability to dispose of particular securities when necessary to meet the Fund's
liquidity needs, or in response to a specific economic event, may be affected.
The lack of a liquid secondary market for certain securities also may make
it more difficult for a Fund to obtain accurate market quotations for purposes
of valuing the Fund's portfolio. Market quotations are generally available on
many lower quality and comparable unrated issues only from a limited number of
dealers, and may not necessarily represent firm bids of such dealers or prices
for actual sales. During periods of thin trading, the spread between bid and
asked prices is likely to increase significantly. In addition, adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of lower quality and comparable unrated
securities, especially in a thinly-traded market.
LEGISLATION. From time to time, legislation designed to limit the use of
certain lower-quality and comparable unrated securities by certain issuers may
be adopted. It is anticipated that if legislation is enacted or proposed, it
could have a material affect on the value of these securities and the existence
of a secondary trading market for such securities.
ILLIQUID SECURITIES
The Funds may invest in illiquid securities (i.e., securities that are not
readily marketable). However, a Fund may not acquire illiquid securities if, as
a result, more than 15% of the value of the Fund's net assets would be invested
in such securities.
Heartland's Board of Directors has the ultimate authority to determine
which securities are illiquid for purposes of this limitation. Certain
securities exempt from registration or issued in transactions exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), such as securities that may be resold to institutional investors under
Rule 144A under the Securities Act and Section 4(2) commercial paper, may be
considered by Heartland Advisors to be liquid under guidelines adopted by
Heartland's Board of Directors.
Heartland's Board of Directors has delegated to Heartland Advisors the
day-to-day determination of the liquidity of a security, although the Board has
retained oversight and ultimate responsibility for such determination. Factors
to be considered include: (a) the frequency of trades or quotes for a security;
(b) the number of dealers willing to purchase and sell the security and the
number of potential buyers; (c) the willingness of dealers to undertake to make
a market in the security; and (d) the nature of the security and the nature of
the marketplace trades, such as the time needed to dispose of the security, the
method of
17
<PAGE> 65
soliciting offers and the mechanics of transfer. Heartland Advisors may
determine 4(2) commercial paper to be liquid if: (x) the 4(2) commercial paper
is not traded flat or in default as to principal and interest; (y) the 4(2)
commercial paper is rated in one of the two highest rating categories by at
least two nationally rated statistical rating organization ("NRSRO"), or, if
rated by only one NRSRO, so rated by that NRSRO, or, if unrated, is determined
by Heartland Advisors to be of comparable quality; and (z) such determination is
made after consideration of the trading market for the specific security,
including the factors listed above.
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is required,
a Fund may be obligated to pay all or part of the registration expense and a
considerable period may elapse between the time it decides to seek registration
and the time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to seek registration of the security. The Funds may invest without
limitation in restricted securities that are eligible for resale to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933,
provided that such securities have been determined to be liquid pursuant to the
guidelines adopted by the Board of Directors.
INVESTMENT RESTRICTIONS
Each Fund has adopted investment restrictions and fundamental policies
which 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. Each Fund's investment
objective and its operating policies are subject to change by Heartland's Board
of Directors without shareholder approval. However, neither Fund will change
materially any operating policy without notice to shareholders. 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, a Fund.
FUNDAMENTAL RESTRICTIONS
The fundamental investment restrictions and policies of each Fund provide
that such Fund may not:
(1) With respect to 75% of the Fund's total assets, invest more than 5% of
the fair market value of its assets in securities of any one issuer, other than
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
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<PAGE> 66
(2) Invest in an issuer to get control or manage it, or, with respect to
75% of the Fund's total assets, purchase more than 10% of the outstanding voting
securities of an issuer;
(3) 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
or sector; provided that there shall be no such limitation on the purchase of
municipal obligations and securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
(4) Buy or sell real estate or oil and gas interests or leases, but this
shall not prevent the Fund from investing in securities secured by real estate
or real estate interests or issued by companies, including real estate
investment trusts, that invest in real estate or real estate interests or whose
business involves the purchase or sale of real estate.
(5) Borrow money or property, except from banks for temporary purposes or
in connection with otherwise permissible leverage activities, and then only in
an amount not in excess of one-third of the value of the Fund's total assets.
For purposes of this restriction, collateralized repurchase agreements, when
issued and delayed-delivery securities are not considered borrowings.
(6) Mortgage, hypothecate, or pledge any of its assets as security for any
of its obligations, except as required for otherwise permissible borrowings,
including reverse repurchase agreements, when issued and delayed-delivery
securities, futures, options and other hedging activities.
(7) Make loans, except that it may: (i) acquire publicly distributed
bonds, debentures, notes and other debt securities; and (ii) enter into
repurchase agreements.
(8) Underwrite the securities of other issuers, although it may invest in
companies that engage in such businesses if it does so in accordance with
policies established by Heartland's Board of Directors, and 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.
(9) Purchase a security if, as a result, more than 15% of the value of the
Fund's total assets would be invested in: (a) securities that are not readily
marketable or that would require registration under the Securities Act of 1933,
as amended, upon disposition; and (b) repurchase agreements which do not provide
for payment within 7 days.
(10) Issue senior securities, as defined in the Investment Company Act of
1940 (the "1940 Act"), except that this restriction shall not be deemed to
prohibit the Fund from making any otherwise permissible borrowings, mortgages or
pledges, reverse repurchase agreements, when issued and delayed-delivery
securities, or hedging activities.
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<PAGE> 67
(11) Invest in commodities, but the Fund may purchase or sell futures
contracts, options on futures, and options.
NON-FUNDAMENTAL RESTRICTIONS
In accordance with the following non-fundamental policies, which may be
changed without shareholder approval, neither Fund may:
(1) Invest in securities of other investment companies except as permitted
by the 1940 Act or as part of a merger, consolidation, acquisition of assets, or
similar reorganization transaction.
(2) Purchase warrants (other than those that have been acquired in units
or attached to other securities).
(3) Purchase or retain the securities of any issuer if the officers,
directors, advisors or managers of the Fund owning beneficially more than
one-half of one percent (0.5 of 1%) 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.
(4) Purchase securities on margin or effect short sales of securities,
except that the Fund may obtain short-term credit necessary for the clearance of
purchases and sales of its portfolio securities, and except as required in
connection with permissible options and futures activities as described
elsewhere in the Prospectus and Statement of Additional Information.
(5) Borrow money or property, except from banks for temporary purposes or
in connection with otherwise permissible leverage activities, and then only in
an amount not in excess of ten percent (10%) of the value of the Fund's total
assets. For purposes of this restriction, collateralized repurchase agreements,
when issued and delayed-delivery securities are not considered borrowings.
For the Funds' limitations on futures and options transactions, see
"Investment Policies and Methods - Limitations on Futures and Options
Transactions."
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<PAGE> 68
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
Name and Address Position with Heartland During Past Five Years
- ---------------- ----------------------- ----------------------
<S> <C> <C>
William J. Nasgovitz President and Director* President and Director Heartland
790 North Milwaukee Street Advisors, Inc., since 1982; Senior
Milwaukee, WI 53202 Vice President Investments, Dain
Bosworth Incorporated from 1988 to
June 1992; Director of Capital
Investments, Inc., since 1989 (small
business investment company).
Willard H. Davidson Director Financial and business consultant
3726 North 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 Vice President and Director* Vice President, Heartland Advisors,
790 North Milwaukee Street Inc. since 1988; Director, Heartland
Milwaukee, WI 53202 Advisors, Inc., 1988 through 1996.
Jon D. Hammes Director President, The Hammes Company, since
Suite 305 1991; prior thereto, Managing Partner,
18000 West Sarah Lane Trammell, Crow Co.
Brookfield, WI 53045
Patrick J. Retzer Vice President, Treasurer and Vice President and Treasurer,
790 North Milwaukee Street Director* Heartland Advisors, Inc. since 1987;
Milwaukee, WI 53202 Director of Heartland Advisors, Inc.
since 1988.
A. Gary Shilling Director President, A. Gary Shilling & Company,
500 Morris Avenue Inc. (economic consultants and
Springfield, NJ 07081-1020 investment advisors), since 1978.
Linda F. Stephenson Director President and Chief Executive Officer,
100 East Wisconsin Avenue Zigman Joseph Stephenson (a public
Milwaukee, WI 53202 relations and marketing communications
firm) since 1989.
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Heartland During Past Five Years
- ---------------- ----------------------- ----------------------
<S> <C> <C>
Lois Schmatzhagen Secretary Secretary, Heartland Advisors, Inc.
790 North Milwaukee Street since 1988.
Milwaukee, WI 53202
</TABLE>
- ----------
*Directors who are "Interested Persons" (as defined in the 1940 Act) of
Heartland Advisors.
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, 1996:
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
AGGREGATE PENSION OR ESTIMATED ACTUAL FROM HEARTLAND
COMPENSATION RETIREMENT BENEFITS UPON AND FUND
DIRECTOR FROM HEARTLAND BENEFITS RETIREMENT COMPLEX
- --------------------------------- ------------------ -------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Willard H. Davidson $7,000 None None $7,000
Jon D. Hammes $7,000 None None $7,000
A. Gary Shilling $7,000 None None $7,000
Linda F. Stephenson $7,000 None None $7,000
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of May 31, 1997, the Directors and officers of Heartland Group, Inc. as
a group (8 persons) owned 1.1% of the Short Duration High-Yield Municipal Fund
and 6.5% of the High-Yield Municipal Bond Fund. As of such date, no person was
known to management to own, beneficially or of record, 5% or more of the
outstanding shares of any of the Funds, except that: Charles Schwab & Co., Inc.,
ATTN: Mutual Funds, 101 Montgomery Street, San Francisco, CA 94104-4122 held of
record 891,728 shares (or 22.9%) of the Short Duration High-Yield Municipal Fund
and 346,294 shares (or 32.4%) of the High-Yield Municipal Bond Fund; Dain
Bosworth, Inc. FBO D. Charles Andrews, P.O. Box 147, Bridgewater Corners, VT
05035 beneficially held 202,882 shares (or 5.2%) of the Short Duration
High-Yield
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<PAGE> 70
Municipal Fund and 101,134 shares (or 9.5%) of the High-Yield Municipal Bond
Fund; and Leo and Marilyn Lemont, 6606 Mapleshade Lane, Apartment 12F, Dallas,
TX 75252-8558 beneficially held 89,635 shares (or 8.4%) of the High-Yield
Municipal Bond Fund.
THE INVESTMENT ADVISOR
Each Fund is managed by Heartland Advisors, pursuant to an Investment
Advisory Agreement (the "Agreement"). The Agreement with respect to the Funds
was approved by the Board of Directors on October 11, 1996 and by the original
shareholder on December 31, 1996.
Heartland Advisors is controlled by William J. Nasgovitz, a Director and
the President of Heartland, by virtue of his ownership of a majority of its
outstanding capital stock. In addition to serving as Advisor to the Funds,
Heartland Advisors also serves as the distributor for the shares of each Fund.
Heartland Advisors, founded in 1982, serves as the investment adviser for the
Heartland Small Cap Contrarian, Value, Mid Cap Value, Large Cap Value, Value
Plus, U.S. Government Securities and Wisconsin Tax Free Funds, seven 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 May 31, 1997, Heartland Advisors had approximately
$3.3 billion 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.
Heartland Advisors provides each Fund with overall investment advisory and
administrative services. Subject to such policies as the Board of Directors may
determine, Heartland Advisors makes investment decisions on behalf of each Fund,
makes available research and statistical data in connection therewith, and
supervises the acquisition and disposition of investments by each Fund,
including the selection of broker-dealers to carry out portfolio and hedging
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 Heartland 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; fees of shareholder
recordkeeping agents; taxes and governmental fees; brokerage commissions and
other expenses incurred in acquiring or disposing of
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<PAGE> 71
portfolio securities, expenses of registering and qualifying shares for sale
with the Securities and Exchange Commission and with various 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.
