<PAGE>
As filed with the Securities and Exchange Commission on April 29, 1998
Registration Nos. 33-11371
811-4982
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _________ [ ]
Post-Effective Amendment No. 34 [X]
---------
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 36 [X]
----------
(Check Appropriate box or boxes)
---------------
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 May 1, 1998 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
---------------
<PAGE>
HEARTLAND GROUP, INC.
FORM N-1A
CROSS-REFERENCE SHEET
TO POST-EFFECTIVE AMENDMENT NO. 34
_________________________________________
HEARTLAND LARGE CAP VALUE FUND
HEARTLAND MID CAP VALUE FUND
HEARTLAND VALUE PLUS FUND
HEARTLAND U.S. GOVERNMENT SECURITIES FUND
HEARTLAND SMALL CAP CONTRARIAN FUND
HEARTLAND VALUE FUND
<TABLE>
<CAPTION>
Form N-1A
Item No. Prospectus Heading
- -------- ------------------
<S> <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;
Appendix A - Asset Composition
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. See Annual Report
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;
How to Redeem Shares
8. Redemption or Repurchase..................... How to Redeem Shares
9. Pending Legal Proceedings.................... None
</TABLE>
<PAGE>
<TABLE>
PART B
<S> <C>
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 Methods; Investment
Restrictions; Appendix A - Securities Ratings
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>
<PAGE>
HEARTLAND LARGE CAP VALUE FUND
HEARTLAND MID CAP VALUE FUND
HEARTLAND VALUE PLUS FUND
HEARTLAND U.S. GOVERNMENT SECURITIES FUND
HEARTLAND SMALL CAP CONTRARIAN FUND
HEARTLAND VALUE FUND
Prospectus
May 1, 1998
Heartland Large Cap Value Fund, Heartland Mid Cap Value Fund, Heartland Value
Plus Fund, Heartland U.S. Government Securities Fund, Heartland Small Cap
Contrarian Fund, and the Heartland Value 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 May 1, 1998) 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.
<PAGE>
INVESTMENT SUMMARY
HEARTLAND LARGE CAP VALUE FUND'S investment objective is long-term capital
appreciation. The Fund seeks to achieve its objective through value investing
in large cap stocks, those of companies with market capitalizations over $1
billion.
HEARTLAND MID CAP VALUE FUND'S investment objective is long-term capital
appreciation. The Fund seeks to achieve its objective through value investing
in mid-cap stocks, those of companies with market capitalizations between $750
million and $5 billion.
HEARTLAND VALUE PLUS FUND'S investment objectives are capital appreciation and
current income. The Fund seeks to achieve its objectives primarily through
investment in income-producing equity securities of smaller companies selected
on a value basis, and the Fund may also invest in debt securities.
HEARTLAND U.S. GOVERNMENT SECURITIES FUND'S investment objectives are a high
level of current income, liquidity and safety of principal.
HEARTLAND SMALL CAP CONTRARIAN FUND'S investment objective is maximum long-term
growth. The Fund seeks to achieve its objective through aggressive, yet
flexible, value investing in small company stocks. The Small Cap Contrarian
Fund is closed to new accounts.
HEARTLAND VALUE FUND'S investment objective is long-term capital appreciation.
The Fund seeks to achieve its objective through investment in small company
stocks selected on a value basis. The Value Fund is closed to new
accounts.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Fund Expenses 4
Financial Highlights 5
Investment Objectives and Policies 11
How to Buy Shares 24
How to Redeem Shares 27
Shareholder Services 30
Dividends, Capital Gains Distributions and Taxes 32
The Funds and the Heartland Organization 33
The Distribution Plan 35
Net Asset Value Calculation 36
Description of Fund Shares 36
Portfolio Transactions 37
Performance Information 37
</TABLE>
<PAGE>
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>
LARGE CAP MID CAP VALUE U.S. GOVT. SMALL CAP VALUE
VALUE VALUE PLUS SECURITIES CONTRARIAN
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C> <C>
Sales load on purchases None None None None None None
Sales load on reinvested dividends None None None None None None
Exchange fees None None None None None None
Redemption fees /(1)/ None None None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Management fees (after waivers) 0%/(2)/ .75% .70% .25%/(3)/ .75% .75%
Rule 12b-1 fees (after waivers) 0%/(2)/ .25% .25% .25% .25% .25%
Other expenses (after
reimbursement) 0%/(2)/ .25%/(4)/ .17% .30% .30% .12%
TOTAL FUND OPERATING EXPENSES 0%/(2)/ 1.25%/(4)/ 1.12% .80%/(3)/ 1.30% 1.12%
</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 the Large Cap
Value Fund give effect to Heartland Advisors' voluntary undertaking to waive the
entire management and Rule 12b-1 fees and to reimburse all other expenses.
Without such waivers and reimbursement, the Management fee, Rule 12b-1 fees and
Other Expenses for 1997 would have been .75%, .25% and 1.00%, respectively, for
a total of 2.00%. Heartland Advisors expects to continue the waivers and
reimbursement for the current fiscal year; however, it may reinstate all or a
portion of such fees or discontinue reimbursement at any time.
(3) The expense information for the U.S. Government Securities Fund has been
restated to give effect to the voluntary waiver by Heartland Advisors of a
portion of its Management fee equal to 0.40 of 1% of average net assets.
Without any waivers, the Management fees and Total Fund Operating Expenses for
1997 would have been .65% and 1.20% of average net assets, respectively.
Heartland Advisors expects to continue the waivers and reimbursement for the
current fiscal year; however, it may reinstate all or a portion of such fees or
discontinue reimbursement at any time.
(4) The expense information for the Mid Cap Value Fund has been restated to
give effect to Heartland Advisors' voluntary undertaking to reimburse the Fund
to the extent that annual Total Fund Operating Expenses would exceed 1.25%.
Without this reimbursement, Other Expenses and Total Fund Operating Expenses for
1997 would have been .32% and 1.32% of average assets, respectively. Heartland
Advisors expects to continue the reimbursement for the current fiscal year;
however, it may discontinue such reimbursement at any time.
<PAGE>
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>
LARGE CAP MID CAP VALUE U.S. GOVT. SMALL CAP VALUE
VALUE VALUE PLUS SECURITIES CONTRARIAN
<S> <C> <C> <C> <C> <C> <C>
One year $0 $ 13 $ 11 $ 8 $ 13 $ 11
Three years $0 $ 40 $ 36 $26 $ 41 $ 36
Five years $0 $ 69 $ 62 $44 $ 71 $ 62
Ten years $0 $151 $136 $99 $157 $136
</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 following Financial Highlights table has been examined by Price Waterhouse
LLP, independent public accountants, with respect to the fiscal year ended
December 31, 1997, whose reports on the financial statements of the Large Cap
Value, Mid Cap Value, Value Plus, U.S. Government Securities, Small Cap
Contrarian and Value Funds for the fiscal year ended December 31, 1997 are
included in the Funds' Annual Report to Shareholders for such period, and
incorporated by reference into the Statement of Additional Information. The
Financial Highlights table has been examined by Arthur Andersen LLP, independent
public accountants, with respect to the fiscal years ended December 31, 1988,
December 31, 1989, December 31, 1990, December 31, 1991, December 31, 1992,
December 31, 1993, December 31, 1994, December 31, 1995 and December 31, 1996.
The table should be read in conjunction with the audited financial statements
and related notes appearing in the Funds' Annual Report, which are incorporated
by reference into the Statement of Additional Information. Additional
information about the Funds' performance is contained in the Annual Report,
which may be obtained without charge by writing or calling Heartland
Advisors.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Large Cap Value Fund Mid Cap Value Fund
------------------------------------------ -------------------------------------------
Year ended Oct. 11,1996(1) through Year ended Oct. 11, 1996(1) through
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1996
--------------- ------------------------ ------------------ ------------------------
<S> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period..... $ 10.50 $ 10.00 $ 10.66 $ 10.00
Income from investment operations:
Net investment income.................. 0.11 -- 0.05 --
Net realized and unrealized gains
on investments....................... 2.28 0.50 2.38 0.66
---------- ---------- ---------- ----------
Total income from investment
operations......................... 2.39 0.50 2.43 0.66
Less distributions from:
Net investment income.................. (0.11) -- (0.05) --
Net realized gains on investments...... (0.48) -- (0.26) --
---------- ---------- ---------- ----------
Total distributions.................. (0.59) -- (0.31) --
---------- ---------- ---------- ----------
Net asset value, end of period........... $ 12.30 $ 10.50 $ 12.78 $ 10.66
========== ========== ========== ==========
Total Return............................. 22.9%(6) 5.0%(2) 22.8%(6) 6.6%(2)
Ratios and Supplemental Data
Net assets, end of period
(in thousands)....................... $ 7,665 $ 2,441 $ 36,558 $ 6,934
Ratio of net expenses to average
net assets........................... 1.36%(4) 2.73%(3) 1.29%(4) 1.94%(3)
Ratio of net investment income (loss)
to average net assets................ 1.14%(4) (0.25)%(3) 0.54%(4) (0.16)%(3)
Portfolio turnover rate................ 30% 1% 48% 4%
Average commission rate per share...... $ 0.0666 $ 0.0668 $ 0.0678 $ 0.0675
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) If there had been no expense reimbursement or management fee waiver by the
Advisor, the ratio of net expenses to average net assets for the year ended
December 31, 1997 would have been 2.00% for the Large Cap Value Fund and
1.32% for the Mid Cap Value Fund and the ratio of net investment income to
average net assets would have been 0.50% and 0.51%, respectively.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Value Plus Fund
-------------------------------------------------------------------------------
For the year ended December 31, Oct. 26, 1993(1) through
1997 1996 1995 1994 Dec. 31, 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of period....... $ 13.73 $ 11.17 $ 9.53 $ 10.45 $ 10.00
Income (loss) from investment operations:
Net investment income..................... 0.48 0.38 0.41 0.41 0.07
Net realized and unrealized gains
(losses) on investments................. 3.66 3.33 1.89 (0.92) 0.45
--------- -------- -------- ------- -------
Total income (loss) from investment
operations............................. 4.14 3.71 2.30 (0.51) 0.52
Less distributions from:
Net investment income..................... (0.48) (0.38) (0.41) (0.41) (0.07)
Net realized gains on investments......... (1.26) (0.77) (0.25) -- --
--------- -------- -------- ------- -------
Total distributions..................... (1.74) (1.15) (0.66) (0.41) (0.07)
--------- -------- -------- ------- -------
Net asset value, end of period............. $ 16.13 $ 13.73 $ 11.17 $ 9.53 $ 10.45
========= ======== ======== ======= =======
Total Return(4)............................ 30.6% 33.8% 24.4% (4.9)% 5.2%
Ratios and Supplemental Data
Net assets, end of period
(in thousands).......................... $ 336,281 $ 66,582 $ 19,123 $ 9,884 $ 5,811
Ratio of net expenses to average
net assets.............................. 1.12% 1.45% 1.54% 1.80% 1.30%(3)
Ratio of net investment income
to average net assets................... 3.32% 3.23% 3.90% 4.39% 6.52%(3)
Portfolio turnover rate................... 74% 73% 150% 127% 6%
Average commission rate per share(5)...... $ 0.0657 $ 0.0573 N/A N/A N/A
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) The contingent deferred sales charge in effect for the Fund prior to June 1,
1994 is not reflected in Total Return as set forth in the table.
(5) Disclosure of average commission rate per share was not required prior to
the year ended December 31, 1996.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. Government Securities Fund
-------------------------------------------------------------------------------
For the year ended December 31,
1997 1996 1995 1994 1993 1992 1991
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Data
Net asset value, beginning of year............ $ 9.54 $ 9.96 $ 8.91 $ 10.50 $ 9.93 $ 9.97 $ 9.39
Income (loss) from investment operations:
Net investment income....................... 0.58 0.59 0.60 0.59 0.56 0.66 0.69
Net realized and unrealized gains
(losses) on investments................... 0.31 (0.42) 1.05 (1.59) 1.18 0.30 0.83
------- ------- ------- -------- ------- ------- -------
Total income (loss) from investment
operations.............................. 0.89 0.17 1.65 (1.00) 1.74 0.96 1.52
Less distributions from:
Net investment income....................... (0.58) (0.59) (0.60) (0.59) (0.56) (0.66) (0.69)
Net realized gains on investments........... -- -- -- -- (0.61) (0.34) (0.25)
------- ------- ------- -------- ------- ------- -------
Total distributions....................... (0.58) (0.59) (0.60) (0.59) (1.17) (1.00) (0.94)
------- ------- ------- -------- ------- ------- -------
Net asset value, end of year.................. $ 9.85 $ 9.54 $ 9.96 $ 8.91 $ 10.50 $ 9.93 $ 9.97
======= ======= ======= ======== ======= ======= =======
Total Return(1)............................... 9.7% 2.0% 19.0% (9.6)% 17.8% 10.1% 17.0%
Ratios and Supplemental Data
Net assets, end of year
(in thousands)............................ $48,562 $51,713 $66,261 $64,807 $66,789 $28,378 $29,101
Ratio of net expenses to average
net assets(2)............................. 0.87% 1.06% 1.07% 1.07% 1.06% 0.92% 0.92%
Ratio of net investment income
to average net assets(2).................. 6.12% 6.36% 6.31% 6.30% 5.09% 6.71% 7.06%
Portfolio turnover rate..................... 143% 30% 97% 95% 200% 149% 185%
<CAPTION>
U.S. Government Securities Fund
--------------------------------
For the year ended December 31,
1990 1989 1988
--------------------------------
<S> <C> <C> <C>
Per Share Data
Net asset value, beginning of year............ $ 9.25 $ 9.04 $ 9.22
Income (loss) from investment operations:
Net investment income....................... 0.73 0.77 0.76
Net realized and unrealized gains
(losses) on investments................... 0.14 0.21 (0.18)
------- ------- -------
Total income (loss) from investment
operations.............................. 0.87 0.98 0.58
Less distributions from:
Net investment income....................... (0.73) (0.77) (0.76)
Net realized gains on investments........... -- -- --
------- ------- -------
Total distributions....................... (0.73) (0.77) (0.76)
------- ------- -------
Net asset value, end of year.................. $ 9.39 $ 9.25 $ 9.04
======= ======= =======
Total Return(1)............................... 10.0% 11.3% 6.4%
Ratios and Supplemental Data
Net assets, end of year
(in thousands)............................ $16,424 $11,595 $12,414
Ratio of net expenses to average
net assets(2)............................. 0.86% 0.89% 0.95%
Ratio of net investment income
to average net assets(2).................. 7.98% 8.45% 8.25%
Portfolio turnover rate..................... 127% 142% 136%
</TABLE>
(1) The contingent deferred and initial sales charges in effect for the Fund
prior to June 1, 1994 are not reflected in Total Return as set forth in the
table.
(2) If there had been no expense reimbursement or management fee waiver by the
Advisor, the ratios of net expenses to average net assets for the years
ended December 31, 1997, 1996, 1995, 1994, 1993, 1992, 1991, 1990, 1989, and
1988, would have been 1.20%, 1.21%, 1.22%, 1.22%, 1.21%, 1.22%, 1.32%,
1.48%, 1.54%, and 1.55%, respectively, and the ratios of net investment
income to average net assets would have been 5.79%, 6.21%, 6.16%, 6.15%,
4.94%, 6.41%, 6.66%, 7.36%, 7.80%, and 7.65%, respectively.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Small Cap Contrarian Fund
---------------------------------------------------------------
For the year ended December 31, April 27, 1995(1)
1997 1996 through Dec. 31, 1995
---------------------------------------------------------------
<S> <C> <C> <C>
Per Share Data
Net asset value, beginning of period.......... $ 13.40 $ 11.79 $ 10.50
Income from investment operations:
Net investment income........................ 0.04 0.02 0.03
Net realized and unrealized gains
on investments............................. 1.77 2.20 2.05
-------- -------- --------
Total income from investment
operations................................ 1.81 2.22 2.08
Less distributions from:
Net investment income........................ (0.05) (0.02) (0.03)
Net realized gains on investments............ (2.52) (0.59) (0.26)
-------- -------- --------
Total distributions........................ (2.57) (0.61) (0.29)
-------- -------- --------
Net asset value, end of period................ $ 12.64 $ 13.40 $ 11.79
======== ======== ========
Total Return.................................. 13.7% 18.9% 20.8%(2)
Ratios and Supplemental Data
Net assets, end of period
(in thousands)............................. $ 276,642 $ 263,011 $ 85,549
Ratio of operating expenses to average
net assets................................. 1.30% 1.30% 1.44%(3)
Ratio of interest expense and dividends on
short positions to average net assets...... 0.05% 0.02% 0.00%(3)
Ratio of net investment income (loss)
to average net assets...................... 0.24% 0.19% 1.01%(3)
Portfolio turnover rate...................... 103% 57% 45%
Average commission rate per share(4)......... $ 0.0445 $ 0.0464 N/A
</TABLE>
(1) Commencement of operations. (2) Not annualized. (3) Annualized.
(4) Disclosure of average commission rate per share was not required prior
to the year ended December 31, 1996.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Value Fund
---------------------------------------------------------------
For the year ended December 31,
1997 1996 1995 1994 1993
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value, beginning of year..................... $ 31.65 $ 27.95 $ 22.72 $ 23.22 $ 20.41
Income (loss) from investment operations:
Net investment income.............................. 0.17 0.06 0.13 (0.09) (0.12)
Net realized and unrealized gains
(losses) on investments.......................... 7.09 5.78 6.63 0.47 3.95
------- ------- ------- ------- --------
Total income (loss) from investment
operations..................................... 7.26 5.84 6.76 0.38 3.83
Less distributions from:
Net investment income.............................. (0.17) (0.06) (0.13) -- --
Net realized gains on investments.................. (4.87) (2.08) (1.40) (0.88) (1.02)
------- ------- ------- ------- --------
Total distributions.............................. (5.04) (2.14) (1.53) (0.88) (1.02)
------- ------- ------- ------- --------
Net asset value, end of year........................... $ 33.87 $ 31.65 $ 27.95 $ 22.72 $ 23.22
======= ======= ======= ======= ========
TOTAL RETURN(1)........................................ 23.2% 21.0% 29.8% 1.7% 18.8%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year
(in thousands)................................... $ 2,126,715 $ 1,626,760 $ 1,190,926 $ 339,364 $ 186,518
Ratio of net expenses to average
net assets....................................... 1.12% 1.23% 1.29% 1.39% 1.51%
Ratio of net investment income (loss)
to average net assets............................ 0.49% 0.22% 0.61% (0.52)% (0.71)%
Portfolio turnover rate................................ 55% 31% 31% 35% 51%
Average commission rate per share(2)................... $ 0.0537 $ 0.0530 N/A N/A N/A
<CAPTION>
Value Fund
--------------------------------------------------------------
For the year ended December 31,
1992 1991 1990 1989 1988
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value, beginning of year..................... $ 16.06 $ 11.32 $ 13.82 $ 14.35 $ 11.74
Income (loss) from investment operations:
Net investment income.............................. (0.09) (0.08) 0.02 0.13 0.13
Net realized and unrealized gains
(losses) on investments.......................... 6.91 5.66 (2.38) 0.81 3.04
------- ------- ------- ------- --------
Total income (loss) from investment
operations..................................... 6.82 5.58 (2.36) 0.94 3.17
Less distributions from:
Net investment income.............................. -- -- (0.02) (0.13) (0.13)
Net realized gains on investments.................. (2.47) (0.84) (0.12) (1.34) (0.43)
------- ------- ------- ------- --------
Total distributions.............................. (2.47) (0.84) (0.14) (1.47) (0.56)
------- ------- ------- ------- --------
Net asset value, end of year........................... $ 20.41 $ 16.06 $ 11.32 $ 13.82 $ 14.35
======= ======= ======= ======= ========
TOTAL RETURN(1)........................................ 42.5% 49.4% (17.1)% 6.6% 27.1%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year
(in thousands)................................... $ 48,391 $ 29,880 $ 19,943 $ 30,798 $ 28,499
Ratio of net expenses to average
net assets....................................... 1.48% 1.69% 1.74% 1.65% 1.71%
Ratio of net investment income (loss)
to average net assets............................ (0.49)% (0.54)% 0.14% 0.86% 0.85%
Portfolio turnover rate................................ 76% 79% 76% 88% 50%
Average commission rate per share(2)................... N/A N/A N/A N/A N/A
</TABLE>
(1) The contingent deferred and initial sales charges in effect for the Fund
prior to June 1, 1994 are not reflected in Total Return as set forth in the
table.
(2) Disclosure of average commission per share was not required prior to the
year ended December 31, 1996.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES. The investment objectives of each of the Funds are
fundamental and may not be changed without shareholder approval. The investment
policies of the Funds, unless otherwise specified, are not fundamental policies,
and therefore may be changed by the affirmative vote of a majority of the
directors of Heartland. 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 LARGE CAP VALUE FUND seeks long-term capital appreciation through value
investing in large companies.
The MID CAP VALUE FUND seeks long-term capital appreciation through value
investing in mid-size companies.
The VALUE PLUS FUND'S investment objectives are capital appreciation and current
income. In pursuit of its objectives, the Fund seeks a yield that exceeds the
yield of securities comprising the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500").
The U.S. GOVERNMENT SECURITIES FUND'S investment objectives are a high level of
current income, liquidity and safety of principal.
The SMALL CAP CONTRARIAN FUND'S investment objective is maximum long-term
growth. The Fund seeks to take advantage of both rising and, to a lesser degree,
declining markets.
The VALUE FUND seeks long-term capital appreciation through value investing in
small companies.
HEARTLAND'S VALUE CRITERIA FOR INVESTING IN STOCKS
In selecting equity securities for the Small Cap Contrarian, Value, Mid Cap
Value, Large Cap Value and Value Plus Funds, Heartland Advisors considers
whether the security is undervalued relative to a set of factors,
including:
. price/earnings ratio . management capabilities
. market price to book value . undervalued assets
. price/cash flow ratio . potential for favorable developments
. earnings growth . insider and institutional ownership
. long-term debt/capital . technical analysis
WHAT IS MEANT BY MARKET CAP?
"Market Cap" (market capitalization) is a measure of the value of a company's
equity as determined by multiplying the company's current stock price by the
number of shares it has outstanding. While every equity investment involves
some degree of risk, in general, companies with larger market capitalizations
tend to be more established and their securities may have greater liquidity and
may be subject to lower volatility than those of smaller companies.
Investments in equity securities of companies with smaller market
capitalizations may involve a higher degree of risk than investments in the
general equity markets. However, Heartland Advisors believes that the relative
lack of attention from investment analysts and institutional investors to small
and mid-cap companies may result in opportunities to purchase the securities of
those companies at attractive valuations. In general, the prices of small and
mid-cap companies may be more volatile than those of larger companies, the
securities of smaller companies may have less market liquidity, and smaller
companies may be more likely to be adversely affected by poor economic or market
conditions.
It is anticipated that certain of the portfolio securities held by the Small Cap
Contrarian Fund, the Value Fund, Value Plus Fund and, to a more limited extent,
the Mid Cap Value Fund may not be widely traded and that a Fund's position in
such securities may be substantial in relation to the market for such
securities. Accordingly, it may be difficult at times for the Fund to dispose of
such securities at prevailing market prices in order to meet redemptions or
other cash needs.
LARGE CAP VALUE FUND
The Large Cap Value Fund seeks to achieve long-term capital appreciation by
investing in attractively priced companies with market capitalizations over $1
billion. Under normal market conditions, the Fund will invest at least 65% of
its total assets in equity securities of companies with market capitalizations
in excess of $1 billion selected on a value basis. Heartland Advisors' value
parameters for investing in stocks are discussed under "Heartland's Value
Criteria for Investing in Stocks." While the Fund will also invest in
securities that do not produce income, Heartland Advisors generally will look
for securities with
<PAGE>
relatively higher dividend yields when selecting securities it considers
undervalued for the Large Cap Value Fund.
Equity securities in which the Fund may invest include common stock, preferred
stock, convertible debt, warrants or other securities exchangeable for shares of
common stock, and other equity securities, including real estate investment
trusts. The Large Cap Value Fund may also invest up to 35% of its total assets
in debt securities, including up to 15% of its total assets which may be
invested in non-investment grade debt securities, provided the Fund may not
invest in securities rated below B, or judged by Heartland Advisors to be of
comparable quality, at the time of purchase. For information regarding non-
investment grade securities, see "Investment Quality."
As a matter of fundamental policy, the Large Cap Value Fund will not purchase
the securities of any issuer if, as a result: (i) with respect to 75% of the
Fund's total assets, more than 5% of its total assets would be invested in such
issuer or the Fund would own more than 10% of the outstanding voting securities
of such issuer; or (ii) more than 25% of its assets would be concentrated in
any one industry. These limitations do not apply to U.S. government
securities.
MID CAP VALUE FUND
The Mid Cap Value Fund seeks to achieve long-term capital appreciation through
investing in mid-size companies that are attractively priced. Under normal
market conditions, the Fund will invest at least 65% of its total assets in
equity securities of companies with market capitalizations between $750 million
and $5 billion selected on a value basis. Heartland Advisors' value criteria
for investing in stocks are discussed above. In addition, Heartland Advisors
will consider a relatively higher dividend yield as a favorable factor in
selecting equity securities for the Mid Cap Value Fund.
Equity securities in which the Fund may invest include common stock, preferred
stock, convertible debt, warrants or other securities exchangeable for shares of
common stock, and other equity securities, including real estate investment
trusts. The Mid Cap Value Fund may also invest up to 35% of its total assets in
debt securities, including up to 15% of its total assets which may be invested
in non-investment grade debt securities, provided the Fund may not invest in
securities rated below B, or judged by Heartland Advisors to be of comparable
quality, at the time of purchase. For information regarding non-investment
grade securities, see "Investment Quality."
As a matter of fundamental policy, the Mid Cap Value Fund will not purchase the
securities of any issuer if, as a result: (i) with respect to 75% of the Fund's
total assets, more than 5% of its total assets would be invested in such issuer
or the Fund would own more than 10% of the outstanding voting securities of such
issuer; or (ii) more than 25% of its assets would be concentrated in any one
industry. These limitations do not apply to U.S. government securities.
VALUE PLUS FUND
To achieve its objectives, the Value Plus Fund primarily invests in income-
producing equity securities of smaller companies, those with market
capitalizations of less than $750 million. The Fund seeks a yield that is
greater than the yield of the S&P 500. The Fund expects to realize income from
dividends earned on equity investments and interest earned on debt
securities.
Under normal market conditions, the Value Plus Fund will invest at least 65% of
its total assets in equity securities of value companies selected by Heartland
Advisors in accordance with the factors listed under "Heartland's Value Criteria
for Investing in Stocks" above.
While the Value Plus Fund may invest in securities of companies with market
capitalizations in excess of $750 million, a majority of the Fund's investments
will be in stocks with smaller market capitalizations. As of March 31, 1998,
the median market capitalization of the companies in the Value Plus Fund's
<PAGE>
portfolio was approximately $168 million, with a weighted average market
capitalization for the Fund's portfolio of approximately $556 million.
Equity securities in which the Fund may invest include common stock, convertible
debt, preferred stock, warrants or other securities exchangeable for shares of
common stock, and other equity securities, including real estate investment
trusts. Heartland Advisors attempts to reduce the volatility of the Fund
relative to the S&P 500 through the income-producing features of the Fund;
however, there is no assurance the Fund will achieve this goal.
The Value Plus Fund may invest up to 35% of its total assets in debt securities,
including up to 25% of its assets in non-investment grade debt securities,
provided that the Fund may not invest in securities rated below B, or judged by
Heartland Advisors to be of comparable quality, at the time of purchase. See
"Investment Quality." While Heartland Advisors will look to the conversion
feature of convertible debt securities and consider them as "equity securities,"
those securities will be subject to the above 25% limitation on investments in
non-investment grade securities.
As a matter of fundamental policy, the Value Plus Fund will not purchase the
securities of any issuer if, as a result: (i) the Fund would own more than 10%
of the outstanding voting securities of such issuer; (ii) with respect to 75%
of the Fund's total assets, more than 5% of its total assets would be invested
in such issuer; (iii) with respect to its total portfolio, more than 10% of the
total assets would be invested in such issuer; or (iv) more than 25% of its
assets would be concentrated in any one industry. These limitations do not
apply to U.S. government securities.
U.S. GOVERNMENT SECURITIES FUND
As a fundamental policy, the U.S. Government Securities Fund will invest at
least 65% of its total assets in obligations issued or guaranteed by the U.S.
government or by its agencies or instrumentalities ("U.S. Government
securities"). Under normal market conditions and with the exception of those
assets invested in short-term liquid reserves or options and futures, the Fund
intends to invest all of its assets in U.S. Government securities.
Some U.S. Government securities, such as Treasury bills, notes and bonds and
securities guaranteed by the Government National Mortgage Association ("GNMA")
are supported by the full faith and credit of the United States. Others, such
as obligations of the Federal Home Loan Banks and Tennessee Valley Authority,
are backed by the right of the issuer to borrow from the Treasury. Still
others, such as those of the Federal National Mortgage Association ("FNMA"), are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations. In addition, obligations of certain agencies or
instrumentalities, such as those of the Student Loan Marketing Association, are
supported only by the credit of the agency or instrumentality issuing the
obligations. Current market prices for U.S. Government securities are not
guaranteed and the value of such securities will fluctuate.
Heartland Advisors buys and sells securities after considering economic
conditions, liquidity factors and interest rate trends. Heartland Advisors also
considers certain factors, including sector rotation, security selection,
duration management and yield curve positioning in its value-based investment
process for the Fund. It may be expected that a decline in interest rates
generally will increase the value of securities held by the U.S. Government
Securities Fund, and an increase in interest rates will generally have the
opposite effect. Thus, interest rate fluctuations will affect the value of the
Fund's portfolio and, as a result, the Fund's net asset value per share. The
impact of interest rate fluctuations on fixed income securities is often
referred to as "market risk." The Fund may employ hedging techniques to reduce
the effects of such interest rate fluctuations; however, there can be no
assurance that such techniques will be successful.
Although 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 within three to six
years.
<PAGE>
SMALL CAP CONTRARIAN FUND
The Small Cap Contrarian Fund is closed to new accounts. Existing shareholders
of the Small Cap Contrarian Fund, certain employee benefit plans and certain
financial advisers and planners may continue to purchase additional shares. See
"How to Buy Shares." The Fund may resume sales to new investors at some future
date, but it has no present intention to do so.
The Small Cap Contrarian Fund seeks to achieve maximum long-term growth by
aggressive, yet flexible, value investing in smaller companies that are
attractively priced. The Fund seeks to take advantage of both rising and, to a
lesser degree, declining markets. Under normal market conditions, at least 65%
of the Fund's total assets will be invested in equity securities of smaller
companies with market capitalizations of less than $750 million.
The Small Cap Contrarian Fund takes an aggressive investment approach and may be
appropriate for investors who seek potentially high long-term returns, have an
investment horizon of at least three years, and are willing to accept certain
risks, including risks of short selling, futures and options, foreign
securities, leverage and potentially significant short-term fluctuations in the
Fund's share price. See "Other Investment Policies, Practices and Risk Factors
of the Funds."
The Fund focuses its investments primarily on equity securities of smaller
companies whose potential values generally have been overlooked by other
investors. Such companies include attractively priced, viable businesses that
have not yet been discovered or become popular, previously unpopular companies
having appreciation potential due to changed circumstances, companies that have
declined in value and no longer command an investor following, and previously
popular companies temporarily out of favor due to short-term factors. Heartland
Advisors will consider the factors listed under "Heartland's Value Criteria for
Investing in Stocks" when selecting companies for the Fund's portfolio. As of
March 31, 1998, the median market capitalization of the companies in which the
Fund had a long position was approximately $57 million, with a weighted average
market capitalization of about $256 million.