The Heartland Short Duration High-Yield Municipal Fund pays Heartland
Advisors an annual fee for its advisory services at the rate of 0.40 of 1% of
the Fund's average daily net assets. The advisory fee for the Heartland
High-Yield Municipal Bond Fund is 0.60 of 1% of the Fund's average daily net
assets. The advisory fees for the Funds are payable in monthly installments.
Heartland Advisors has voluntarily agreed to certain fee waivers and expense
reimbursements as further discussed in the Funds' Prospectus.
The Agreement will continue in effect from year to year, as long as it is
approved at least annually by the Board of Directors or by a vote of the
outstanding voting securities of the appropriate 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 their "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 that
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 the Funds refers to the annual average return for 1, 5, and 10-year
periods (or the portion thereof during which a 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 of the period.
24
<PAGE> 72
Performance information should be considered in light of the particular
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 a Fund's
performance to performance figures published for other investment vehicles.
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 a Fund has been in existence) 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:
n
P(1+T) = 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).
In some circumstances a Fund may advertise its total return for a 1, 2, or
3-year period, or the total return since the Fund commenced operations. In such
circumstances the Fund will adjust the values used in computing return to
correspond to the length of the period for which the information is provided.
Cumulative total return since inception on January 2, 1997 through May 31,
1997 was 2.36% for the Short Duration High-Yield Municipal Fund and 2.99% for
the High-Yield Municipal Bond Fund.
25
<PAGE> 73
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:
a-b 6
Yield = 2[( ----- +1) = 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.
Taxable equivalent yield is computed by dividing that portion of the yield
of a 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.
The yield for the 30 days ended May 30, 1997 was 5.87% for the Short
Duration High-Yield Municipal Fund and 6.79% for the High-Yield Municipal Bond
Fund, and the taxable equivalent yield based on a 39.6% federal tax rate was
9.72% and 11.24%, respectively. When advertising yield, a 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.
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 the
Fund's liabilities (including accrued expenses and dividends payable) from the
Fund's total assets (the value of the securities a 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.
26
<PAGE> 74
The next determined net asset value per share will be calculated as of the
close of regular trading on the New York Stock Exchange 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, Martin Luther King, Jr. 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 the Fund's
redeemable securities. Portfolio securities which are traded on stock exchanges
are valued at the last sale price as of the close of business on the day the
securities are being valued, or, lacking any sales, at the latest bid price.
Each over-the-counter security for which the last sale price on the day of
valuation is available from NASDAQ and falls within the range of the latest bid
and asked quotations is valued at that price. All other securities traded in the
over-the-counter market are valued at the most recent bid prices as obtained
from one or more dealers that make markets in the securities. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market.
Securities and other assets for which quotations are not readily available
will be valued at their fair value as determined by the Board of Directors.
DISTRIBUTION OF SHARES
Heartland Advisors, each Fund's investment advisor, also acts as the
distributor of the shares of each Fund. 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 Distribution Agreement will automatically terminate in the event of
its assignment. Under the Agreement, Heartland Advisors will pay for the costs
and expenses of preparing, printing and distributing materials not prepared by
the Fund 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.
DISTRIBUTION PLAN
27
<PAGE> 75
Each Fund has adopted a Distribution Plan, which is described in the
Prospectus (see "The Distribution Plan"). Under the Plan, Heartland Advisors
provides the Directors for their review promptly after the end of each quarter a
written report setting forth all amounts expended under the Plan, including all
amounts paid to dealers as distribution or service fees. In approving the Plan
in accordance with the requirements of Rule 12b-1, the Directors considered
various factors, including the amount of the distribution fee. The Directors
determined that there is a reasonable likelihood that the Plan will benefit each
Fund and its shareholders.
The Plan may be terminated with respect to either Fund by vote of a
majority of the Directors who are not interested persons, or by vote of a
majority of the outstanding voting securities of the Fund. Any change in the
Plan that would materially increase the distribution cost to a Fund requires
shareholder approval; otherwise, it may be amended by the Directors, including a
majority of the Directors who are not interested persons, by vote cast in person
at a meeting called for the purpose of voting upon such amendment. So long as a
Distribution Plan is in effect, the selection or nomination of the Directors who
are not interested persons is committed to the discretion of such Directors.
The Distribution Plan of a Fund may be terminated with respect to either
Fund by the Directors at any time on 60 days written notice without payment of
any penalty by Heartland Advisors, by vote of a majority of the outstanding
voting securities of the Fund, or by vote of a majority of the Directors who are
not interested persons.
The Distribution Plan will continue in effect for successive one-year
periods with respect to a Fund, if not sooner terminated in accordance with its
terms, provided that each such continuance is specifically approved by the vote
of the Directors, including a majority of the Directors who are not interested
persons.
TAX STATUS
The information in this section supplements that in the Prospectus (see
"Dividends, Capital Gains 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 a Fund 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.
28
<PAGE> 76
If a shareholder exchanges shares of one Fund for shares of another 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 possible
exclusion of such portion of their dividends for state and local income tax
purposes.
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 with the replacement of certificates and may require a fee for each
new stock certificate that is issued by the Fund 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 a change in that series' 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
29
<PAGE> 77
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 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, dealers 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). Some broker-dealers may indicate that the provision of research
services is dependent upon the generation of certain specified levels of
commissions by Heartland Advisors' clients, including the Funds. In addition,
some broker-dealers may supply research from third party service providers in
consideration of their receipt of brokerage commissions from transactions
allocated by Heartland Advisors. Each Fund may also consider sales of its own
shares or the shares of 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.
For particular transactions, the Funds may pay higher commissions to
brokers (other than Heartland Advisors or its affiliates) than might be charged
if a different broker had been selected, if, in Heartland Advisor's 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 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 or commodities 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, 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.
30
<PAGE> 78
Brokerage transactions with Heartland Advisors are also subject to such
fiduciary standards as may be imposed upon Heartland Advisors by applicable law.
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 (the "Custodian" and the "Agent",
respectively). Its address is 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. Price Waterhouse
LLP, serve as independent public accountants for the Funds.
31
<PAGE> 79
FINANCIAL STATEMENTS
The following pages present unaudited financial statements of the Funds as
of May 31, 1997, and for the period from January 2, 1997 through May 31, 1997.
In the opinion of the management of Heartland, all adjustments which are
necessary for a fair presentation of the results of operations for the interim
period ended May 31, 1997 are reflected.
32
<PAGE> 80
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS
MAY 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT LONG-TERM INVESTMENTS - 102.0% COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS - 102.0%
ALABAMA - 2.6%
$1,000,000 West Jefferson Amusement & Public Park Authority -
Visionland Alabama Project................................. 7.500 % 12/01/2008 $ 986,250
ARIZONA - 2.6%
1,000,000 Scottsdale, Arizona Industrial Development Authority -
Westminster Village........................................ 5.500 06/01/2017 1,000,000
CALIFORNIA - 0.6%
100,000 Los Angeles, California Regional Airports - Continental
Airlines (a)............................................... 9.000 08/01/2008 106,125
100,000 Stanislaus Waste-to-Energy Financial Agency - Ogden
Martin Systems, Incorporated............................... 7.500 01/01/2005 106,125
-------------
212,250
COLORADO - 3.4%
400,000 Colorado Student Obligation Bond Authority - Student Loan
Revenue.................................................... 6.900 09/01/2001 420,000
605,000 Denver, Colorado City & County Airport........................ 8.500 11/15/2023 678,356
110,000 Denver, Colorado City & County Airport........................ 8.000 11/15/2025 121,688
90,000 Denver, Colorado City & County Airport........................ 7.500 11/15/2025 92,679
-------------
1,312,723
CONNECTICUT - 7.8%
440,000 Connecticut State Health & Educational Facilities Authority -
University of Hartford..................................... 5.700 01/07/1998 439,340
1,600,000 Connecticut State Development Authority - Alzheimer's
Resource Center............................................ 6.875 08/15/2004 1,624,000
850,000 Connecticut Resource Recovery Authority - American Refuse
Fuel Company............................................... 8.000 11/15/2015 907,375
-------------
2,970,715
DELAWARE - 2.4%
850,000 Delaware State Economic Development Authority - Delmarva
Power & Light Company...................................... 7.150 07/01/2018 929,688
DISTRICT OF COLUMBIA - 0.1%
55,000 District of Columbia General Obligation....................... 4.700 01/06/1999 54,656
FLORIDA - 7.4%
265,000 Broward County, Florida Resource Recovery - Broward
Waste Energy - Limited Partnership North................... 7.950 12/01/2008 288,519
2,000,000 Martin County, Florida Industrial Development Authority -
Indiantown Cogeneration Project............................ 7.875 12/15/2025 2,245,000
265,000 St. Petersburg, Florida Housing Authority - Rogall Congregate
Section 8/Elderly.......................................... 7.500 12/01/2006 275,931
-------------
2,809,450
GEORGIA - 0.2%
55,000 Atlanta, Georgia Special Purpose Facilities - Delta Airlines,
Incorporated............................................... 7.900 12/01/2018 59,056
HAWAII - 1.1%
185,000 Hawaii State Department of Budget & Finance - Hawaiian
Electric Company........................................... 7.625 12/01/2018 198,181
190,000 Hawaii State Department of Budget & Finance - Hawaiian
Electric Company........................................... 7.600 07/01/2020 203,775
-------------
401,956
</TABLE>
<PAGE> 81
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS (CONT'D)
MAY 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - (CONT'D) COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS - (CONT'D)
IDAHO - 5.3%
$2,050,000 Idaho Health Facilities Authority - Bonner General Hospital... 5.700 % 10/01/2004 $ 2,021,813
ILLINOIS - 8.4%
35,000 Belleville, Illinois Industrial Development Revenue - Kmart
Corporation................................................ 6.900 06/15/2007 36,050
125,000 Carol Stream, Illinois First Mortgage Revenue - Windsor
Park Manor................................................. 5.750 12/01/1999 125,156
250,000 Carol Stream, Illinois First Mortgage Revenue - Windsor
Park Manor................................................. 6.000 12/01/2000 250,313
250,000 Carol Stream, Illinois First Mortgage Revenue - Windsor
Park Manor................................................. 6.250 12/01/2001 250,313
70,000 Chicago-O'Hare International Airport - United Air Lines,
Incorporated............................................... 8.400 05/01/2018 75,425
170,000 Chicago-O'Hare International Airport - United Air Lines,
Incorporated............................................... 8.950 05/01/2018 190,825
80,000 Chicago-O'Hare International Airport - American Air Lines,
Incorporated............................................... 7.875 11/01/2025 86,500
2,000,000 Robbins, Illinois Resource Recovery Revenue - Robbins
Resource Recovery Partners................................. 8.375 10/15/2016 2,032,500
140,000 Rochelle, Illinois Water & Sewer Revenue...................... 6.250 05/01/2000 144,375
-------------
3,191,457
KANSAS - 2.0%
180,000 Lawrence, Kansas Commercial Development Revenue -
Holiday Inn Project........................................ 7.000 07/01/1999 181,125
190,000 Lawrence, Kansas Commercial Development Revenue -
Holiday Inn Project........................................ 7.000 07/01/2000 191,425
180,000 Manhattan, Kansas Commercial Development Revenue -
Holiday Inn Project........................................ 7.000 07/01/1999 181,125
190,000 Manhattan, Kansas Commercial Development Revenue -
Holiday Inn Project........................................ 7.000 07/01/2000 191,188
-------------
744,863
KENTUCKY - 2.1%
475,000 Kenton County, Kentucky Airport Board - Delta Airlines,
Incorporated............................................... 6.750 02/01/2002 498,156
210,000 Kenton County, Kentucky Airport Board - Delta Airlines,
Incorporated............................................... 7.125 02/01/2021 222,338
90,000 Kenton County, Kentucky Airport Board - Delta Airlines,
Incorporated............................................... 7.250 02/01/2022 96,300
-------------
816,794
LOUISIANA - 5.7%
2,000,000 Louisiana Public Facilities Authority - Beverly Enterprises,
Incorporated............................................... 8.250 09/01/2008 2,157,497
MASSACHUSETTS - 4.7%
850,000 Massachusetts Industrial Finance Agency - Reeds Landing
Project.................................................... 7.750 10/01/2000 870,205
50,000 Massachusetts Industrial Finance Agency - SEMASS Project...... 9.250 07/01/2015 56,375
400,000 Massachusetts Industrial Finance Agency - SEMASS Project...... 9.000 07/01/2015 450,000
385,000 Springfield, Massachusetts Housing Authority - Citywide
Apartments Project......................................... 9.500 11/01/2005 423,019
-------------
1,799,599
MICHIGAN - 5.6%
425,000 Dickinson County, Michigan Hospital System.................... 7.625 11/01/2005 456,344
30,000 Kentwood, Michigan Economic Development - Kmart Corporation... 7.850 09/01/2001 30,367
65,000 Michigan State Strategic Fund - Kmart Corporation............. 6.700 01/01/2007 66,463
</TABLE>
<PAGE> 82
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS (CONT'D)
MAY 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PAR
AMOUNT LONG-TERM INVESTMENTS - (CONT'D) COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS - (CONT'D)
MICHIGAN (CONT'D)
$1,455,000 Midland County, Michigan Economic Development
Corporation Pollution Control Revenue - Midland
Cogeneration............................................... 9.500 % 07/23/2009 $ 1,587,769
-------------
2,140,943
MINNESOTA - 2.7%
1,000,000 St. Paul, Minnesota Housing & Redevelopment Authority -
Healtheast Project......................................... 9.750 11/01/2017 1,039,470
MISSISSIPPI - 1.3%
450,000 Claiborne County, Mississippi Pollution Control Revenue -
Middle South Energy, Incorporated.......................... 9.875 12/01/2014 491,063
NEW HAMPSHIRE - 2.7%
1,000,000 New Hampshire Industrial Development Authority - United
Illuminating Company....................................... 10.750 10/01/2012 1,047,530
NEW JERSEY - 2.6%
500,000 New Jersey Health Care Facilities Financial Authority -
Columbus Hospital.......................................... 7.200 07/01/2001 511,875
450,000 New Jersey Economic Development Authority - Vineland
Cogeneration Limited Partnership........................... 7.875 06/01/2019 484,313
-------------
996,188
NEW MEXICO - 3.7%
375,000 Chaves New Mexico Hospital Revenue - Eastern New
Mexico Medical Center...................................... 7.250 12/01/2010 399,844
90,000 New Mexico Educational Assistance Foundation - Student
Loan Revenue............................................... 6.050 12/01/2000 93,150
900,000 New Mexico Educational Assistance Foundation - Student
Loan Revenue............................................... 5.500 11/01/2003 907,875
-------------
1,400,869
NEW YORK - 3.4%
900,000 Port Authority of New York & New Jersey Special Obligation
- Continental Airlines/Laguardia........................... 9.125 12/01/2015 1,015,875
280,000 Tompkins County, New York Industrial Development Agency -
Kendal at Ithaca........................................... 7.625 06/01/2009 288,050
-------------
1,303,925
NORTH DAKOTA - 3.3%
1,220,000 Mercer County, North Dakota Pollution Control Revenue -
Basin Electric Power....................................... 7.000 01/01/2019 1,276,425
OHIO - 1.4%
100,000 Cleveland Ohio Airport Special Revenue - Continental
Airlines, Incorporated..................................... 9.000 12/01/2019 108,125
425,000 Marion County Ohio Hospital Improvement Revenue -
Community Hospital......................................... 5.900 05/15/2004 430,844
-------------
538,969
PENNSYLVANIA - 11.2%
495,000 Clarion County, Pennsylvania Industrial Development
Authority - Beverly Enterprises, Incorporated.............. 10.125 05/01/2007 533,363
425,000 Erie County, Pennsylvania Industrial Development Revenue -
International Paper Company................................ 7.600 09/01/2010 463,781
</TABLE>
<PAGE> 83
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS (CONT'D)
MAY 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT LONG-TERM INVESTMENTS - (CONT'D) COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS - (CONT'D)
PENNSYLVANIA (CONT'D)
$ 240,000 Lehigh County, Pennsylvania Industrial Development
Authority - Keebler Company Project........................ 6.050 % 10/01/2001 $ 241,500
1,000,000 Philadelphia Hospitals & Higher Educational Facilities -
Graduate Health System..................................... 6.900 07/01/2000 1,042,500
125,000 Philadelphia, Pennsylvania Municipal Authority - Gas Works
Lease Revenue.............................................. 7.625 05/01/2014 131,562
500,000 Ridley Park, Pennsylvania Hospital Authority - Taylor
Hospital................................................... 6.000 12/01/2005 501,875
500,000 Scranton-Lackawanna Health & Welfare Authority - Allied
Services Rehabilitation Hospitals.......................... 6.600 07/15/2000 510,000
500,000 Scranton-Lackawanna Health & Welfare Authority - Allied
Services Rehabilitation Hospitals.......................... 7.125 07/15/2005 533,750
300,000 Scranton-Lackawanna Health & Welfare - Moses Taylor
Hospital Project........................................... 8.250 07/01/2009 330,750
-------------
4,289,081
RHODE ISLAND - 2.5%
900,000 Rhode Island Housing & Mortgage Finance Corporation -
Homeownership Opportunity.................................. 8.050 04/01/2022 937,125
TENNESSEE - 0.7%
250,000 Roane County, Tennessee Industrial Development Board -
Kmart Corporation.......................................... 7.250 01/15/2007 261,875
TEXAS - 3.7%
210,000 Alliance Airport Authority, Texas - American Airlines,
Incorporated............................................... 7.500 12/01/2029 224,700
80,000 Brazos River Authority Texas Pollution Control Revenue -
Texas Utilities Electric Company........................... 8.250 01/01/2019 85,200
35,000 Dallas-Fort Worth Texas International Airport - Delta Air
Lines, Incorporated........................................ 7.125 11/01/2026 36,444
1,000,000 San Antonio, Texas Health Facilities Development
Corporation - Beverly Enterprises, Incorporated............ 8.250 12/01/2019 1,080,000
-------------
1,426,344
UTAH - 0.3%
100,000 Salt Lake City, Utah Airport Revenue - Delta Airlines,
Incorporated............................................... 7.900 06/01/2017 105,875
WISCONSIN - 0.5%
200,000 Menomonee Falls, Wisconsin Industrial Development
Revenue - Keebler Company Project.......................... 6.450 03/01/2004 202,750
-------------
TOTAL MUNICIPAL BONDS (COST $38,903,346) 38,927,199
-------------
TOTAL LONG-TERM INVESTMENTS (COST $38,903,346) $ 38,927,199
-------------
</TABLE>
<PAGE> 84
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
SCHEDULE OF INVESTMENTS (CONT'D)
MAY 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT SHORT-TERM INVESTMENTS - 5.0% COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BOND 0.0%
PENNSYLVANIA - 0.0%
$ 15,000 Philadelphia Hospitals & Higher Educational Facilities -
Graduate Health System..................................... 6.500 % 07/01/97 $ 15,015
-----------
TOTAL MUNICIPAL BOND (COST $15,014) 15,015
-----------
DAILY VARIABLE RATE PUT BONDS - 5.0%
MASSACHUSETTS - 2.6%
1,000,000 Massachusetts State Industrial Finance Agency Pollution
Control Revenue - New England Power........................ 4.050 10/01/2022 1,000,000
TENNESSEE - 2.4%
900,000 Metropolitan Nashville Airport Authority - American
Airlines Project........................................... 4.000 10/01/2012 900,000
-----------
TOTAL DAILY VARIABLE RATE PUT BONDS (COST $1,900,000) 1,900,000
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $1,915,014) $ 1,915,015
-----------
TOTAL INVESTMENTS - (COST $40,818,360)........................ 107.0 % $40,842,214
Liabilities, less cash and receivables........................ (7.0)% (2,678,956)
------- -----------
TOTAL NET ASSETS.............................................. 100.0 % $38,163,258
======= ===========
</TABLE>
(a) All or a portion of security committed to cover margin requirements for
futures contracts.
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
<PAGE> 85
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS
MAY 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT LONG-TERM INVESTMENTS - 99.6% COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS - 99.6%
ALABAMA - 3.2%
$ 350,000 West Jefferson Amusement & Public Park Authority -
Visionland Alabama Project................................. 8.000 % 12/01/2026 $ 340,375
CONNECTICUT - 3.3%
250,000 Connecticut State Development Authority - Alzheimers
Resource Center............................................ 7.000 08/15/2009 252,500
100,000 Connecticut State Development Authority - Alzheimers
Resource Center............................................ 7.250 08/15/2021 100,625
-----------
353,125
DISTRICT OF COLUMBIA - 1.0%
100,000 District of Columbia General Obligation....................... 6.375 06/01/2026 101,375
FLORIDA - 6.8%
250,000 Manatee County, Florida Housing Finance Authority - Single
Family Mortgage............................................ 7.200 05/01/2028 272,813
400,000 Martin County, Florida Industrial Development Authority -
Indiantown Cogeneration Project............................ 7.875 12/15/2025 449,000
-----------
721,813
GEORGIA - 6.0%
325,000 Dekalb County, Georgia Housing Authority - Friendly Hills
Apartments Project......................................... 7.050 01/01/2039 345,313
30,000 Savannah, Georgia Hospital Authority - Candler Hospital....... 7.000 01/01/2011 31,125
255,000 Savannah, Georgia Hospital Authority - Candler Hospital....... 7.000 01/01/2023 263,606
-----------
640,044
IDAHO - 1.0%
100,000 Idaho Housing & Finance Association - Single Family
Mortgage................................................... 6.200 07/01/2028 101,125
ILLINOIS - 12.0%
250,000 Carol Stream, Illinois First Mortgage Revenue - Windsor
Park Manor................................................. 7.000 12/01/2013 248,125
240,000 Illinois Health Facilities Authority - Fairview Obligated
Group...................................................... 7.125 08/15/2017 237,000
360,000 Illinois Housing Development Authority - Multi-Family
Housing Revenue............................................ 5.000 07/01/2025 281,250
500,000 Robbins, Illinois Resource Recovery Revenue - Robbins
Resource Recovery Partners................................. 8.375 10/15/2016 508,125
-----------
1,274,500
INDIANA - 1.0%
100,000 Indianapolis, Indiana Airport Authority - Federal Express
Corporation................................................ 7.100 01/15/2017 108,125
KANSAS - 2.1%
115,000 Lawrence, Kansas Commercial Development Revenue -
Holiday Inn Project........................................ 8.000 07/01/2016 118,163
105,000 Manhattan, Kansas Commercial Development Revenue -
Holiday Inn Project........................................ 8.000 07/01/2016 107,887
-----------
226,050
LOUISIANA - 1.3%
125,000 Louisiana Public Facilities Authority - Beverly Enterprises,
Incorporated............................................... 8.250 09/01/2008 134,844
</TABLE>
<PAGE> 86
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS
MAY 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
PAR
AMOUNT LONG-TERM INVESTMENTS - (CONT'D) COUPON MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS - (CONT'D)
MASSACHUSETTS - 10.7%
$ 410,000 Massachusetts Industrial Finance Agency - Reeds
Landing Project............................................ 7.750 % 10/01/2000 $ 419,746
345,000 Massachusetts Health & Education Facilities Authority -
Central New England Health Alliance........................ 6.125 08/01/2013 326,456
100,000 Massachusetts State Health & Education Facilities
Authority - Sisters of Providence Health System............ 6.625 11/15/2022 100,375
185,000 Massachusetts Industrial Finance Agency - Evanswood
Bethzatha Corporation...................................... 8.000 01/15/2027 185,925
100,000 Massachusetts Health & Education Facilities Authority -
Youville Hospital.......................................... 6.000 02/15/2034 100,500
-------------
1,133,002
MINNESOTA - 4.7%
500,000 Minneapolis, Minnesota Health Facilities Development
Revenue - Community Home Program Company Project........... 7.500 12/01/2026 494,375
MONTANA - 13.7%
1,525,000 Montana Board of Investments - Yellowstone Energy
Limited Partnership........................................ 7.000 12/31/2019 1,448,750
NORTH DAKOTA - 4.7%
500,000 North Dakota Housing Finance Agency - Single Family
Mortgage................................................... 5.950 07/01/2017 501,875
OKLAHOMA - 0.9%
100,000 Oklahoma County Industrial Authority - National Benevolent
Association................................................ 6.150 01/01/2011 99,875
PENNSYLVANIA - 7.9%
500,000 Allegheny County, Pennsylvania Hospital Authority -
Pittsburgh Mercy Health System............................. 5.625 08/15/2006 493,125
300,000 Clarion County, Pennsylvania Industrial Development
Authority - Beverly Enterprises............................ 10.125 05/01/2007 323,250
15,000 Philadelphia Hospitals & Higher Education Facilities -
Graduate Health System..................................... 7.250 07/01/2010 15,788
-------------
832,163
TENNESSEE - 6.6%
65,000 Hawkins County, Tennessee Industrial Development Board -
Kmart Corporation.......................................... 7.000 01/01/2006 66,950
630,000 Shelby County, Tennessee Health, Education & Housing
Facilities - Winfield Village of Cordova................... 8.500 07/01/2026 628,425
-------------
695,375
TEXAS - 12.7%
100,000 Amarillo, Texas Health Facilities Corporation - Sears
Panhandle Retirement Corporation........................... 6.300 08/15/2005 98,875
665,000 Danforth, Texas Health Facilities Corporation - Sam Houston
Long Term Care Facility.................................... 8.250 03/01/2027 648,375
95,000 Lufkin, Texas Health Facilities Development Corporation -
Memorial Health System of East Texas....................... 6.875 02/15/2026 98,800
510,000 Tarrant County, Texas Health Facilities Development
Corporation - St. Joseph Long Term Care Facility........... 8.500 05/01/2027 493,425
-------------
1,339,475
-------------
TOTAL MUNICIPAL BONDS (COST $10,524,496) 10,546,266
-------------
TOTAL LONG-TERM BONDS (COST $10,524,496) 10,546,266
-------------
TOTAL INVESTMENTS - (COST $10,524,496)........................ 99.6 % $ 10,546,266
Cash and receivables, less liabilities........................ 0.4 % 43,441
------- -------------
TOTAL NET ASSETS.............................................. 100.0 % $ 10,589,707
======= =============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
Schedule.