Equity securities in which the Fund may invest include common stock, convertible
debt, preferred stock, warrants or other securities exchangeable for shares of
common stock, and other equity securities, including real estate investment
trusts. The Small Cap Contrarian Fund may invest up to, but less than, 35% of
its total assets in debt securities, including lower-quality, high-yielding debt
securities. The Fund may buy debt securities of all types and qualities issued
by both domestic and foreign issuers. For information regarding the risks
associated with investing in lower-quality securities, see "Investment Quality."
As a matter of fundamental policy, the Small Cap Contrarian Fund will not
purchase the securities of any issuer if, as a result: (i) with respect to 75%
of the Fund's total assets, more than 5% of its total assets would be invested
in such issuer or the Fund would own more than 10% of the outstanding voting
securities of such issuer; or (ii) more than 25% of its assets would be
concentrated in any one industry. These limitations do not apply to U.S.
government securities. The aggressive investment techniques in which the Small
Cap Contrarian Fund may engage may entail risks not encountered by the average
mutual fund. Some techniques, such as short sales, the use of put and call
options and futures, investments in foreign securities, leverage and short-term
trading, may be considered speculative and may also result in higher operating
expenses. See "Other Investment Policies and Practices of the Funds."
VALUE FUND
The Value Fund is closed to new accounts. Existing shareholders of the Value
Fund and certain employee benefit plans may continue to purchase additional
shares. See "How to Buy Shares." The Fund may resume sales to new investors at
some future date, but it has no present intention to do so.
To achieve long-term capital appreciation, the Value Fund invests primarily in
equity securities of small companies with market capitalizations of less than
$750 million selected on a value basis. The Value Fund will invest at least 65%
of its total assets in equity securities of value companies as determined by
<PAGE>
Heartland Advisors in accordance with the factors listed under "Heartland's
Value Criteria for Investing in Stocks."
While the Value Fund may invest in securities of companies with market
capitalizations in excess of $750 million, a majority of the Fund's investments
will be in stocks with smaller market capitalizations. As of March 31, 1998, the
median market capitalization of the companies in the Value Fund's portfolio was
approximately $104 million, with a weighted average market capitalization for
the Fund's portfolio of approximately $537 million. The Value Fund may also
invest in convertible securities and debt securities rated B or above or judged
by Heartland Advisors to be of comparable quality, and warrants, each up to 5%
of the Fund's net assets.
As a matter of fundamental policy, the Value Fund will not purchase the
securities of any company if, as a result: (i) it would own more than 10% of the
outstanding voting securities of such company; (ii) such holdings would amount
to more than 5% of the Value Fund's total assets; or (iii) more than 25% of its
assets would be concentrated in any one industry. These limitations do not apply
to U.S. government securities. The Value Fund may, from time to time purchase
securities issued by broker-dealers that sell or distribute its shares or that
execute portfolio brokerage transactions for the Value Fund; provided that any
such purchases will only be made in accordance with the limitations imposed on
such purchases by the Securities and Exchange Commission. The Value Fund will
not invest in securities issued by Heartland Advisors.
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. 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. Based on underlying assumptions,
duration measures the approximate price sensitivity of a bond or bond portfolio
to a one percent rise or fall in interest rates. For example, if interest rates
were to increase by 1%, the market value of a bond with a duration of four years
would be expected to decrease by about 4%, with all other factors being
constant. 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 "Other Investment Practices - Options,
Futures Contracts and Options on Futures Contracts."
INVESTMENT QUALITY
INVESTMENT GRADE SECURITIES. Investment grade debt securities in which the Funds
may invest are considered by Heartland Advisors to include securities rated at
the time of purchase within the four highest rating categories assigned by
Moody's Investors Service, Inc. ("Moody's"), or Standard & Poor's
<PAGE>
Corporation ("S&P"), or securities which are unrated, provided that such
securities are judged by Heartland Advisors, at the time of purchase, to be of
comparable quality to securities rated within such four highest categories.
Investment grade debt obligations are generally believed to have relatively
lower degrees of credit risk. However, securities rated in the fourth highest
rating category, while considered investment grade, may have some speculative
characteristics since their issuer's capacity for repayment may be more
vulnerable to adverse economic conditions or changing circumstances than that of
higher rated issuers.
HIGH YIELD SECURITIES. Non-investment grade securities (commonly known as "junk
bonds") in which each Fund, other than the U.S. Government Securities Fund, may
invest may be regarded, on balance, as predominantly speculative with respect to
the capacity to pay interest and repay principal in accordance with the terms of
the obligation. While such bonds typically offer higher rates of return, they
involve greater risk, including greater risk of default and loss of principal.
The prices of these lower rated bonds may be less sensitive to interest rate
changes than higher rated bonds, but more sensitive to adverse economic changes.
Periods of economic uncertainty and change may cause market price volatility in
these higher yielding bonds and corresponding volatility in the Fund's net asset
value. Furthermore, higher yielding bonds may contain redemption or call
provisions which, if exercised during a declining interest rate environment, may
require the Fund to replace the security with a lower yielding security,
resulting in a decreased return to the Fund. Finally, the secondary trading
market for higher yielding bonds may not be as active as for lower yielding
bonds. As a result, it may be difficult to accurately assess the value of such
bonds (and therefore the respective Fund's securities portfolio), and the Fund's
ability to dispose of such bonds may be limited. For a more detailed discussion
of the risks associated with investing in lower rated securities, see
"Investment Policies and Methods - Non-Investment Grade Securities" in the
Statement of Additional Information. Debt securities rated B, the lowest
category in which the Value, Mid Cap Value, Large Cap Value and Value Plus Funds
may invest, are regarded by S&P as having a greater vulnerability to default but
having the ability, at the time they are rated, to meet scheduled interest and
principal payments. Moody's notes that the assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small. The Small Cap Contrarian Fund may invest in debt
securities rated as low as the lowest rating category assigned by Moody's or
S&P, which securities may be even more speculative than B rated debt. 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.
A description of the ratings assigned by Moody's and S&P is contained in the
Statement of Additional Information.
See "Appendix A-Asset Composition" for a summary of the dollar-weighted averages
of the Funds' month-end portfolio debt holdings during the year ended December
31, 1997.
OTHER INVESTMENT PRACTICES
In addition to the investments described above for each Fund, the Funds may
invest in securities and employ investment techniques that may present special
risks as described below. Although there is no uniform definition of "derivative
securities," certain instruments in which the Funds may invest may be considered
derivative because the value of the instrument fluctuates depending upon the
value of another security, index, reference interest rate, or currency. These
instruments may include options, futures, options on futures, forward foreign
currency contracts, indexed securities, and certain stripped obligations and
mortgage-backed securities. A more complete discussion of the Funds' securities
and investment techniques and their associated risks, as well as further
investment restrictions to which the Funds may be subject, is contained in the
Statement of Additional Information.
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Each Fund may
engage in transactions in options, futures contracts, and options on futures
contracts to hedge protectively against anticipated declines in the market value
of its portfolio securities, or against increases in the market values of
securities it intends to purchase, or to manage exposure to changing interest
rates or, with respect to each Fund other than the U.S. Government Securities
Fund, as a hedge against changes in prevailing levels of currency exchange
rates. The Funds will not use these instruments for speculation. Some options
and futures
<PAGE>
strategies, including selling futures, buying puts and writing calls, tend to
hedge a Fund's investments against price fluctuations. Other strategies,
including buying futures, writing puts, and buying calls, tend to increase
market exposure. Options and futures may be combined with each other or with
forward contracts in order to adjust the risk and return characteristics of the
Fund's overall strategy.
Each Fund other than the Small Cap Contrarian Fund may write covered call
options and purchase put options that are traded on recognized U.S. exchanges
with respect to specific securities and enter into closing transactions with
respect to such options. The Value, Mid Cap Value, Large Cap Value and Value
Plus Funds also may sell covered call options and purchase put options on
foreign currencies and on stock indices composed of securities of the same
general character as each Fund's portfolio and may enter into closing
transactions with respect to such options. The Mid Cap Value and Large Cap Value
Funds may also purchase call options on any type of security related to their
respective investments.
The Value, Value Plus and U.S. Government Securities Funds each may purchase and
sell futures contracts, including interest rate futures, index futures and, with
respect to the Value Fund and the Value Plus Fund, currency futures, that are
traded on a recognized U.S. exchange, board of trade or similar entity, or
quoted on an automated quotation system. Each of those Funds may also write
covered call options and purchase put options on futures contracts and enter
into closing transactions with respect to such options. The Mid Cap Value and
Large Cap Value Funds each may buy and sell exchange-traded futures and options
on futures based on any type of security, index or currency related to its
investments, including futures and options on futures traded on foreign
exchanges.
The Small Cap Contrarian Fund may buy and sell options and futures, including
purchasing and writing put and call options and options on futures, based on any
type of security, index, or currency related to its investments, including
options and futures traded on foreign exchanges and options not traded on
exchanges.
Each Fund will limit its use of these hedging instruments so that: (i) no more
than 5% of the Fund's total assets would be committed to initial margin deposits
or premiums on futures contracts; (ii) no more than 25% of the Fund's net assets
would be subject to futures contracts; (iii) no more than 5% of the Fund's total
assets would be committed to premiums paid for options; and (iv) no more than
25% of the Fund's total assets would be subject to options. Each of these
limitations applies immediately after a purchase. A subsequent change in the
applicable percentage resulting from market fluctuations does not require
elimination of any security, option or future from the portfolio. Consequently,
a Fund's assets could be hedged in excess of the above percentages at a date
subsequent to the hedging transaction.
Options and futures can be highly volatile investments and involve certain
risks. Successful hedging strategies require the ability to predict future
movements in securities prices, interest rates and other economic factors.
Heartland Advisors' attempts to use such investments for hedging purposes may
not be successful and could result in reduction of a Fund's total return. A
Fund's potential losses from the use of futures extend beyond its initial
investment in such contracts. Each Fund could also experience losses if the
prices of its options or futures positions were poorly correlated with its other
investments, or if it was unable to close out its positions due to disruptions
in the market or lack of liquidity. Over-the-counter options and futures
generally involve greater credit and liquidity risks than exchange-traded
options and futures. Options and futures traded on foreign exchanges generally
are not regulated by U.S. authorities, and may offer less liquidity and less
protection to a Fund if the other party to the contract default.
SHORT SALES. If the Small Cap Contrarian Fund anticipates that the price of a
security will decline, it may sell the security short (sell a security which the
Fund does not then own for delivery at a future date) and borrow the same
security from a broker or other institution to complete the sale. The Fund may
make a profit or loss depending upon whether the market price of the security
decreases or increases between the date of the short sale and the date on which
the Fund must replace the borrowed security. The Fund will maintain a segregated
account with cash or liquid assets to cover its open short positions.
<PAGE>
Each Fund other than the U.S. Government Securities Fund may engage in "short
sales against the box," a less aggressive short selling technique which involves
selling a security that the Fund owns (or has an unconditional right to
purchase) for delivery at a specified date in the future, to hedge protectively
against anticipated declines in the market price of its portfolio's securities .
If the value of the securities sold short increases prior to the scheduled
delivery date, the Fund loses the opportunity to participate in the gain. Those
Funds may also engage in short sales of securities of an issuer ("acquiror")
that has publicly announced a proposed or a pending transaction in which a
portfolio security of the Fund will be converted into securities of the
acquiror. Each Fund will maintain a segregated collateral account with its
custodian to cover open short positions in acquiror securities. If the value of
an acquiror's security sold short were to increase relative to the segregated
collateral, the Fund would lose the opportunity to participate in the
appreciation and may also be required to purchase additional shares of the
shorted security to close out the position or settle the position in cash.
The Small Cap Contrarian Fund will not sell short securities whose underlying
value exceeds 25% of its total assets and the Fund will limit short sales, other
than short sales against the box or of acquiror securities, of any one issuer's
securities to 2% of the Fund's total assets and to 2% of any one class of the
issuer's securities. The Value, Mid Cap Value, Large Cap Value and Value Plus
Funds will each limit short sales against the box and of acquiror securities so
that: (i) no more than 5% of its total assets would be subject to open short
positions; and (ii) no more than 10% of the Fund's net assets would be held as
collateral for such positions.
FOREIGN SECURITIES. The Value and Value Plus Funds may invest up to 15% of their
respective assets directly in the securities of foreign issuers traded outside
of the United States (Non-U.S. Traded Foreign Securities). The Small Cap
Contrarian, Mid Cap Value and Large Cap Value Funds may invest up to 25% of
their respective assets in Non-U.S. Traded Foreign Securities or, with respect
to the Small Cap Contrarian Fund, in any one currency. Each Fund other than the
U.S. Government Securities Fund may also invest in foreign securities in
domestic markets through depository receipts and securities of foreign issuers
that are traded on a registered U.S. stock exchange or the NASDAQ National
Market System and foreign securities guaranteed by a United States person
without regard to the above limitations. While investment in foreign securities
is intended to reduce risk by providing further diversification, such
investments involve certain risks in addition to the credit and market risks
normally associated with domestic securities. Such risks include: adverse
political and economic developments or social instability; the imposition of
foreign withholding taxes or exchange controls; expropriation or
nationalization; currency blockage (which could prevent cash from being brought
back to the United States); the impact of exchange rate and foreign currency
fluctuations on the market value of foreign securities; more limited
availability of public information regarding security issuers; the degree of
governmental supervision regarding securities markets; different accounting,
auditing and financial standards; difficulties in enforcing legal rights; and
the potential for less liquidity and more volatility of foreign securities
markets.
Brokerage commissions, fees for custodial services, and other costs relating to
foreign investments generally are greater than in the U.S. Such markets may have
different clearance and settlement procedures, and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to settle certain transactions.
Inability to sell a portfolio security due to settlement problems could result
either in a loss to the Fund if the value of the portfolio security subsequently
declined, or, if the Fund had entered into a contract to sell the security,
could result in possible claims against the Fund.
The U.S. Government Securities Fund does not invest in foreign securities. No
other Fund expects to invest, nor did invest as of December 31, 1997, more than
5% of its assets in Non-U.S. Traded Foreign Securities as defined above.
However, as of December 31, 1997, the percentage of each Fund's total holdings
of foreign securities was:
<PAGE>
<TABLE>
<CAPTION>
NON-U.S. TRADED
FUND FOREIGN SECURITIES U.S. TRADED/BACKED TOTAL FOREIGN
FOREIGN SECURITIES SECURITIES
(including ADRs/GDRs)
<S> <C> <C> <C>
Large Cap Value - 20.16% 20.16%
Mid Cap Value - 6.03% 6.03%
Value Plus .08% 8.34% 8.42%
Small Cap Contrarian - 11.90% 11.90%
Value .09% 3.88% 3.97%
</TABLE>
FOREIGN CURRENCY TRANSACTIONS. Foreign securities are subject to currency risk,
that is, the risk that the U.S. dollar value of these securities may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations. To manage this risk and facilitate the purchase
and sale of foreign securities, each Fund other than the U.S. Government
Securities Fund may engage in foreign currency transactions involving the
purchase and sale of forward foreign currency exchange contracts (agreements to
exchange one currency for another at a future date), or they may engage in
transactions in options on foreign currencies, currency futures contracts, or
options on currency futures contracts. Although foreign currency transactions
will be used to protect such Funds from adverse currency movements, they involve
the risk that anticipated currency movements will not be accurately predicted
and a Fund's total return could be adversely affected as a result.
MORTGAGE-RELATED SECURITIES. The U.S. Government Securities Fund may invest up
to 65% of its assets in mortgage-related securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities. Mortgage-related securities
in which the Fund may invest include mortgage pass-through securities and
derivative mortgage securities, such as collateralized mortgage obligations and
stripped mortgage-backed securities, issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Mortgage-related securities are
subject to prepayment risk, that is, the possibility that prepayments on the
underlying mortgages will cause the principal and interest on the mortgage-
related securities to be paid prior to their maturities, and the value of these
securities may be significantly affected by changes in interest rates. The rate
of prepayments on underlying mortgages will affect the price and volatility of a
mortgage-related security and may have the effect of shortening or extending the
effective duration of the security beyond what was anticipated at the time of
purchase. Prepayments during a period of declining interest rates may shorten
the effective duration of the mortgage-related security, resulting in the Fund
having to invest the unanticipated proceeds in lower-yielding securities. To
the extent that unanticipated rates of prepayment on underlying mortgages
increase the effective duration of a mortgage-related security, the volatility
of such security can be expected to increase. During periods of increased
interest-rate volatility, the market for certain mortgage-related securities may
be thinner than the market for securities in general, which can adversely affect
the availability of market quotations and the prices at which such securities
can be sold.
Mortgage pass-through securities are securities representing interests in
"pools" of mortgage loans secured by residential or commercial real property in
which payments of both interest and principal on the securities are generally
made monthly, in effect "passing through" payments made by the individual
borrowers on the underlying mortgage loans after deduction of servicing fees.
Payments of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Treasury, such as securities guaranteed by GNMA.
Other securities are guaranteed by U.S. Government agencies or
instrumentalities, such as
<PAGE>
securities guaranteed by FNMA or the Federal Home Loan Mortgage Corporation
which are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations. The U.S. Government Securities Fund may
invest in adjustable rate mortgage securities ("ARMs"), which are pass-through
securities collateralized by mortgages with interest rates that may be adjusted
from time to time, rather than fixed rate mortgages. ARMs may experience greater
rates of prepayment than other mortgage pass-through securities.
Collateralized Mortgage Obligations ("CMOs") are hybrid mortgage-related
instruments secured by pools of mortgage loans or other mortgage-related
securities, such as mortgage pass through securities or stripped mortgage-backed
securities. CMOs may be structured into multiple classes, often referred to as
"tranches," with each class bearing a different stated maturity and entitled to
a different schedule for payments of principal and interest, including
prepayments. Principal prepayments on collateral underlying a CMO may cause it
to be retired substantially earlier than its stated maturity.
Stripped Mortgage-Backed Securities ("SMBS") are derivative mortgage-related
securities generally structured in classes with rights to receive varying
proportions of principal and interest. A common type of SMBS will have one
class receiving some of the interest and most of the principal from the
underlying mortgage loans, while the other class will receive most of the
interest and the remainder of the principal. In certain cases, one class will
receive all of the interest (the interest-only, or "IO" class), while the other
class will receive all of the principal (the principal-only, or "PO" class).
The cash flows and yields on IO and PO classes are extremely sensitive to the
rate of principal payments (including prepayments) on the underlying mortgage-
related securities. The U.S. Government Securities Fund will limit its
aggregate investments in IO and PO classes to 10% of net assets.
ZERO COUPON BONDS AND STRIPPED SECURITIES. Each Fund other than the Value Fund
may invest in zero coupon bonds, which do not pay current interest, but are
purchased at a discount from their face value with principal and accrued
interest paid at maturity. Those Funds may also invest in stripped obligations,
which are the separate income or principal components of a debt instrument,
issued by the U.S. Government or its agencies and instrumentalities. The market
value of zero coupon bonds and stripped obligations may be subject to greater
volatility in response to changes in interest rates than other debt securities.
INDEXED SECURITIES. Each Fund other than the Value Fund may invest in indexed
securities whose value is linked to currencies, interest rates, commodities,
indices, or other financial indicators. Many indexed securities are short to
intermediate term fixed-income securities whose values at maturity, or interest
rates, rise or fall according to the change in one or more specified underlying
instruments. Indexed securities may be positively or negatively indexed (i.e.,
their value may increase or decrease if the underlying instrument appreciates)
and may have return characteristics similar to direct investments in the
underlying instrument or to one or more options on the underlying instrument.
Indexed securities may be more volatile than the underlying instrument itself
and the market for indexed securities may be thinner than the market for
securities in general, which can adversely affect the availability of market
quotations and the prices at which indexed securities are sold.
INVESTMENTS IN INVESTMENT COMPANIES. The Small Cap Contrarian, Mid Cap Value
and Large Cap Value Funds may invest up to 10% of their respective 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.
REAL ESTATE INVESTMENT TRUSTS. The Small Cap Contrarian, Mid Cap Value, Large
Cap Value, and Value Plus Funds may invest up to 10% of their respective total
assets in real estate investment trusts ("REITs"). REITs are subject to
volatility from risks associated with investments in real estate and investments
dependent on income from real estate, such as fluctuating demand for real estate
and sensitivity to adverse economic conditions. In addition, the failure of a
REIT in which the Fund has invested to continue to qualify as a REIT for tax
purposes would have an adverse impact on the value of the Fund's investment.
<PAGE>
LENDING PORTFOLIO SECURITIES. Each Fund may lend its portfolio securities to
institutional investors or broker-dealers to a maximum of 30% of its assets,
where such loans are callable at any time and are continuously secured by
collateral consisting of cash or liquid assets at least equal to the value of
the security loaned. The collateral received by a Fund will be invested in
short-term debt instruments. The respective Fund receives amounts equal to
earned income for having made the loans. The respective Fund is the beneficial
owner of the loaned securities in that any gain or loss in the market price
during the loan period inures to the Fund. Thus, when the loan is terminated,
the value of the securities may be more or less than their value at the
beginning of the loan. In determining whether to lend its portfolio securities,
each Fund takes into account the creditworthiness of the borrower since the
Fund could experience costs and delays in recovering loaned securities or
exercising its rights to the collateral in the event of bankruptcy of the
borrower. Each Fund may pay a fee to placing brokers in connection with loans of
its portfolio securities.
<PAGE>
REPURCHASE AGREEMENTS. Each Fund other than the Value Fund may enter into
repurchase agreements with banks and broker-dealers, under which the Fund
purchases securities and agrees to sell them back at a specified time and price.
The difference between the amount the Fund pays for the securities and the
amount it receives upon resale is accrued as interest and reflected in its net
income. In the event of a bankruptcy or default of certain sellers of repurchase
agreements, the Fund could experience costs and delays in liquidating the
underlying security, which is held as collateral, and the Fund might incur a
loss if the value of the collateral held declines during this period. In
determining whether to enter into a repurchase agreement, the respective Fund
will take into account the creditworthiness of the counterparty. Those Funds
will use repurchase agreements as a means of making short-term investments, and
will invest in repurchase agreements of a duration of seven days or less in an
amount not exceeding 25% of their respective net assets. Each Fund's
<PAGE>
ability to invest in repurchase agreements that mature in more than seven days
is subject to an investment restriction that limits investment in "illiquid"
securities, including such repurchase agreements, to 10% of net assets.
REVERSE REPURCHASE AGREEMENTS. The Small Cap Contrarian, Mid Cap Value and Large
Cap Value Funds may enter into reverse repurchase agreements with banks and
broker-dealers, under which the Fund sells a portfolio security to such party in
return for cash and the Fund 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 that the value of the
security the Fund agrees to repurchase declines, the Fund may experience a loss.
Reverse repurchase transactions may increase fluctuations in the market value of
the Fund's assets and may be viewed as a form of leverage. In determining
whether to enter into a reverse repurchase agreement, the Fund will take into
account the creditworthiness of the counterparty.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. Each Fund may purchase and sell
securities on a "when-issued" and "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 into the obligation. The market value of a
security may increase or decrease between the time that the Fund makes its
commitment and the time the security is delivered. Each Fund will make such
commitments only with the intention of actually acquiring the securities, but
may sell the securities before settlement date if it is deemed advisable for
investment reasons. At the time a Fund makes a commitment to purchase an
obligation, it will record the transaction and reflect the value of the
obligation in determining its net asset value. The custodian will maintain on a
daily basis a separate account consisting of cash or liquid securities with a
value at least equal to the amount of the Fund's commitments to purchase when-
issued obligations. There are no limitations on the percentage of the Fund's
assets which may be invested in such securities; however, it is not expected
that at any one time more than 25% of its assets would be so invested.
SHORT-TERM INVESTMENTS. Each Fund may invest a portion of its portfolio in
liquid reserves to meet its cash flow requirements. Under normal conditions, it
is not anticipated that such reserves will exceed 20% of the respective assets
of the Small Cap Contrarian, Value or Value Plus Funds, or 15% of the respective
assets of the Mid Cap Value, Large Cap Value or U.S. Government Securities
Funds. Liquid reserves may be increased to enable a Fund to take advantage of
buying opportunities or may be increased up to 100% of a Fund's assets for
temporary defensive purposes. Such reserves will be invested in money market
instruments, certificates of deposit, commercial paper, short-term corporate
debt securities, variable rate demand notes, and U.S. Government securities.
BORROWINGS AND LEVERAGE. As a fundamental policy, the Value, Mid Cap Value,
Large Cap Value, Value Plus and U.S. Government Securities Funds will not borrow
money or property except for temporary or emergency purposes. If one of those
Funds ever should borrow money, it would only borrow from banks and in an amount
not exceeding 10% of the market value of its total assets (not including the
amount borrowed). None of those Funds will pledge more than 15% of its net
assets to secure such borrowings. In the event one of such Funds' borrowings
exceeds 5% of the market value of its total assets, the Fund will not invest in
any additional portfolio securities until its borrowings are reduced to below 5%
of its total assets. For purposes of these restrictions, collateral arrangements
for premium and margin payments in connection with a Fund's hedging activities
are not deemed to be a pledge of assets.
<PAGE>
The Small Cap Contrarian Fund may borrow from banks up to one-third of its total
assets, and may pledge its assets in connection with such borrowings. If the
Small Cap Contrarian Fund makes additional investments while borrowings are
outstanding, this may be construed as a form of leverage. This leverage may
exaggerate changes in the Small Cap Contrarian Fund's share value and the gains
and losses on the Fund's investments. Borrowing also creates interest expenses
that may exceed the return on investments made with the borrowings. The extent
to which the Fund will borrow money, and the amount it may borrow, depend on
market conditions and interest rates. Successful use of leverage depends on
Heartland Advisors' ability to predict market movements correctly.
ILLIQUID INVESTMENTS. Under the supervision of, and pursuant to the guidelines
adopted by, the 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 for a Fund to sell such an
investment promptly at an acceptable price. None of the Funds may invest more
than 10% of their respective net assets in illiquid investments. Certain
restricted securities which may be resold to institutional investors under Rule
144A under the Securities Act of 1933 may be determined to be liquid under the
guidelines. The Board of Directors has determined that private placement notes
issued pursuant to Section 4(2) of the Securities Act of 1933 generally are
readily marketable even though they are subject to certain legal restrictions on
resale. As such, they are not treated as being subject to the limitation on
illiquid securities.
PORTFOLIO TURNOVER. The Value Fund, Mid Cap Value, Large Cap Value and Value
Plus Funds will not trade portfolio securities for short-term profits, but when
circumstances warrant, securities may be sold without regard to their holding
period. During the fiscal years ended December 31, 1997 and 1996, the portfolio
turnover rates for the Value Fund were 55% and 31%, respectively, for the Small
Cap Contrarian Fund the portfolio turnover rates were 103% and 57%,
respectively, for the Value Plus Fund the portfolio turnover rates were 74% and
73%, respectively, and for the U.S. Government Securities Fund the portfolio
turnover rates were 143% and 30%, respectively. The portfolio turnover rates for
the Mid Cap Value Fund for the fiscal year ended December 31, 1997, and for the
period from October 11, 1996 (commencement of operations) to December 31, 1996
were 48% and 44%, respectively. The portfolio turnover rates for the Large Cap
Value Fund for the fiscal year ended December 31, 1997 and for the period from
October 11, 1996 (commencement of operations) to December 31, 1996 were 30% and
1%, respectively. A high portfolio turnover rate may increase transaction costs
and may affect taxes paid by shareholders to the extent short-term gains are
distributed.
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: BY OVERNIGHT MAIL TO:
<PAGE>
Firstar Trust Company Firstar Trust Company
Mutual Fund Services, 3rd Floor Mutual Fund Services, 3rd Floor
P.O. Box 701 615 East Michigan Street
Milwaukee, WI 53201-0701 Milwaukee, WI 53202
To Open an Account:
Complete and sign the Account Application. Make your check payable to either
Heartland Small Cap Contrarian Fund, Heartland Value Fund, Heartland Mid Cap
Value Fund, Heartland Large Cap Value Fund, Heartland Value Plus Fund or
Heartland U.S. Government Securities Fund and mail to one of the addresses
above.
If you are investing through a tax-sheltered retirement plan, such as an IRA,
you will need to use a special application. Please call 1-800-432-7856 for
special instructions on establishing an IRA for a minor.
To Add to an Account:
Make your check payable to the Fund you are invested in, indicate your Fund
account number on your check, and mail to one of the addresses above. You may
also include an "Additional Investment Form" from a prior account statement with
your check.
______________________________________________________________________________
BY WIRE:
Firstar National Bank
ABA #0750-00022
Firstar Trust MFS A/C #112-952-137
777 East Wisconsin Avenue, Milwaukee, WI 53202
CREDIT TO: Heartland (name of Fund), (your account number and
the title of the account)
To Open an Account:
Call the Agent at 1-800-443-2862 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
<PAGE>
exchange from another Heartland fund account with the same registration,
including name, address and taxpayer ID number. See "Shareholder Services-
Exchange Privilege."
To Add to an Account:
Unless you have elected not to have this privilege on the Account Application,
you may call to exchange from another Heartland fund account with the same
registration, including name, address and taxpayer ID. See "Shareholder
Services-Exchange Privilege." You may also make additional investments from $100
to $25,000 by Telephone from your bank checking or NOW account into your
Heartland fund account. Sign up for this service with a Telephone Purchase
Form when you open your account, or call 1-800-432-7856.
______________________________________________________________________________
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 purchase 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.
______________________________________________________________________________
CONDITIONS OF YOUR PURCHASE.
MINIMUM INVESTMENTS. The minimum initial investment for each Fund is $1,000,
except in the case of retirement plan investors and 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 and/or Heartland Advisors for providing such
services.
<PAGE>
Certain service providers have been authorized to designate other intermediaries
to accept purchase and redemption orders on the Funds' behalf. Each Fund will
be deemed to have received a purchase or redemption order when an authorized
service provider or, if applicable, a service provider's designee, accepts the
order.
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 canceled
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.
SMALL CAP CONTRARIAN AND VALUE FUNDS CLOSED TO NEW INVESTORS
The Small Cap Contrarian and Value Funds are closed to new accounts, except as
described below. Shareholders of those Funds may purchase additional shares of
the Fund in which they are invested by adding to an existing account. In
addition, employee benefit plans that are shareholders of those Funds may
continue to purchase shares of the Fund in which they are invested for both
existing and new participants in the ordinary course of the Plan's operations.
Financial advisers, sub-advisers and planners with at least $2 million of
clients' assets invested in the Small Cap Contrarian Fund as of October 31,
1997, may continue to purchase shares of that Fund on behalf of new and existing
clients as long as their clients' aggregate assets in the Fund do not fall below
$2 million as a result of redemptions. The discussion elsewhere in the
Prospectus regarding the purchase of shares of the Small Cap Contrarian and
Value Funds is qualified by this limitation. Each of the Small Cap Contrarian
and Value Funds may resume sales to new investors at some future date, but has
no present intention to do so.
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
per share following receipt of a redemption in proper form (see "Net Asset Value
Calculation").
BY TELEPHONE:
1-800-432-7856 You may redeem by calling Heartland Advisors,
or unless you elected not to have this privilege
(414) 289-7000 on your account application.
____________________________________________________________________________
THROUGH SECURITIES REPRESENTATIVES:
You may redeem shares through a broker-dealer or financial institution, which
must promptly forward your instructions to the Agent. The broker-dealer or
financial institution may charge a fee for such services.
<PAGE>
______________________________________________________________________________
BY MAIL TO:
Firstar Trust Company, Send a written request specifying the name of
Mutual Fund Services the Mutual Fund, the number of shares to be
3rd Floor redeemed, your name, account number, and any
P.O. Box 701 additional documents listed below that apply
Milwaukee, WI 53201-0701 to your particular account. The Agent cannot
accept requests submitted by fax or requests
BY OVERNIGHT specifying a particular date for redemption
DELIVERY TO: or other special conditions. A signature
Firstar Trust Company guarantee is required for certain
Mutual Fund Services redemptions, including written redemptions
615 E. Michigan St., 3rd Fl. over $25,000. For further information, see
Milwaukee, WI 53202 "Signature Guarantees."