<PAGE> 87
STATEMENTS OF ASSETS AND LIABILITIES
May 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Short
Duration
High-Yield High-Yield
ASSETS: Municipal Municipal
Fund Bond Fund
------------ ------------
<S> <C> <C>
Investments in securities, at cost ........................................ $ 40,818,360 $ 10,524,496
============ ============
Investments in securities, at value ....................................... $ 40,842,214 $ 10,546,264
Cash ...................................................................... 61,785 ---
Receivable from fund shares sold .......................................... 144,337 ---
Receivable from investments sold .......................................... 452,587 ---
Accrued interest .......................................................... 802,675 226,435
Deferred organization expense ............................................. 21,672 21,672
Receivable from Advisor for management fee waiver and expense reimbursement 47,497 22,139
------------ ------------
Total Assets ........................................................... 42,372,767 10,816,510
------------ ------------
LIABILITIES:
Payable to custodian ...................................................... --- 119,774
Payable to Advisor for management fee ..................................... 11,468 4,858
Variation margin on open futures contracts ................................ 4,301 ---
Payable to Advisor for distribution fees .................................. 11,269 3,358
Payable for investments purchased ......................................... 3,765,991 ---
Distribution payable ...................................................... 163,265 53,210
Payable for fund shares redeemed .......................................... 206,783 10,010
Payable to Advisor for deferred organization expense ...................... 21,672 21,672
Accrued expenses .......................................................... 24,760 13,923
------------ ------------
Total Liabilities ...................................................... 4,209,509 226,805
------------ ------------
NET ASSETS APPLICABLE TO OUTSTANDING SHARES .................................... $ 38,163,258 $ 10,589,705
============ ============
SHARES OUTSTANDING, $.001 par value (100,000,000 shares authorized) ....... 3,816,426 1,055,134
============ ============
NET ASSET VALUE PER SHARE ...................................................... $ 10.00 $ 10.04
============ ============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of
these Statements.
<PAGE> 88
STATEMENTS OF OPERATIONS
For the period January 2, 1997 (commencement of operations)
to May 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Short
Duration
High-Yield High-Yield
Municipal Municipal
Fund Bond Fund
------------ ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest.................................................................... $ 363,221 $ 146,667
------------ ------------
Total investment income ................................................ 363,221 146,667
------------ ------------
EXPENSES:
Management fees ............................................................ 24,408 13,439
Distribution fees .......................................................... 15,255 5,600
Registration fees .......................................................... 11,426 5,786
Custodian fees ............................................................. 3,516 2,060
Audit fees ................................................................. 2,500 2,500
Printing and communications ................................................ 2,100 700
Amortization of organization expenses ...................................... 1,971 1,971
Directors' fees ............................................................ 1,916 1,790
Transfer agent fees ........................................................ 1,635 1,100
Postage .................................................................... 300 200
Legal fees ................................................................. 100 100
Other operating expenses ................................................... 3,227 1,293
------------ ------------
Total expenses ........................................................ 68,354 36,539
------------ ------------
Less: Management fee waiver ........................................... (24,408) (13,439)
Less: Expense reimbursement ........................................... (43,946) (23,100)
------------ ------------
Net expenses .......................................................... --- ---
NET INVESTMENT INCOME .......................................................... 363,221 146,667
------------ ------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on:
Securities ............................................................ (3,621) 3,655
Futures contracts ..................................................... 5,999 (26,558)
Net increase (decrease) in unrealized appreciation on:
Securities ............................................................ 23,854 21,768
Futures contracts ..................................................... (71,943) ---
------------ ------------
TOTAL REALIZED AND UNREALIZED LOSSES ON INVESTMENTS ............................ (45,711) (1,135)
------------ ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ $ 317,510 $ 145,532
============ ============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of
these Statements.
<PAGE> 89
STATEMENTS OF CHANGES IN NET ASSETS
For the period January 2, 1997 (commencement of operations)
to May 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Short
Duration
High-Yield High-Yield
Municipal Municipal
Fund Bond Fund
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income ...................................................... $ 363,221 $ 146,667
Net realized gains (losses) on investments ................................. 2,378 (22,903)
Net increase (decrease) in unrealized appreciation on investments .......... (48,089) 21,768
------------ ------------
Net increase in net assets resulting from operations ......... 317,510 145,532
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ...................................................... (363,221) (146,667)
FUND SHARE ACTIVITIES:
Proceeds from shares issued ................................................ 40,042,902 10,742,750
Reinvested dividends from net investment income ............................ 189,394 73,333
Cost of shares redeemed .................................................... (2,023,327) (225,243)
------------ ------------
Net increase in net assets derived from Fund share activities 38,208,969 10,590,840
------------ ------------
TOTAL INCREASE IN NET ASSETS .................................................. 38,163,258 10,589,705
------------ ------------
NET ASSETS AT THE BEGINNING OF THE PERIOD ..................................... --- ---
NET ASSETS AT THE END OF THE PERIOD ........................................... $ 38,163,258 $ 10,589,705
============ ============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of
these Statements.
<PAGE> 90
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Short Duration High-Yield
High-Yield Municipal
Municipal Fund Bond Fund
1/2/97(1) to 5/31/97 1/2/97(1) to 5/31/97
-------------------- --------------------
<S> <C> <C>
PER SHARE DATA
Net asset value, beginning of period......................... $ 10.00 $ 10.00
Income from investment operations:
Net investment income.................................... 0.23 0.27
Net realized and unrealized gains on investments......... --- 0.04
------------ ------------
Total income from investment operations................ 0.23 0.31
Less distributions from:
Net investment income.................................... 0.23 0.27
Net realized gains on investments........................ --- ---
------------ ------------
Total distributions.................................... 0.23 0.27
Net asset value, end of period............................... $ 10.00 $ 10.04
============ ============
TOTAL RETURN(2)............................................. 2.4% 3.0%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands)................. $ 38,163 $ 10,590
Ratio of net expenses to average net assets.............. 0.00%(3)(4) 0.00%(3)(4)
Ratio of net investment income to average net assets..... 4.76%(3)(4) 5.87%(3)(4)
Portfolio turnover rate.................................. 66% 46%
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) If there had been no management fee waiver or expense reimbursement by the
Advisor, the ratio of net expenses to average net assets would have been
0.90% for the Short Duration High-Yield Municipal Fund and 1.46% for the
High-Yield Municipal Bond Fund and the ratio of net investment income to
average net assets would have been 3.87% and 4.41%, respectively.
The accompanying Notes to Financial Statements are an integral part of these
Statements.
<PAGE> 91
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1997 (UNAUDITED)
(1) ORGANIZATION
The Heartland Group, Inc. (the "Corporation") is registered as a
diversified open-end management company under the Investment Company
Act of 1940. The Short Duration High-Yield Municipal Fund and the
High-Yield Municipal Bond Fund (the "Funds") are two of the nine series
of funds issued by the Corporation at May 31, 1997.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed
by the Funds in the preparation of the financial statements:
(a) Debt securities are stated at fair value as furnished by
independent pricing services based primarily upon information
concerning market transactions and dealer quotations for
similar securities or by dealers who make markets in such
securities. Debt securities having maturities of 60 days or
less may be valued at acquisition cost, plus or minus any
amortized discount or premium. Securities and other assets for
which quotations are not readily available are valued at their
fair value using methods determined by the Board of Directors.
(b) The Funds' policy is to comply with the requirements of the
Internal Revenue Code which are applicable to regulated
investment companies and to distribute substantially all of
their taxable income to their shareholders. The Fund
accordingly paid no Federal income taxes, and no Federal
income tax provision is required.
(c) Net investment income is distributed to each shareholder as a
dividend. Dividends are declared daily and distributed monthly
and are recorded by the Funds on the ex-dividend date. Net
realized gains on investments, if any, are distributed
annually.
(d) The Funds record security and shareholder transactions no
later than the first business day after the trade date. Net
realized gains and losses on investments are computed on the
identified cost basis. Interest income is recognized on an
accrual basis. The Funds amortize premium and accrete original
issue discount on investments utilizing the effective interest
method.
(e) The Funds may enter into futures contracts for hedging
purposes, such as to protect against anticipated declines in
the market value of their portfolio securities or to manage
exposure to changing interest rates. Upon entering into a
futures contract, a Fund pledges to the broker securities
equal to the minimum "initial margin" requirements of the
exchange. Additionally, the Fund receives from or pays to the
broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as
"variation margin," and are recorded by the Fund as unrealized
gains or losses. When the futures contract is closed, the Fund
records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened
and the value at the time it was closed.
The use of futures contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in
the Statements of Assets and Liabilities. The predominant risk
is that the movement of the futures contracts price may result
in a loss which could render a portfolio's hedging strategy
unsuccessful.
<PAGE> 92
The Short Duration High-Yield Municipal Fund had the following
open futures contracts at May 31, 1997:
<TABLE>
<CAPTION>
Unrealized
Number Expiration Appreciation
Type of Contracts Date (Depreciation)
- ---- ------------- ---------- --------------
<S> <C> <C> <C>
Municipal Bond Index (14) June 1997 $ (72,016)
Municipal Bond Index ( 4) Sept. 1997 73
----------
$ (71,943)
==========
</TABLE>
The High-Yield Municipal Bond Fund had no open futures
contracts at May 31, 1997.
(f) The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from the
estimates.
(3) INVESTMENT MANAGEMENT FEES AND TRANSACTIONS WITH RELATED PARTIES
The Funds have management agreements with Heartland Advisors, Inc. (the
"Advisor") to serve as investment advisor and manager. Under the terms
of the agreements, the Short Duration High-Yield Municipal Fund pays
the Advisor a monthly management fee at the annual rate of .40% of the
daily net asset value of the Fund and the High-Yield Municipal Bond
Fund pays the Advisor a monthly management fee at the annual rate of
.60% of the daily net asset value of the Fund.
The Funds have adopted a Distribution Plan (the "Plan) pursuant to Rule
12b-1 under the Investment Company act of 1940. The Distributor is
Heartland Advisors, Inc. (the "Distributor"). The Plan requires the
Funds to pay to the Distributor a quarterly distribution fee on an
annual basis up to .25% of their daily net assets.
The Advisor has voluntarily committed to waive the entire management
and Rule 12b-1 fees and to reimburse all other expenses for the Funds
for the fiscal year ending December 31, 1997. As a result, the Funds
did not incur any operating expenses for the period ended May 31, 1997.
Effective January 1, 1998, the Advisor will begin to reduce the amount
of this waiver and reimbursement each month by 0.15% on an annualized
basis, but will voluntarily reimburse the Funds to the extent that
annual total fund operating expenses would exceed 0.75% for the Short
Duration High-Yield Municipal Fund and 0.95% for the High-Yield
Municipal Bond Fund.
Officers and certain directors of the Corporation are also officers
and/or directors of Heartland Advisors, Inc.; however, they receive no
compensation from the Funds.
As permitted under Rule 10f-3 of the Investment Company Act of 1940,
the Board of Directors of the Corporation has adopted a plan which will
allow the Funds, under certain conditions described in the Rule, to
acquire newly-issued securities from syndicates in which the
Distributor is a member.
(4) DEFERRED ORGANIZATION EXPENSES
Organization expenses have been deferred and are being
amortized on a straight-line basis over sixty months. Payments for
these expenses were advanced by the Advisor, who will be reimbursed by
the Funds over the same period. The proceeds of any redemption of the
initial shares by the original shareholders will be reduced by a
pro-rata portion of any then unamortized expenses. Unamortized
deferred organizational expenses and the related payable to the
Advisor at May 31, 1997, were $21,672 for each Fund. Reimbursement to
the Advisor of these amounts by the Funds will be subject to the
expense limitations and reimbursements in effect for the Funds at the
time.
<PAGE> 93
(5) INVESTMENT TRANSACTIONS
During the period ended May 31, 1997, purchases and sales of
securities, other than short-term obligations, were as follows (in
thousands):
<TABLE>
<CAPTION>
Short
Duration
High-Yield High-Yield
Municipal Municipal
Fund Bond Fund
----------- -----------
<S> <C> <C>
Purchases $49,277,288 $12,733,480
Proceeds from sales 9,363,860 2,156,202
</TABLE>
At May 31, 1997, the gross unrealized appreciation and depreciation on
securities for tax purposes were as follows:
<TABLE>
<CAPTION>
Short
Duration
High-Yield High-Yield
Municipal Municipal
Fund Bond Fund
----------- -----------
<S> <C> <C>
Appreciation $ 88,966 $ 51,929
Depreciation (65,112) (30,161)
-------- --------
$ 23,854 $ 21,768
======== ========
</TABLE>
Cost of investments is substantially the same for financial reporting
purposes and federal income tax purposes.
(6) FUND SHARE TRANSACTIONS
For the period ended May 31, 1997, Fund share transactions were as
follows:
<TABLE>
<CAPTION>
Short
Duration
High-Yield High-Yield
Municipal Municipal
Fund Bond Fund
----------- -----------
<S> <C> <C>
Shares issued 3,999,891 1,070,323
Reinvested dividends from net
investment income 18,940 7,309
Shares redeemed (202,405) (22,498)
----------- -----------
Net increase in Fund shares 3,816,426 1,055,134
=========== ===========
</TABLE>
<PAGE> 94
(7) SOURCES OF NET ASSETS
At May 31, 1997, the Funds' sources of net assets were as follows:
<TABLE>
<CAPTION>
Short
Duration
High-Yield High-Yield
Municipal Municipal
Fund Bond Fund
----------- -----------
<S> <C> <C>
Paid-in capital $38,208,969 $10,590,840
Net unrealized appreciation
(depreciation) on investments (48,089) 21,768
Accumulated undistributed net
realized gains (losses) on
investments 2,378 (22,903)
----------- -----------
$38,163,258 $10,589,705
=========== ===========
</TABLE>
<PAGE> 95
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INTRODUCTION TO THE FUNDS 2
INVESTMENT POLICIES AND PRACTICES 2
INVESTMENT RISKS AND CONSIDERATIONS 15
INVESTMENT RESTRICTIONS 18
MANAGEMENT 21
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES 22
THE INVESTMENT ADVISOR 23
PERFORMANCE INFORMATION 24
DETERMINATION OF NET ASSET VALUE PER SHARE 26
DISTRIBUTION OF SHARES 27
DISTRIBUTION PLAN 27
TAX STATUS 28
DESCRIPTION OF SHARES 29
PORTFOLIO TRANSACTIONS 29
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT 30
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS 31
FINANCIAL STATEMENTS 31
</TABLE>
Heartland Short Duration High-Yield Municipal Fund
Heartland High-Yield Municipal Bond 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
<PAGE> 96
Auditor
Price Waterhouse LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
<PAGE> 97
Part C. Other Information.
Item 24. Financial Statements and Exhibits
(a) Financial Statements and related footnotes for the Funds
included or incorporated by reference in Part B are:
(1) Reports of Independent Public Accountants
(2) Statement of Net Assets
(3) Statement of Changes in Net Assets
(4) Statement of Operations
(b) Exhibits:
See Exhibit Index following the signature page of this
registration statement, which index is incorporated herein
by this reference.
Item 25. Persons Controlled by or under Common Control with Registrant
Not Applicable. See "Control Persons and Principal Holders of
Securities" in Part B.
Item 26. Number of Holders of Securities
On March 31, 1997, the number of record holders of each class of
securities of the Registrant was:
<TABLE>
<CAPTION>
NUMBER OF HOLDERS OF
FUND RECORD OF COMMON STOCK
---- ----------------------
<S> <C>
Heartland Small Cap Contrarian Fund 17,410
Heartland Value Fund 68,326
Heartland Mid Cap Value Fund 974
Heartland Large Cap Value Fund 443
Heartland Value Plus Fund 5,749
Heartland U.S. Government Securities Fund 2,657
</TABLE>
C-1
<PAGE> 98
<TABLE>
<S> <C>
Heartland Wisconsin Tax Free Fund 3,492
Heartland Short Duration High-Yield Municipal Fund 229
Heartland High-Yield Municipal Bond Fund 133
</TABLE>
Item 27. Indemnification
Reference is made to Article IX of the Registrant's Bylaws filed as Exhibit No.
2 to Registrant's Registration Statement with respect to the indemnification of
Registrant's directors and officers, which is set forth below:
Section 9.1. Indemnification of Officers, Directors, Employees
and Agents. The Corporation shall indemnify each person who was
or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative
("Proceeding"), by reason of the fact that he is or was a
Director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a Director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against all expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection
with such Proceeding to the fullest extent permitted by law;
provided that:
(a) whether or not there is an adjudication of
liability in such Proceeding, the Corporation shall
not indemnify any person for any liability arising
by reason of such person's willful misfeasance, bad
faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office or
under any contract or agreement with the
Corporation ("disabling conduct"); and
(b) the Corporation shall not indemnify any person
unless:
(1) the court or other body before which the
Proceeding was brought (i) dismisses the Proceeding
for insufficiency of evidence of any disabling
conduct, or (ii) reaches a final decision on the
merits that such person was not liable by reason of
disabling conduct; or
(2) absent such a decision, a reasonable
determination is made, based upon a review of the
facts, by (i) the vote of a majority of a quorum of
the Directors of the Corporation who are neither
interested persons of the Corporation as defined in
C-2
<PAGE> 99
the Investment Company Act of 1940 nor parties to
the Proceeding, or (ii) if such quorum is not
obtainable, or even if obtainable, if a majority of
a quorum of Directors described in paragraph
(b)(2)(i) above so directs, by independent legal
counsel in a written opinion, that such person was
not liable by reason of disabling conduct.
Expenses (including attorneys' fees) incurred in
defending a Proceeding will be paid by the
Corporation in advance of the final disposition
thereof upon an undertaking by such person to repay
such expenses (unless it is ultimately determined
that he is entitled to indemnification),
(1) such person shall provide adequate
security for his undertaking;
(2) the Corporation shall be insured against
losses arising by reason of such advance; or
(3) a majority of a quorum of the Directors
of the Corporation who are neither
interested persons of the Corporation as
defined in the Investment Company Act of
1940 nor parties to the Proceeding, or
independent legal counsel in a written
opinion, shall determine, based on a review
of readily available facts, that there is
reason to believe that such person will be
found to be entitled to indemnification.
Section 9.2. Insurance of Officers, Directors, Employees and
Agents. The Corporation may purchase and maintain insurance on behalf of
any person who is or was a Director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
Director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in or arising out of
his position. However, in no event will the Corporation purchase
insurance to indemnify any such person for any act for which the
Corporation itself is not permitted to indemnify him.
In addition, the Registrant maintains an Investment Advisor/Mutual Fund
Professional Liability insurance policy with a $10 million limit of liability
under which the Registrant and its affiliate, Heartland Advisors, Inc., and each
of their respective directors and officers are named insureds.
Registrant undertakes that insofar as indemnification for liabilities arising
under the Securities
C-3
<PAGE> 100
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. Business and Other Connections of Investment Advisor
(a) Heartland Advisors, Inc.
Heartland Advisors, Inc. acts as the Investment Advisor and
Distributor to each of the Heartland Funds. William J. Nasgovitz,
a director and President of Heartland Group, Inc., is a
controlling person of Heartland Advisors through his ownership of
a majority of its voting common stock. Mr. Nasgovitz has
indicated he intends to retain control of the Advisor through
continued ownership of a majority of its outstanding voting
stock.
Set forth below is a list of the executive officers and directors
of Heartland Advisors, Inc. as of March 31, 1997, together with
information as to any other business, profession, vocation or
employment of a substantial nature of those officers and
directors during the past two years:
<TABLE>
<CAPTION>
POSITION WITH
NAME HEARTLAND ADVISORS, INC. OTHER
- ---- ------------------------ -----
<S> <C> <C>
William J. Nasgovitz President and Director President and Director,
Heartland Group, Inc.
Patrick J. Retzer Director and Senior Vice Vice President, Treasurer, and
President, Treasurer Director, Heartland Group, Inc.
Kevin D. Clark Senior Vice President, Trading None
Mitchell L. Kohls Chief Operating Officer Communications Manager, GE
Medical Systems (General
Electric) (8/88 to 6/95)
Kenneth J. Della Chief Financial Officer None
Lorraine J. Koeper Senior Vice President and General Attorney, Quarles & Brady (9/92
Counsel and Director to 7/95)
</TABLE>
C-4
<PAGE> 101
<TABLE>
<S> <C> <C>
Lois J. Schmatzhagen Secretary Secretary, Heartland Group, Inc.