______________________________________________________________________________
TYPE OF REGISTRATION REQUIREMENTS
Individual, Joint Tenants, Letter of instruction signed by all persons
Sole Proprietorship, authorized to sign for the account, exactly
Custodial, General Partners as it is registered, accompanied by signature
guarantee(s) if required.
Corporations, Associations Letter of instruction accompanied by a
corporate resolution. The letter must be
signed by at least one individual authorized
(via corporate resolution) to act on the
account. The corporate resolution must include
a corporate seal or signature guarantee.
Trusts Letter of instruction signed by the Trustee(s)
(as Trustee(s)), with signature guarantee(s).
(If the Trustee's name is not registered on
the account, provide a copy of the trust
document, certified within the last 60 days.)
If you do not fall into any of these registration categories (i.e., executors,
administrators, conservators, or guardians), please call Heartland Advisors for
further instructions.
______________________________________________________________________________
TELEPHONE REDEMPTIONS. Shares may be redeemed by telephone to Heartland
Advisors, unless the shareholder elects not to have this privilege on the
account application. By establishing the telephone redemption service, the
shareholder assumes some risks for unauthorized transactions. Heartland Advisors
has implemented procedures designed to reasonably assure that telephone
instructions are genuine. These procedures include recording telephone
conversations, requesting
<PAGE>
verification of various pieces of personal information and providing written
confirmation of such transactions. If the Agent, the Funds, Heartland Advisors
or any of their employees fails to abide by these procedures, the Funds may be
liable to a shareholder for losses he or she suffers from any resulting
unauthorized transaction(s). However, none of the Agent, the Custodian, the
Funds, Heartland Advisors or any of their employees will be liable for losses
suffered by a shareholder which result from following telephone instructions
reasonably believed to be genuine after verification pursuant to these
procedures.
There is currently no charge for telephone redemptions, although a charge may be
imposed in the future. Subject to waiver by the Funds in certain instances, the
minimum amount that may be redeemed by telephone is $1,000; all other
redemptions may be done in writing. During periods of substantial economic or
market changes, telephone redemptions 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 as described above. The Agent and the Funds reserve the right
to change, modify or terminate this telephone redemption service at any time.
SIGNATURE GUARANTEES. To protect your account, the Agent and the Funds from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Agent to be sure that you are the person who has
authorized a redemption from your account. Signature guarantees are required
for: (1) any redemption by mail if the proceeds are to be paid to someone other
than the person(s) or organization in whose name the account is registered or
are to be sent to an address other than the address of the registered holder of
the shares; (2) any redemptions by mail which request that the proceeds be wired
to a bank; (3) any redemptions by mail where the redemption proceeds exceed
$25,000; and (4) requests to transfer the registration of shares to another
owner. These requirements may be waived by the Funds in certain instances.
The following institutions are acceptable guarantors: (a) commercial banks,
savings and loan associations and savings banks, which are members of the
Federal Deposit Insurance Corporation; (b) credit unions; (c) trust companies;
(d) firms which are members of a domestic stock exchange; and (e) foreign
branches of any of the above. The Agent cannot accept guarantees from notaries
public.
SENDING REDEMPTION PROCEEDS. The Agent will not send redemption proceeds until
all payments for the shares being redeemed have cleared, which may take up to 15
days from the purchase date.
By Mail. The Agent mails checks for redemption proceeds typically within one or
two days, but not later than seven days, after it receives the request and all
necessary documents. The Agent will send redemption proceeds in accordance with
your instructions.
By Wire. The Agent will normally wire redemption proceeds to your bank the next
business day after receiving the redemption request and all necessary documents.
The signatures on any written request for a wire redemption must be guaranteed.
The Agent currently deducts a $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.
<PAGE>
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.
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 account application, at the net asset value determined on the
dividend or distribution payment date. 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.
TAX-SHELTERED RETIREMENT PLANS. Shares of each Fund are available for purchase
in connection with the following tax-sheltered retirement plans: (i) Keogh Plans
(H.R. 10) for self-employed individuals; (ii) Qualified Corporate Pension and
Profit-Sharing Plans for employees; (iii) Individual Retirement Accounts; (iv)
Simplified Employee Pension Plans and SIMPLE retirement plans established by
employers for individual or employer contributions; and (v) 403(b) Plans for
employees of most non-profit organizations.
The minimum initial retirement plan investment in any Fund is $500 (there is no
minimum required for a SIMPLE IRA). Firstar Trust Company, as the trustee of the
Individual Retirement Account plan, charges a $12.50 annual maintenance fee with
a $25 maximum for multiple accounts with the same social security number
(subject to change by the trustee) for each Individual Retirement Account. The
IRA annual maintenance fee will be waived for investors with an aggregate of
$10,000 or more in Heartland fund accounts under the same social security
number. For other tax-sheltered retirement plans, the individual investor must
employ a self-directed plan. Detailed information concerning these plans and
copies of plans are available from Heartland Advisors. This information should
be read carefully and consultation with an attorney or tax advisor may be
advisable.
<PAGE>
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. IRA contributions through the automatic investment plan apply as
a current year purchase and may not be applied as prior year contributions
unless the Fund receives written instructions to that effect on or before April
15th. 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 but no more than 2%, 6%, 12% or 24% of your initial account
balance each monthly, quarterly, semi-annual or annual payment, respectively.
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 Firstar Money Market Fund, provided the fund into which you wish
to exchange is qualified for sale in the jurisdiction of residence which you
state at the time you make the exchange. Before initiating an exchange, you
should obtain from Heartland Advisors and carefully read the prospectus relating
to the fund into which you wish to exchange.
Exchanges Among Heartland Funds. Under the exchange privilege, each Heartland
fund offers to exchange its shares for shares of another Heartland fund on the
basis of relative net asset value per share. In order to qualify for the
exchange privilege without further approval of Heartland, 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.
Exchanges with Firstar Money Market Fund. Shareholders may exchange all or a
portion of their shares in the Funds for shares of the Firstar 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 Firstar Money Market Fund. No charge to shareholders is imposed in
connection with this exchange; however, Heartland Advisors, as distributor, is
entitled to receive a
<PAGE>
fee from the Firstar 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.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
DIVIDENDS. Substantially all of the Small Cap Contrarian Fund's, Value Fund's,
Mid Cap Value Fund's, and Large Cap Value Fund's net investment income will be
paid to shareholders annually as a dividend. With respect to the Value Plus
Fund, dividends will be paid to shareholders quarterly. In the U.S. Government
Securities Fund, dividends will be declared daily and paid monthly. It is the
intent of each Fund to distribute substantially all of the Fund's net investment
income. 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 another Fund, unless a shareholder has
notified Heartland Advisors by telephone or in writing that he or she elects to
receive dividends and capital gain distributions in cash.
CAPITAL GAINS DISTRIBUTIONS. If a Fund has net capital gains for the year it is
the intent of the Fund to generally distribute substantially all of the net
capital gain.
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
<PAGE>
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. Distributions from a Fund's income and short-term
capital gains are taxed as dividends, and long-term capital gain distributions
are taxed at long-term capital gain rates. Distributions of long-term capital
gains will be taxable to the investor as long-term capital gains regardless of
the length of time shares have been held. If you realize a loss on the sale or
exchange of Fund shares held six months or less, your short-term loss will be
reclassified to long-term to the extent of any long-term capital gain
distribution received. A portion of each Fund's dividends may qualify for the
dividends received deduction for corporations. The Funds' distributions are
taxable when they are paid, whether a shareholder takes them in cash or
reinvests them in additional shares, except that distributions declared in the
last three months of the year and paid in January are taxable as if paid on
December 31. The federal income tax status of all distributions will be reported
to shareholders annually. If a Fund's taxable distributions exceed its current
and accumulated earnings and profits, all or a portion of these distributions
may be treated as a return of capital to shareholders for tax purposes.
"BUYING A DIVIDEND." On the date of a distribution by a Fund, its share price is
reduced by the amount of the distribution. If you buy shares just before the
record date ("buying a dividend"), you will pay the full price for the shares,
and then receive a portion of the price back as a taxable distribution.
OTHER TAX INFORMATION. Under federal tax law, some 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.
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 Short Duration High-Yield Municipal Fund, Heartland High-Yield
Municipal Bond Fund and Heartland Wisconsin Tax Free Fund, three additional
series of Heartland, and also provides investment management services for
individuals and institutional accounts, such as pension funds and profit-sharing
plans. As of March 31, 1998, Heartland Advisors had approximately $4.5 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.
<PAGE>
For the fiscal year ended December 31, 1997, the Small Cap Contrarian, Value and
Mid Cap Value Funds paid advisory fees of $2,109,857, $14,673,206 and $184,843,
respectively, or approximately 0.75 of 1% of each Fund's average daily net
assets during that year. For the fiscal year ended December 31, 1997, the Value
Plus Fund paid advisory fees of $1,292,331, or approximately 0.70 of 1% of the
Fund's average daily net assets.
For the fiscal year ended December 31, 1997, the Large Cap Value Fund paid
advisory fees of $26,585, or approximately 0.49 of 1% of average daily net
assets. Heartland Advisors voluntarily waived a portion of its fee during that
year; had no fee waiver been effect, the Large Cap Value Fund would have paid
$40,359 in advisory fees, or 0.75 of 1% of average daily net assets for the
year. At present Heartland Advisors is voluntarily waiving its entire
investment advisory fee for the Large Cap Value Fund. Heartland Advisors may
reinstate all or a portion of the fee at any time.
For the fiscal year ended December 31, 1997, the U.S. Government Securities Fund
paid advisory fees of $146,128, or approximately 0.31 of 1% of average daily net
assets. Heartland Advisors voluntarily waived a portion of its fee during that
year; had no fee waiver been in effect, the U.S. Government Securities Fund
would have paid $301,650 in advisory fees, or 0.65 of 1% of average daily net
assets for the year. At present, Heartland Advisors is voluntarily waiving 0.40
of 1% of its investment advisory fee for the U.S. Government Securities Fund,
resulting in an annual rate of 0.25 of 1% of average daily net assets.
Heartland Advisors may reinstate all or a portion of the fee at any time.
PORTFOLIO MANAGERS. William J. Nasgovitz serves as co-portfolio manager for the
Value Fund and has managed or co-managed the Fund since commencement of its
operations. Mr. Nasgovitz also serves as portfolio manager for the Small Cap
Contrarian Fund and as co-manager of the Value Plus Fund, and has managed or co-
managed those Funds since commencement of their respective operations. Mr.
Nasgovitz has been President and a Director of Heartland Advisors and Heartland
since 1982 and was Senior Vice President-Investments with Dain Bosworth
Incorporated from 1988 to June of 1992.
Michael A. Berry, Ph. D., serves as portfolio manager for the Mid Cap Value Fund
and has managed the Fund since its inception. Prior to joining Heartland
Advisors in July, 1996, Dr. Berry had been the portfolio manager of the Kemper-
Dreman Small Cap Value Fund, a Managing Director of Dreman Value Advisors, Inc.
and Chief Equity Strategist for Zurich Kemper Investments since September, 1995.
Dr. Berry had been associated with Dreman Value Advisors' predecessor since 1984
and also served as a Professor in Finance at James Madison University and at the
University of Virginia.
James P. Holmes, CFA, serves as portfolio manager for the Large Cap Value Fund
and has managed the Fund since its inception. Prior to joining Heartland
Advisors in July, 1996, Mr. Holmes had been a Managing Director of Dreman Value
Advisors, Inc. and its predecessor since 1986, with responsibility for portfolio
management of institutional accounts.
Eric J. Miller, CMA, serves as co-portfolio manager of the Value Fund with Mr.
Nasgovitz. Mr. Miller, a Senior Vice President of Heartland Advisors, has co-
managed the Fund since July, 1997. Mr. Miller has been a director of Heartland
Advisors since 1997 and a portfolio manager and research analyst for advisory
clients since January, 1994. Prior to joining Heartland Advisors, Mr.
<PAGE>
Miller had been with American Appraisal Associates, Inc. since 1986, serving as
Vice President, Head of U.S. Appraisal Operations.
Patrick J. Retzer, CPA, serves as co-portfolio manager of the U.S. Government
Securities Fund and has managed or co-managed the Fund since October 1988. Mr.
Retzer also serves as co-manager of the Value Plus Fund with Mr. Nasgovitz and
has been in that position since July, 1997. Mr. Retzer, Senior Vice President
and Treasurer of Heartland Advisors, has been Vice President and Treasurer of
Heartland since 1987, a Director of Heartland Advisors since 1988 and a Director
of Heartland since 1993.
Douglas S. Rogers, CFA, serves as co-portfolio manager of the U.S. Government
Securities Fund with Mr. Retzer. Mr. Rogers has co-managed the Fund since May
1, 1996. Prior to joining Heartland Advisors in October 1995, Mr. Rogers was
with Sit Investment Associates, Inc., where he was a member of the
Fixed Income Policy Committee and responsible for taxable bond portfolio
management.
YEAR 2000. The services provided to the Funds and the shareholders by Heartland
Advisors and the Custodian, Transfer and Dividend Disbursing Agent depend on the
smooth functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although at this time there can be no assurance that there will be no adverse
impact on the Funds, Heartland Advisors and the Custodian, Transfer and Dividend
Disbursing Agent have advised Heartland that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside service providers, will be
adapted in time for that event.
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 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. During the fiscal year ended December 31,
1997, Heartland Advisors waived $4,591 of the distribution fee for the Large Cap
Value Fund pursuant to a voluntary fee waiver. For further information
regarding the Distribution Plans, see the Statement of Additional Information.
<PAGE>
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. 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. 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.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded, and are translated from the local currency into U.S.
dollars using current exchange rates. Fluctuations in the value of such
currencies in relation to the U.S. dollar may affect the net asset value of Fund
shares even if there has not been any change in the foreign currency denominated
values of such securities.
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. Currently, nine series are
authorized and outstanding.
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. Shares have no
preemptive, cumulative voting, subscription or conversion rights and are freely
transferable. Although annual meetings of shareholders are not required,
special meetings may be called for purposes such as electing or
<PAGE>
removing directors, changing fundamental policies or approving investment
advisory contracts.
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. 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.
Transactions in smaller companies may involve specialized services on the part
of the broker and thereby entail higher commissions or spreads than would be
paid in transactions involving more widely traded securities.
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.
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.
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
<PAGE>
conditions during the applicable period, and should not be considered as a
representation of what may be achieved in the future. Further information is
contained in the Statement of Additional Information.
<PAGE>
APPENDIX A
ASSET COMPOSITION
The following table provides a summary of the Value Plus Fund's debt holdings,
including convertible debt securities, as rated by the higher of Moody's or S&P
or, in the case of unrated securities, as determined by Heartland Advisors.
These figures are dollar-weighted averages of month-end portfolio holdings
during the year ended December 31, 1997, presented as a percentage of total
portfolio holdings and total to 22.1%. During the year ended December 31, 1997,
the Small Cap Contrarian, Mid Cap Value and Large Cap Value Funds were not
invested in long-term corporate debt securities and the Value Fund did not
invest more than 5% of its assets in such securities. Effective March 31, 1997,
the U.S. Government Securities Fund no longer invests in long-term corporate
debt securities. The percentages are historical and are not necessarily
indicative of the quality of current or future Fund holdings, which may
vary. Those securities assigned an equivalent rating may include those rated by
other nationally recognized rating organizations, as well as unrated securities.
Unrated securities are not necessarily lower quality securities. Please refer to
the Statement of Additional Information for a more complete discussion of these
ratings
<TABLE>
<CAPTION>
MOODY'S/S&P RATING VALUE PLUS FUND PORTFOLIO
HOLDING %
(dollar-weighted average)
<S> <C>
Aaa/AAA 2.9%
Aa/AA 0.0
A 0.0
Baa/BBB 1.0
Ba/BB 1.4
B 9.6
----
14.9%
EQUIVALENT RATING VALUE PLUS FUND PORTFOLIO
HOLDING %
(dollar-weighted average)
Aaa/AAA 0%
Aa/AA 0.0
A 0.0
Baa/BBB 0.0
Ba/BB 1.5
B 5.7
----
7.2%
</TABLE>
<PAGE>
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
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
COUNSEL
Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
<PAGE>
Statement of Additional Information
Dated May 1, 1998
HEARTLAND LARGE CAP VALUE FUND
HEARTLAND MID CAP VALUE FUND
HEARTLAND VALUE PLUS FUND
HEARTLAND U.S. GOVERNMENT SECURITIES FUND
HEARTLAND SMALL CAP CONTRARIAN FUND
HEARTLAND VALUE FUND
790 North Milwaukee Street, Milwaukee, Wisconsin 53202
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 May 1, 1998 and any supplement
thereto ("Prospectus"). A copy of the Prospectus and an account application 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.
________________________________________________________________________________
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----
<S> <C>
INTRODUCTION TO THE FUNDS 2
INVESTMENT POLICIES AND METHODS 2
INVESTMENT RESTRICTIONS 17
MANAGEMENT 24
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES 26
THE INVESTMENT ADVISOR 26
PERFORMANCE INFORMATION 28
DETERMINATION OF NET ASSET VALUE PER SHARE 30
DISTRIBUTION OF SHARES 30
DISTRIBUTION PLAN 31
TAX STATUS 31
DESCRIPTIONS OF SHARES 32
PORTFOLIO TRANSACTIONS 32
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT 36
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS 36
FINANCIAL STATEMENTS 36
APPENDIX A--SECURITIES RATINGS 37
</TABLE>
1
<PAGE>
INTRODUCTION TO THE FUNDS
The Heartland family of funds consists of nine 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 Small Cap Contrarian Fund, the Heartland Value Fund, the
Heartland Mid Cap Value Fund, the Heartland Large Cap Value Fund, the Heartland
Value Plus Fund, and the Heartland U.S. Government Securities Fund, (the "Small
Cap Contrarian Fund," the "Value Fund," the "Mid Cap Value Fund," the "Large Cap
Value Fund," the "Value Plus Fund," and the "U.S. Government Securities Fund,"
respectively, collectively referred to herein as 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 METHODS
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.
Options, Futures Contracts and Options on Futures Contracts
Writing Covered Call Options. Each Fund may write covered call options on
its portfolio securities and enter into closing transactions with respect to
such options. The Value, Mid Cap Value, Large Cap Value and Value Plus Funds may
also write covered call options on foreign currencies. In addition, the Small
Cap Contrarian Fund may write covered call options on any type of security
related to its investments, including options traded on foreign exchanges. 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 security 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 an 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 price increases in the underlying security. 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
2
<PAGE>
option period. The premium received by a Fund for writing covered call options
will be recorded as a cash asset and a liability of the Fund. The liability will
be adjusted daily with a corresponding adjustment to the Fund's total assets, to
reflect the option's current market value, which will be the latest sale price
at the time at which the net asset value per share of the Fund is computed
(close of regular trading on the New York Stock Exchange), or, in the absence of
such sale, the latest asked price. The liability will be extinguished and the
net gain or loss on the option realized upon expiration of the option, the
purchase of an identical option in a closing transaction, or delivery of the
underlying security upon the exercise of the option. The Funds do not consider a
security covered by a call to be "pledged" as that term is used in the
respective Fund's policy limiting the pledging of its assets.
Closing transactions may be effected by purchasing a call option in order
to realize a profit on an outstanding call option, to prevent an underlying
security from being called, or, to permit the sale of the underlying security.
Furthermore, effecting a closing transaction may permit a Fund to write another
call option on the underlying security with either a different exercise price or
expiration date or both. If a Fund desires to sell a particular security from
its portfolio on which it has written a call option, it will seek to effect a
closing transaction prior to, or 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. The Small Cap Contrarian Fund may write
covered put options on any type of security related to its investments,
including options traded on foreign exchanges, 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.
The 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. The 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 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 with respect to
its portfolio securities. In addition, the Small Cap Contrarian Fund may
purchase put options on any type of security related to its investments,
including options traded on foreign exchanges. 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 an underlying security owned by the Fund 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.
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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. The Small Cap Contrarian Fund, the Mid Cap Value
Fund, and the Large Cap Value Fund may purchase call options on any type of
security related to their respective investments, including options traded on
foreign exchanges. As the holder of a call option, a Fund has the right to
purchase the underlying security at the exercise price at any time during the
option period. A Fund may enter into closing sale transactions with respect to
such options, exercise them, or permit them to expire. A call buyer typically
attempts to participate in potential price increases of the underlying security
with risk limited to the cost of the option if security prices fall. At the same
time, the buyer can expect to suffer a loss if security prices do not rise
sufficiently to offset the cost of the option.
Index Options. The Value Fund, the Mid Cap Value Fund, the Large Cap Value
Fund, and the Value Plus Fund may sell covered call options and purchase put
options on stock indices composed of securities of the same general character as
each Fund's portfolio and may enter into closing transactions with respect to
such options. The Small Cap Contrarian Fund may buy and sell options based on
any type of index related to its investments. 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. The Value Fund, the Value Plus Fund, and the
U.S. Government Securities Fund may each write covered call options and purchase
put options on futures contracts and enter into closing transactions with
respect to such options. The Small Cap Contrarian Fund, the Mid Cap Value Fund,
and the Large Cap Value Fund may buy and sell options on futures based on any
type of security, index, or currency related to their respective investments.
Options on futures 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. In addition, the Small Cap Contrarian Fund, the Mid
Cap Value Fund, and the Large Cap Value Fund may purchase and sell futures
contracts based on any type of security, index, or currency related to their
respective investments, including futures traded on foreign exchanges. Each Fund
will engage in transactions in futures contracts solely for bona fide hedging
purposes.
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 initial
margin required for a particular futures contract is set by the exchange on
which the contract is traded
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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
initial 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 initial 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. If a Fund closes out
an open futures contract by entering into an offsetting futures contract, and
the offsetting purchase price is less than the original sale price, a Fund
realizes a gain; if it is more, a Fund 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.
OTC Options. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and strike
price, the terms of over-the-counter options ("OTC options," i.e., options not
traded on exchanges) in which the Small Cap Contrarian Fund may invest generally
are established through negotiation with the other party to the option contract.
While this type of arrangement allows the Fund greater flexibility to tailor an
option to its needs, OTC options generally involve greater credit risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded. The risk of illiquidity is also greater
with OTC options, since these options generally can be closed out only by
negotiation with the other party to the option. The Small Cap Contrarian Fund
will generally consider OTC options to be illiquid. In determining whether to
enter into an OTC option transaction, the Small Cap Contrarian Fund will take
into account the creditworthiness of the other party to the contract.
Limitations on Futures and Options on Futures 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. The Value Fund and the U.S. Government Securities Fund will also be
subject to their fundamental investment restrictions regarding commodities,
futures, and options discussed herein.
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In addition to the above limitations, the Small Cap Contrarian Fund, the
Mid Cap Value Fund, the Large Cap Value Fund, and the Value Plus Fund will not:
(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 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 Small Cap
Contrarian Fund's, the Mid Cap Value Fund's, the Large Cap Value Fund's, and the
Value Plus Fund's 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 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. 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
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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.
As discussed above, OTC options in which the Small Cap Contrarian Fund may
invest are subject to risks in addition to the risks related to exchange-traded
options. The Small Cap Contrarian Fund currently intends to treat the value of
any OTC option it purchases as illiquid for the purposes of its investment
limitations. Similarly, for any OTC option it writes, the Fund will treat as
illiquid the value of the option's underlying instrument; however, if the Fund
has a guaranteed right to close out the option with a primary U.S. government
securities dealer, only the maximum price of the closing transaction less the
amount the option is in-the-money will be considered illiquid. The Small Cap
Contrarian Fund may also buy and sell options and futures based on any type of
security, index, or currency related to its investments, including options and
futures traded on foreign exchanges. Investments in foreign securities are
subject to additional risks as described below.
Foreign Investments
The Value Fund and the Value Plus Fund may invest up to 15% of their
respective assets directly in the securities of foreign issuers traded outside
of the United States. The Small Cap Contrarian Fund, the Mid Cap Value Fund, and
the Large Cap Value Fund may invest up to 25% of their respective assets
directly in the securities of foreign issuers traded outside the United States
or, with respect to the Small Cap Contrarian Fund, in any one currency. The
value of securities, and dividends and interest earned from such securities can
change significantly when foreign currencies strengthen or weaken relative to
the U.S. dollar. Foreign securities markets generally have lower trading volume
and less liquidity than U.S. markets, and prices on some foreign markets can be
highly volatile. Many foreign countries lack uniform accounting and disclosure
standards comparable to those applicable to U.S. companies, and it may be more
difficult to obtain reliable information regarding a foreign issuer's financial
condition and operations. In addition, the costs of foreign investing, including
withholding taxes, brokerage commissions, and custodial costs, are generally
higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government regulation. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It also may be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including, but not limited to, the possibility
of expropriation or nationalization of assets, confiscatory taxation,
restrictions on U.S. investment or on the ability to repatriate assets or
convert currency into U.S. dollars. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic or social instability, military action or unrest, or adverse diplomatic
developments. There is no assurance that Heartland Advisors will be able to
anticipate these political events or counter their effects.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities. Equity securities of foreign companies
with smaller
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market capitalizations may involve a higher degree of risk than investments in
the general foreign equity markets and such securities may be subject to even
greater price volatility and may have less market liquidity than equity
securities of foreign issuers with larger market capitalizations.
The Small Cap Contrarian Fund, the Value Fund, the Mid Cap Value Fund, the
Large Cap Value Fund, and the Value Plus Fund each may invest in foreign
securities that impose restrictions on transfer within the U.S. or to U.S.
persons. Although securities subject to transfer restrictions may be marketable
abroad, they may be less liquid than foreign securities of the same class that
are not subject to such restrictions.
American Depository Receipts and Global Depository Receipts ("ADRs" and
"GDRs") are certificates evidencing ownership of shares of a foreign-based
issuer held by a bank or similar financial institution as depository. Designed
for use in U.S. and global securities markets, respectively, ADRs and GDRs are
alternatives to the direct purchase of the underlying securities in their
national markets and currencies. The limitations as to a respective Fund's
investments in foreign securities do not apply to investments in ADRs and GDRs
or to securities of foreign issuers that are traded on a registered U.S. stock
exchange or the NASDAQ National Market System. A Depository Receipt may be
sponsored or unsponsored. In the case of a Fund invested in an unsponsored
Depository Receipt the Fund is likely to bear its proportionate share of the
expenses of the depository, and it may have greater difficulty in receiving
shareholder communications than it would have with a sponsored ADR.
Foreign Currency Transactions
Forward Foreign Currency Contracts. To manage the currency risk
accompanying investments in foreign securities and to facilitate the purchase
and sale of foreign securities, the Small Cap Contrarian Fund, the Value Fund,
the Mid Cap Value Fund, the Large Cap Value Fund, and the Value Plus Fund may
engage in foreign currency transactions on a spot (cash) basis at the spot rate
prevailing in the foreign currency exchange market or through entering into
contracts to purchase or sell foreign currencies at a future date ("forward
foreign currency" contracts or "forward" contracts).
A forward foreign currency contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are principally traded in the interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. A forward contract generally has no deposit
requirement and no commissions are charged at any stage for trades.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security. By entering into a forward contract for the purchase or
sale, for a fixed amount of U.S. dollars, of the amount of foreign currency
involved in the underlying security transaction, the Fund will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date the security is purchased or sold and the date on which
payment is made or received. This technique is sometimes referred to as a
"settlement hedge" or "transaction hedge." Heartland Advisors may enter into
settlement hedges in the normal course of managing a Fund's foreign investments.
When Heartland Advisors believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, it may enter
into a forward contract to sell for a fixed amount of U.S. dollars, the amount
of the foreign currency approximating the value of some or all of the respective
Fund's portfolio securities denominated in such foreign currency. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both positive
and negative currency fluctuations, but would not offset changes in security
values caused by other factors. The Value Fund, the Mid Cap Value Fund, the
Large Cap Value Fund, and the Value Plus Fund will not enter into such forward
contracts or maintain a net exposure to such contracts where the consummation of
the contracts would obligate the Fund to deliver an amount of foreign currency
in excess of the value of the respective Fund's securities or other assets
denominated in that currency. The Small Cap Contrarian Fund could also hedge a
position by selling another currency expected to perform similarly to the
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currency in which the Fund's securities are denominated. This type of hedge,
sometimes referred to as a "proxy hedge," could offer advantages in terms of
cost, yield or efficiency, but generally would not hedge currency exposure as
effectively as a simple hedge into U.S. dollars. Proxy hedges may result in
losses if the currency used to hedge does not perform similarly to the currency
in which the hedged securities are denominated.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult and the successful execution of a short-
term hedging strategy is highly uncertain. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer-term investment decisions made with regard to overall diversification
strategies. However, Heartland Advisors believes that it is important to have
the flexibility to enter into such forward contracts when it determines that the
best interests of a Fund will be served.
At the maturity of a forward contract, a Fund may either sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of the foreign currency.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline during the period between the
Fund's entering into a forward contract for the sale of a foreign currency and
the date it enters into an offsetting contract for the purchase of the foreign
currency, the Fund will realize a gain to the extent the price of the currency
it has agreed to sell exceeds the price of the currency it has agreed to
purchase. Should forward prices increase, the Fund will suffer a loss to the
extent that the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
It is impossible to forecast with precision the market value of securities
at the expiration of a forward contract. Accordingly, it may be necessary for a
Fund to purchase additional foreign currency on the spot market (and bear the
expense of such purchase) if the market value of the security is less than the
amount of foreign currency the Fund is obligated to deliver and if a decision is
made to sell the security and make delivery of the foreign currency. Conversely,
it may be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security if its market value exceeds the
amount of foreign currency the Fund is obligated to deliver.
The Small Cap Contrarian Fund's, the Value Fund's, the Mid Cap Value
Fund's, the Large Cap Value Fund's, and the Value Plus Fund's dealings in
forward foreign currency exchange contracts will be limited to the transactions
described above. Of course, the Funds are not required to enter into such
transactions with regard to their foreign currency-denominated securities and
will not do so unless deemed appropriate by Heartland Advisors. This method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange which one can achieve at some future point in time.
Additionally, although such contracts tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time, they tend to
limit any potential gain which might result should the value of such currency
increase. Successful use of forward currency contracts will depend on Heartland
Advisors' skill in analyzing and predicting currency values. Forward contracts
may substantially change a Fund's investment exposure to changes in currency
exchange rates, and could result in losses to the Fund if currencies do not
perform as Heartland Advisors anticipates. For example, if a currency's value
rose at a time when Heartland Advisors had hedged a Fund by selling that
currency in exchange for U.S. dollars, the Fund would be unable to participate
in the currency's appreciation. If Heartland Advisors hedges a currency exposure
for the Small Cap Contrarian Fund through proxy hedges, the Fund could realize
currency losses from the hedge and the security position at the same time if the
two currencies do not move in tandem. Similarly, if Heartland Advisors increases
a Fund's exposure to a foreign currency, and that currency's value declines, the
Fund will realize a loss. There is no assurance that
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Heartland Advisors' use of forward currency contracts will be advantageous to a
Fund or that it will hedge at an appropriate time.
Although each of the Small Cap Contrarian Fund, the Value Fund, the Mid Cap
Value Fund, the Large Cap Value Fund, and the Value Plus Fund values its assets
daily in terms of U.S. dollars, it does not intend to convert its holdings of
foreign currencies into U.S. dollars on a daily basis. It will do so from time
to time and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a dealer may offer
to sell a foreign currency to a Fund at one rate, while offering a lesser rate
of exchange should the Fund desire to resell that currency to the dealer. The
policies described in this section regarding forward foreign currency contracts
and the respective Fund's policies regarding foreign currency transactions
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.