Eric J. Miller Senior Vice President None
</TABLE>
Item 29. Principal Underwriters
(a) Heartland Advisors, Inc. acts as the Distributor of each
of the Heartland funds shares. Heartland Advisors, Inc.
does not act as the principal underwriter or distributor
for any open-end mutual funds other than the Heartland
funds.
(b) See response to item 28(a) above.
(c) Not applicable.
Item 30. Location of Accounts and Records
(a) Heartland Group, Inc.
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
(b) Firstar Trust Company
Mutual Funds Services, Third Floor
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
(c) Firstar National Bank-Milwaukee
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Item 31. Management Services
Not applicable
Item 32. Undertakings
The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's latest annual
report to shareholders, upon request and without charge.
C-5
<PAGE> 102
\ SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Milwaukee, and State of Wisconsin, on
the 25th day of June, 1997.
HEARTLAND GROUP, INC.
By: /s/ William J. Nasgovitz
---------------------------------------
WILLIAM J. NASGOVITZ
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed on this 25th day of
June, 1997, by or on behalf of the following persons in the capacities
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ William J. Nasgovitz Director and President (Chief Executive Officer)
- -------------------------------------
WILLIAM J. NASGOVITZ
/s/ Patrick J. Retzer Director, Vice President and Treasurer (Chief
- ------------------------------------- Financial and Accounting Officer)
PATRICK J. RETZER
Hugh F. Denison* Director
- -------------------------------------
HUGH F. DENISON
A. Gary Shilling* Director
- -------------------------------------
A. GARY SHILLING
Willard H. Davidson* Director
- -------------------------------------
WILLARD H. DAVIDSON
Jon D. Hammes* Director
- -------------------------------------
JON D. HAMMES
Linda F. Stephenson* Director
- -------------------------------------
LINDA F. STEPHENSON
* By: /s/ William J. Nasgovitz
--------------------------------
WILLIAM J. NASGOVITZ
Pursuant to Power of Attorney dated April 27, 1995
</TABLE>
C-6
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
<S> <C>
1(a) Articles of Incorporation*
(b) Form of Articles Supplementary to Articles of Incorporation filed
with Maryland Department of Assessments and Taxation to withdraw
the designation of, and to discontinue, the series known as the
Heartland Nebraska Tax Free Fund*
2 Amended and Restated By-Laws*
5(a) Investment Advisory Agreement for Heartland Value Fund*
5(b) Investment Advisory Agreement for Heartland U.S. Government,
Wisconsin Tax Free, Value Plus, Small Cap Contrarian, Mid
Cap Value and Large Cap Value Funds*
5(c) Amended Schedule A to Investment Advisory Agreement adding
Heartland Short Duration High-Yield Municipal and Heartland
High-Yield Municipal Bond Funds*
6(a)(i) Distribution Agreement between Heartland
Group, Inc. and Heartland Advisors, Inc.*
(a)(ii) Amendment No. 1 to Distribution Agreement between Heartland
Group, Inc. and Heartland Advisors, Inc.*
(b) Form of Selected Dealer Agreements*
(c) Form of Selling Agreement for Banks*
8(a) Custodian Agreement*
(b) Transfer Agent/Dividend Disbursing Agent Agreement*
9(a) Heartland Group, Inc.'s Rule 10f-3 Plan*
(b) Heartland Value Fund, Inc.'s Rule 10f-3 Plan*
10 Opinion of Quarles & Brady*
</TABLE>
<PAGE> 104
<TABLE>
<S> <C>
11(a) Consent of Arthur Andersen LLP - Not Applicable
(b) Consent of Quarles & Brady*
13 Subscription Agreements*
14(a) Form of Model Retirement Plans*
(b) Form of Heartland Funds Individual Retirement Account
Agreement and Forms*
(c) Form of Heartland Funds Section 403(b)(7) Custodial Account
Agreement and Forms*
(d) Form of Heartland Funds SIMPLE IRA Attachment to IRS
Form 5305-SA*
15(a) The Value Fund's Rule 12b-1 Plan*
(b) Heartland Group Inc.'s Amended and Restated Rule 12b-1 Plan*
(c) Form of Related Distribution Agreement for Rule 12b-1 Plan*
16(a) Schedules for Computation of Performance Information for the
Heartland Value Fund and the Heartland U.S. Government Fund*
(b) Schedules for Computation of Performance Information for the
Heartland Wisconsin Tax Free Fund*
(c) Schedules for Computation of Performance Information for the
Heartland Value Plus Fund*
(d) Schedules for Computation of Performance Information for the
Heartland Small Cap Contrarian Fund*
(e) Schedules for Computation of Performance Information for
the Heartland Short Duration High-Yield Municipal Fund
(f) Schedules for Computation of Performance Information for
the Heartland High-Yield Municipal Bond Fund
17 Financial Data Schedules (See Exhibit 27)
</TABLE>
<PAGE> 105
<TABLE>
<S> <C>
27.9 Financial Data Schedule for the Heartland Short Duration
High-Yield Municipal Fund
27.10 Financial Data Schedule for the Heartland High-Yield
Municipal Bond Fund
</TABLE>
- ------------------
* Previously filed and incorporated herein by reference.
<PAGE> 1
HEARTLAND SHORT DURATION HIGH YIELD MUNI FUND - CALCULATION OF YIELD
CALCULATION OF INTEREST EARNED ON INVESTMENTS, EXPENSES, & AVERAGE NUMBER OF
SHARES ENTITLED TO DIVIDENDS FOR 30 DAYS BEGINNING MAY 1, 1997
<TABLE>
<CAPTION>
Yield = 2[(((a-b)/cd)+1
158,960.61 a= dividends & interest earned during the period
# OF SHARES 0.00 b= expenses accrued for the period
INCOME EXPENSES ACCRUING DIV 3,288,272.53 c= average number shares outstanding during the period
------------ ----------- -------------- that were entitled to recieve dividends
10.00 d= the maximum offering price per share on the last day
of the period
<S> <C> <C> <C> <C> <C>
a-b= 158,960.61
cd= 32,882,725.25
May 1 3,686.65 0.00 2,472,946.939 ((a-b)/cd)+1= 1.0048341678
2 3,785.51 0.00 2,611,918.115 6
3 3,881.67 0.00 2,635,842.443 (((a-b)/cd)+1= 1.0293578118
4 3,881.67 0.00 2,635,842.443 6
5 3,881.67 0.00 2,635,842.443 (((a-b)/cd)+1= 0.0293578118
6 3,922.04 0.00 2,887,673.150 6
7 4,061.11 0.00 3,002,259.150 2[(((a-b)/cd)+1)= 0.0587156236
8 4,836.26 0.00 3,009,519.526
9 5,283.59 0.00 3,114,413.079 YIELD= 5.87%
10 5,269.76 0.00 3,299,606.674 ===============
11 5,269.76 0.00 3,299,606.674
12 5,456.06 0.00 3,299,606.674
13 5,466.60 0.00 3,334,567.933
14 5,463.98 0.00 3,341,950.707
15 5,502.06 0.00 3,374,279.949
16 5,676.10 0.00 3,439,974.880
17 5,891.09 0.00 3,449,308.083
18 5,891.09 0.00 3,449,308.083
19 5,774.66 0.00 3,449,308.083
20 5,860.47 0.00 3,472,269.017
21 5,860.47 0.00 3,491,138.113
22 5,783.49 0.00 3,536,468.958
23 5,849.41 0.00 3,567,561.538
24 5,861.12 0.00 3,658,902.248
25 5,861.12 0.00 3,658,902.248
26 5,861.12 0.00 3,658,902.248
27 6,104.85 0.00 3,658,902.248
28 6,222.61 0.00 3,658,902.248
29 6,365.15 0.00 3,719,775.248
30 6,451.47 0.00 3,822,676.622
Totals 158,960.62 98,648,175.76
========== ==== =============
30 = days in period
158,960.62 0.00 3,288,272.525 = avg shares accr dividends
</TABLE>
<PAGE> 2
PAGE: 1 DAILY SEC ADVERTISING
YIELD RUN DATE: 5/30/97
FUND: 28 SHORT DUR HIGH YIELD BOND & NOTE
HOLDING AS OF: 5/30/97
CALL CALL
ACCRUED
SECURITY COUPON MATURITY DATE PRICE
PAR MKT PRICE Y-T-M INTEREST INCOME
- --------------------------------------------------------------------------------
- -------------------------------------------------------------
01852LAA8 ALLIANCE APT AUTH 7.5000000 12/01/29 12/01/00 102.000000
210,000 107.00000 5.800 7,787.81 37.45
047848AD8 ATLANTA GA 7.9% 121 7.9000000 12/01/18 12/01/99 102.000000
55,000 107.25000 5.490 2,148.45 9.32
078845AF1 Belleville IL 6.9% 6.9000000 6/15/07 6/15/02 103.000000
35,000 102.87500 6.440 1,102.50 6.64
106213BK6 Brazos River TX 8.2500000 1/01/19 1/01/99 102.000000
80,000 106.37500 5.180 2,716.20 12.64
115064AD9 Broward Cnty 7.9500000 12/01/08 12/01/99 103.000000
265,000 108.75000 5.290 10,418.62 43.87
143737AC8 Carol Stream 5.75 5.7500000 12/01/99
125,000 100.12500 5.720 1,758.14 20.17
143737AD6 Carol Stream 6 6.0000000 12/01/00
250,000 100.12500 5.970 3,669.04 42.12
143737AE4 Carol Stream 6.25 6.2500000 12/01/01
250,000 100.00000 6.235 3,822.14 43.96