Options and Futures Relating to Foreign Currencies. Currency futures
contracts are similar to forward foreign currency contracts, except that they
are traded on exchanges (and have margin requirements) and are standardized as
to contract size and delivery date. Most currency futures contracts call for
payment or delivery in U.S. dollars. The underlying instrument of a currency
option may be a foreign currency, which generally is purchased or delivered in
exchange for U.S. dollars, or may be a futures contract. The purchaser of a
currency call obtains the right to purchase the underlying currency, and the
purchaser of a currency put obtains the right to sell the underlying currency.
The uses and risks of currency options and futures are similar to options
and futures relating to securities or indices, as discussed above. Each of the
Small Cap Contrarian Fund, the Value Fund, the Mid Cap Value Fund, the Large Cap
Value Fund, and the Value Plus Fund may purchase and sell currency futures and
may purchase and write currency options to increase or decrease its exposure to
different foreign currencies. The Small Cap Contrarian Fund, the Value Fund, the
Mid Cap Value Fund, the Large Cap Value Fund, and the Value Plus Fund may also
purchase and write currency options in conjunction with each other or with
currency futures or forward contracts. Currency futures and options values can
be expected to correlate with exchange rates, but may not reflect other factors
that affect the value of the respective Fund's investments. A currency hedge,
for example, should protect a Yen-denominated security from a decline in the
Yen, but will not protect the respective Fund against a price decline resulting
from deterioration in the issuer's creditworthiness. Because the value of the
respective Fund's foreign-denominated investments changes in response to many
factors other than exchange rates, it may not be possible to match the amount of
currency options and futures to the value of the respective Fund's investments
exactly over time.
Federal Tax Treatment of Options, Futures Contracts, and Forward Foreign
Exchange Contracts
The Funds may enter into certain option, futures, and, with respect to the
Small Cap Contrarian Fund, the Value Fund, the Mid Cap Value Fund, the Large Cap
Value Fund, and the Value Plus Fund, forward foreign exchange contracts which
may or may not 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. Generally, 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 recognize net gains or losses on such
transactions when determining the Fund's distribution requirements even though
it may not have closed the transaction and received cash to pay such
distribution.
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Options, futures, and forward foreign exchange contracts which offset a
foreign dollar denominated bond or currency position may be considered straddles
for tax purposes in which case a loss on any position in a straddle will be
subject to deferral to the extent of unrealized gain in an offsetting position.
In order for a Fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income (i.e., dividends, interest,
income derived from loans of securities, and gains from the sale of securities
or currencies). Options, futures and foreign exchange contracts entered into for
an investment purpose are qualifying income.
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale
treatment for federal income tax purposes on certain hedging strategies with
respect to appreciated securities. Under these rules, taxpayers will recognize
gain, but not loss, with respect to securities if they enter into short sales of
"offsetting notional principal contracts" (as defined by the Act) or futures or
"forward contracts" (as defined by the Act) with respect to the same or
substantially identical property, or if they enter into such transactions and
then acquire the same or substantially identical property. These changes
generally apply to constructive sales after June 8, 1997. Furthermore, the
Secretary of the Treasury is authorized to promulgate regulations that will
treat as constructive sales certain transactions that have substantially the
same effect as short sales, offsetting notional principal contracts, and futures
or forward contracts to deliver the same or substantially similar property.
Non-Investment Grade Securities
Non-investment grade debt securities (those rated below the four highest
categories by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Corporation ("S&P") or, if unrated, judged by Heartland Advisors to be of
comparable quality, commonly known as "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 securities typically offer higher rates of return than investment
grade securities, they also involve greater risk, including greater risk of
default. An economic downturn could severely disrupt the market for such high
yield securities and adversely affect their value and the ability of the issuers
to repay principal and interest. The rate of incidence of default of non-
investment grade securities is likely to increase during times of economic
downturns and extended periods of increased interest rates. Yields on non-
investment grade securities will fluctuate over time, and are generally more
volatile than yields on investment grade securities.
The secondary trading market for non-investment grade securities may be
less well-established than for investment grade securities, and such securities
may therefore be only thinly traded. As a result, there may be no readily
ascertainable market value for such securities, in which case it will be more
difficult for the Funds to value accurately the securities, and consequently the
investment portfolio. Under such circumstances, the subjective judgment of the
Board of Directors will play a greater role in the valuation. Additionally,
adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidities of non-investment grade
securities, especially in a thinly traded market.
The Value Fund, Mid Cap Value Fund, Large Cap Value Fund and Value Plus
Fund will not invest in securities that are rated below the fifth or sixth
rating categories by Moody's or S&P (Ba and B for Moody's and BB and B for S&P)
or, if unrated, judged comparable by Heartland Advisors. Securities rated in the
higher of those categories have less near-term vulnerability to default than
other speculative issues, however they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. However,
business and financial alternatives available to obligors of such securities can
generally be identified which could assist them in satisfying their debt service
requirements. Securities rated in the lower of these two categories are
considered highly speculative. While the issuers of such securities currently
must be meeting debt service requirements in order to achieve this rating,
adverse business, financial, or economic conditions likely could impair the
issuer's capacity or willingness to pay interest and repay principal.
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The Small Cap Contrarian Fund may invest in debt securities rated as low as
the lowest rating category assigned by Moody's or S&P (C for Moody's and D for
S&P). Debt securities rated below B may be even more speculative than B rated
bonds and may either be currently vulnerable to default or may be in default. A
detailed description of the characteristics associated with the various debt
credit ratings established by Moody's and S&P is set forth in Appendix A to this
Statement of Additional Information.
While rating categories help identify credit risks associated with debt
securities, they do not evaluate the market value risk of non-investment grade
securities. Additionally, the credit rating agencies may fail to promptly change
the credit ratings to reflect subsequent events. Accordingly, Heartland's Board
of Directors and Heartland Advisors continuously monitor the issuers of non-
investment grade securities held in each Fund's portfolio. Since the risk of
default is higher for non-investment grade debt securities, Heartland Advisors'
research and credit analysis are an especially important part of managing
securities of this type held by a Fund. In considering investments for the Fund,
Heartland Advisors will attempt to identify those issuers of non-investment
grade securities whose financial condition is adequate to meet future
obligations, has improved, or is expected to improve in the future. Heartland
Advisors' analysis focuses on relative values based on such factors as interest
or dividend coverage, asset coverage, earnings prospects, and the experience and
managerial strength of the issuer.
A Fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise to exercise its rights as a security holder to seek to
protect the interests of security holders if it determines this to be in the
best interests of the Fund's shareholders.
Indexed Securities
The Small Cap Contrarian Fund, the Mid Cap Value Fund, the Large Cap Value
Fund, the Value Plus Fund, and the U.S. Government Securities Fund may purchase
securities whose prices are indexed to the prices of other securities,
securities indices, currencies, precious metals or other commodities, 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. Gold-indexed securities, for
example, typically provide for a maturity value that depends on the price of
gold, resulting in a security whose price tends to rise and fall together with
gold prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may also have prices that
depend on the values of a number of different foreign currencies relative to
each other. 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, currency, 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
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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.
Inflation - Indexed Bonds
Each Fund may invest in inflation-indexed bonds issued by the U.S.
Government, its agencies or instrumentalities. Inflation-indexed bonds are fixed
income securities whose principal value is periodically adjusted according to
the rate of inflation. The interest rate on these bonds is generally fixed at
issuance at a rate lower than typical bonds. Over the life of an inflation-
indexed bond, however, interest will be paid based on a principal value that is
adjusted for inflation.
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward and, as a result, the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. If any such downward adjustment in the
principal value of an inflation-indexed bond exceeds the interest otherwise
includable in the Fund's gross income for the relevant tax year, the excess will
be treated as an ordinary loss. However, the amount of the loss that a Fund may
record for any tax year is limited to the amount by which the total taxable
income realized by the Fund with respect to the particular bond in prior tax
years exceeds the total ordinary losses recorded by the Fund on the bond in
prior tax years. If the reduction in the principal value of the bond for any tax
year exceeds this limit, the excess can be carried forward to offset interest
income on the bond in future tax years.
If the periodic adjustment rate measuring inflation increases, the
principal value of inflation-indexed bonds will be adjusted upward and, as a
result, the interest payable on these securities (calculated with respect to a
larger principal amount) will be increased. Any increase in the principal amount
of an inflation-indexed bond will be considered taxable ordinary income and will
be includable in the Fund's gross income in the period in which it accrues, even
though investors do not receive their principal until maturity, subject to
offset against any tax loss carryforwards from earlier tax years. There can be
no assurance that the applicable inflation index for the security will
accurately measure the real rate of inflation (or deflation) in the prices of
goods and services. At present, the U.S. Treasury has only recently begun
issuing inflation-indexed bonds. As such, there is no trading history of these
securities, and there can be no assurance that a liquid market in these
instruments will develop, although one is expected.
Investments in Other Investment Companies
Each of the Small Cap Contrarian, Mid Cap Value and Large Cap Value 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 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.
Restricted Securities
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 Small Cap Contrarian, Mid Cap
Value, Large Cap Value and Value Plus Funds may invest without limitation in
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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.
Value Fund - Debt Securities
The Value Fund may invest up to 5% of its net assets in debt securities
rated at least B by Moody's or S&P, or, if unrated, judged comparable by
Heartland Advisors. See "Non-Investment Grade Securities" above. Debt securities
in which the Value Fund may invest include corporate debt securities, securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
and money market instruments, such as certificates of deposit and commercial
paper. This percentage limitation is in addition to assets that may be invested
in short-term instruments as described in the Prospectus.
U.S. Government Securities Fund - Mortgage-Related Securities
Mortgage-related securities in which the U.S. Government Securities Fund
may invest include mortgage pass-through securities and derivative mortgage
securities, such as collateralized mortgage obligations and stripped mortgage-
backed securities, issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
In general, mortgage-related securities have yield and maturity
characteristics corresponding to the underlying assets. Unlike traditional debt
securities, which may pay a fixed rate of interest until the entire principal
amount comes due at maturity, payments on certain mortgage-related securities
include both interest and a partial repayment of principal. Besides the
scheduled repayment of principal, repayments of principal on mortgage-related
securities may result from the voluntary prepayment, refinancing, or foreclosure
of the underlying mortgage loans. If property owners make unscheduled
prepayments of their mortgage loans, these prepayments may result in early
payment of the applicable mortgage-related securities. In that event, the Fund
may be unable to invest the proceeds from the early payment of the mortgage-
related securities in an investment that provides as high a yield as the
mortgage-related securities. Consequently, early payment associated with
mortgage-related securities may cause these securities to experience
significantly greater price and yield volatility than that experienced by
traditional fixed-income securities. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. During periods of falling interest rates, the rate of
mortgage prepayments generally tends to increase, thereby tending to decrease
the life of mortgage-related securities. During periods of rising interest
rates, the rate of mortgage prepayments generally decreases, thereby tending to
increase the life of mortgage-related securities. If the life of a mortgage-
related security is inaccurately predicted, the Fund may not be able to realize
the rate of return it expected.
Mortgage-related securities are less effective than other types of
securities as a means of "locking in" attractive long-term interest rates. One
reason is the need to reinvest prepayments of principal; another is the
possibility of significant unscheduled prepayments resulting from declines in
interest rates. During periods of declining interest rates, these prepayments
likely would have to be reinvested at lower rates. As a result, these securities
may have less potential for capital appreciation during periods of declining
interest rates than other securities of comparable maturities, although they may
have a similar risk of decline in market value during periods of rising interest
rates.
Prepayments may cause losses in securities purchased at a premium. At
times, some of the mortgage-related securities in which the Fund may invest may
have higher than market yields and, therefore, will be purchased at a premium
above their par value. Unscheduled prepayments, which are made at par, will
cause the Fund to experience a loss equal to any unamortized premium. In
addition, the value of mortgage-related securities may change due to changes in
the market's perception of the creditworthiness of the federal agency that
issued them, and the mortgage-related securities market in general may be
adversely affected by changes in governmental regulation or tax policies.
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Certain characteristics of adjustable rate mortgage securities ("ARMs") may
make them more susceptible to prepayments than other mortgage-related
securities. Unlike fixed rate mortgages, the interest rates on adjustable rate
mortgages are adjusted at regular intervals, generally based on a specified,
published interest rate index. Investments in ARMs allow the Fund to participate
in changing interest rate levels through regular adjustments in the coupons of
the underlying mortgages, resulting in more variable current income, and
potentially shorter duration characteristics than longer-term fixed rate
mortgage securities. The extent to which the values of ARMs fluctuate with
changes in interest rates will depend on the frequency of the interest resets on
the underlying mortgages, and the specific indexes underlying the ARMs, as
certain indexes closely mirror market interest rate levels and others tend to
lag changes in market rates.
ARMs will frequently have caps and floors which limit the maximum amount by
which the interest rate on the underlying mortgage loans may move up or down
during each adjustment period, and over the life of the loan. Interest rate caps
on ARMs may cause them to decrease in value in an increasing interest rate
environment and may also prevent their income from increasing to levels
commensurate with prevailing interest rates. Conversely, interest rate floors on
ARMs may cause their income to remain higher than prevailing interest rate
levels and result in an increase in the value of such securities. However, this
increase may be tempered by an acceleration of prepayments. In general, ARMs
tend to experience higher levels of prepayment than other mortgage-related
securities. During favorable interest rate environments, holders of adjustable
rate mortgages have greater incentives to refinance with fixed rate mortgages in
order to avoid interest rate risk. In addition, significant increases in the
index rates used for adjustment of the mortgages may result in increased
delinquency, default and foreclosure rates, which in turn would increase the
rate of prepayment on the ARMs.
Collateralized mortgage obligations ("CMOs") are designed to reduce the
risk of prepayment for investors by issuing multiple classes of securities, each
having different maturities, interest rates and payment schedules, and with the
principal and interest on the underlying mortgages allocated among the several
classes in various ways. Payment of interest or principal on some classes or
series of CMOs may be subject to contingencies or some classes or series may
bear some or all of the risk of default on the underlying mortgages. CMOs of
different classes or series are generally retired in sequence as the underlying
mortgage loans in the mortgage pool are repaid. If enough mortgages are repaid
ahead of schedule, the classes or series of a CMO with the earliest maturities
generally will be retired prior to their maturities. Thus, the early retirement
of particular classes or series of a CMO held by the Fund would have the same
effect as the prepayment of mortgages underlying other mortgage-related
securities. The prices of certain CMOs, depending on their structure and the
rate of prepayments, can be volatile and the market for certain CMOs may not be
as liquid as the market for other securities in general.
Similarly, prepayments could also result in losses on stripped mortgage-
backed securities. Stripped mortgage-backed securities are commonly structured
with two classes that receive different portions of the interest and principal
distributions on a pool of mortgage loans. The Fund may invest in both the
interest-only or "IO" class and the principal-only or "PO" class. The yield to
maturity on an IO class of stripped mortgage-backed securities is extremely
sensitive not only to changes in prevailing interest rates but also to the rate
of principal payments (including prepayments) on the underlying assets. A rapid
rate of principal prepayments may have a measurable adverse effect on the Fund's
yield to maturity to the extent it invests in IOs. If the assets underlying the
IO experience greater than anticipated prepayments of principal, the Fund may
fail to recoup fully its initial investment in these securities. Conversely, POs
tend to increase in value if prepayments are greater than anticipated and
decline if prepayments are slower than anticipated.
The secondary market for stripped mortgage-backed securities may be more
volatile and less liquid than that for other mortgage-related securities,
potentially limiting the Fund's ability to obtain market quotations for those
securities or to buy or sell those securities at any particular time.
The U.S. Government Securities Fund anticipates that governmental and
government-related entities may create mortgage loan pools offering pass-through
investments in addition to the types discussed above, including securities with
underlying pools of derivative mortgage-related securities. As new types of
mortgage-related
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securities are developed and offered to investors, Heartland Advisors will,
consistent with the Fund's objective and investment policies, consider making
investments in such new types of securities.
Small Cap Contrarian Fund - Short Sales
The Small Cap Contrarian Fund may seek to hedge investments or realize
additional gains through short sales. Short sales are transactions in which the
Fund sells a security it does not own in anticipation of a decline in the market
value of that security. To complete such a transaction, the Fund must borrow the
security to make delivery to the buyer. The Fund then is obligated to replace
the security borrowed by purchasing it at the market price at or prior to the
time of replacement. The price at such time may be more or less than the price
at which the security was sold by the Fund. Until the security is replaced, the
Fund is required to repay the lender any dividends or interest that accrued
during the period of the loan. To borrow the security, the Fund also may be
required to pay a premium, which would increase the cost of the security sold.
The net proceeds of the short sale will be retained by the broker (or by the
Fund's custodian), to the extent necessary to meet margin requirements, until
the short position is closed out. The Fund may also incur transaction costs in
effecting short sales.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the premium,
dividends, interest or expenses a Fund may be required to pay in connection with
a short sale.
Whenever the Small Cap Contrarian Fund engages in a short sale, it will
maintain a segregated collateral account with its custodian consisting of an
amount of cash or liquid assets equal to the difference between (a) the market
value of the securities sold short at the time they were sold short and (b) any
cash or liquid assets required to be deposited as collateral with the broker in
connection with the short sale (not including the proceeds from the short sale).
The Fund will maintain the account on a daily basis so that the amount deposited
with the custodian plus the amount deposited with the broker as collateral will
equal the current market value of the securities sold short; provided, that at
no time will the amount segregated in the account plus the amount deposited with
the broker be less than the market value of the securities at the time they were
sold short.
Small Cap Contrarian Fund - Leverage
The Small Cap Contrarian Fund may borrow from banks up to one-third of its
total assets, and may pledge its assets in connection with such borrowings. If
the Small Cap Contrarian Fund makes additional investments while borrowings are
outstanding, this may be construed as a form of leverage. Leveraging the Small
Cap Contrarian Fund may create an opportunity for increased net income; however,
it may also give rise to special risk considerations. For example, leveraging
may exaggerate changes in the net asset value of the Fund's shares and in the
gains and losses on the Fund's investments. Leveraging will create interest
expenses for the Fund that may exceed the return on investments made with the
borrowings. To the extent the income derived from securities purchased with
borrowed funds exceeds the Fund's costs of borrowing, the Fund's net income may
be greater than if leveraging were not used. Conversely, if the income from the
investments made with the borrowed funds is not sufficient to cover the cost of
leveraging, the net income of the Fund will be less than if leveraging were not
used and the value of the Fund's shares may be adversely affected. Reverse
repurchase agreements that are not fully collateralized create leverage, a
speculative factor, and will be considered as borrowings for purposes of the
Fund's investment limitations.
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Portfolio Turnover
Portfolio turnover for each Fund is the ratio of the lesser of annual
purchases or sales of portfolio securities by the Fund to the average monthly
value of portfolio securities owned by the Fund, not including securities
maturing in less than twelve months. A 100% portfolio turnover rate would occur,
for example, if the lesser of the value of purchases or sales of a Fund's
portfolio securities for a particular year were equal to the average monthly
value of the portfolio securities owned by the Fund during the year. For the
fiscal years ended December 31, 1997 and 1996, the portfolio turnover rates for
the Value Fund were 55% and 31%, respectively; for the Value Plus Fund the
portfolio turnover rates were 74% and 73%, respectively; for the Small Cap
Contrarian Fund the portfolio turnover rates were 103% and 57%, respectively;
and for the U.S. Government Securities Fund the portfolio turnover rates were
143% and 30%, respectively. The turnover rate for the Small Cap Contrarian Fund
was relatively high in 1997, in part because the Fund took losses in several
stocks where the fundamentals had deteriorated and realized profits in many of
its equity positions that had experienced significant appreciation. In addition,
the Fund had several companies in the portfolio that were the subject of
takeovers during 1997, thereby increasing portfolio turnover. The turnover rate
for the U.S. Government Securities Fund was relatively high in 1997, in part due
to the sector rotation strategy employed by the Fund. In addition to pursuing
such a strategy, effective March 31, 1997 the Fund eliminated its positions in
corporate bonds pursuant to a change in investment policy, thereby increasing
portfolio turnover. The portfolio turnover rates for the Mid Cap Value Fund for
the 1997 fiscal year and for the period from October 11, 1996 (commencement of
operations) to December 31, 1996 were 48% and 4%, respectively. The portfolio
turnover rates for the Large Cap Value Fund for the 1997 fiscal year and for the
period from October 11, 1996 (commencement of operations) to December 31, 1996
were 30% and 1%, respectively.
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. Operating policies are
subject to change by the Board of Directors without shareholder approval.
However, no Fund will change materially any operating policy without notice to
shareholders. Any investment policy or 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.
Small Cap Contrarian Fund
The fundamental investment restrictions and policies of the Small Cap
Contrarian Fund provide that such Fund may not:
(1) With respect to 75% of the Fund 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;
(2) Invest in a company 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;
provided that there shall be no limitation on the purchase of securities issued
or guaranteed by the U.S. government, its agencies or instrumentalities.
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(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 reverse repurchase agreements
are not deemed to be 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), short sales, futures, options and
other hedging activities.
(7) Make loans, except that it may: (i) acquire publicly distributed bonds,
debentures, notes and other debt securities; (ii) lend portfolio securities
provided that no such loan may be made if as a result the aggregate of such
loans would exceed one-third of the value of the Fund's total assets; and (iii)
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 10% 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, or entering into permissible reverse repurchase agreements, or hedging
activities.
(11) Invest in commodities, but the Fund may purchase or sell futures
contracts, options on futures, and options.
In accordance with the following non-fundamental policies, which may be
changed without shareholder approval, the Small Cap Contrarian Fund may not:
(1) Invest more than 5% of its total assets in securities of companies
which, including any predecessors, have a record of less than three years of
continuous operations.
(2) 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.
(3) Purchase warrants (other than those that have been acquired in units or
attached to other securities), except that the Fund may purchase warrants which,
when valued at lower of cost or market, do not exceed 5% of the value of the
Fund's net assets; included within the 5%, but not in excess of 2% of the Fund's
net assets, may be warrants which are not listed on the New York or American
Stock Exchanges.
(4) Purchase or retain the securities of any issuer if the officers,
directors, advisors or managers of the Fund owning beneficially more than 0.5%
of the securities of such issuer together own beneficially 5% of such
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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.
(5) 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, futures, short selling and leverage
activities as described elsewhere in the Prospectus and Statement of Additional
Information.
(6) Invest more than 10% of its total assets in real estate investment
trusts.
For the Small Cap Contrarian Fund's limitations on futures and options
transactions, see "Investment Policies and Methods - Limitations on Futures and
Options Transactions."
Value Fund and U.S. Government Securities Fund
The fundamental investment restrictions and policies of the Value Fund and
the U.S. Government Securities Fund provide that such Funds may not:
(1) Invest more than 5% of the fair market value of its assets in
securities of any one issuer except for United States government agency
securities and securities backed by the United States Government, its agencies
or instrumentalities, which may be purchased without limitation. For the
purposes of this limitation, the Funds will regard the entity which has the
ultimate responsibility for payment of principal and interest as the issuer.
(2) Purchase more than 10% of the outstanding voting securities of an
issuer, or invest in a company to get control or manage it.
(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;
provided that there shall be no limitation on the purchase of securities issued
or guaranteed by the United States government, its agencies or
instrumentalities.
(4) Invest more than 5% of its total assets in securities of companies
which, including any predecessors, have a record of less than three years of
continuous operations.
(5) Invest in securities of other investment companies except as they may
be acquired as part of a merger, consolidation, reorganization or acquisition of
assets.
(6) Buy or sell real estate, real estate investment trusts, or oil and gas
interests, but this shall not prevent the Funds from investing in securities of
companies whose business involves the purchase or sale of real estate, except
that the U.S. Government Securities Fund will not invest in real estate limited
partnerships.
(7) Borrow money or property except for temporary or emergency purposes. If
a Fund ever should borrow money it would only borrow from banks and in an amount
not exceeding 10% of the market value of its total assets (not including the
amount borrowed). Neither Fund will pledge more than 15% of its net assets to
secure such borrowings. In the event a Fund's borrowing exceeds 5% of the market
value of its total assets the Fund will not invest in any additional portfolio
securities until its borrowings are reduced to below 5% of its total assets. For
purposes of these restrictions, collateral arrangements for premium and margin
payments in connection with a Fund's hedging activities are not to be deemed to
be a pledge of assets.
(8) Make loans, except that it may (i) acquire publicly distributed bonds,
debentures, notes and other debt securities and (ii) lend portfolio securities
provided that no such loan may be made if as a result the aggregate of such
loans would exceed 30% of the value of the Fund's total assets.
19
<PAGE>
(9) Underwrite the securities of other issuers except where it might
technically be deemed to be an underwriter for purposes of the Securities Act of
1933 upon the disposition of certain securities.
(10) Except with respect to investments in repurchase agreements by the
U.S. Government Securities Fund, purchase securities with legal or contractual
restrictions on resale.
(11) Issue senior securities.
(12) Purchase securities on margin or effect short sales of securities,
except that the Value Fund may sell securities short where it either: (a) holds
a long position in the same security which equals or exceeds the number of
shares sold short; or (b) holds a long position in a security with respect to
which there has been a public announcement of a proposed transaction that would
result in the conversion of the securities so held into an equal or greater
number of shares of the securities sold short; provided that the Value Fund may
not effect any such short sale of securities if, as a result thereof, the
aggregate value of all of its open short positions would exceed 5% of the Value
Fund's total assets, or if more than 10% of the Value Fund's net assets would be
held as collateral for such short positions.
(13) Buy or sell commodities or commodity contracts or enter into an
interest rate futures contract or an option thereon, except that a Fund may
purchase or sell futures and options on futures and enter into closing
transactions with respect thereto unless, as a result thereof: (a) 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 Fund's net assets (taken at
market value at the time of entering into the contract and excluding the amount
by which any of its options on futures are in-the-money); and (b) more than 5%
of the Fund's total assets (taken at market value at the time of entering into
the contract and excluding the amount by which any of its options on futures are
in-the-money) would be committed to initial margin and premiums paid on such
futures contracts.
(14) Write, purchase or sell puts, calls, straddles, spreads or any
combination thereof, except that a Fund may write covered call options and
purchase put options on portfolio securities or securities indexes and enter
into closing transactions with respect to such options, and, subject to
restriction (13) above, a Fund may write covered call options and purchase put
options on futures contracts and enter into closing transactions with respect to
such options on futures, unless, as a result of any of the foregoing
transactions: (a) the aggregate market value of all portfolio securities
covering call options written by the Fund would exceed 25% of the Fund's total
assets; or (b) the aggregate value of all premiums paid for put options
purchased by the Fund would exceed 5% of the Fund's total assets (less the
amount by which any such positions are in-the-money), excluding puts purchased
on closing transactions.
(15) Invest in illiquid securities, except that the U.S. Government
Securities Fund may invest up to 10% of its net assets in illiquid securities,
including investments in repurchase agreements which mature in more than seven
days.
(16) Purchase warrants, except that the Value Fund may purchase warrants
which, when valued at lower of cost or market, do not exceed 5% of the value of
the Fund's net assets; included within the 5%, but not in excess of 2% of the
Fund's net assets, may be warrants which are not listed on the New York or
American Stock Exchanges.
(17) With respect to the U.S. Government Securities Fund, purchase or
retain the securities of any issuer if the officers, directors, advisors or
managers of the fund owning beneficially more than one and one-half of one
percent of the securities of such issuer together own beneficially 5% of such
securities; provided no officer or director shall be deemed to own beneficially
securities held in other accounts managed by such person or held in employee or
similar plans for which such person acts as trustee.
20
<PAGE>
Mid Cap Value Fund and Large Cap Value Fund
The fundamental investment restrictions and policies of the Mid Cap Value
Fund and the Large Cap Value Fund provide that each such Fund may not:
(1) With respect to 75% of its 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;
(2) Invest in a company to get control or manage it or, with respect to 75%
of its 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;
provided that there shall be no limitation on the purchase of 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 for temporary or emergency purposes. If
the Fund ever should borrow money it would only borrow from banks and in an
amount not exceeding 10% of the market value of its total assets (not including
the amount borrowed). No Fund will pledge more than 15% of its net assets to
secure such borrowings. In the event the Fund's borrowing exceeds 5% of the
market value of its total assets the Fund will not invest in any additional
portfolio securities until its borrowings are reduced to below 5% of its total
assets. For purposes of these restrictions, collateral arrangements for premium
and margin payments in connection with the Fund's hedging activities are not to
be deemed to be a pledge of assets.
(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), short sales, futures, options, and
other hedging activities.
(7) Make loans, except that it may: (i) acquire publicly distributed bonds,
debentures, notes, and other debt securities; (ii) lend portfolio securities
provided that no such loan may be made if as a result the aggregate of such
loans would exceed one-third of the value of the Fund's total assets; and (iii)
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 10% 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 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from making any otherwise
permissible borrowings, mortgages or pledges, or entering into permissible
reverse repurchase agreements, or hedging activities.
21
<PAGE>
(11) Invest in commodities, but the Fund may purchase or sell futures
contracts, options on futures, and options.
In accordance with the following non-fundamental policies, which may be
changed without shareholder approval, the Mid Cap Value Fund and the Large Cap
Value Fund each may not:
(1) Invest more than 5% of its total assets in securities of companies
which, including any predecessors, have a record of less than three years of
continuous operations.
(2) 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.
(3) Purchase warrants (other than those that have been acquired in units or
attached to other securities), except that the Fund may purchase warrants which,
when valued at lower of cost or market, do not exceed 5% of the value of the
Fund's net assets; included within the 5%, but not in excess of 2% of the Fund's
net assets, may be warrants which are not listed on the New York or American
Stock Exchanges.
(4) Purchase or retain the securities of any issuer if the officers,
directors, advisors or managers of the Fund owning beneficially more than 0.5%
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.
(5) 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, futures, short selling and leverage
activities as described elsewhere in the Prospectus and Statement of Additional
Information.
(6) Invest more than 10% of its total assets in real estate investment
trusts.
For the Mid Cap Value Fund's and Large Cap Value Fund's limitations on
futures and options transactions, see "Investment Policies and Methods -
Limitations on Futures and Options Transactions."
Value Plus Fund
The fundamental investment restrictions and policies of the Value Plus 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;
(2) Invest more than 10% of the fair market value of its total assets in
securities of any one issuer, other than securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities;
(3) Purchase more than 10% of the outstanding voting securities of an
issuer, or invest in a company to get control or manage it.
(4) Invest more than 25% of its total assets, based on current market value
at the time of purchase, in securities of issuers in any single industry;
provided that there shall be no limitation on the purchase of securities issued
or guaranteed by the U.S. government, its agencies or instrumentalities.
(5) 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
22
<PAGE>
investment trusts, that invest in real estate or real estate interests or whose
business involves the purchase or sale of real estate.
(6) Borrow money or property except for temporary or emergency purposes. If
the Fund ever should borrow money it would only borrow from banks and in an
amount not exceeding 10% of the market value of its total assets (not including
the amount borrowed). The Fund will not pledge more than 15% of its net assets
to secure such borrowings. In the event the Fund's borrowing exceeds 5% of the
market value of its total assets the Fund will not invest in any additional
portfolio securities until its borrowings are reduced to below 5% of its total
assets. For purposes of these restrictions, collateral arrangements for premium
and margin payments in connection with the Fund's hedging activities are not to
be deemed to be a pledge of assets.
(7) Make loans, except that it may: (i) acquire publicly distributed bonds,
debentures, notes and other debt securities; (ii) lend portfolio securities
provided that no such loan may be made if as a result the aggregate of such
loans would exceed 30% of the value of the Fund's total assets; and (iii) enter
into repurchase agreements.
(8) Underwrite the securities of other issuers except where it might
technically be deemed to be an underwriter for purposes of the Securities Act of
1933 upon the disposition of certain securities.
(9) Purchase a security if, as a result, more than 10% of the value of the
Fund's total assets would be invested in: (a) securities with legal or
contractual restrictions on resale (other than investments in repurchase
agreements); (b) securities for which market quotations are not readily
available; and (c) repurchase agreements which do not provide for payment within
7 days.
(10) Issue senior securities.
(11) Invest in commodities, but the Fund may invest in futures contracts,
options on futures, and options.
In accordance with the following non-fundamental policies, which may be
changed without shareholder approval, the Value Plus Fund may not:
(1) Invest more than 5% of its total assets in securities of companies
which, including any predecessors, have a record of less than three years of
continuous operations.
(2) Invest in securities of other investment companies except as they may
be acquired as part of a merger, consolidation, reorganization or acquisition of
assets.
(3) Purchase warrants, except that the Fund may purchase warrants which,
when valued at lower of cost or market, do not exceed 5% of the value of the
Fund's net assets; included within the 5%, but not in excess of 2% of the Fund's
net assets, may be warrants which are not listed on the New York or American
Stock Exchanges.
(4) Purchase or retain the securities of any issuer if the officers,
directors, advisors or managers of the Fund owning beneficially more than 0.5%
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.
(5) Purchase securities on margin or effect short sales of securities,
except as required in connection with permissible options and futures activities
as described elsewhere in the Prospectus and Statement of Additional Information
and except that the Fund may sell securities short where it either: (a) holds a
long position in the same security which equals or exceeds the number of shares
sold short; or (b) holds a long position in a security with respect to which
there has been a public announcement of a proposed transaction that would result
in the conversion of the securities so held into an equal or greater number of
shares of the securities sold short; provided that the Fund may not effect any
such short sale of securities if, as a result thereof, the aggregate value of
23
<PAGE>
all of its open short positions would exceed 5% of the Fund's total assets, or
if more than 10% of the Fund's net assets would be held as collateral for such
short positions.
(6) Invest more than 10% of its total assets in real estate investment
trusts.
For the Value Plus Fund's limitations on futures and options transactions,
see "Investment Policies and Methods - Limitations on Futures and Options
Transactions."
MANAGEMENT
The Board of Directors of Heartland provides broad supervision over the
affairs of each Fund, and the officers are responsible for its operations. The
Directors and officers are listed below, together with their principal
occupations during the past five years. Subject to the direction of the Board of
Directors, Heartland Advisors is responsible for investment management of the
assets of each Fund. Although each Fund is offering only its own shares, it is
possible that one Fund might become liable for any misstatement in the
Prospectus about another Fund. The Board of Directors has considered this factor
in approving the use of a single combined prospectus.
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Heartland During Past Five Years
- ---------------- ----------------------- ---------------------------------
<S> <C> <C>
William J. Nasgovitz President and Director* President and Director Heartland Advisors, Inc., since 1982; Senior Vice
790 North Milwaukee Street President Investments, Dain Bosworth Incorporated from 1988 to June 1992;
Milwaukee, WI 53202 Director of Capital Investments, Inc., since 1989 (small business
investment company).
Willard H. Davidson Director Financial and business consultant since 1984; prior thereto, Chairman and
3726 North Lake Drive a Director, Marine Corporation (a bank holding company) and Marine Bank,
Milwaukee, WI 53211 N.A.
Hugh F. Denison Director* Vice President, Heartland Advisors, Inc., since 1988. Director, Heartland
790 North Milwaukee Street Advisors, Inc., 1988 through 1996.
Milwaukee, WI 53202
Jon D. Hammes Director President, The Hammes Company, since 1991; prior thereto, Managing
Suite 305 Partner, Trammell, Crow Co.
18000 West Sarah Lane
Brookfield, WI 53045
Patrick J. Retzer Vice President, Treasurer Senior Vice President and Treasurer, Heartland Advisors, Inc. since 1987;
790 North Milwaukee Street and Director* Director of Heartland Advisors, Inc. since 1988.
Milwaukee, WI 53202
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
A. Gary Shilling Director President, A. Gary Shilling & Company, Inc. (economic consultants and
500 Morris Avenue investment advisors), since 1978.
Springfield, NJ 07081-1020
Linda F. Stephenson Director President and Chief Executive Officer, Zigman Joseph Stephenson (a public
100 East Wisconsin Avenue relations and marketing communications firm) since 1989.
Milwaukee, WI 53202
Jilaine Hummel Bauer Vice President Senior Vice President, Heartland Advisors, Inc., since January 1998,
790 North Milwaukee Street Senior Vice President, Stein Roe & Farnham Incorporated, 1992 through
Milwaukee, WI 53202 1997.
Paul T. Beste Vice President and Investment Operations Officer, Heartland Advisors, Inc. since 1997;
790 North Milwaukee Street Principal Accounting Director of Taxes/Compliance, Strong Capital Management, Inc., 1992 to
Milwaukee, WI 53202 Officer June 1997.
Kenneth J. Della Vice President Chief Financial Officer, Heartland Advisors, Inc. since July 1995.
790 North Milwaukee Street Employed by Heartland Advisors, Inc. since May 1992.
Milwaukee, WI 53202
Lois Schmatzhagen Secretary Secretary, Heartland Advisors, Inc. since 1988.
790 North Milwaukee Street
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, 1997:
<TABLE>
<CAPTION>
Total
Aggregate Estimated Compensation
Compensation Pension or Actual Benefits from Heartland
from Retirement Upon and Fund
Director Heartland Benefits Retirement Complex
- -------- --------- -------- ---------- -------
<S> <C> <C> <C> <C>
Willard H. Davidson $16,000 None None $16,000
Jon D. Hammes $16,000 None None $16,000
A. Gary Shilling $16,000 None None $16,000
Linda F. Stephenson $16,000 None None $16,000
</TABLE>
25
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 31, 1998, the Directors and officers of Heartland Group, Inc.
as a group (9 persons) owned less than 1% of the outstanding shares of the Small
Cap Contrarian Fund, the Value Fund, the Value Plus Fund and the Mid Cap Value
Fund, and owned 1.87% of the U.S. Government Securities Fund and 4.62% of the
Large Cap Value 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;12,785,959 shares
(or 20.2%) of the Value Fund; 8,857,648 shares (or 39.1%) of the Value Plus
Fund; 6,162,309 shares (or 30.9%) of the Small Cap Contrarian Fund;1,615,845
shares (or 51.0%) of the Mid Cap Value Fund; and 95,990 shares (or 14.7%) of the
Large Cap Value Fund. In addition Heartland Advisors, Inc., ATTN: Ken Della, 790
North Milwaukee Street, Milwaukee, WI 53202-3712 held of record 41,529 shares,
or 6.3%, of the Large Cap Value Fund. Catherine J. Polaski, 5329 Highway 38,
Franksville, WI 53126, held of record 39,969 shares (or 6.1%) of the Large Cap
Value Fund.
THE INVESTMENT ADVISOR
Each Fund is managed by Heartland Advisors, pursuant to an Investment
Advisory Agreement with respect to the Value Fund and a separate Investment
Advisory Agreement with respect to the Small Cap Contrarian Fund, the Mid Cap
Value Fund, the Large Cap Value Fund, the Value Plus Fund, and the U.S.
Government Securities Fund (the "Agreements"). The Agreements, with respect to
the Small Cap Contrarian Fund, the Value Plus Fund, the U.S. Government
Securities Fund, the Mid Cap Value Fund, the Large Cap Value Fund, and the Value
Fund, were most recently approved by the Board of Directors, including a
majority of the Directors who are not Interested Persons of the Fund or of
Heartland Advisors, on July 15, 1997.
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 investment advisor,
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 Short Duration High-Yield Municipal Fund, Heartland High-Yield
Municipal Bond Fund and Heartland Wisconsin Tax Free Fund, three additional
series of Heartland, and also provides investment management services for
individuals, and institutional accounts, such as pension funds and profit-
sharing plans. As of March 31, 1998, Heartland Advisors had approximately $4.5
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 Agreements 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 portfolio securities,
expenses of registering and qualifying shares for sale with the Securities and
Exchange
26
<PAGE>
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.
Each of the Small Cap Contrarian Fund, the Value Fund, the Mid Cap Value
Fund, and the Large Cap Value Fund pays Heartland Advisors an annual fee for its
services at the rate of 0.75 of 1% of the respective Fund's average daily net
assets. While the advisory fee is larger than the fee paid by most mutual funds,
it is consistent with the fee paid by funds with investment characteristics and
objectives similar to that of the referenced Funds. The Value Plus Fund pays
Heartland Advisors an annual fee for its advisory services at the rate of 0.70
of 1% of the Fund's average daily net assets. The advisory fee for the U.S.
Government Securities Fund is 0.65 of 1% of the first $100 million of the Fund's
average daily net assets, 0.50 of 1% of the next $400 million of assets, and
0.40 of 1% on assets in excess of $500 million. The advisory fees for the Funds
are payable in monthly installments.
For the fiscal years ended December 31, 1995, 1996, and 1997 the Value Fund
paid advisory fees of, $6,452,487, $10,877,255, and $14,673,206 respectively.
For the period from April 27, 1995 (commencement of operations) to December 31,
1995, and for the fiscal years ended December 31, 1996 and 1997, the Small Cap
Contrarian Fund paid advisory fees of $172,583, $1,448,964 and $2,109,857,
respectively. For the period from October 11, 1996 (commencement of operations)
to December 31, 1996, and for the fiscal year ended December 31, 1997, the Mid
Cap Value Fund paid advisory fees of $6,087 and $184,843, respectively. For the
period from October 11, 1996 (commencement of operations) to December 31, 1996,
and for the fiscal year ended December 31, 1997, the Large Cap Value Fund paid
advisory fees of $2,325 and $26,585, respectively. During the fiscal year ended
December 31, 1997, advisory fees provided under the Large Cap Value Fund's
Agreement totaled $40,359, but Heartland Advisors voluntarily waived $13,774 of
the fees during this period. For the fiscal years ended December 31, 1995, 1996,
and 1997, the Value Plus Fund paid advisory fees of $102,311, $218,448, and
$1,292,331, respectively. For the years ended December 31,1995, 1996, and 1997,
the U.S. Government Securities Fund paid advisory fees of $325,124, $291,423 and
$146,128,, respectively. During those periods, advisory fees provided under the
U.S. Government Securities Fund's Agreement totaled $422,661, $378,850, and
$301,650, respectively, but Heartland Advisors voluntarily waived $97,537,
$87,427, and $155,522 of the fees during those respective periods.
The Agreements provide that Heartland Advisors' fee will be reduced, or
Heartland Advisors will reimburse a Fund (up to the amount of its fee), by an
amount necessary to prevent the total expenses of a Fund (excluding taxes,
interest, brokerage commissions or transactions costs, distribution fees and
extraordinary expenses) from exceeding limits applicable to the Fund in any
state in which its shares are then qualified for sale. Presently the most
restrictive expense ratio limitation imposed by any state is 2-1/2% of the first
$30 million of a Fund's average net assets, 2% of the next $70 million and 1-
1/2% of the remaining assets. For the purposes of these tests, average net
assets will be computed in the same manner as average daily net assets are
computed in determining the investment advisory fee. Such reimbursements would
be made monthly, subject to annual adjustment.
Each of the Agreements 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. Each 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. Each 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.
27
<PAGE>
PERFORMANCE INFORMATION
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. Prior
to June 1, 1994, shares of the Funds had been sold subject to a contingent
deferred sales charge and prior to February 12, 1993, shares of the Value and
U.S. Government Securities Funds had been sold subject to an initial sales
charge, neither of which is reflected in the total return figures, rather the
figures reflect the current no-load sales structure.
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.
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:
P(1 + T)/n/ = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value for a hypothetical $1,000 payment made
at the beginning of the 1, 5 and 10-year periods at the end of
the 1, 5 and 10-year period (or fractional portion thereof).
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.
28
<PAGE>
The average annual total return for the Funds for the one, five, and ten-year
periods or, if less, from commencement of operations through December 31, 1997
are as follows:
<TABLE>
<CAPTION>
10 years or, if Less,
From Commencement of
Fund 1 Year 5 Years Operations
---- ------ ------- ---------------------
<S> <C> <C> <C>
Heartland Value Fund 23.2% 18.5% 18.8%
Heartland Small Cap Contrarian Fund (4/27/95) 13.7% N/A 20.1%
Heartland Mid Cap Value Fund (10/11/96) 22.8% N/A 24.7%
Heartland Large Cap Value Fund (10/11/96) 22.9% N/A 23.2%
Heartland Value Plus Fund (10/26/93) 30.6% N/A 20.4%
Heartland U.S. Government Securities Fund 9.7% 7.2% 9.0%
</TABLE>
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
Yield = 2[(----- + 1)/6/ - 1]
cd
Where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the
period.
Since the Value Fund's investment objective is long-term capital
appreciation, the Fund will typically not calculate or advertise its yield.
Similarly, the Small Cap Contrarian, Mid Cap Value and Large Cap Value Funds
will not typically calculate their yields. The yield for the Value Plus Fund
for the thirty days ended December 31, 1997 was 3.78%. The yield for the U.S.
Government Securities Fund for the thirty days ended December 31, 1997 was
5.70%. 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.
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 and 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
29
<PAGE>
categories. In general, the Small Cap Contrarian Fund would appear in the
Capital Appreciation, Small Value or Micro Cap categories, the Value Fund
would appear in the Small Value, Small Cap or Capital Appreciation categories,
the Mid Cap Value Fund would appear in the Mid-Cap Value, Mid Cap or General
Equity categories, the Large Cap Value Fund would appear in the Large Value,
General Equity or Growth and Income categories and the Value Plus Fund would
appear in the Domestic Hybird or Equity Income categories. The U.S. Government
Securities Fund would generally appear in the Fixed Income or Intermediate-Term
Government, General U.S. Government categories. Each Fund may also compare its
performance to recognized stock and bond market indices, including the S&P 500,
the Standard & Poor's Mid-Cap Index, the Russell 2000 Stock Index, the Lipper
General U.S. Government Fund Index, and the Lehman Intermediate and Long-Term
Government Bond Indices.
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.
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.
Foreign securities are valued at the last sale price in the principal
market where they are traded, or, if last sale prices are unavailable, at the
last bid price available prior to the time the Fund's net asset value is
determined. Foreign securities prices may be furnished by quotation services who
express the value of securities in their local currency. Heartland Advisors
translates the value of foreign securities from the local currency into U.S.
dollars at current exchange rates. Any changes in the value of forward contracts
due to exchange rate fluctuations are included in the determination of net asset
value. Because foreign securities markets may close prior to the time a Fund
determines its net asset value, events affecting the value of portfolio
securities occurring between the time securities prices are determined and the
time the Fund calculates its net asset value may not be reflected in the Fund's
calculation.
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
30
<PAGE>
of shares for sale to the public, including the additional costs of printing
copies of the prospectus and of annual and interim reports to shareholders other
than copies required for distribution to shareholders or for filing under the
federal securities laws, and any expenses of advertising incurred by Heartland
Advisors in connection with the offering of the shares.
For the fiscal year ended December 31, 1997, Heartland Advisors received
contingent deferred sales charges with respect to redemption of shares of the
Value Fund, the Value Plus Fund, and the U.S. Government Securities Fund in the
amounts of $10,491, $285, and $3,268, respectively. For the fiscal year ended
December 31, 1996, Heartland Advisors received contingent deferred sales charges
with respect to redemptions of shares of the Value Fund, Value Plus Fund, and
the U.S. Government Securities Fund in the amounts of $91,223, $7,812, and
$32,254, respectively. For the fiscal year ended December 31, 1995, Heartland
Advisors received contingent deferred sales charges with respect to redemptions
of shares of the Value Fund, the Value Plus Fund, and the U.S. Government
Securities Fund in the amounts of $205,943, $12,134, and $82,882, respectively.
DISTRIBUTION PLAN
Each Fund has adopted a Distribution Plan, which is described in the
Prospectus (see "The Distribution Plan"). Under each 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 of each
respective Fund will benefit the Fund and the shareholders of the Fund.
Each Plan may be terminated 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 the 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 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.
Each Distribution Plan will continue in effect for successive one-year
periods, 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.
During the fiscal year ended December 31, 1997, the Funds paid the
following amounts under their respective Plans, all of which were spent on
compensation to dealers, financial institutions, and other service providers,
including Heartland Advisors: $703,286 for the Small Cap Contrarian Fund;
$4,891,069 for the Value Fund; $61,614 for the Mid Cap Value Fund; $461,547 for
the Value Plus Fund; $116,354 for the U.S. Government Securities Fund, and
$8,862 for the Large Cap Value Fund. During the fiscal year ended December 31,
1997, Heartland Advisors voluntarily waived a portion of its fee; had no fee
waiver been in effect, the Large Cap Fund would have paid $13,453 pursuant to
its Distribution Plan.
TAX STATUS
The information in this section supplements that in the Prospectus (see
"Dividends, Capital Gains Distributions And Taxes").
31
<PAGE>
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
eighteen months will generally be long-term capital gain or loss. Gains and
losses on the sale of securities held by a Fund for more than one year but not
more than eighteen months, are classified as 28% gain or loss, also known as
"mid-term gains or losses." Gain or loss on the sale of securities held for one
year or less will be short-term capital gain or loss.
If a shareholder exchanges shares of one 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. 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
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
32
<PAGE>
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 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) 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. Brokerage transactions with Heartland
Advisors are also subject to such fiduciary standards as may be imposed upon
Heartland Advisors by applicable law.
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.
During the fiscal year ended December 31, 1995, the aggregate brokerage
commissions on portfolio transactions paid by the Funds were as follows: the
Value Fund paid $2,619,410; the Value Plus Fund paid $140,980; and the U.S.
Government Securities Fund paid $676. Of such brokerage commissions, amounts
paid to Heartland Advisors as broker were: $438,094 for the Value Fund ; $29,768
for the Value Plus Fund; and $0 for the U.S. Government Securities Fund. For the
period from April 27, 1995 (commencement of operations) to December 31, 1995,
the Small Cap Contrarian Fund paid aggregate brokerage commissions of $246,960
on portfolio transactions. Of such brokerage commissions, amounts paid to
Heartland Advisors as broker by the Fund were $43,741.
During the fiscal year ended December 31, 1996, the aggregate brokerage
commissions on portfolio transactions paid by the Funds, were as follows: the
Small Cap Contrarian Fund paid $874,098; the Value Fund paid $2,822,252; the
Value Plus Fund paid $149,195; and the U.S. Government Securities Fund paid $75.
Of such brokerage commissions, amounts paid to Heartland Advisors as broker
were: $22,532 for the Small Cap Contrarian Fund; $285,057 for the Value Fund;
$4,028 for the Value Plus Fund; and $0 for the U.S. Government Securities Fund.
For the period from October 11, 1996 (commencement of operations) to December
31, 1996, the
33
<PAGE>
Mid Cap Value Fund paid aggregate brokerage commissions of $18,036 on portfolio
transactions. For the period from October 11, 1996 (commencement of operations)
to December 31, 1996, the Large Cap Value Fund paid aggregate brokerage
commissions of $4,995 on portfolio transactions. None of the commissions paid by
the Mid Cap Value and Large Cap Value Funds were paid to Heartland Advisors.
During the fiscal year ended December 31, 1997, the aggregate brokerage
commissions paid by the Funds, and the total dollar amount of portfolio
transactions on which brokerage commissions were paid, were as follows: the
Small Cap Contrarian Fund paid $1,260,985 on portfolio transactions of
$446,591,501; the Value Fund paid $3,925,925 on portfolio transactions of
$854,023,965; the Value Plus Fund paid $830,002 on portfolio transactions of
$216,388,591; the Mid Cap Value Fund paid $120,274 on portfolio transactions of
$216,388,591; the Large Cap Value Fund paid $16,006 or portfolio transactions of
$7,060,824; and the U.S. Government Securities Fund paid $6,222 on portfolio
transactions of $18,219,526. Of such brokerage commissions, amounts paid to
Heartland Advisors as broker were: $48,716 in commissions (or 0.79% of total
commissions) on $12,878,556 of transactions (or 0.81% of total transactions) for
the Small Cap Contrarian Fund; $159,609 in commissions (or 2.59% of total
commissions) on $49,766,663 of transactions (or 3.14% of total transactions) for
the Value Fund; $306 in commissions (or less than 1% of total commissions) on
$74,281 of transactions (or less than 1% of total transactions) for the Mid Cap
Value Fund; $12,093 in commissions (or 0.19% of total commissions) or $2,450,592
of transactions (or 0.15% of total transactions) for the Value Plus Fund; and no
brokerage commissions were paid to Heartland Advisors by the Large Cap and U.S.
Government Securities Funds. All such transactions were effected in accordance
with the procedures adopted by the Board with respect to commissions paid to
Heartland Advisors.
The following tables show any commissions paid by the Funds on futures
transactions during the past three fiscal years:
Fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
# of Contracts # of Contracts
Fund Commissions Paid Sold Short Covered
- ---- ---------------- -------------- --------------
<S> <C> <C> <C>
Value Plus $ 974 (37) 37
Small Cap Contrarian $ 3,331 (158) 93
Value $32,405 (1,221) 1,221
U.S. Govt. Securities $42,679 (1,760) 1,760
</TABLE>
Fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
# of Contracts # of Contracts
Fund Commissions Paid Sold Short Covered
- ---- ---------------- -------------- --------------
<S> <C> <C> <C>
Value Plus $ 974 (37) 37
Small Cap Contrarian $39,493 (1,440) 1,505
Value $21,232 (800) 800
U.S. Govt. Securities $46,113 (1,715) 1,715
</TABLE>
34
<PAGE>
Fiscal year ended December 31, 1997:
<TABLE>
<CAPTION>
# of Contracts # of Contracts
Fund Commissions Paid Sold Short Covered
- ---- ---------------- -------------- ------------
<S> <C> <C> <C>
Small Cap Contrarian $28,975 (1,268) 928
Value $24,549 (925) 925
U.S. Govt. Securities $ 2,372 (135) 135
</TABLE>
The table below shows information on brokerage commissions paid by the related
Fund to brokers or dealers who supplied research services to Heartland Advisors
during the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Amount of Commissions Total Dollar amount
paid to brokers or dealers amount involved
who supplied research services in such transfers
Fund to the Heartland Advisors (000 omitted)
- ---- ------------------------------ -------------------
<S> <C> <C>
Mid Cap Value $ 115,073 $ 38,265
Value Plus $ 688,931 $172,593
Small Cap Contrarian $ 736,712 $193,091
Value $2,751,057 $508,421
Large Cap Value $ 16,006 $ 7,060
</TABLE>
Under the Investment Company Act of 1940, Stifel Financial Corporation
("Stifel") and Advest Group, Inc. ("Advest") may have been deemed affiliated
persons of Heartland Advisors since Heartland Advisors may have been deemed to
hold or control more than 5% of the outstanding voting securities of Stifel and
Advest in Heartland Advisors' capacity as investment advisor to the Funds and
other investment advisory accounts. During the fiscal year ended December 31,
1997, the Value Fund paid $59,453 in brokerage commissions (or 1.5% of total
commissions paid) to Stifel for effecting $6,797,071 of transactions, or
approximately 0.8% of the dollar value of portfolio transactions for which a
brokerage commission was paid; the Value Plus Fund paid $20,576 in brokerage
commissions (or 2.9% of total commissions paid) to Stifel for effecting
$4,015,273 of transactions, or approximately 1.9% of the dollar value of
portfolio transactions for which a brokerage commission was paid; and the Small
Cap Contrarian Fund paid $6,218 in brokerage commissions (or 0.5% of total
commissions paid) to Stifel for effecting $1,508,911 of transactions, or
approximately 0.3% of the dollar value of portfolio transactions for which
brokerage commissions were paid. During the fiscal year ended December 31, 1997
the Value Fund paid $17,570 in brokerage commissions (or 0.4% of total
commissions paid) to Advest for effecting $4,527,731 of transactions, or
approximately 0.5% of the dollar value of portfolio transactions for which
brokerage commissions were paid; the Value Plus Fund paid $5,250 in brokerage
commissions (or 0.6% of total commissions paid) to Advest for effecting
$1,448,229 of transactions, or approximately 0.7% of the dollar value of
portfolio transactions for which brokerage commissions were paid; and the Small
Cap Contrarian Fund paid $5,250 in brokerage commissions (or 0.4% of total
commissions paid) to Advest for effecting $1,508,762 of transactions, or
approximately 0.3% of the dollar value of portfolio transactions for which
brokerage commissions were paid.
During the fiscal year ended December 31, 1996, the Value Fund paid $40,974
in brokerage commissions (or 1.5% of total commissions paid) to Stifel for
effecting $10,567,489 of transactions, or approximately 1.8% of the dollar value
of portfolio transactions for which a brokerage commission was paid; the Value
Plus Fund paid $2,100 in brokerage commissions (or 1.4% of total commissions
paid) to Stifel for effecting $441,215 of transactions, or approximately 1.2% of
the dollar value of portfolio transactions for which a brokerage commission was
paid; and the Small Cap Contrarian Fund paid $3,000 in brokerage commissions (or
0.3% of total commissions paid) to Stifel for effecting $400,437 of
transactions, or approximately 0.2% of the dollar value of portfolio
transactions for which brokerage commissions were paid. During the fiscal year
ended December 31, 1996 the Value Fund paid $19,486 in brokerage commissions (or
0.7% of total commissions paid) to Advest for effecting $5,167,636 of
transactions, or approximately 0.9% of the dollar value of portfolio
transactions for which brokerage commissions
35
<PAGE>
were paid; the Value Plus Fund paid $1,400 in brokerage commissions (or 0.9% of
total commissions paid) to Advest for effecting $340,000 of transactions, or
approximately 0.9% of the dollar value of portfolio transactions for which
brokerage commissions were paid; and the Small Cap Contrarian Fund paid $1,750
in brokerage commissions (or 0.2% of total commissions paid) to Advest for
effecting $627,240 of transactions, or approximately 0.3% of the dollar value of
portfolio transactions for which brokerage commissions were paid.
During the fiscal year ended December 31, 1995, the Value Fund paid $38,996 in
brokerage commissions (or 1.5% of total commissions paid) to Stifel for
effecting $5,930,376 of transactions, or approximately 1.6% of the dollar value
of portfolio transactions for which a brokerage commission was paid. During the
fiscal year ended December 31, 1995, the Value Plus Fund paid $1,050 in
brokerage commissions (or 0.7% of total commissions paid) to Stifel for
effecting $1,175,390 of transactions, or approximately 3.4% of the dollar value
of portfolio transactions for which a brokerage commission was paid.
The portfolio holdings of the Funds may include the securities of certain
publicly traded brokerage firms. At December 31, 1997, the Value Fund held
224,900 shares, with a market value of $15,518,100, of Dain Rauscher
Corporation, the parent corporation of Dain Bosworth, Inc. and Rauscher Pierce
Refsnes, Inc., which were among the Funds' regular brokers or dealers for 1997
as defined in Rule 10b-1 under the Investment Company Act of 1940. At December
31, 1997, the Mid Cap Value and Large Cap Value Funds held 16,500 and 1,600
shares, respectively, with a market value of $841,500 and $81,600, respectively,
of Lehman Brothers Holdings, Inc., the parent corporation of Lehman Brothers,
Inc., which was among the Funds' regular brokers or dealers for 1997 as defined
in Rule 10b-1 under the Investment Company Act of 1940.
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. Subcustodians provide custodial services for
assets of the Funds held outside the U.S.
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS
Quarles & Brady serves as legal counsel for the Funds. Arthur Anderson LLP,
independent public accountants, served as auditors of the Funds through calendar
year 1996. Price Waterhouse LLP have been selected as independent public
accountants for the Funds beginning with fiscal year 1997.
FINANCIAL STATEMENTS
The financial statements, related notes and related reports of Price
Waterhouse LLP, independent public accountants, contained in the Annual Report
to Shareholders of the Funds as of December 31, 1997 and for the fiscal year or
period then ended, are hereby incorporated by reference. Copies of the Annual
Report may be obtained without charge by writing to Heartland Advisors, Inc.,
790 North Milwaukee Street, Milwaukee, Wisconsin 53202, or by calling 1-800-432-
7856 or (414) 289-7000.
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<PAGE>
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
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. and Standard & Poor's Corporation
CORPORATE BOND RATINGS
Ratings by Moody's
Aaa -- Bonds which are rated Aaa are judged to be of the best quality, they
carry the smallest degree of investment risk, and are generally referred to as
"gilt edged." 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 Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated 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 Baa are considered as 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 future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
<PAGE>
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 Caa
rating classifications except with respect to Caa ratings of U.S. municipal bond
securities. 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 assigned by Standard & Poor's to a debt
obligation. The obligor's capacity to meet its financial commitment is extremely
strong.
AA -- An obligation rated AA differs from AAA issues only in small degree.
The obligor's capacity to meet its financial commitment is very strong.
A -- Debt rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment is still very strong.
BBB -- Debt rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on an
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. "BB" indicates the least degree of speculation and
"C" the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB -- Debt rated BB is less vulnerable to default on payment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment.
B -- Debt rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment.
Adverse business, financial or economic conditions will likely impair the
obligor's capacity or willingness to meet its financial commitment.
CCC -- Debt rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment. In the event of adverse business,
financial, or economic conditions, it is not likely for the obligor to meet its
financial commitment.
CC -- Debt rated CC is currently highly vulnerable to nonpayment.
<PAGE>
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
D -- Debt rated D is in payment default. The D rating category is used when
payments on an obligation 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 or the taking of a similar action if payments on an
obligation 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 within the major categories.
The symbol "r" is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
<PAGE>
HEARTLAND GROUP, INC.
FORM N-1A
CROSS-REFERENCE SHEET
TO POST-EFFECTIVE AMENDMENT NO. 34
_________________________________________
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
Form N-1A
Item No. Prospectus Heading
-------- ------------------
<S> <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; Appendix B - Asset Composition
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. See Annual Report
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>
<TABLE>
<S> <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>
<PAGE>
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
Prospectus
May 1, 1998
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 May 1,
1998) 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."
<PAGE>
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>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<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............................................. 17
SHAREHOLDER SERVICES.......................................... 21
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES.............. 24
THE FUNDS AND THE HEARTLAND ORGANIZATION...................... 25
THE DISTRIBUTION PLAN......................................... 27
NET ASSET VALUE CALCULATION................................... 28
DESCRIPTION OF FUND SHARES.................................... 28
PORTFOLIO TRANSACTIONS........................................ 29
PERFORMANCE INFORMATION....................................... 29
HOW TO REDEEM SHARES.......................................... 30
APPENDIX A - SECURITIES RATINGS............................... 34
APPENDIX B - ASSET COMPOSITION................................ 42
</TABLE>
<PAGE>
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
SHAREHOLDER TRANSACTION EXPENSES MUNICIPAL FUND BOND FUND
-------------------------------- -------------- ---------
<S> <C> <C>
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)/ .30% .41%
Rule 12b-1 fees (after waivers)/(2)/ .23% .23%
Other expenses (after reimbursement)/(2)/ .10% .10%
--- ---
TOTAL FUND OPERATING EXPENSES (AFTER .63% .74%
FEE WAIVERS AND EXPENSE === ===
REIMBURSEMENT)/(2)/
</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) Prior to December 31, 1997, Heartland Advisors had completely subsidized
all fees and expenses related to the Funds. The Annual Fund Operating
Expenses shown in the table for each Fund give effect to Heartland
Advisors' voluntary undertaking, effective January 1, 1998, to begin to
reduce the amount of this reimbursement and waiver each month by .15% on
an annualized basis, but to voluntarily reimburse the Funds to the extent
that annual Total Fund Operating Expenses would exceed .75% for the Short
Duration High-Yield Municipal Fund and .95% for the High-Yield Municipal
Bond Fund. Without these waivers and reimbursements, the Management Fees,
Rule 12b-1 fees and Other Expenses for 1997 would have been .40%, .25% and
.19%, respectively, for a total of .84% for the Short Duration High-Yield
Municipal Fund, and .60%, .25% and .40%,
<PAGE>
respectively, for a total of 1.25% for the High-Yield Municipal Bond Fund.