162636AX2 Chaves NM 7.25% 7.2500000 12/01/10 12/01/02 102.000000
Page 3
<PAGE> 3
SEC0530.TXT
375,000 106.50000 6.142 13,446.61 70.43
167590AN8 CHICAGO 8.4% 5/1/18 8.4000000 5/01/18 5/01/99 103.000000
70,000 107.62500 5.610 472.43 11.81
167590AP3 Chicago O'Hare 5/18 8.9500000 5/01/18 11/01/00 103.000000
170,000 112.12500 5.780 1,199.07 30.80
167590BR8 Chicago 7.875% 7.8750000 11/01/25 11/01/00 102.000000
80,000 108.00000 5.800 496.48 14.00
179423AC2 Clairborne 9.875 9.8750000 12/01/14 12/01/98 103.000000
450,000 109.12500 5.430 21,976.61 77.39
180519AA8 CLARION CO PA 10.1250000 5/01/07 5/01/99 103.000000
495,000 107.75000 7.200 3,949.55 107.46
186347AA8 CLEVELAND OH 9 9.0000000 12/01/19 12/01/99 102.000000
100,000 108.00000 6.230 4,451.00 19.46
196777GZ3 Colorado Student 6.9000000 9/01/01
400,000 104.87500 5.585 6,764.85 66.13
207742XU6 CT STATE HEALTH 5.7000000 7/01/98
440,000 99.81900 5.870 9,698.54 73.20
207755FB0 Connecticut 8% 11/1 8.0000000 11/15/15 11/15/98 103.000000
850,000 106.75000 5.120 2,771.72 129.44
207913BP8 Connecticut 6.875 6.8750000 8/15/04
1,600,000 101.37500 6.624 31,602.33 304.26
235035AF9 DALLAS-FORT WORTH 7.1250000 11/01/26 11/01/01 100.000000
35,000 104.00000 6.084 196.57 6.19
246387BQ6 Delaware 7.15% 7/18 7.1500000 7/01/18 7/01/01 102.000000
850,000 109.25000 5.042 25,048.73 133.57
249181GW2 Denver CO 8.5% 8.5000000 11/15/23 11/15/00 102.000000
605,000 112.00000 5.180 2,876.54 97.92
249181GX0 Denver 8% 11/15/25 8.0000000 11/15/25 11/15/00 102.000000
110,000 110.50000 5.180 359.16 17.55
249181KAS DENVER AIRPORT 7.5000000 11/15/25 11/15/97 102.000000
90,000 102.97000 5.170 275.12 13.35
253219AB5 DICKSON COUNTY MI 7.6250000 11/01/05 11/01/04 102.000000
425,000 107.25000 6.487 2,553.74 82.60
254760S44 DISTRICT OF COLUMBI 4.7000000 6/01/99
55,000 99.00000 5.230 1,278.07 8.10
295206HB5 Erie Cnty PA 7.6 7.6000000 9/01/10 9/01/00 102.000000
425,000 109.00000 5.130 7,882.50 67.14
419798HU0 Hawaii ST 7.625% 7.6250000 12/01/18 9/27/99 102.000000
185,000 107.00000 5.350 6,976.71 30.45
419798HW6 HAWAII SEPT OF BUDG 7.6000000 7/01/20 7/01/00 102.000000
190,000 107.12500 5.650 6,186.93 32.91
491026JE1 Kenton Cnty 6.75% 0 6.7500000 2/01/02
Page 4
<PAGE> 4
SEC0530.TXT
475,000 104.75000 5.580 10,513.86 78.75
491026JJ0 KENTON CO KY 7.2500000 2/01/22 2/01/02 102.000000
90,000 106.87500 5.929 2,127.02 16.19
491026JK7 Kenton Cnty 7.125 7.1250000 2/01/21 2/01/02 102.000000
210,000 105.75000 6.057 4,896.78 38.19
491740AA4 Kentwood MI 7.85 7.8500000 9/01/01 9/01/97 100.250000
30,000 101.23200 2.718 576.28 2.34
520129AG2 LAWRENCE KA 7% 7/99 7.0000000 7/01/99
180,000 100.62500 6.683 5,180.00 34.59
520129AH0 Lawrence KA 7.0000000 7/01/00
190,000 100.75000 6.732 5,467.47 36.82
524807BF0 LEHIGH CNTY 6.05 6.0500000 10/01/01
240,000 100.50000 5.906 2,340.94 39.96
544628DS6 Los Angeles Airport 9.0000000 8/01/08 8/01/98 102.000000
100,000 106.12500 5.140 2,933.65 15.57
54640AGR5 LOUISIANA PUBLIC FA 8.2500000 9/01/08 9/01/02 103.000000
2,000,000 107.75000 6.934 40,540.62 422.88
563014AG4 MANHATTAN KA 7% 7/9 7.0000000 7/01/99
180,000 100.62500 6.683 5,180.00 34.59
563014AH2 Manhattan KA 7% 7.0000000 7/01/00
190,000 100.50000 6.810 5,467.49 37.16
569122BH6 MARION CNTY OH 5/04 5.9000000 5/15/04
425,000 101.25000 5.684 1,022.09 68.10
573904AH2 MARTIN CO FL 7.8750000 12/15/25 12/15/04 102.000000
2,000,000 112.00000 6.079 71,934.25 390.39
575912AV2 Massachusetts 9% 9.0000000 7/01/15 7/01/01 103.000000
400,000 112.37500 6.164 14,862.85 79.51
575912AW0 MA INDL FIN 9.25 9.2500000 7/01/15 7/01/01 103.000000
50,000 112.75000 6.314 1,909.02 10.22
575914ZS8 Massachusetts Indl 7.7500000 10/01/00 10/01/97 102.000000
850,000 102.37400 6.370 10,635.34 155.85
586903BM7 Menomonee Falls 6.4500000 3/01/04
200,000 101.25000 6.226 3,155.14 35.56
587850CX4 Mercer Cnty 7% 1/19 7.0000000 1/01/19 1/01/99 103.000000
1,220,000 104.50000 5.790 35,249.48 210.71
594692Z32 MI Strategic Fund 6.7000000 1/01/07 1/01/02 103.000000
65,000 102.12500 6.332 1,797.21 11.99
597901AD9 MIDLAND CO MI ECON 9.5000000 6/15/04 6/15/00 102.000000
1,455.000 109.12500 6.740 47,869.95 306.22
644688EC3 New Hampshire 10.75 10.7500000 10/01/12 10/01/97 103.000000
1,000,000 104.75800 5.050 17,483.13 149.41
64577KAC8 NEW JERSEY 7.875% 7.8750000 6/01/19 6/01/02 102.000000
Page 5
<PAGE> 5
SEC0530.TXT
450,000 107.62500 6.426 17,523.50 89.58
<PAGE> 6
PAGE 2 DAILY SEC ADVERTISING
YIELD RUN DATE: 5/30/97
FUND: 28 SHORT DUR HIGH YIELD BOND & NOTE
HOLDING AS OF: 5/30/97
CALL CALL
<TABLE>
<CAPTION>
CALL CALL
ACCRUED
SECURITY COUPON MATURITY DATE PRICE
PAR MKT PRICE Y-T-M INTEREST INCOME
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
64579CFWS NEW JERSEY 7.2% 7/0 7.2000000 7/01/01
500,000 102.37500 6.004 14,853.28 87.85
647111AT0 NEW MEXICO EDUCATIO 6.0500000 12/01/00
90,000 103.37500 4.980 2,692.07 13.24
647111DW0 NEW MEXICO 5.5 5.50000000 11/01/03
900,000 100.75000 5.367 3,900.79 135.76
717903KZ0 PHILADELPHIA 6.5 6.5000000 7/01/97
15,000 100.11600 4.860 401.99 2.08
717903LC0 Philadelphia 6.9 6.9000000 7/01/00
1,000,000 104.12500 5.410 28,477.94 160.76
717905AN3 PHILADELPHIA 7.625 7.6250000 5/01/14 5/01/99 102.000000
125,000 105.12500 5.740 751.10 21.07
73358EAA2 PORT AUTHORITY 9.12 9.1250000 12/01/15 12/01/00 102.000000
900,000 112.75000 5.580 40,615.71 163.58
762211HU7 RHODE ISLAND 8.05 8.0500000 4/01/22 10/01/00 102.000000
900,000 104.00000 7.132 11,697.80 187.75
766370BT6 RIDLEY PARK 6% 12/0 6.0000000 12/01/05
500,000 100.25000 5.958 14,847.23 85.41
769774AF7 Roane Cnty TN 7.2500000 1/15/07 7/15/01 103.000000
250,000 104.62500 6.423 6,746.66 47.87
770222AG2 ROBBINS IL RESOURCE 8.3750000 10/15/16 10/15/06 100.000000
2,000,000 101.50000 8.148 20,901.03 464.18
771265EH4 ROCHELLE IL 6.25 6.2500000 5/01/00
140,000 103.00000 5.112 689.58 20.57
792888FM6 ST PAUL 9.75% 11/17 9.7500000 11/01/17 11/01/97 102.000000
1,000,000 103.95200 4.770 7,801.01 138.77
79331PAA6 St. Petersburg 7.5000000 12/01/06
265,000 104.12500 6.893 9,827.11 54.71
</TABLE>
Page 6
<PAGE> 7
SEC0530.TXT
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
795576BV8 Salt Lake 7.9% 6/17 7.9000000 6/01/17 6/01/99 102.000000
100,000 105.87500 5.720 3,907.34 17.44
79625DAA8 San Antonio 8.25 8.2500000 12/01/19 12/01/02 103.000000
1,000,000 107.87500 6.962 40,804.33 216.51
810694SM2 SCRANTON 8.25% 8.2500000 7/01/09 7/01/01 102.000000
300,000 108.62500 6.256 10,213.54 58.41
810694VA4 SCRANTON PA 7/15/00 6.6000000 7/15/00
500,000 102.00000 5.900 12,353.63 85.61
810694VF3 Scranton-Lackawanna 7.1250000 7/15/05 7/15/04 102.000000
500,000 106.62500 6.084 13,303.92 92.35
850757AA3 Springfield MA 9.5% 9.5000000 11/01/05 5/01/00 103.000000
385,000 109.87500 6.658 2,882.30 78.77
854441AK8 Stanislaus CA 7.5% 7.5000000 1/01/05 1/01/00 102.000000
100,000 106.00000 5.694 3,087.57 17.25
953452AB5 West Jefferson 7.5000000 12/01/08 12/01/06 102.000000
1,000,000 98.62500 7.683 37,092.29 218.40
========== ========== ========
TOTALS
33,740,000 780,400.45 6,243.25
</TABLE>
<PAGE> 8
PAGE: 3 DAILY SEC ADVERTISING
YIELD RUN DATE: 5/30/97
FUND: 28 SHORT DUR HIGH YIELD AS OF: 5/30/97
SECURITY COUPON MATURITY PAR
INTEREST AMORT REAL G/L INCOME
- --------------------------------------------------------------------------------
- ---------------------------------------------------------
575856BK4 MA 4.2% 10/1/22 4.0500000 10/01/22 1,000,000
110.95 0.00 0.00 110.95
592195AC5 METROPOLITAN NASHVIL 4.0000000 10/01/12 900,000
97.27 0.00 0.00 97.27
SUB-TOTALS FOR SHORT-TERM BONDS 1,900,000
208.22 0.00 0.00 208.22*
Page 7
<PAGE> 9
SEC0530.TXT
===========
============ ================= ============== ===================
TOTALS 1,900,000
208.22 0.00 0.00 208.22
Page 8
<PAGE> 10
Heartland Short Duration High - Yield Municipal Fund
Total Return Calculation - On Net Asset Value
From Inception (1/2/97) to 05/31/97
Amt Invested At 02-Jan-97 10,000.00 02-Jan-97 10.00
<TABLE>
<CAPTION>
DIV/ REINVEST # SHARES # SHARES
DATE # SHARES SHARE PRICE FROM DIV AFTER DIV VALUE MONTHLY CUMULATIVE
-------- --------- ------------- ----------- --------- --------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