Other expenses are based on management's estimates for the current fiscal
year. Heartland Advisors expects to continue the reimbursement for the
current fiscal year; however, it may discontinue such reimbursement at any
time.
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 $ 6 $ 8
Three years $20 $24
Five years $35 $41
Ten years $79 $92
</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 following Financial Highlights table has been examined by Price
Waterhouse LLP, independent public accountants, whose report on the financial
statements of the Short Duration High-Yield Municipal and High-Yield Municipal
Bond Funds for the fiscal period ended December 31, 1997 are included in the
Funds' Annual Report to Shareholders for such period, and incorporated by
reference into the Statement of Additional Information. The table should be read
in conjunction with the audited financial statements and related notes appearing
in the Funds' Annual Report. Additional information about the Funds' performance
is contained in the Annual Report, which may be obtained without charge by
writing or calling Heartland Advisors.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Short Duration High-Yield Municipal Fund High-Yield Municipal Bond Fund
---------------------------------------- ----------------------------------------
Jan. 2, 1996/(1)/ through Jan. 2, 1996/(1)/ through
Dec. 31, 1997 Dec. 31, 1997
------------------------ -----------------------
<S> <C> <C>
PER SHARE DATA
Net asset value, beginning of period........ $ 10.00 $ 10.00
Income from investment operations:
Net investment income.................... 0.57 0.68
Net realized and unrealized gains
on investments......................... 0.15 0.48
------------ ------------
Total income from investment
operations........................... 0.72 1.16
Less distributions from:
Net investment income.................... (0.57) (0.68)
Net realized gains on investments........ -- (0.03)
------------ ------------
Total distributions.................... (0.57) (0.71)
------------ ------------
Net asset value, end of period.............. $ 10.15 $ 10.45
============ ============
Total Return................................ 7.4% 11.7%
Ratios and Supplemental Data
Net assets, end of period
(in thousands)......................... $ 120,942 $ 30,608
Ratio of net expenses to average
net assets............................. 0.00%/(2)/ 0.00%/(2)/
Ratio of net investment income
to average net assets.................. 5.33%/(2)/ 6.01%/(2)/
Portfolio turnover rate.................. 175% 439%
</TABLE>
/(1)/ Commencement of operations.
/(2)/ If there had been no expense reimbursement and management fee waiver by
the Advisor, the ratio of net expenses to average net assets for the
period ended December 31, 1997 would have been 0.84% for the Short
Duration High-Yield Municipal Fund and 1.25% for the High-Yield Municipal
Bond Fund and the ratio of net investment income to average net assets
would have been 4.49% and 4.76%, respectively.
<PAGE>
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.
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
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.
7
<PAGE>
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
The 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 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.
8
<PAGE>
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:
. 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
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
9
<PAGE>
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 well-known rating organizations.
10
<PAGE>
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 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
11
<PAGE>
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 liquid secondary market may have an adverse effect on market price and
a Fund's ability to sell particular securities. See "Appendix B - Asset
Composition" for a summary of the dollar-weighted averages of the Funds' month-
end portfolio debt holdings during the year ended December 31, 1997.
<PAGE>
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 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.
<PAGE>
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.
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
<PAGE>
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 may be determined to
be liquid under the guidelines. The Board of Directors has determined that
private placement notes issued pursuant to Section 4(2) of the Securities Act of
1933 generally are readily marketable even though they are subject to certain
legal restrictions on resale. As such, they are not traded as being subject to
the limitation on illiquid securities. 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.
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. 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
<PAGE>
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 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
<PAGE>
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, the Short Duration High-
Yield Municipal and High-Yield Municipal Bond Funds' annual turnover rates for
the fiscal year ended December 31, 1997 were 175% and 439%, respectively. 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,
<PAGE>
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.
To Add to an Account:
Make your check payable to the Fund you are invested in, indicate your
Fund account number on your check, and mail to one of the addresses above. You
may also include an "Additional Investment Form" from a prior account statement
with your check.
________________________________________________________________________________
BY WIRE:
Firstar National Bank
ABA #0750-00022
Firstar Trust MFS A/C #112-952-137
<PAGE>
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."
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:
<PAGE>
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.
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.
<PAGE>
Certain service providers may receive compensation from the Funds or Heartland
Advisors for providing such services.
Certain service providers have been authorized to designate other
intermediaries to accept purchase and redemption orders on the Funds' behalf.
Each Fund will be deemed to have received a purchase or redemption order when an
authorized service provider or, if applicable, a service provider's designee,
accepts the order.
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 canceled 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 account application, at the net asset value
determined on the dividend or distribution payment date. 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
<PAGE>
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 Firstar Money Market Fund, provided the
fund into which you wish to exchange is qualified for sale in the jurisdiction
of residence which you state at the time you make the exchange. Before
initiating an exchange, you should obtain from Heartland Advisors and carefully
read the prospectus relating to the fund into which you wish to exchange.
Exchanges Among Heartland Funds. Under the exchange privilege, each
Heartland fund offers to exchange its shares for shares of another Heartland
fund on the basis of relative net asset value per share. In order to qualify
for the exchange privilege without further approval of Heartland, 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.
Exchanges with Firstar Money Market Fund. Shareholders may exchange
all or a portion of their shares in the Funds for shares of the Firstar 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 Firstar Money Market Fund. No charge to shareholders is
imposed in connection with this exchange;
<PAGE>
however, Heartland Advisors, as distributor, is entitled to receive a fee from
the Firstar 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 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
<PAGE>
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. It is the intent of each Fund to distribute substantially all of
the Fund's net investment income. 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.
CAPITAL GAINS DISTRIBUTIONS. If a Fund has net capital gains for the
year, it is the intent of the Fund to generally distribute substantially all of
the net capital gain.
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 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. If you realize a loss on the sale or exchange of Fund shares
held six months or less, your short-term loss will be reclassified to long-term
to the extent of any long-term capital gain distribution received.
<PAGE>
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 current and accumulated
earnings and profits, 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.
"BUYING A DIVIDEND." On the record date for a distribution of
capital gains by a Fund, its share price is reduced by the amount of the
distribution. If you buy shares just before the record date ("buying a
dividend"), you will pay the full price for the shares, and then receive a
portion of the price back as a taxable distribution.
OTHER TAX INFORMATION. Under federal tax law, some 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.
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
<PAGE>
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 March 31, 1998, Heartland Advisors had approximately $4.5
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 voluntarily waived the advisory fee for each of the Funds
during the fiscal year ended December 31, 1997; had no fee waiver been in
effect, the Short Duration High-Yield Municipal and High-Yield Municipal Bond
Funds would have paid $214,608 and $82,569 in advisory fees, respectively, or
0.40 of 1% and 0.60 of 1% of average net assets for the year, respectively.
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 Short Duration High-Yield Municipal Fund and 0.60 of 1% of the
average daily net assets of the High-Yield Municipal Bond Fund. All or a
portion of such fees may be waived from time to time in connection with an
undertaking to each Fund to reimburse Total Fund Operating Expenses in excess of
0.75% for the Short Duration High-Yield Municipal Fund and 0.95% for the High-
Yield Municipal Bond Fund; however, Heartland Advisors may discontinue this
reimbursement at any time.
PORTFOLIO MANAGERS. Thomas J. Conlin, CFA and Greg D. Winston, CFA
have served as co-managers of the Funds since commencement of the Funds'
operations. Mr. Conlin is also portfolio co-manager of the Heartland Wisconsin
Tax Free Fund. 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).
<PAGE>
Mr. Winston joined Heartland Advisors in August of 1996 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).
YEAR 2000. The services provided to the Funds and the shareholders by
Heartland Advisors and the Custodian, Transfer and Dividend Disbursing Agent
depend on the smooth functioning of their computer systems and those of their
outside service providers. Many computer software systems in use today cannot
distinguish the year 2000 from the year 1900 because of the way dates are
encoded and calculated. Such event could have a negative impact on handling
securities trades, payments of interest and dividends, pricing and account
services. Although, at this time, there can be no assurance that there will be
no adverse impact on the Funds, Heartland Advisors and the Custodian, Transfer
and Dividend Disbursing Agent have advised Heartland that they have been
actively working on necessary changes to their computer systems to prepare for
the year 2000 and expect that their systems, and those of their outside service
providers, will be adapted in time for that event.
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 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. During the fiscal year ended December 31, 1997, Heartland Advisors
waived distribution fees for the Short Duration High-Yield Municipal and
High-Yield Municipal Bond Funds totaling $134,130 and $34,401, respectively,
pursuant to voluntary fee waivers in effect. For further information regarding
the Distribution Plans, see the Statement of Additional Information.
<PAGE>
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, nine series
are authorized and outstanding.
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. Shares
have no preemptive, cumulative voting, subscription or conversion rights and are
freely transferable. Although annual meetings of shareholders are not required,
special meetings of shareholders may be called for purposes such as electing or
removing directors, changing fundamental policies or approving investment
advisory contracts.
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.
<PAGE>
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
in similar transactions, diffculty 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.
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.
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.
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
<PAGE>
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.
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:
<PAGE>
Firstar Trust Company
Mutual Fund Services
3rd Floor
P.O. Box 701
Milwaukee, WI 53201-0701
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."
_______________________________________________________________________ ____
TYPE OF REGISTRATION REQUIREMENTS
- -------------------- ------------
Individual, Joint Tenants, Letter of instruction signed by all persons
Custodial, General Part- authorized to sign for the account, exactly
ners as it is registered, accompanied by signature
guarantee(s) if required.
Corporations, Letter of instruction accompanied by a
Associations 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.)
<PAGE>
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 $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.
<PAGE>
The following institutions are acceptable guarantors: (a) commercial
banks, savings and loan associations and savings banks, which are members of the
Federal Deposit Insurance Corporation; (b) credit unions; (c) trust companies;
(d) firms which are members of a domestic stock exchange; and (e) foreign
branches of any of the above. The Agent cannot accept guarantees from notaries
public.
SENDING REDEMPTION PROCEEDS. The Agent will not send redemption
proceeds until all payments for the shares being redeemed have cleared, which
may take up to 15 days from the purchase date.
By Mail. The Agent mails checks for redemption proceeds typically
within one or two days, but not later than seven days, after it receives the
request and all necessary documents. The Agent will send redemption proceeds in
accordance with your instructions.
By Wire. The Agent will normally wire redemption proceeds to your
bank the next business day after receiving the redemption request and all
necessary documents. The signatures on any written request for a wire
redemption must be guaranteed. The Agent currently deducts a $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. 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.
<PAGE>
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
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., and Duff & Phelps.
CORPORATE AND MUNICIPAL BOND RATINGS
RATINGS BY MOODY'S
Aaa -- Bonds which are rated Aaa are judged to be of the best
quality, they carry the smallest degree of investment risk, and are generally
referred to as "gilt edged." 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 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.
<PAGE>
A -- Bonds which are rated 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 Baa are considered as 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 future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate, and thereby
not well safeguarded during both 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
Caa rating classifications except with respect to Caa ratings of U.S. municipal
bond securities. 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 assigned by Standard & Poor's to a
debt obligation. The obligor's capacity to meet its financial commitment is
extremely strong.
<PAGE>
AA - An obligation rated AA differs from AAA issues only in small
degree. The obligor's capacity to meet its financial commitment is very
strong.
A -- Debt rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment is still very strong.
BBB -- Debt rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on an obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB -- Debt rated BB is less vulnerable to default on payment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment.
B -- Debt rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment. Adverse business, financial or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial
commitment.
CCC -- Debt rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment. In the event of adverse business,
financial, or economic conditions, it is not likely for the obligor to meet its
financial commitment
CC -- Debt rated CC is currently highly vulnerable to nonpayment.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
D -- Debt rated D is in payment default. The D rating category is
used when payments on an obligation 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 or the taking of a similar action if payments on
an obligation are jeopardized.
<PAGE>
Standard & Poor's ratings, from AA to CCC, may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
The symbol "r" is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
RATINGS BY FITCH IBCA ("FITCH")
INVESTMENT GRADE
AAA - Highest credit quality. Denotes the lowest expectation of credit risk.
-----------------------
Assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
AA - Very high credit quality. Denotes a very low expectation of credit risk.
-------------------------
Indicates very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
A - High credit quality. Denotes a low expectation of credit risk. The
-------------------
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB - Good credit quality. Indicates that there is currently a low expectation
-------------------
of credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
SPECULATIVE GRADE
BB - Speculative. Indicates that there is a possibility of credit risk
-----------
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B - Highly speculative. Indicates that significant credit risk is present, but
------------------
a limited margin of safety remains. Financial commitments are currently being
met; however, capacity for
<PAGE>
continued payment is contingent upon a sustained, favorable business and
economic environment.
CCC, CC, C - High default risk. Default is a real possibility. Capacity for
-----------------
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A "CC" rating indicates that default of some
kind appears probable. "C" ratings signal imminent default.
DDD,DD, and D - Default. Securities are not meeting current obligations and
-------
are extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, "DD" indicates expected recovery of 50% - 90% of such outstandings, and
"D" the lowest recovery potential, i.e. below 50%.
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+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal and
-----
interest.
<PAGE>
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
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 - Highest credit quality. Indicates the strongest capacity for timely
----------------------
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 - Good credit quality. A satisfactory capacity for timely payment of
-------------------
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
F3 - Fair credit quality. The capacity for timely payment of financial
-------------------
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
B - Speculative. Minimal capacity for timely payment of financial commitments,
-----------
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C - High default risk. Default is a real possibility. Capacity for meeting
-----------------
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D - Default. Denotes actual or imminent payment default.
-------
VARIABLE RATE DEMAND SECURITIES
- -------------------------------
RATINGS BY MOODY'S
------------------
Moody's may assign a separate rating to the demand feature of a variable
rate demand security. Such a rating may include:
<PAGE>
VMIG 1. This designation 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.
VMIG 2. This designation denotes high quality. Margins of protection are
------
ample although not so large as in the preceding group.
VMIG 3. This designation 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
- ----------------
S&P assigns a dual rating to all long-term debt issues that have as part of
their provisions a demand feature. The first rating addresses the likelihood of
repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term debt rating symbols are used for bonds to
denote the long-term maturity and the commercial paper rating symbols are
usually used to denote the put (demand) option (for example, AAA/A-1+).
Normally, demand notes receive note rating symbols combined with commercial
paper symbols (for example, SP-1/A-1+).
COMMERCIAL PAPER RATINGS
RATINGS BY DUFF & PHELPS
CATEGORY 1: TOP GRADE
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
<PAGE>
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. If an issuer represents that its commercial
paper obligations are supported by the credit of another entity or entities,
Moody's, in assigning ratings to such issuer evaluates the financial strength of
the indicated affiliate, commercial bank, insurance company, foreign government,
or other entity, but only as one factor in the total rating assessment.
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
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.
<PAGE>
APPENDIX B
ASSET COMPOSITION
The following tables provide a summary of the Short Duration High-
Yield Municipal and High-Yield Municipal Bond Funds' debt holdings as rated by
the higher of Moody's or S&P or, in the case of unrated securities, as
determined by Heartland Advisors. These figures are dollar-weighted averages of
month-end portfolio holdings of the Funds during the fiscal year ended December
31, 1997, presented as a percentage of total investments. These percentages are
historical and are not necessarily indicative of the quality of current or
future Fund holdings, which may vary. These securities assigned an equivalent
rating may include those rated by other nationally recognized rating
organizations, as well as unrated securities. Unrated securities are not
necessarily lower-quality securities. Issuers of municipal securities frequently
choose not to incur the expense of obtaining a rating. Please refer to Appendix
A and the Statement of Additional Information for a more complete discussion of
these ratings.
<TABLE>
<CAPTION>
SHORT DURATION HIGH-YIELD MUNICIPAL FUND
MOODY'S/S&P RATING PORTFOLIO HOLDING %
(DOLLAR-WEIGHTED AVERAGE)
<S> <C>
Aaa/AAA 7.8%
Aa/AA 4.7%
A 3.3%
Baa/BBB 18.5%
Ba/BB 10.6%
B 2.2%
----
Total 47.1%
HEARTLAND EQUIVALENT RATING PORTFOLIO HOLDING %
(DOLLAR-WEIGHTED AVERAGE)
Aaa/AAA 2.2%
Aa/AA 7.2%
A 0.1%
Baa/BBB 12.8%
Ba/BB 27.5%
B 3.1%
----
Total 52.9%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HIGH-YIELD MUNICIPAL BOND FUND
MOODY'S/S&P RATING PORTFOLIO HOLDING %
(DOLLAR-WEIGHTED AVERAGE)
<S> <C>
Aaa/AAA 8.6%
Aa/AA 7.6%
A 4.8%
Baa/BBB 4.4%
Ba/BB 2.5%
B 0.5%
----
Total 28.4%
HEARTLAND EQUIVALENT RATING PORTFOLIO HOLDING %
(DOLLAR-WEIGHTED AVERAGE)
Aaa/AAA 2.4%
Aa/AA 0.9%
A 0.7%
Baa/BBB 13.5%
Ba/BB 47.9%
B 6.2%
----
Total 71.6%
</TABLE>
<PAGE>
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
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
COUNSEL
Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
<PAGE>
Statement of Additional Information
Dated May 1, 1998
HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
790 North Milwaukee Street, Milwaukee, Wisconsin 53202
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 May 1, 1998. A copy of the
Prospectus and an account application 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.
================================================================================
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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 23
THE INVESTMENT ADVISOR 23
PERFORMANCE INFORMATION 25
DETERMINATION OF NET ASSET VALUE PER SHARE 27
DISTRIBUTION OF SHARES 28
DISTRIBUTION PLAN 28
TAX STATUS 29
DESCRIPTION OF SHARES 30
PORTFOLIO TRANSACTIONS 30
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT 32
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS 32
FINANCIAL STATEMENTS 32
================================================================================
</TABLE>
<PAGE>
INTRODUCTION TO THE FUNDS
The Heartland family of funds consists of nine 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.
2
<PAGE>
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.
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.
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
3
<PAGE>
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.
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
4
<PAGE>
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 Funds' 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 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,
5
<PAGE>
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.
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
6
<PAGE>
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 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
7
<PAGE>
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 price increases in the underlying security. If a call option
which a Fund has written expires, the Fund will realize a gain in the amount of
the premium; however, such gain may be offset by a decline in the market value
of the underlying security during the option period. If the call option is
exercised, the Fund will realize a gain or loss from the sale of the underlying
security.
The premium received is the market value of an option. The premium a
Fund receives from writing a call option reflects, among other things, the
current market price of the underlying security, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security and the length of the option period. The premium received by
a Fund for writing covered call options will be recorded as a cash asset and a
liability of the Fund. The liability will be adjusted daily with a corresponding
adjustment to the Fund's total assets, to reflect the option's current market
value, which will be the latest sale price at the time at which the net asset
value per share of the Fund is computed (close of regular trading on the New
York Stock Exchange), or, in the absence of such sale, the latest asked price.
The liability will be extinguished and the net gain or loss on the option
realized upon expiration of the option, the purchase of an identical option in a
closing transaction, or delivery of the underlying security upon the exercise of
the option. The Funds do not consider a security covered by a call to be
"pledged" as that term is used in the respective Fund's policy limiting the
pledging of its assets.
Closing transactions may be effected by purchasing a call option in
order to realize a profit on an outstanding call option, to prevent an
underlying security from being called, or, to permit the sale of the underlying
security. Furthermore, effecting a closing transaction may permit a Fund to
write another call option on the underlying security with either a different
exercise price or expiration date or both. If a Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will seek to effect a closing transaction prior to, or 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
8
<PAGE>
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 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
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<PAGE>
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 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
10
<PAGE>
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 initial 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 initial 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 initial margin on deposit does not
satisfy margin requirements, the broker will require the payment of "variation
margin" to settle the change in value on a daily basis. If the value of a
position increases because of favorable price changes in the futures contract so
that the margin deposit exceeds the required margin, the broker will pay the
excess to the Fund. In computing daily net asset value, a Fund marks to market
the current value of its open futures contracts. The Funds expect to earn
interest income on their margin deposits.
Futures contracts can be held until their delivery dates, or can be
closed out before then if a liquid secondary market is available. Closing out an
open futures contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for the same
aggregate amount of the identical securities and the same delivery date. If a
Fund closes out an open futures contract by entering into an offsetting futures
contract, and the offsetting purchase price is less than the original sale
price, a Fund realizes a gain; if it is more, a Fund 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
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<PAGE>
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 on Futures 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 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.
12
<PAGE>
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 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.
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<PAGE>
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 may or may not 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.
Generally, 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 recognize net gains or
losses on such transactions when determining the Fund's distribution
requirements 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.
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). Options, futures and forward foreign exchange
contracts entered into for an investment purpose are qualifying income.
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale
treatment for federal income tax purposes on certain hedging strategies with
respect to appreciated securities. Under these rules, taxpayers will recognize
gain, but not loss, with respect to securities if they enter into short sales of
"offsetting notional principal contracts" (as defined by the Act) or futures or
"forward contracts" (as defined by the Act) with respect to the same
14
<PAGE>
or substantially identical property, or if they enter into such transactions and
then acquire the same or substantially identical property. These changes
generally apply to constructive sales after June 8, 1997. Furthermore, the
Secretary of the Treasury is authorized to promulgate regulations that will
treat as constructive sales certain transactions that have substantially the
same effect as short sales, offsetting notional principal contracts, and futures
or forward contracts to deliver the same or substantially similar property.
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 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
15
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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 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.
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<PAGE>
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, may be considered by Heartland Advisors to be liquid under
guidelines adopted by Heartland's Board of Directors. The Board of Directors has
determined that private placement notes issued pursuant to Section 4(2) of the
Securities Act of 1933 generally are readily marketable even though they are
subject to certain legal restrictions on resale. As such, they are not treated
as being subject to the limitation on illiquid securities.
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 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
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<PAGE>
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.
Portfolio Turnover
Portfolio turnover for each Fund is the ratio of the lesser of annual
purchases or sales of portfolio securities by the Fund to the average monthly
value of portfolio securities owned by the Fund, not including securities
maturing in less than 12 months. A 100% portfolio turnover rate would occur, for
example, if the lesser of the value of purchases or sales of a Fund's portfolio
securities for a particular year were equal to the average monthly value of the
portfolio securities owned by the Fund during the year. For the fiscal year
ended December 31, 1997, the portfolio turnover rates for the Short Duration
High-Yield Municipal and High-Yield Municipal Bond Funds were 175% and 439%,
respectively. The high turnover rates were attributable to trading activity
associated with relatively smaller positions acquired in connection with
portfolio diversification requirements being replaced by larger positions during
a period of rapid asset growth. This trend would be expected to continue should
assets in the Funds continue to grow at a rapid rate.
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
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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;
(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
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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.
(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.
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(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."
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 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
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Heartland During Past Five Years
- ---------------- ----------------------- ----------------------
<S> <C> <C>
Patrick J. Retzer Vice President, Treasurer and Senior 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.
Jilaine Hummel Bauer Vice President Senior Vice President, Heartland
790 North Milwaukee Street Advisors, Inc., since January 1998;
Milwaukee, WI 53202 Senior Vice President, Stein Roe &
Farnham Incorporated, 1992 through
1997.
Paul T. Beste Vice President and Principal Investment Operations Officer,
790 North Milwaukee Street Accounting Officer Heartland Advisors, Inc. since 1997;
Milwaukee, WI 53202 Director of Taxes/Compliance, Strong
Capital Management, Inc., 1992 to June
1997.
Kenneth J. Della Vice President Chief Financial Officer, Heartland
790 North Milwaukee Street Advisors, Inc. since July 1995.
Milwaukee, WI 53202 Employed by Heartland Advisors, Inc.
since May 1992.
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, 1997:
22
<PAGE>
<TABLE>
<CAPTION>
Total Compensation
Aggregate Estimated Actual from Heartland
Compensation from Pension or Benefits Upon and Fund
Director Heartland Retirement Benefits Retirement Complex
-------- ----------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Willard H. Davidson $16,000 None None $16,000
Jon D. Hammes $16,000 None None $16,000
A. Gary Shilling $16,000 None None $16,000
Linda F. Stephenson $16,000 None None $16,000
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 31, 1998, the Directors and officers of Heartland Group, Inc.
as a group (9 persons) owned less than 1% of the outstanding shares of the Short
Duration High-Yield Municipal Fund and 2.1% 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 3,479,616 shares (or 25.4%) of the Short
Duration High-Yield Municipal Fund and 1,534,141 shares (or 32.5%) of the High-
Yield Municipal Bond Fund; and 32nd and Thunderbird LLC, 9440 Santa Monica
Blvd., Suite 706, Beverly Hills, CA 90210-4609 beneficially held 282,065 shares
(or 6.0%) 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 was approved most recently
on behalf of the Funds by the Board of Directors, including a majority of the
Directors who are not interested persons of the Fund or of Heartland Advisors,
on July 15, 1997. Heartland Advisors also serves as distributor for the Funds.
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 March 31, 1998 Heartland Advisors had approximately $4.5
billion in assets under management.
23
<PAGE>
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 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.
For the period from January 2, 1997 (commencement of the Funds' operations) to
December 31, 1997, the Short Duration High-Yield Municipal and High-Yield
Municipal Bond Funds paid no advisory fees. During the period, advisory fees
provided under the Short Duration High-Yield Municipal and High-Yield Municipal
Bond Funds' Agreements totaled $214,608 and $82,569, respectively, but
Heartland Advisors voluntarily waived all of these fees during the period.
24
<PAGE>
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.
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
25
<PAGE>
equate the initial amount invested to the ending redeemable value, according to
the following formula:
P(1+T)/n/ = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value for a hypothetical $1,000 payment made at
the beginning of the 1, 5 and 10-year periods at the end of the 1,
5 and 10-year period (or fractional portion thereof).
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.
Average annual total return since inception on January 2, 1997 through
December 31, 1997 was 7.44% for the Short Duration High-Yield Municipal Fund and
11.67% for the High-Yield Municipal Bond Fund.
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
Yield = 2[(---+1)/6/-1]
cd
Where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends; and
26
<PAGE>
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 December 31, 1997 was 5.56% for the Short
Duration High-Yield Municipal Fund and 6.33% for the High-Yield Municipal Bond
Fund, and the taxable equivalent yield based on a 39.6% federal tax rate was
9.20% and 10.48%, 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.
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. In general, the Heartland Short Duration
High-Yield Municipal Fund would appear in the short-term or high yield municipal
debt funds category, and the Heartland High-Yield Municipal Bond Fund would
appear in the intermediate-term or high yield municipal debt funds category.
Each Fund also may compare its performance to recognized bond market indices,
such as the Lehman Brothers Municipal Non-Investment Grade Bond Index.
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.
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
27
<PAGE>
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
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,
28
<PAGE>
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.
For the period from January 2, 1997 (commencement of the Funds' operations)
to December 31, 1997, the Short Duration High-Yield Municipal and High-Yield
Municipal Bond Funds paid no fees under their respective plans. During the
period, fees provided in the Short Duration High-Yield Municipal and High-Yield
Municipal Bond Funds' Plans totaled $134,130 and $34,401, respectively, but
Heartland Advisors voluntarily waived all of these fees during the period.
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
eighteen months will generally be long-term capital gain or loss. Gains and
losses on the sale of securities held by a Fund for more than one year, but not
more than eighteen months, are classified as 28% gain or loss, also known as
"mid-term gains or losses." Gain or loss on the sale of securities held for one
year or less will be short-term capital gain or loss.
If a shareholder exchanges shares of one 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
29
<PAGE>
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
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
30
<PAGE>
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 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) 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. Brokerage transactions with Heartland
Advisors are also subject to such fiduciary standards as may be imposed upon
Heartland Advisors by applicable law.
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
31
<PAGE>
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. For the period January
2, 1997 (commencement of the Funds' operations) to December 31, 1997, the Short
Duration High-Yield Municipal and High-Yield Municipal Bond Funds paid $13,133
and $6,730, respectively, in brokerage commissions.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
Firstar Trust Company acts as Custodian of each Fund's investments, and
acts as Transfer and Dividend Disbursing Agent (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.
FINANCIAL STATEMENTS
The financial statements and related report of Price Waterhouse LLP, independent
public accountants, contained in the Annual Report to Shareholders of the Funds
for the period from January 2, 1997 (commencement of the Funds' operations)
through December 31, 1997 are hereby incorporated by reference. Copies of the
Annual Report may be obtained without charge by writing to Heartland Advisors,
Inc. 790 North Milwaukee Street, Milwaukee, WI 53202, or by calling 1-800-432-
7856 or (414) 289-7000.
32
<PAGE>
FORM N-1A
CROSS-REFERENCE SHEET
TO POST-EFFECTIVE AMENDMENT NO. 34
__________________________________
HEARTLAND WISCONSIN TAX FREE FUND
<TABLE>
<CAPTION>
Form N-1A
Item No. Prospectus Heading
- ------- ------------------
<S> <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; Appendix A - Asset Composition
5. Management of the Fund....................... The Fund and the Heartland Organization; How
to Buy Shares; Net Asset Value Calculation;
Portfolio Transactions
5A. Management's Discussion
of Fund Performance.......................... Not applicable. See Annual Report
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;
How to Redeem Shares
8. Redemption or Repurchase..................... How to Redeem Shares
9. Pending Legal Proceedings.................... None
</TABLE>
<PAGE>
<TABLE>
PART B
<S> <C>
10. Cover Page................................... Cover Page
11. Table of Contents............................ Cover Page
12. General Information and
History...................................... Introduction to the Heartland Funds
13. Investment Objectives and
Policies..................................... Investment Objective and Policies; Investment
Restrictions; Appendix A - Securities Ratings
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>
<PAGE>
HEARTLAND WISCONSIN TAX FREE FUND
Prospectus
May 1, 1998
________________________________________________________________________________
INVESTMENT SUMMARY
The Heartland Wisconsin Tax Free Fund's investment objective is to provide
investors with a high level of current income that is exempt from federal income
tax and Wisconsin personal income tax.
The Heartland Wisconsin Tax Free Fund (the "Fund") is a separate non-diversified
mutual fund portfolio of Heartland Group, Inc. ("Heartland"). This Prospectus
contains information you should know about the Fund before you invest. Please
keep it for reference. A Statement of Additional Information for the Fund
(dated May 1, 1998) 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 Fund's 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.
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Fund Expenses.................................................... 3
Financial Highlights............................................. 4
Investment Objective and Policies................................ 5
How to Buy Shares................................................ 13
Shareholder Services............................................. 16
Dividends, Capital Gains Distributions and Taxes................. 18
The Fund and the Heartland Organization.......................... 20
Net Asset Value Calculation...................................... 21
Description of Fund Shares....................................... 21
Portfolio Transactions........................................... 22
Performance Information.......................................... 22
How to Redeem Shares............................................. 23
Appendix A--Asset Composition.................................... 27
</TABLE>
<PAGE>
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 the Fund's
investment objective and performance.
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases None
Sales load imposed on reinvested dividends None
Redemption fees/(1)/ None
Exchange fees None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees .65%
Rule 12b-1 distribution plan fees None
Other expenses .16%
TOTAL FUND OPERATING EXPENSES/(2)/ .81%
(1) The Agent charges a wire fee for the return of redemption proceeds requested
by wire transfer. The fee is currently $12. See "How to Redeem Shares."
(2) The Fund has entered into arrangements with its custodian and transfer agent
whereby interest earned on uninvested cash balances is used to reduce custodian
and transfer agent expenses. The ratio does not include fees paid indirectly. If
the Fund did not have fees paid indirectly, the total fund operating expenses
would have been .82%.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming: (1) 5%
annual return; and (2) redemption at the end of each time period in the Fund:
One year $ 8
Three years $ 26
Five years $ 45
Ten years $100
The purpose of this expense information is to assist you in understanding the
various costs and expenses that you would bear directly or indirectly as an
investor in the Fund. More detailed information concerning these expenses is
set forth in the sections of this Prospectus entitled "How To Buy Shares" and
"The Fund and The Heartland Organization."
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
FINANCIAL HIGHLIGHTS
The following Financial Highlights table has been examined by Price Waterhouse
LLP, independent public accountants, with respect to the fiscal year ended
December 31, 1997, whose report on the financial statements of the Fund for the
fiscal year ended December 31, 1997 is included in the Fund's Annual Report
to Shareholders for such period and is incorporated by reference into the
Statement of Additional Information. The Financial Highlights table for the Fund
has been examined by Arthur Andersen LLP, independent public accountants, with
respect to the fiscal years ended December 31, 1992, December 31, 1993, December
31, 1994, December 31, 1995 and December 31, 1996. The table should be read in
conjunction with the audited financial statements and related notes appearing in
the Annual Report. Additional information about the Fund's performance is
contained in the Annual Report, which may be obtained without charge by writing
or calling Heartland Advisors.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
WISCONSIN TAX FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, APRIL 4, 1992/(1)/
THROUGH
1997 1996 1995 1994 1993 DEC. 31, 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value, beginning of period........ $ 10.16 $ 10.30 $ 9.21 $ 10.38 $ 9.85 $ 9.70
Income (loss) from investment operations:
Net investment income.................... 0.52 0.51 0.51 0.51 0.49 0.37
Net realized and unrealized gains
(losses) on investments................ 0.28 (0.14) 1.09 (1.17) 0.55 0.15
-------- -------- -------- -------- -------- --------
Total income (loss) from investment
operations........................... 0.80 0.37 1.60 (0.66) 1.04 0.52
Less distributions from:
Net investment income.................... (0.52) (0.51) (0.51) (0.51) (0.49) (0.37)
Net realized gains on investments........ -- -- -- -- (0.02) --
-------- -------- -------- -------- -------- --------
Total distributions.................... (0.52) (0.51) (0.51) (0.51) (0.51) (0.37)
-------- -------- -------- -------- -------- --------
Net asset value, end of period.............. $ 10.44 $ 10.16 $ 10.30 $ 9.21 $ 10.38 $ 9.85
======== ======== ======== ======== ======== ========
Total Return(2)............................. 8.1% 3.8% 17.8% (6.5)% 10.8% 7.3%/(3)/
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in thousands)......................... $131,348 $124,545 $118,513 $101,749 $ 99,350 $ 36,304
Ratio of net expenses to average
net assets............................. 0.81%/(4)/ 0.80%/(4)/ 0.84% 0.85% 0.84% 0.82%/(3)/
Ratio of net investment income
to average net assets.................. 5.05% 5.12% 5.23% 5.28% 4.81% 4.87%/(3)/
Portfolio turnover rate.................. 8% 14% 11% 22% 6% 7%
</TABLE>
(1) Commencement of operations.
(2) The front-end sales charge in effect for the Fund prior to June 1, 1994 is
not reflected in Total Return as set forth in the table.
(3) Annualized.
(4) The ratio does not include fees paid indirectly. If the Fund did not have
fees paid indirectly, the expense ratio would have been 0.82% for 1997 and
0.81% for 1996. Disclosure of fees paid indirectly was not required prior to
December 31, 1995.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide investors with a high level
of current income that is exempt from federal and Wisconsin personal income
taxes. The Fund invests primarily in municipal securities that are exempt from
personal income tax in Wisconsin and under federal law, including certain
Wisconsin municipal securities and securities of other entities meeting such
criteria.
Only limited categories of municipal securities are exempt from Wisconsin
personal income taxes. These include higher education bonds issued by the State
of Wisconsin, public housing authority bonds issued by Wisconsin municipalities,
redevelopment authority bonds issued by Wisconsin municipalities, certain bonds
issued by the Wisconsin Housing and Economic Development Authority, Wisconsin
Housing Finance Authority bonds, certain general obligation bonds issued by the
District of Columbia, Puerto Rico, the Virgin Islands and Guam, and certain
public housing agency bonds issued by agencies located outside of Wisconsin.
Due to the limited availability and liquidity of such securities issued within
Wisconsin, it is possible that the Fund may invest a significant portion of its
assets in obligations issued by territories and possessions of the United
States, and the District of Columbia, their agencies or instrumentalities. The
Fund may invest up to 100% of its assets in tax-exempt securities of issuers
outside of Wisconsin if such securities bear interest which is exempt from
federal and Wisconsin personal income taxes.
INVESTMENT POLICIES OF THE FUND
TAX-FREE INCOME. As a matter of fundamental policy, the Fund will seek to
invest at least 80% of its assets so that the income earned thereon will be
exempt from federal and Wisconsin personal income taxes. In practice, under
normal market conditions, the Fund will seek to invest all of its assets so that
income therefrom will be exempt from federal and Wisconsin personal income tax,
other than assets invested for hedging purposes. There can be no assurance that
the Fund will be successful in this investment policy or that it will achieve
its investment objective.
<PAGE>
Also as a matter of fundamental policy, the Fund will seek to invest its assets
so that at least 80% are invested so as to be exempt from the federal
alternative minimum tax. However, under abnormal conditions the Fund may invest
as much as 100% of its assets in municipal securities issued to finance private
activities whose interest is a "tax preference item" for purposes of the federal
alternative minimum tax. If you are subject to the alternative minimum tax, a
portion of your income may not be exempt from federal income tax. Income
distributions that are a tax preference item for purposes of the federal
alternative minimum tax are considered to be exempt from federal income tax for
purposes of the Fund's objective. See "Dividends, Distributions and Taxes."
TAX-FREE INVESTMENTS. The term "municipal securities," as used in this
Prospectus, means debt obligations issued by or on behalf of states, territories
or possessions of the United States, the District of Columbia and their
political subdivisions, agencies, and instrumentalities, the interest on which
is generally exempt from federal income tax. 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 securities are classified principally as either "general obligations"
or "revenue obligations." General obligation bonds are secured by the
municipality's pledge of its credit and taxing power for the payment of
principal and interest. Revenue obligations are generally payable only from the
revenues derived from a particular facility or class of facilities, or in some
cases from the proceeds of a special excise tax or other specific revenue
source. Industrial development or revenue bonds are usually bonds the credit
quality of which is related directly to the credit standing of the industrial
user involved or of any entity which has provided a guaranty or enhancement of
such credit.
The Fund may invest in municipal lease obligations, which are issued by a state
or local government or authority to acquire land, equipment or facilities and
are not fully backed by the municipality's credit. These obligations typically
are secured by the municipality's obligation to make payments under the lease,
which may be subject to certain conditions, including future appropriation of
funds. If the municipality stops making lease payments, the obligations could
lose value. A more detailed description of lease obligations is set forth in
the Statement of Additional Information under "Investment Objective and Policies
- - Tax-Exempt Obligations - State or Municipal Lease Obligations."
OTHER INVESTMENTS. The Fund may invest temporarily in certificates of deposit,
bankers' acceptances and other time deposits. Certificates of deposit are
certificates representing the obligation of a bank to repay the funds deposited
(plus interest thereon) at a time certain after the deposit. Bankers'
acceptances are credit instruments evidencing the obligation of a bank to pay a
draft drawn on it by a customer. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Time deposits maturing in greater than seven days will be
considered illiquid securities.
<PAGE>
Under abnormal market conditions or for defensive purposes, the Fund may invest
more than 20% of its assets in fixed-income securities, the interest on which is
subject to federal and/or Wisconsin personal income tax. Investments in
securities subject to federal income tax will be primarily in securities issued
or guaranteed by the United States government, its agencies, instrumentalities
or authorities; corporate debt securities rated in the highest three categories
by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P"), or Fitch Investors Service, Inc. ("Fitch"); commercial paper rated in
the highest category by S&P or Moody's; unrated variable rate demand notes which
Heartland Advisors believes have investment characteristics comparable to debt
securities rated in one of the top three rating categories by Moody's, S&P or
Fitch; or certificates of deposit of the 100 largest domestic banks in terms of
assets which are subject to federal or state regulatory supervision.
INVESTMENT QUALITY
The Fund invests primarily in municipal bonds judged by Heartland Advisors to be
of investment grade quality. Such securities are considered by Heartland
Advisors to include securities rated at the time of purchase within the four
highest rating categories assigned by Moody's, S&P, or Fitch, or securities
which are unrated, provided that such securities are judged by Heartland
Advisors, at the time of purchase, to be of comparable quality to securities
rated within such four highest categories. A description of the ratings
assigned by Moody's, S&P and Fitch is contained in the Statement of Additional
Information. Investment grade bonds have adequate to strong protection of
principal and interest payments. The investment grade rating of some bonds may
result from various enhancements, such as insurance or letters of credit, rather
than the credit of the issuer. Bonds rated in the fourth highest rating
category are more sensitive to economic changes than are bonds rated in one of
the top three categories, and such bonds have speculative characteristics.
The Fund may invest up to 25% of its assets in lower quality bonds (those rated
below the four highest categories by Moody's, S&P or Fitch or judged by
Heartland Advisors to be of comparable quality, commonly known as "junk bonds"),
provided that it may not invest in bonds rated below B at the time of purchase.
Bonds rated below the top four rating categories are regarded, on balance, as
predominantly speculative with respect to the capacity to pay interest and repay
principal in accordance with the terms of the obligation. While such bonds
typically offer higher rates of return, they involve greater risk, including
greater risk of default and loss of principal.
The prices of these lower rated bonds may be less sensitive to interest rate
changes than higher rated bonds, but more sensitive to adverse economic changes.
Periods of economic uncertainty and change may cause market price volatility in
these higher yielding bonds and corresponding volatility in the Fund's net asset
value. Furthermore, higher yielding bonds may contain redemption or call
provisions which, if exercised during a declining interest rate environment, may
require the Fund to replace the security with a lower yielding security,
resulting in a decreased return to the Fund. Finally, the secondary trading
market for higher
<PAGE>
yielding bonds may not be as active as for lower yielding bonds. As a result, it
may be difficult to accurately assess the value of such bonds (and therefore the
Fund's securities portfolio), and the Fund's ability to dispose of such bonds
may be limited. For a more detailed discussion of the risks associated with
investing in lower rated securities, see "Investment Objective and Policies -
Tax-Exempt Obligations - Non-Investment Grade Bonds" in the Statement of
Additional Information.
Subsequent to their purchase by the Fund, particular obligations may cease to be
rated or their ratings may be reduced below the minimum rating required for
purchase by the Fund. Neither event will require the elimination of an
investment from the Fund's portfolio, but Heartland Advisors will consider such
an event in its determination of whether the Fund should continue to hold an
investment in its portfolio.
Rated as well as unrated municipal securities will be analyzed by Heartland
Advisors on the basis of available information as to creditworthiness and with a
view to various qualitative factors and trends affecting municipal securities
generally. It should be noted, however, that the amount of information about
the financial condition of an issuer of municipal securities or an obligor
thereon may not be as extensive or as readily available as information regarding
securities that are more actively traded. See "Appendix A - Asset Composition"
for a summary of the dollar-weighted averages of the Fund's month-end portfolio
debt holdings during the year ended December 31, 1997.
OTHER INVESTMENT PRACTICES
In addition to the investments described above, the Fund may invest in certain
securities and employ certain investment techniques, which may present special
risks as described below. A more complete discussion of these securities and
investment techniques and their associated risks, as well as further investment
restrictions to which the Fund may be subject, is contained in the Statement of
Additional Information.
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may
engage in transactions in options, futures contracts, and options on futures
contracts to hedge against anticipated declines in the market value of its
portfolio securities, or against increases in the market values of securities it
intends to purchase, or to manage exposure to changing interest rates. The Fund
will not use these instruments for speculation. Some options and futures
strategies, including selling futures, buying puts and writing calls, tend to
hedge the Fund's investments against price fluctuations. Other strategies,
including buying futures, writing puts, and buying calls, tend to increase
market exposure. Options and futures may be combined with each other in order
to adjust the risk and return characteristics of the Fund's overall strategy.
The Fund may purchase and write put and call options that are traded on
recognized U.S. exchanges with respect to any type of security or index related
to its investments, and may
<PAGE>
enter into closing transactions with respect to such options. The Fund may
purchase and sell futures contracts, including interest rate futures and index
futures, that are traded on a recognized U.S. exchange, board of trade or
similar entity, or quoted on an automated quotation system. The Fund may also
purchase and write put and call options on futures contracts and enter into
closing transactions with respect to such options.
The Fund will limit its use of these hedging instruments so that: (i) no more
than 5% of the Fund's total assets would be committed to initial margin deposits
or premiums on futures contracts; (ii) no more than 20% of the Fund's net assets
would be subject to futures contracts; (iii) no more than 5% of the Fund's total
assets would be committed to premiums paid for options; and (iv) no more than
20% of the Fund's total assets would be subject to options. Each of these
limitations applies immediately after a purchase. A subsequent change in the
applicable percentage resulting from market fluctuations does not require
elimination of any security, option or future from the Fund's portfolio.
Consequently, the Fund's assets could be hedged in excess of the above
percentages at a date subsequent to the hedging transaction.
Options and futures can be highly volatile investments and involve certain
risks. Successful hedging strategies require the ability to predict future
movements in securities prices, interest rates and other economic factors.
Heartland Advisors' attempts to use such investments for hedging purposes may
not be successful and could result in reduction of the Fund's total return. The
Fund's potential losses from the use of futures extends beyond its initial
investment in such contracts.
Because available exchange-traded options and futures contracts will not match
the Fund's current or anticipated investments exactly, there is a risk that the
options or futures positions will not track the performance of the Fund's other
investments. The Fund could also experience losses if the prices of its options
or futures positions were poorly correlated with its other investments, or if it
was unable to close out its positions due to disruptions in the market or lack
of liquidity.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis, i.e., obligate itself to purchase or
sell securities with delivery and payment to occur at a later date in order to
secure what is considered to be an advantageous price and yield at the time of
entering into the obligation. The Fund will make such commitments only with the
intention of actually acquiring the securities, but may sell the securities
before settlement date if it is deemed advisable for investment reasons. At the
time 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 Custodian will maintain on a daily basis a separate account
consisting of cash or liquid securities with a value at least equal to the
amount of the Fund's commitments to purchase when-issued obligations.
REPURCHASE AGREEMENTS. The Fund also may invest in collateralized repurchase
agreements, but has no present intention to do so. Such repurchase agreements
are described in the
<PAGE>
Statement of Additional Information under "Investment Objective and Policies -
Taxable Obligations - Repurchase Agreements."
BORROWING. The Fund may borrow from banks for temporary or emergency purposes
up to 10% of its total assets and pledge up to 10% of its total assets in
connection therewith. For purposes of this borrowing restriction, collateral
arrangements for premium and margin payments in connection with the Fund's
hedging activities are not deemed to be a pledge of assets.
PORTFOLIO TURNOVER AND MATURITY
While it is not the policy of the Fund to trade actively for short-term profits,
it will dispose of securities without regard to the time they have been held
when such action appears advisable to Heartland Advisors. Frequent portfolio
trades may result in higher transaction and other costs. The Fund's portfolio
turnover rate for the fiscal year ended December 31, 1997 was 8%. The Fund
is not restricted as to the average maturity of its portfolio.
INVESTMENT LIMITATIONS
The Fund's investment policies discussed above are subject to further
restrictions which are described in the Statement of Additional Information.
Three principal investment limitations are that:
1. Under normal market conditions, the Fund will seek to invest at least 80%
of its assets so that the income earned thereon will be exempt from federal
and Wisconsin personal income taxes.
2. The Fund will seek to invest its assets so that at least 80% are invested
so as to be exempt from the federal alternative minimum tax.
3. The Fund will not purchase a security if, as a result thereof, (i) more
than 25% of its total assets would be invested in a single issuer, other
than securities issued or guaranteed by the United States government, or a
state or territory of the United States, or the District of Columbia, or
their agencies, instrumentalities, municipalities or political subdivisions
or (ii) more than 10% of its net assets would be invested in illiquid
securities.
The above "Investment Limitations" are fundamental policies of the Fund and can
be changed only by a majority vote of its shareholders. However, neither the
investment objective nor policies of the Fund are fundamental and they may be
changed by Heartland's Board of Directors. If there is a future change in the
investment objective, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial position and
needs.
<PAGE>
RISK FACTORS
MARKET RISK. The principal value of the Fund's assets would be expected to vary
with changes in interest rates. It may be expected that a decline in prevailing
levels of interest rates generally will increase the value of securities held by
the Fund, and an increase in rates will generally have the opposite effect. The
Fund may employ hedging techniques to reduce the effects of interest rate
fluctuations; however, there can be no assurance that such techniques will be
successful. Thus, interest rate fluctuations will affect the Fund's net asset
value per share, but not the income received by it from its existing portfolio
securities. Because yields on securities available for purchase by the Fund
will vary over time, no specific yield on the Fund's portfolio can be assured.
Total returns on bonds tend to fluctuate in much wider ranges than fluctuations
in interest rates because gain or loss in bond value is combined with interest
to calculate total return. The amount of increase or decrease in value and
total return will also be affected by the average maturity of the Fund, with
shorter maturities tending to minimize changes and longer maturities tending to
produce greater changes.
CREDIT RISK
GEOGRAPHIC CONCENTRATION. Ordinarily, an investment company concentrating its
investments in limited geographic areas, such as the Fund, would be exposed to
greater credit risks than an investment company investing in a nationally
diversified portfolio of municipal securities. The value of municipal
securities may be closely tied to local, political, and economic conditions and
developments within Wisconsin. Other risks include possible tax changes,
legislative or judicial action, environmental concerns, and differing levels of
supply and demand for debt obligations exempt from federal and Wisconsin
personal income taxes.
The Fund's policies and programs seek to minimize this geographic concentration
risk in a number of ways. First, the Fund intends to comply with the provisions
of Subchapter M of the Internal Revenue Code which, in part, require that, at
the close of each quarter of the taxable year, those issues which represent more
than 5% of the Fund's total assets be limited in the aggregate to 50% of the
Fund's total assets, and that no single issue exceed 25% of the Fund's total
assets. Moreover, since the Fund's policies and programs permit it to purchase
securities issued by territories or possessions of the United States, which are
exempt from federal and Wisconsin personal income taxes, the geographic
concentration is less than if the Fund was limited solely to investments in one
state.
Wisconsin Economy. Wisconsin's economy, although fairly diverse, is primarily
concentrated in the manufacturing, services and trade sectors and is influenced
by the vast supply of resources in the State. This diversification has caused
the State's economy to continue to outperform the national economy. The State's
annual unemployment rate over the last ten years has been below the national
average. In addition, Wisconsin has historically been able
<PAGE>
to balance its budget while cutting taxes and not increasing general taxes. As a
result of these factors, revenues and assets necessary to support and
collateralize interest and principal payments on bonds issued by Wisconsin
public and private issuers in which the Fund may invest remain relatively
strong.
Puerto Rico Economy. A significant portion of the Fund may be invested in
municipal securities issued by or on behalf of Puerto Rico, its agencies or
instrumentalities. At March 31, 1998, 5.7% of the Fund's assets were
invested in such securities. Once primarily supported by agriculture, Puerto
Rico's economy now has a diverse, technology-oriented manufacturing base. In
terms of Gross Domestic Product, manufacturing contributes $16 billion, or 42%
of GDP. Finance, insurance and real estate services have undergone dynamic
growth over the past decade and now account for 13% of GDP. Puerto Rico's
unemployment rate remains relatively high at approximately 14% and per capita
income is less than half of the U.S. average. Debt ratios for the Commonwealth
are high as it assumes much of the responsibility for financing improvements in
the local infrastructure. Historically, Puerto Rico's economic base was centered
around tax advantages offered to U.S. manufacturing firms. However, legislation
passed in 1996 significantly reduces such tax incentives, with a general phase-
out by 2006 for corporations with operations on the island. While Puerto Rico
may have time to find other sources of economic growth, it is still uncertain
what effect such reduction in tax incentives will have on the Commonwealth's
economic stability and on the market for its securities.
Guam Economy. The Fund may also invest a significant portion of its assets in
certain obligations issued by or on behalf of the Government of Guam. At March
31, 1998, such securities made up 7.4% of the Fund's total assets. Tourism and,
to a lesser extent, the U.S. military contribute significantly to Guam's
economy. Reductions in the U.S. military presence in Guam, circumstances which
negatively impact the tourism industry, such as natural disasters (i.e. seismic
activity) and domestic economic difficulties in the countries of its foreign
tourists, particularly Japan, or continuation of past weak financial performance
could negatively impact the long-term outlook of Guam's economy and the market
for its securities.
Industry Concentration. The Fund may invest 25% or more of its total assets in
municipal securities whose revenue sources are from similar types of projects,
for example, community development, education, electric utilities, health care,
housing, redevelopment, transportation, or water, sewer and gas utilities.
There may be economic, business or political developments or changes that affect
all securities of a similar type, such as proposed legislation affecting the
financing of certain projects, judicial decisions relating to the validity of
certain projects or the means of financing them, shortages or price increases of
necessary materials, or declining market needs for such projects. Therefore,
developments affecting a single issuer or industry, or the securities financing
similar types of projects, could have a significant effect on the Fund's
performance.
The Fund historically has invested a substantial portion of its assets in
housing authority obligations. Since housing authority obligations may be
supported to a large extent by federal
<PAGE>
housing subsidy programs, the failure of a housing authority to meet the
qualifications required for coverage under the federal programs could result in
a decrease or elimination of subsidies available for payment of principal and
interest on the housing authority's obligations. Economic developments,
including fluctuations in interest rates, failure or inability to increase
rentals and increasing construction and operating costs may adversely impact the
revenues of housing authorities, and adverse economic conditions may result in
an increasing rate of default by mortgagors on the underlying mortgage loans.
For some housing authorities, inability to obtain additional financing could
also reduce revenues available to pay existing obligations. In addition, certain
housing authority obligations may be subject to early redemption at par based on
unused proceeds from the issue and/or prepayment of underlying mortgage
obligations.
Obligations issued to finance the operation or expansion of utilities may be
affected by various economic and other conditions which adversely impact utility
entities, including inflation, increases in financing requirements, increases in
raw material, construction and other operating costs, changes in the demand for
services and the effects of environmental and other governmental regulations.
In particular, recent laws regulating air quality standards and future
legislation regarding other environmental and toxic waste regulation may further
increase the cost of utility services.
HOW TO BUY SHARES
SHARE PRICE
The Fund's shares are sold without a sales charge. The 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 Fund's transfer and dividend disbursing agent (the "Agent").
OPENING AN ACCOUNT AND PURCHASING SHARES
BY MAIL TO: BY OVERNIGHT MAIL TO:
Firstar Trust Company Firstar Trust Company
Mutual Fund Services, 3rd Floor Mutual Fund Services, 3rd Floor
P.O. Box 701 615 East Michigan Street
Milwaukee, WI 53201-0701 Milwaukee, WI 53202
To Open an Account:
Complete and sign the Account Application. Make your check payable to the
Heartland Wisconsin Tax Free Fund and mail to one of the addresses above.
<PAGE>
To Add to an Account:
Make your check payable to the Fund, 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 Wisconsin Tax Free 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."
To Add to an Account:
<PAGE>
Unless you have elected not to have this privilege on the Account Application,
you may call to exchange from another Heartland fund account with the same
registration, including name, address and taxpayer ID. See "Shareholder
Services-Exchange Privilege." 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 purchase 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.
______________________________________________________________________________
CONDITIONS OF YOUR PURCHASE.
MINIMUM INVESTMENTS. The minimum initial investment for the Fund is $1,000.
The minimum additional investment, except for reinvestments of distributions and
investments under the automatic investment plan, is $100.
<PAGE>
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 and/or Heartland Advisors for providing such
services.
Certain service providers have been authorized to designate other intermediaries
to accept purchase and redemption orders on the Fund's behalf. The Fund will be
deemed to have received a purchase or redemption order when an authorized
service provider or, if applicable, a service provider's designee, accepts the
order.
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 canceled
and the prospective investor will be liable for any losses or fees incurred by
the Fund or the Fund's 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, the Fund can hold payment on redemption of shares
so purchased until it 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 the Fund through the
Federal Reserve System.
SHAREHOLDER SERVICES
The 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 Fund
or Heartland Advisors.
AUTOMATIC DIVIDEND REINVESTMENT. You may automatically reinvest all dividends
and distributions or elect to receive them in the form of a check. If your
dividends and distributions are reinvested, they will automatically purchase
additional shares of the Fund, or shares of another Heartland fund, as indicated
on your 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 the 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
<PAGE>
(minimum $50 per transaction) from your checking or savings account to your
account in the Fund on a monthly or twice-monthly basis. The application must be
accompanied by a "voided" check, and be received at least 14 business days prior
to the initial transaction. Once enrolled in the automatic investment plan, you
may change the monthly amount or terminate your participation at any time by
writing the Agent. Allow five business days for a change to become effective.
Your bank must be a member of Automated Clearing House. If the automatic
purchase cannot be made due to insufficient funds or a stop payment, a $20
service fee will be assessed. If you stop making automatic investments when your
aggregate investment in the 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. 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 Fund at any time by written notice.
EXCHANGE PRIVILEGE. Shares of the 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 Firstar Money Market Fund, provided the fund into which you
wish to exchange is qualified for sale in the jurisdiction of residence which
you state at the time you make the exchange. Before initiating an exchange, you
should obtain from Heartland Advisors and carefully read the prospectus relating
to the fund into which you wish to exchange.
Exchanges Among Heartland Funds. Under the exchange privilege, each Heartland
fund offers to exchange its shares for shares of another Heartland fund on the
basis of relative net asset value per share. In order to qualify for the
exchange privilege without further approval of Heartland, 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.
Exchanges with Firstar Money Market Fund. Shareholders may exchange all or a
portion of their shares in the Fund for shares of the Firstar 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 Firstar 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 Firstar Money Market Fund for certain
<PAGE>
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 securities representative (either in writing or by
telephone), who will advise Heartland of the exchange, but who may charge a fee
for such service. See "HOW TO REDEEM SHARES - Telephone Redemptions" for
information on transactions by telephone.
Tax and Other Considerations. An exchange between funds is treated as a sale
for federal income tax purposes and, depending upon the circumstances, a short
or long-term capital gain or loss may be realized. If you have questions as to
the tax consequences of an exchange, you should consult your tax advisor. The
exchange privilege may be modified or terminated at any time upon 60 days prior
written notice. Although an investor may make up to four exchanges in any
calendar year, Heartland reserves the right to limit the number of exchanges
beyond that.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund will declare income dividends daily and pay all of its net
investment income to shareholders monthly. It is the intent of the Fund to
distribute substantially all of the Fund's net investment income. Dividends and
capital gains distributions will be reinvested in additional shares of the Fund,
unless the shareholder has indicated on the account application or otherwise
notified Heartland Advisors by telephone or in writing that he or she elects to
receive such dividends and distributions in cash.
CAPITAL GAINS DISTRIBUTIONS. If the Fund has net capital gains for the year it
is the intent of the Fund to generally distribute substantially all of the net
capital gain.
FEDERAL TAXES. The 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. The Fund also intends to make distributions as
required by the Code to avoid the imposition of a 4% excise tax.
Interest earned by the Fund on municipal securities is in general federally tax-
free when distributed to you as dividends. If the Fund earns taxable income from
any of its investments, it would be distributed as a taxable dividend. Gains
from the Fund's hedging transactions will be distributed as short-term and long-
term capital gains.
The Fund may invest in municipal obligations whose interest (less any related
expenses) is subject to the federal alternative minimum tax for individuals
(private activity securities). To the extent that the Fund invests in private
activity securities, individuals who are subject to the alternative minimum tax
will be required to report a portion of the Fund's dividends as a "tax
preference item" in determining their federal alternative minimum tax.
Liability for the federal alternative minimum tax will depend on each investor's
individual tax circumstances.
<PAGE>
Distribution from the Fund's short-term capital gains are federally taxable as
dividends, and long-term capital gain distributions are federally taxable at
long-term capital gains rates. Distributions of long-term capital gains will be
taxable to the investor at long-term capital gains rates regardless of the
length of time shares have been held. If you realize a loss on the sale or
exchange of Fund shares held six months or less, your short-term loss will be
reclassified to long-term to the extent of any long-term capital gain
distribution received. The Fund's distributions are taxable when they are paid,
whether you take them in cash or reinvest them in additional shares, except that
distributions declared in the last three months of the year and paid in January
are taxable as if paid on December 31. You will receive information annually
indicating the tax status of the dividends received in the prior year under
federal and Wisconsin law.
If the Fund's taxable distributions exceed its current and accumulated earnings
and profits, all or a portion of those distributions may be treated as a return
of capital to shareholders for tax purposes.
STATE TAXES. To the extent that the Fund's distributions are derived from
obligations whose interest is tax-free under Wisconsin law, its dividends paid
from tax-exempt interest will be exempt from Wisconsin personal income tax.
Wisconsin also imposes a state alternative minimum tax dependent upon an
investor's individual tax circumstances, which is based on federal alternative
minimum tax with certain modifications. Distributions from short-term and long-
term capital gains will be taxable as dividends and as capital gains,
respectively, for state tax purposes.
"BUYING A DIVIDEND." On the record date for a distribution from capital gains
by the Fund, its share price is reduced by the amount of the distribution. If
you buy shares just before the record date ("buying a dividend"), you will pay
the full price for the shares, and then receive a portion of the price back as a
taxable distribution.
OTHER TAX INFORMATION. Under federal tax law, some investors may be subject to
a 31% withholding on reportable dividends, capital gains distributions, and
redemption payments ("backup withholding"). Generally, investors subject to
backup withholding will be those for whom a taxpayer identification number is
not on file with the Fund or who, to the Fund's knowledge, have furnished an
incorrect number. In order to avoid this withholding requirement, an investor
must certify on the account application that the taxpayer identification number
provided is correct and that the investment is not otherwise subject to backup
withholding, or is exempt from backup withholding.
The foregoing discussion relates to federal and Wisconsin taxation as of the
date of this Prospectus and is general in nature; each investor is advised to
consult his or her tax advisor for additional information. Distributions from
the Fund, including exempt-interest dividends, may be subject to tax in other
states.
<PAGE>
THE FUND AND THE HEARTLAND ORGANIZATION
Heartland's Board of Directors provides broad supervision over the affairs of
the Fund, and the officers are responsible for its operations.
HEARTLAND ADVISORS
Heartland Advisors provides the Fund 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 the Fund, makes available
research and statistical data, and supervises the acquisition and disposition of
investments by the Fund. Heartland Advisors is also the distributor for the
Fund.
Heartland Advisors, founded in 1982, serves as the investment advisor for the
Heartland Small Cap Contrarian Fund, Value Fund, Mid Cap Value Fund, Large Cap
Value Fund, Value Plus Fund, U.S. Government Securities Fund, Short Duration
High-Yield Municipal Fund, and High-Yield Municipal Bond Fund, eight additional
series of Heartland, and also provides investment management services for
individuals, and institutional accounts, such as pension funds and profit-
sharing plans. As of March 31, 1998, Heartland Advisors had approximately
$4.5 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.
For the fiscal year ended December 31, 1997, the Fund paid advisory fees of
$819,186 or approximately 0.65 of 1% of average net assets.
PORTFOLIO MANAGERS. Patrick J. Retzer, CPA and Thomas J. Conlin, CFA serve as
co-managers of the Fund. Mr. Retzer has managed or co-managed the Fund since
commencement of its operations. Mr. Retzer is also portfolio co-manager of the
Heartland U.S. Government Securities Fund. Mr. Retzer has been Vice President
and Treasurer of Heartland Advisors and Heartland since 1987, a Director of
Heartland Advisors since 1988 and a Director of Heartland since 1993.