01/02/97 1,000.000 0.00000000000 10.00 0.000 1000.000 10,000.00 0.0000% 0.0000%
01/31/97 1,000.000 0.04108792237 10.01 4.105 1004.105 10,051.09 0.5109% 0.5109%
02/28/97 1,004.105 0.04524833705 10.06 4.516 1008.621 10,146.73 0.9515% 1.4673%
03/31/97 1,008.621 0.05121532962 10.00 5.166 1013.787 10,137.87 -0.0873% 1.3787%
04/30/97 1,013.787 0.04898904315 10.00 4.966 1018.753 10,187.53 0.4899% 1.8753%
05/31/97 1,018.753 0.04773416188 10.00 4.863 1023.616 10,236.16 0.4773% 2.3616%
</TABLE>
CUMULATIVE TOTAL RETURN 1/2/97 TO 5/31/97 2.36%
<PAGE> 1
HEARTLAND HIGH YIELD MUNI FUND - CALCULATION OF YIELD
CALCULATION OF INTEREST EARNED ON INVESTMENTS, EXPENSES,
& AVERAGE NUMBER OF SHARES ENTITLED TO DIVIDENDS FOR
30 DAYS BEGINNING MAY 1, 1997.
<TABLE>
<CAPTION>
Yield = 2[(((a-b)/cd)+1
55,871.43 a= dividends & interest earned during the period
# OF SHARES 0.00 b= expenses accrued for the period
INCOME EXPENSES ACCRUING DIV 996,941.46 c= average number shares outstanding during the period
--------------- --------------- ------------- that were entitled to receive dividends
10.04 d= the maximum offering price per share on the last day
of the period
<S> <C> <C> <C> <C> <C> <C>
a-b= 55,871.43
cd= 10,009,292.22
May 1 1,363.70 0.00 782,611.189 1 ((a-b)/cd)+1= 1.0055819561238
2 1,343.31 0.00 783,214.678 2 6
3 1,343.31 0.00 794,303.269 3 (((a-b)/cd)+1= 1.0339626033283
4 1,343.31 0.00 794,303.269 4 6
5 1,349.63 0.00 794,303.269 5 (((a-b)/cd)+1= 0.0339626033283
6 1,560.82 0.00 1,018,969.172 6 6
7 1,764.54 0.00 1,017,983.268 7 2[(((a-b)/cd)+1)= 0.0679252066567
8 1,807.70 0.00 1,020,083.268 8
9 1,807.57 0.00 1,020,983.483 9 YIELD= 6.79%
10 1,807.66 0.00 1,023,200.500 10 ================
11 1,825.83 0.00 1,023,200.500 11
12 1,859.80 0.00 1,023,200.500 12
13 1,967.56 0.00 1,029,460.500 13
14 1,967.01 0.00 1,029,470.500 14
15 2,049.62 0.00 1,036,714.844 15
16 1,999.07 0.00 1,041,211.365 16
17 1,916.34 0.00 1,044,156.419 17
18 1,998.95 0.00 1,044,156.419 18
19 2,028.92 0.00 1,044,156.419 19
20 2,028.92 0.00 1,047,452.822 20
21 2,020.36 0.00 1,049,495.659 21
22 2,074.22 0.00 1,045,001.353 22
23 2,060.13 0.00 1,046,554.020 23
24 2,011.81 0.00 1,046,999.354 24
25 2,011.40 0.00 1,046,999.354 25
26 2,058.47 0.00 1,046,999.354 26
27 2,060.25 0.00 1,046,999.354 27
28 2,144.29 0.00 1,051,775.858 28
29 2,148.97 0.00 1,058,149.773 29
30 2,147.96 0.00 1,056,133.952 30
-------------- --------------
Totals 55,871.43 29,908,243.68
============== ==============
30 days in period
996,941.456 avg shares accr dividends
</TABLE>
<PAGE> 2
PAGE: 1 DAILY SEC ADVERTISING
YIELD RUN DATE: 5/30/97
FUND: 29 HIGH YIELD MUNI BOND BOND & NOTE
HOLDING AS OF: 5/30/97
CALL CALL
ACCRUED
SECURITY COUPON MATURITY DATE PRICE
PAR MKT PRICE YTM INTEREST INCOME
- --------------------------------------------------------------------------------
- -------------------------------------------------------------
01728AMJ2 ALLEGHENY PA 5.625% 5.6250000 8/15/26 8/15/06 102.000000
500,000 98.25000 5.749 8,183.60 79.75
023031BA4 Amarillo, TX 6.3 8/0 6.3000000 8/15/05 8/15/01 102.000000
100,000 98.75000 6.490 1,809.76 18.13
143737AH7 CAROL STREAM IL 7.0000000 12/01/13 12/01/07 102.000000
250,000 99.12500 7.096 4,312.32 49.70
180519AA8 CLARION CO PA 10.1250000 5/01/07 5/01/99 103.000000
300,000 107.75000 7.200 2,393.66 65.13
207913BN3 CT ST DEV AUTH 7.2500000 8/15/21 8/15/04 102.000000
100,000 100.50000 7.168 2,082.97 20.43
207913BQ6 CT STATE DEV AUTH 7.0000000 8/15/09 8/15/04 102.000000
250,000 100.87500 6.867 5,077.10 49.08
236141BH9 DANFORTH TX HEALTH 8.2500000 3/01/27 3/01/04 102.000000
665,000 97.25000 8.504 13,440.70 155.94
240471FX5 DEKALB CO GA 7.0500000 1/01/39 1/01/08 104.000000
325,000 106.00000 6.408 3,716.27 61.98
2547604Y4 DC.GO 6.3750000 6/01/26 6/01/06 102.000000
100,000 101.25000 6.222 1,027.70 17.68
420240AX1 HAWKINS CO TN 7.0000000 1/01/06 7/01/00 102.000000
65,000 103.00000 6.307 1,870.66 12.06
45129THA8 IDAHO HOUSING 6.2000000 7/01/28 1/01/07 102.000000
101,000 101.00000 6.080 2,548.80 17.49
45200LDU7 IL HEALTH FACILITIE 7.1250000 8/15/17 8/15/06 102.000000
240,000 98.50000 7.264 4,913.02 48.69
452010SK8 IL HOUSING DEV AUTH 5.0000000 7/01/25 7/01/97 100.000000
360,000 78.00000 6.764 7,421.44 54.16
Page 1
<PAGE> 3
SEC0530.TXT
455254CZ3 INDIAN IN AIRPORT 7.1000000 1/15/17 7/15/04 102.000000
100,000 107.87500 5.951 2,647.54 18.27
520129AD9 LAWRENCE KS 8.0000000 7/01/16 1/01/07 102.000000
115,000 102.62500 7.652 3,787.74 25.89
54640AGR5 LOUISIANA PUBLIC FA 8.2500000 9/01/08 9/01/02 103.000000
125,000 107.75000 6.934 2,533.81 26.43
549802AC0 LUFKIN TX HEALTH 6.8750000 2/15/26 2/15/06 102.000000
95,000 103.87500 6.372 1,876.31 17.80
561842MN2 MANATEE CO FL 7.2000000 5/01/28 5/01/07 105.000000
250,000 108.87500 6.275 2,923.00 47.95
563014AD1 MANHATTAN KS 8.0000000 7/01/16 1/01/07 102.000000
105,000 102.62500 7.652 3,458.27 23.64
573904AH2 MARTIN CO FL 7.8750000 12/15/25 12/15/04 102.000000
400,000 112.00000 6.079 14,386.87 78.08
575851GB0 MA STATE HEALTH 6.6250000 11/15/22 11/15/02 102.000000
100,000 100.37500 6.563 270.02 18.35
575851ZU7 MA HEALTH & EDUC FA 6.1250000 8/01/13 8/01/03 102.000000
345,000 94.50000 6.686 6,950.30 61.84
57585JAZ4 MA STATE HEALTH 6.0000000 2/15/34 2/15/04 102.000000
100,000 100.25000 5.967 1,723.46 16.90
575914ZS8 Massachusetts Indl 7.7500000 10/01/00 10/01/97 102.000000
410,000 102.37400 6.370 5,121.96 75.18
575925AR3 MA IND FIN AGENCY 8.0000000 1/15/27 1/15/07 102.000000
185,000 100.37500 7.944 6,909.57 42.50
60374RAP7 MINN MN HLTH 7.5 7.5000000 2/01/26 12/01/01 100.000000
500,000 98.62500 7.618 4,594.26 105.32
61213KAD2 MT BOARD OF INV 7.0000000 12/31/19 6/30/03 102.000000
1,525,000 94.75000 7.484 44,355.45 309.60
65888MND9 NORTH DAKOTA HOUSIN 5.9500000 7/01/17 7/01/07 102.000000
500,000 100.25000 5.919 4,684.03 83.19
678691AW6 OKLAHOMA CITY IND AU 6.1500000 1/01/11 1/01/07 102.000000
100,000 99.50000 6.198 2,531.47 17.57
717903LE6 PHILLY PA HOSPITALS 7.2500000 7/01/10 7/01/02 102.000000
15,000 105.12500 6.333 447.39 2.85
770222AG2 ROBBINS IL RESOURCE 8.3750000 10/15/16 10/15/06 100.000000
500,000 101.50000 8.148 5,175.08 116.05
804833CB5 SAVANNAH GA HOSP 7.0000000 1/01/11 1/01/03 102.000000
30,000 103.62500 6.392 863.13 5.67
804833CC3 SAVANNAH 7% 7.0000000 1/01/23 1/01/03 102.000000
255,000 103.25000 6.442 7,345.94 48.43
821697PF0 SHELBY CO TN 8.5000000 7/01/26 7/01/06 102.000000
630,000 99.75000 8.523 22,015.00 153.99
Page 2
<PAGE> 4
SEC0530.TXT
87638LBN9 TARRANT CO TX 8.5000000 5/01/27 5/01/04 102.000000
510,000 96.75000 8.809 1,800.12 121.18
953452AA7 WEST JEFFERSON 8.0000000 12/01/26 12/01/06 100.000000
350,000 97.25000 8.226 13,924.35 81.06
===========
============ ================== ============= ==============
TOTALS
2,147.96
<PAGE> 5
Heartland High Yield Municipal Fund
Total Return Calculation - On Net Asset Value
From Inception (1/2/97) to 5/31/97
Amt Invested At 02-Jan-97 10,000.00 02-Jan-97 10.00
<TABLE>
<CAPTION>
DIV/ REINVEST # SHARES # SHARES
DATE # SHARES SHARE PRICE FROM DIV AFTER DIV VALUE MONTHLY CUMULATIVE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
01/02/97 1,000.000 0.00000000000 10.00 0.000 1000.000 10,000.00 0.0000% 0.0000%
01/31/97 1,000.000 0.04118107614 10.06 4.094 1004.094 10,101.18 1.0118% 1.0118%
02/28/97 1,004.094 0.05059800697 10.10 5.030 1009.124 10,192,15 0.9006% 1.9215%
03/31/97 1,009.124 0.05554229150 10.02 5.594 1014.717 10,167.47 -0.2422% 1.6747%
04/30/97 1,014.717 0.05576350505 10.00 5.658 1020.376 10,203.76 0.3569% 2.0376%
05/31/97 1,020.376 0.05304924462 10.04 5.391 1025.767 10,298.70 0.9305% 2.9870%
CUMULATIVE TOTAL RETURN 1/2/97 TO 5/31/97 2.99%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF ADDITIONAL INFORMATION DATED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH DOCUMENT.
</LEGEND>
<SERIES>
<NUMBER> 9
<NAME> HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-02-1997
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 40,818,360
<INVESTMENTS-AT-VALUE> 40,842,214
<RECEIVABLES> 1,447,096
<ASSETS-OTHER> 83,457
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 42,372,767
<PAYABLE-FOR-SECURITIES> 3,765,991
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 443,518
<TOTAL-LIABILITIES> 4,209,509
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 38,208,969
<SHARES-COMMON-STOCK> 3,816,426
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,378
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (48,089)
<NET-ASSETS> 38,163,258
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 363,221
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 363,221
<REALIZED-GAINS-CURRENT> 2,378
<APPREC-INCREASE-CURRENT> (48,089)
<NET-CHANGE-FROM-OPS> 317,510
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 363,221
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,999,891
<NUMBER-OF-SHARES-REDEEMED> (202,405)
<SHARES-REINVESTED> 18,940
<NET-CHANGE-IN-ASSETS> 38,163,258
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24,408
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 68,354
<AVERAGE-NET-ASSETS> 18,302,937
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .23
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .23
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF ADDITIONAL INFORMATION DATED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH DOCUMENT.
</LEGEND>
<SERIES>
<NUMBER> 10
<NAME> HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-02-1997
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 10,524,496
<INVESTMENTS-AT-VALUE> 10,546,264
<RECEIVABLES> 248,574
<ASSETS-OTHER> 21,672
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,816,510
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 226,805
<TOTAL-LIABILITIES> 226,805
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,590,840
<SHARES-COMMON-STOCK> 1,055,134
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (22,903)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,768
<NET-ASSETS> 10,589,705
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 146,667
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 146,667
<REALIZED-GAINS-CURRENT> (22,903)
<APPREC-INCREASE-CURRENT> 21,768
<NET-CHANGE-FROM-OPS> 145,532
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (146,667)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,070,323
<NUMBER-OF-SHARES-REDEEMED> (22,498)
<SHARES-REINVESTED> 7,309
<NET-CHANGE-IN-ASSETS> 10,589,705
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 13,439
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 36,539
<AVERAGE-NET-ASSETS> 5,995,669
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .27
<PER-SHARE-GAIN-APPREC> .04
<PER-SHARE-DIVIDEND> (.27)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.04
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