Mr. Conlin joined Heartland Advisors in August, 1996 as a municipal bond
portfolio manager. Mr. Conlin previously was managing director of the Municipal
Fixed-Income Department of 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, Incorporated. in Chicago, Illinois, where
he served both as a portfolio manager and as a director of municipal
research.
<PAGE>
YEAR 2000. The services provided to the Fund and the shareholders by Heartland
Advisors and the Custodian, Transfer and Dividend Disbursing Agent depend on the
smooth functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund, Heartland Advisors and the Custodian, Transfer and Dividend
Disbursing Agent have advised Heartland that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside service providers, will be
adapted in time for that event.
NET ASSET VALUE CALCULATION
The Fund's net asset value per share is computed daily by dividing the total
value of the investments and other assets of the Fund, less any liabilities, by
the total outstanding shares of the Fund. The net asset value per share is
determined as of the close of the New York Stock Exchange regular trading
(generally 4:00 p.m. Eastern time) on each day the New York Stock Exchange is
opened.
Securities owned by the Fund are valued on the basis of market quotations or at
their fair value. The Fund generally uses fair value, as market quotations for
most municipal bonds are not readily available on a daily basis. Fair value of
the Fund's debt securities is determined by a pricing service approved by
Heartland's Board of Directors, based primarily upon information concerning
market transactions and dealer quotations for similar securities, 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 Fund is a
separate non-diversified mutual fund series of Heartland. Currently, nine series
are authorized and outstanding:.
<PAGE>
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. Shares have no
preemptive, cumulative voting, subscription or conversion rights and are freely
transferable. Although annual meetings of shareholders are not required, special
meetings of shareholders may be called for purposes such as electing or removing
Directors, changing fundamental policies or approving investment advisory
contracts.
PORTFOLIO TRANSACTIONS
As provided in its Investment Advisory Agreement, Heartland Advisors is
responsible for the Fund's portfolio decisions and the placing of portfolio
transactions. In executing such transactions, Heartland Advisors seeks to
obtain the best net results for the Fund, taking into account such factors as
price (including the brokerage commission or dealer spread), size of order,
competitive commissions on similar transactions, difficulty of execution and
operation facilities of the firm involved and the firm's risk in positioning a
block of securities. While Heartland Advisors seeks reasonably competitive
rates, it does not necessarily pay the lowest commission or spreads available.
Transactions in smaller issues of municipal securities may involve specialized
services on the part of the broker and thereby entail higher spreads than would
be paid in transactions involving more widely traded securities.
Although Heartland Advisors may serve as a broker for the Fund, such
transactions are expected to be infrequent. In order for Heartland Advisors to
effect any portfolio transactions for the Fund, 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.
Allocation of transactions, including their frequency, to various dealers is
determined by Heartland Advisors, as the Fund's advisor, in its best judgment
and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt and efficient execution of orders in an effective manner
at the most favorable price. Subject to this primary consideration, Heartland
Advisors may also consider the provision of supplemental research services and
sales of the shares of Heartland funds as factors in the selection of broker-
dealers to execute portfolio transactions.
PERFORMANCE INFORMATION
From time to time the 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 the Fund refers to the income generated by an investment in the Fund over a
one-month period (which period will be stated in the advertisement). This
income is then "annualized." That is, the amount of income generated by the
investment during the month is assumed to be generated each month over a 12-
month period and is shown as a percentage of the investment.
<PAGE>
"Total return" of the Fund refers to the average annual total return for one,
five and ten-year periods (or the portion thereof during which the Fund has been
in existence). Total return is the change in redemption value of shares
purchased with an initial $1,000 investment, assuming the reinvestment of
dividends and capital gain distributions, and the redemption of the shares at
the end of the period. Performance information should be considered in light of
the Fund's investment objective 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 Fund may also advertise total returns other than those described
above if such information is deemed informative to investors for use in
evaluating the Fund.
In connection with the standardized yield and total return quotations described
above, the Fund may also advertise a standardized tax equivalent yield which
illustrates the yield that would be required on a fully taxable investment to
result in the same net income to an investor in the Fund, after payment of
federal and Wisconsin taxes at the stated rate. The yield is computed by
dividing that portion of the Fund's current yield which is tax-exempt by one
minus a stated federal and Wisconsin income tax rate, and then adding the
product to the value of any yield of the Fund which is not tax-exempt.
HOW TO REDEEM SHARES
Shareholders may have any or all of their shares redeemed as described below on
any day the Fund is open for business at the next determined net asset value per
share following receipt of a redemption in proper form (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.
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.
<PAGE>
BY MAIL TO:
Firstar Trust Company
Mutual Fund Services, 3rd Floor
P.O. Box 701
Milwaukee, WI 53201-0701
BY OVERNIGHT DELIVERY TO:
Firstar Trust Company
Mutual Fund Services, 3rd Floor
615 East Michigan Street
Milwaukee, WI 53202
Send a written request specifying the name of the Fund, the number of shares to
be redeemed, your name, your account number, and any additional documents listed
below that apply to your particular account. The Agent cannot accept 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."
TYPE OF REGISTRATION REQUIREMENTS
Individual, Joint Tenants, Letter of instruction signed by all persons
Sole Proprietorship, Custodial, authorized to sign for the account, exactly
General Partners as it is registered, accompanied by
signature guarantee(s) if required.
Corporations, Associations Letter of instruction accompanied by a
corporate resolution. The letter must be
signed by at least one individual authorized
(via corporate resolution) to act on the
account. The corporate resolution must
include a corporate seal or signature
guarantee.
Trusts Letter of instruction signed by the
Trustee(s) (as Trustee(s)), with signature
guarantee(s). (If the Trustee's name is not
registered on the account, provide a copy of
the trust document, certified within the
last 60 days.)
<PAGE>
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.
TELEPHONE REDEMPTIONS. Shares may be redeemed by telephone, unless the
shareholder elects not to have this privilege on the account application. By
establishing the telephone redemption service, the shareholder assumes some
risks for unauthorized transactions. Heartland Advisors has implemented
procedures designed to reasonably assure that telephone instructions are
genuine. These procedures include recording telephone conversations, requesting
verification of various pieces of personal information and providing written
confirmation of such transactions. If the Agent, the Fund, Heartland Advisors
or any of their employees fails to abide by these procedures, the Fund 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
Fund, Heartland Advisors or any of their employees will be liable for losses
suffered by a shareholder which result from following telephone instructions
reasonably believed to be genuine after verification pursuant to these
procedures.
There is currently no charge for telephone redemptions, although a charge may be
imposed in the future. Subject to waiver by the Fund in certain instances, the
minimum amount that may be redeemed by telephone is $1,000; all other
redemptions may be done in writing. During periods of substantial economic or
market changes, telephone redemptions 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 as described above. The Agent and the Fund reserve the right
to change, modify or terminate this telephone redemption service at any time.
SIGNATURE GUARANTEES. To protect your account, the Agent and the Fund 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 Fund 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.
<PAGE>
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 $12.00 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 redemptions, exchanges or other transfers, a
shareholder's account drops below $500 for three months or more, the Fund has
the right to redeem the shareholder's account, after giving 60 days notice,
unless the shareholder makes additional investments to bring the account value
to $1,000. Alternatively, the Fund may, after giving notice, impose a fee on
accounts maintained below the minimum investment level without an active
automatic investment plan.
The 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.
<PAGE>
APPENDIX A
ASSET COMPOSITION
The following table provides a summary of the Fund's debt holdings as rated by
the higher of Moody's or S&P or, in the case of unrated securities, as
determined by Heartland Advisors. These figures are dollar-weighted averages of
month-end portfolio holdings of the Fund during the fiscal year ended December
31, 1997, presented as a percentage of total investments. These percentages are
historical and are not necessarily indicative of the quality of current or
future Fund holdings, which may vary. Those securities assigned an equivalent
rating may include those rated by other nationally recognized rating
organizations, as well as unrated securities. Unrated securities are not
necessarily lower-quality securities. Issuers of municipal securities frequently
choose not to incur the expense of obtaining a rating. Please refer to the
Statement of Additional Information for a more complete discussion of these
ratings.
<TABLE>
<CAPTION>
MOODY'S/S&P RATING WISCONSIN TAX FREE FUND
PORTFOLIO HOLDING %
(dollar-weighted average)
<S> <C>
Aaa/AAA 22.6%
Aa/AA 0.5%
AA 17.0%
Baa/BBB 8.6%
Ba/BB 0.0%
B 0.0%
-----
Total 48.7%
<CAPTION>
HEARTLAND EQUIVALENT RATING WISCONSIN TAX FREE FUND
PORTFOLIO HOLDING %
(dollar-weighted average)
<S> <C>
Aaa/AAA 8.7%
Aa/AA 1.6%
AA 27.6%
Baa/BBB 12.6%
Ba/BB 0.4%
B 0.4%
-----
Total 51.3%
</TABLE>
<PAGE>
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
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
COUNSEL
Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
<PAGE>
Statement of Additional Information
Dated May 1, 1998
HEARTLAND WISCONSIN TAX FREE FUND
790 North Milwaukee Street, Milwaukee, Wisconsin 53202
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 May 1, 1998 and any supplements
thereto ("Prospectus"). A copy of the Prospectus and an account application may
be obtained without charge by telephone or written request to the distributor,
Heartland Advisors, Inc. ("Heartland Advisors"), or participating dealers or
financial institutions. Shareholder inquiries should be directed to the Fund in
writing or by telephone.
================================================================================
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Introduction to the Heartland Funds....................................... 2
Investment Objective and Policies......................................... 2
Investment Restrictions................................................... 25
Management................................................................ 28
Control Persons and Principal Holders of Securities....................... 31
The Investment Advisor.................................................... 31
Performance Information................................................... 33
Determination of Net Asset Value per Share................................ 37
Distribution of Shares.................................................... 38
Tax Status................................................................ 38
Description of Shares..................................................... 40
Portfolio Transactions.................................................... 41
Custodian and Transfer and Dividend Disbursing Agent...................... 43
Counsel and Independent Public Accountants................................ 43
Financial Statements...................................................... 43
Appendix A--Securities Rating............................................. 45
</TABLE>
<PAGE>
INTRODUCTION TO THE HEARTLAND FUNDS
The Heartland family of funds consists of nine separate series of Heartland
Group, Inc. ("Heartland"), a Maryland corporation registered as an open-end
management investment company. This Statement of Additional Information relates
only to the Heartland Wisconsin Tax Free Fund (the "Fund") which is a non-
diversified fund with a distinct investment objective and program. A separate
Prospectus and related Statement of Additional Information for the other
Heartland funds are available from Heartland Advisors.
INVESTMENT OBJECTIVE AND POLICIES
General
The following information supplements the discussion of the Fund's
investment objective and policies discussed in the Prospectus. Unless otherwise
specified, the investment objective, policies and restrictions of the Fund are
not fundamental, and are therefore subject to change by the Board of Directors
of Heartland without shareholder approval. However, shareholders will be
notified prior to a material change in any such objective, policy or
restriction. The fundamental policies of the Fund, on the other hand, may not
be changed without the approval of at least a majority of the outstanding shares
of the Fund or, if it is less, 67% of the shares represented at a meeting of
shareholders of the Fund at which the holders of 50% or more of the shares are
represented.
Tax Exempt Obligations
General. The term "Tax Exempt Obligations" as used herein refers to debt
obligations issued by or on behalf of states, territories or possessions of the
United States or the District of Columbia, or their agencies, instrumentalities,
municipalities and political subdivisions, the interest payable on which is, in
the opinion of bond counsel, excludable from gross income both for purposes of
federal income taxation (except, in certain instances, the alternative minimum
tax, depending upon the shareholder's tax status) and Wisconsin personal income
tax. Tax Exempt Obligations are generally issued to obtain funds for various
public purposes,
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including the construction or improvement of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which Tax
Exempt Obligations may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses and lending such funds to other
public institutions and facilities. In addition, Tax Exempt Obligations may be
issued by or on behalf of public bodies to obtain funds to provide for the
construction, equipping, repair or improvement of housing facilities, convention
or trade show facilities, airport, mass transit, industrial, port or parking
facilities and certain local facilities for water supply, gas, electricity,
sewage or solid waste disposal.
The yields on Tax Exempt Obligations are dependent on a variety of factors,
including the financial condition of the issuer or other obligor thereon or the
revenue source from which debt service is payable, general economic and monetary
conditions, conditions in the relevant market, the size of a particular issue,
maturity of the obligation and the rating of the issue.
Securities in which the Fund may invest, including Tax Exempt Obligations,
are subject to the provisions of bankruptcy, insolvency, reorganization and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Code, and laws, if any, which may be enacted by Congress, state
legislatures or other governmental agencies extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations within constitutional limitations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of issuers to make interest and principal payments on their Tax Exempt
Obligations may be materially impaired.
As noted in the Prospectus, the Fund invests primarily in municipal bonds
judged by Heartland Advisors, the Fund's investment advisor, to be of investment
grade quality. Heartland Advisors considers Tax Exempt Obligations to be
investment grade if rated by Moody's, S&P or Fitch within their four highest
rating categories for municipal securities, or securities which are unrated,
provided that such securities are judged by Heartland Advisors, at the time of
purchase, to be of comparable quality to securities rated within such four
highest categories. A
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description of the rating categories is contained in Appendix A attached to this
Statement of Additional Information. Bonds rated in the fourth highest rating
category are generally more sensitive to economic changes than are those rated
in one of the top three categories, and these bonds generally have speculative
characteristics.
Subsequent to being purchased by the Fund, an issue of rated Tax Exempt
Obligations may cease to be rated or its rating may be reduced below the top
four categories. Neither event will require the sale of such Tax Exempt
Obligations by the Fund, but Heartland Advisors will consider such event in
determining whether the Fund should continue to hold the Tax Exempt Obligations.
To the extent that the ratings given by Moody's, S&P or Fitch for Tax Exempt
Obligations may change as a result of changes in such organizations or their
rating systems, the Fund will attempt to use comparable ratings as standards for
their investments in accordance with the investment policies contained in the
Prospectus and this Statement of Additional Information.
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of the Tax Exempt Obligations which they undertake to rate. Investors
should bear in mind, however, that ratings are relative and subjective and are
not absolute standards of quality. Although these ratings are an initial
consideration for selection of portfolio investments, Heartland Advisors will
subject these securities to other evaluative criteria prior to investing in such
securities, and may invest in unrated securities which it believes, based on
information available to it and its own analysis, are of comparable quality to
those securities that are rated in the top four categories.
Non-Investment Grade Bonds. The Fund may invest up to 25% of its assets in
non-investment grade bonds (those rated below the four highest categories by
Moody's, S&P or Fitch or, if unrated, judged by Heartland Advisors to be of
comparable quality), provided that the Fund may not invest in bonds rated below
B at the time of purchase. These so-called "junk bonds" are regarded, on
balance, as predominantly speculative with respect to the capacity of the issuer
to pay interest and repay principal in accordance with the terms of the
obligation. While such bonds typically offer higher rates of return than
investment grade bonds, they also involve greater risk, including greater risk
of
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default. An economic downturn could severely disrupt the market for such high
yield bonds and adversely affect their value and the ability of the issuers to
repay principal and interest. The rate of incidence of default on junk bonds is
likely to increase during times of economic downturns and extended periods of
increasing interest rates. Yields on junk bonds will fluctuate over time, and
are generally more volatile than yields on investment grade bonds.
The secondary trading market for junk bonds may be less well established
than for investment grade bonds, and such bonds may therefore be only thinly
traded. As a result, there may be no readily ascertainable market value of such
securities, in which case it will be more difficult for the Fund to value
accurately the securities, and consequently the investment portfolio. Under
such circumstances, the subjective judgment of the Board of Directors will play
a greater role in the valuation. Additionally, adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidities of junk bonds, especially in a thinly traded market. To
the extent such securities are or become "illiquid" under the guidelines
established by Heartland's Board of Directors, the Fund's ability to purchase
and hold such securities will be subject to its investment restriction limiting
its investment in illiquid securities to 10% of its net assets. See "Investment
Restrictions."
As noted above, the Fund will not invest in junk bonds that are rated below
the fifth or sixth rating categories by any of S&P, Moody's, or Fitch (Ba and B
for Moody's and BB and B for S&P and Fitch) or, if unrated, judged comparable by
Heartland Advisors. Bonds rated in the first of those categories have less
near-term vulnerability to default than other speculative issues, however they
face major ongoing uncertainties or exposure to adverse business, financial or
economic conditions which could lead to inadequate capacity to meet timely
interest and principal payments. However, business and financial alternatives
available to obligors of such bonds can generally be identified which could
assist them in satisfying their debt service requirements. Bonds rated in the
second of these two categories are considered highly speculative. While the
issuers of such bonds must be currently meeting debt service requirements in
order to achieve this rating, adverse business, financial or economic conditions
could likely
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impair the issuer's capacity or willingness to pay interest and repay principal.
A detailed description of the characteristics associated with the various debt
credit ratings established by S&P, Moody's and Fitch is set forth in Appendix A
to this Statement of Additional Information.
While rating categories help identify credit risks associated with bonds,
they do not evaluate the market value risk of junk bonds. Additionally, the
credit rating agencies may fail to promptly change the credit ratings to reflect
subsequent events. Accordingly, Heartland's Board of Directors and Heartland
Advisors continuously monitor the issuers of junk bonds held in the Fund's
portfolio to assess and determine whether the issuers will have sufficient cash
flow to meet required principal and interest payments, and to assure the
continued liquidity of such bonds so that the Fund can meet redemption requests.
Floating and Variable Rate Demand Notes. The Fund may purchase floating
and variable rate demand notes. Generally, such notes are secured by letters of
credit or other credit support arrangements provided by banks. Such notes
normally have a stated long-term maturity but permit the holder to tender the
note for purchase and payment of principal and accrued interest upon a specified
number of days notice. The issuer of floating and variable rate demand notes
normally has a corresponding right, after a given period, to prepay in its
discretion the outstanding principal amount of the note plus accrued interest
upon a specified number of days notice to the noteholders. The interest rate on
a floating rate demand note is based on a specified interest index, such as a
bank's prime rate, and is adjusted automatically with changes in the index. The
interest rate on a variable rate demand note is adjusted at specified intervals,
based upon current market conditions. Heartland Advisors monitors the
creditworthiness of issuers of floating and variable rate demand notes in the
Fund's portfolio.
State or Municipal Lease Obligations. The Fund may invest a portion of its
assets in state or municipal leases and participation interests therein. The
leases may take the form of a lease with an option to purchase, an installment
purchase or a conditional sales contract which is entered into by state and
local governments and authorities to purchase or lease a wide array of equipment
such as fire, sanitation or police vehicles
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or telecommunications equipment, buildings or other capital assets. State or
municipal lease obligations frequently have the special risks described below
which are not associated with general obligation or revenue bonds issued by
public bodies.
The constitution and statutes of many states contain requirements with
which the state and municipalities must comply whenever incurring debt.
Depending on the circumstances, these requirements may include approving voter
referenda, debt limits, interest rate limits and public sale requirements.
Leases have evolved as a means for public bodies to acquire property and
equipment without needing to comply with all of the constitutional and statutory
requirements for the issuance of debt. The debt-issuance limitations may be
inapplicable for one or more of the following reasons: (i) the inclusion in
many leases or contracts of "nonappropriation" clauses that provide that the
public body has no obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on a yearly or other periodic basis (the "nonappropriation"
clause); (ii) the exclusion of a lease or conditional sales contract from the
definition of indebtedness under relevant state law; or (iii) the lease provides
for termination at the option of the public body at the end of each fiscal year
for any reason or, in some cases, automatically if not affirmatively renewed.
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.
When-Issued Purchases. The Fund may make commitments to purchase Tax
Exempt Obligations on a "when-issued" basis, that is, delivery and payment for
the obligations normally takes place at a date after the commitment to purchase
although the payment obligation and the coupon rate have been established before
the time the Fund enters into the commitment. The settlement date usually
occurs within one week of the purchase of notes and within one month of the
purchase of bonds. The Fund intends to make
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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 debt securities with
a value at least equal to the amount of the Fund's commitments to purchase
"when-issued" obligations.
Obligations purchased on a "when-issued" basis or held in the Fund's
portfolio are subject to changes in market value based not only upon the
public's perception of the creditworthiness of the issuer, but also upon changes
in the level of interest rates. In the absence of a change in credit
characteristics, which would likely cause changes in value, the value of
portfolio investments can be expected to decline in periods of rising interest
rates and to increase in periods of declining interest rates.
When payment is made for "when-issued" securities, 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" securities themselves (which may
have a market value greater or lesser than the Fund's obligation). Sale of
securities to meet such obligations would involve a greater potential for the
realization of capital gains, which could cause the Fund to realize income not
exempt from federal and Wisconsin personal income tax.
Taxable Obligations
As set forth in the Prospectus, under certain circumstances and subject to
certain limitations, the Fund may invest in obligations and instruments, the
interest on which is includable in gross income for purposes of federal and
state income taxation.
Government Obligations. The Fund may invest in securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities. These
securities include a variety of Treasury securities, which differ in their
interest rates, maturities and
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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.
The Fund will invest in such securities only when Heartland Advisors is
satisfied that the credit risk with respect to the issuer is minimal.
Repurchase Agreements. The Fund may invest in repurchase agreements. The
Custodian will hold the securities underlying any repurchase agreement or such
securities will be part of the Federal Reserve Book Entry System. The market
value of the collateral underlying the repurchase agreement will be determined
on each business day. If at any time the market value of the collateral falls
below the repurchase price of the repurchase agreement (including any accrued
interest), the obligor under the agreement will promptly furnish additional
collateral to the Custodian (so the total collateral is an amount at least equal
to the repurchase price plus accrued interest).
Other Taxable Investments. As noted in the Prospectus, the Fund also may
invest temporarily in certificates of deposit, bankers' acceptances and other
time deposits.
Options, Futures Contracts and Options on Futures Contracts
Writing Covered Call Options. The Fund may write covered call options on
securities related to its investments (such as U.S. Government securities) and
enter into closing transactions
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with respect to such options. In writing covered call options, the 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.
A call option gives the holder (buyer) the right to purchase a specified
security at a stated price (the exercise price) at any time before a specified
date (the expiration date). The term "covered" call option means that the Fund
will own the securities subject to the option or have an unconditional right to
purchase the same underlying security at a price equal to or less than the
exercise price of the "covered" option, or will establish and maintain with its
Custodian, for the term of the option, an account consisting of cash 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 price increases in the underlying security. If a call option which the 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 the
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 the 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
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asked price. The liability will be extinguished and the net gain or loss on the
option realized upon expiration of the option, the purchase of an identical
option in a closing transaction, or delivery of the underlying security upon the
exercise of the option. The Fund does not consider a security covered by a call
to be "pledged" as that term is used in the 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 the Fund to write
another call option on the underlying security with either a different exercise
price or expiration date or both. If the 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 the Fund will be able to
effect such closing transactions at a favorable price. The 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. The Fund may write covered put options on
securities related to its investments, and may purchase options to close out
options previously written by the Fund. As the writer (seller) of a put option,
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.
The 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
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price of "covered" options at all times while the put option is outstanding.
The 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 directly
because the premium received for writing the option will mitigate the effects of
the decline.
Purchasing Put Options. The Fund may purchase put options on securities
related to its investments (such as U.S. Government securities). As the holder
of a put option, the Fund has the right to sell the underlying security at the
exercise price at any time during the option period. The Fund may also enter
into closing transactions with respect to such options, exercise them or permit
them to expire. The 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 the 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
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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. The Fund may purchase call options on securities
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. The 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. The Fund may buy and sell options on indices related to its
investments (such as municipal bond or U.S. Treasury securities indices), and
may enter into closing transactions with respect to such options. Options on
indices would be used in a manner similar to the use of options on securities;
however, upon the exercise of an index option, settlement occurs in cash rather
than by delivery of an underlying security, with the exercising option holder
receiving the difference between the closing level of the index upon which the
option is based and the exercise price of the option. Unlike options on
specific debt instruments, gain or loss on an index option depends on the price
movements in the instruments underlying the index rather than price movements in
individual debt instruments.
Options on Futures Contracts. The Fund may buy and sell options on futures
contracts and enter into closing transactions with respect to such options.
Options on futures contracts would be used in a manner similar to the use of
options on securities. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call, and a short 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 the Fund
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will be required to make margin payments as described below for futures
contracts.
Futures Contracts. The Fund may purchase and sell futures contracts,
including interest rate and securities index futures contracts, that are traded
on a recognized U.S. exchange, board of trade or similar entity, or quoted on an
automated quotation system.
When the Fund purchases a futures contract, it agrees to purchase a
specified underlying instrument at a specified future date. When the 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, the
Fund would be required to deposit "initial margin" with its Custodian in a
segregated account in the name of the executing futures commission merchant when
the contract is entered into. The initial 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 initial
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 initial 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, the Fund marks to
market the current value of its open futures contracts. The Fund expects to
earn interest income on its margin deposits.
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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 the Fund closes out
an open futures contract by entering into an offsetting futures contract, and
the offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the 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 that the
Fund will be able to enter into an offsetting transaction with respect to a
particular futures contract at a particular time. If the 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 the Fund's exposure to positive and negative
price fluctuations in the underlying instrument, much as if it had purchased the
underlying instrument directly. When the Fund sells a futures contract, by
contrast, the value of its futures position will tend to move in a direction
contrary to the market. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
A public market exists in futures contracts covering various fixed income
securities (including long-term U.S. Treasury Bonds, 10-year U.S. Treasury
Notes, Government National Mortgage Association modified pass-through mortgage-
backed certificates, three-month U.S. Treasury Bills, and 90-day commercial
paper), as well as municipal bonds and related indices. The Fund reserves the
right to effect transactions in other securities and indices which may be
developed in the future.
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Limitations on Futures and Options on Futures Transactions
The Fund will engage in transactions in options, futures contracts and
options thereon only for bona fide hedging and risk management purposes, in each
case in accordance with the rules and regulations of the Commodity Futures
Trading Commission, and not for speculation.
The 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, the Fund will not: (a)
purchase or sell futures and options on futures or enter into closing
transactions with respect thereto if, as a result thereof, the then current
aggregate futures market prices and financial instruments required to be
delivered under open futures contract sales plus the then current aggregate
purchase price of financial instruments required to be purchased under open
futures contract purchases would exceed 20% of the Fund's net assets (taken at
market value at the time of entering into the contract and excluding the amount
by which any of its options on futures are in-the-money); (b) the aggregate
value of all premiums paid for put options purchased by the Fund would exceed 5%
of the Fund's total assets (less the amount by which any such positions are in-
the-money; or (c) the aggregate market value of all portfolio securities
covering call options written by the Fund would exceed 20% of the Fund's total
assets. The above limitations on the Fund's investments in futures contracts
and options and the policies regarding futures contracts and options discussed
elsewhere in this Statement of Additional Information are not fundamental
policies of the Fund and may be changed by Heartland's Board of Directors as
permitted by applicable regulatory authority.
Combined Positions. The Fund may purchase and write options in combination
with each other, or in combination with futures contracts, to adjust the risk
and return characteristics of the overall position. For example, the Fund may
purchase a put option
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and write a call option on the same underlying instrument in order to construct
a combined position whose risk and return characteristics are similar to selling
a futures contract. Another possible combined position would involve writing a
call option at one exercise price and buying a call option at a lower price, in
order to reduce the risks of the written call option in the event of a
substantial price increase. Because combined positions involve multiple trades,
they may result in higher transaction costs and may be more difficult to open
and close out.
Risks in Options and Futures Transactions
Options and futures can be highly volatile investments and involve certain
risks. A decision of whether, when, and how to hedge involves skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior, or market or interest rate trends.
Successful hedging strategies require the ability to predict future movements in
securities prices, interest rates and other economic factors. There can be no
assurance that price movements in a hedging vehicle and in the underlying
securities will be directly correlated. Options and futures prices are affected
by such factors as current and anticipated short-term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from different levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts by an exchange. If price changes in the
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.
The risks of poor correlation may be increased for the Fund because
available exchange-traded options and standardized futures contracts will not
match the Fund's current or anticipated investments exactly. For example, even
the use of an option or a futures contract on a municipal bond index may result
in an imperfect correlation since the index generally will be composed of a much
broader range of municipal securities then the Tax
17
<PAGE>
Exempt Obligations in which the Fund will be invested, which are limited to
securities exempt from federal income tax and Wisconsin personal income tax. To
the extent that the Fund's hedging vehicles do not match its current or
anticipated investments, there is an increased risk that the options or futures
positions will not track the performance of the Fund's other investments.
Because of the low margin deposits required, futures trading involves a
high degree of leverage. A relatively small price movement in futures contracts
could result in an immediate and substantial gain or loss to the 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 the 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 the Fund to
continue to hold the position until delivery or expiration regardless of changes
in its value. As a result, the Fund's access to other assets held to cover its
options or futures positions could also be impaired.
Diversification
The number of issues of securities which meet the Fund's investment
objective and criteria may be somewhat limited. As a result, a relatively high
percentage of the Fund's assets may be invested from time to time in the
obligations of a limited number of issuers, some of which may be subject to the
same economic trends and/or be located in the same geographic area. The Fund's
portfolio securities may therefore be more susceptible to any single economic,
political or regulatory occurrence than the portfolio securities of diversified
investment companies.
The Fund will operate as a non-diversified management investment company
under the 1940 Act, but intends to comply with the diversification requirements
contained in the Internal Revenue Code of 1986. These provisions of the
Internal Revenue Code
18
<PAGE>
presently require that, at the end of each quarter of the Fund's taxable year:
(i) at least 50% of the market value of the Fund's assets must be invested in
cash, government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Fund's total assets; and (ii) not more than 25% of the value of
the Fund's total assets can be invested in the securities of any one issuer
(other than government securities or the securities of other regulated
investment companies).
For purposes of such diversification, the identification of the issuer of
Tax Exempt Obligations depends on the terms and conditions of the security. If
a state or territory of the United States or the District of Columbia, or a
political subdivision of any of them, as the case may be, pledges its full faith
and credit to payment of a security, the guarantor is deemed the sole issuer of
the security. If the assets and revenues of an agency, authority or
instrumentality of a state or territory of the United States or the District of
Columbia, or a political subdivision of any of them, are separate from those of
the state, territory, District or political subdivision, and the security is
backed only by the assets and revenues of the agency, authority or
instrumentality, such agency, authority or instrumentality is deemed to be the
sole issuer of the security. Moreover, if the security is backed only by
revenues of an enterprise or specific projects of the state, territory or
District, or a political subdivision or agency, authority or instrumentality
thereof, such as utility revenue bonds, and the full faith and credit of the
governmental unit is not pledged to the payment of principal and interest on the
obligation, such enterprise or specific project is deemed the sole issuer.
Similarly, in the case of an industrial development bond, if that bond is backed
only by certain revenues to be received from the non-governmental user of the
project financed by the bond, then such non-governmental user is deemed to be
the sole issuer. If, however, in any of the above cases, a state, territory or
the District, or a political subdivision of any of them, or some other entity,
guarantees a security and the value of all securities issued or guaranteed by
the guarantor and owned by the Fund exceeds 10% of the value of the Fund's total
assets, the guarantee is considered a separate security and is treated as an
issue of the guarantor.
19
<PAGE>
Health Care Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal authorities, to finance hospital or health care facilities or
equipment. The ability of any subject health care entity or hospital to make
payments in amounts sufficient to pay maturing principal and interest
obligations is dependent, among other things, upon the revenues, costs and
occupancy levels of the subject health care entity or hospital. Revenues and
expenses of hospitals and health care facilities will be affected by future
events and conditions relating generally to, among other things, demand for
health care services at the particular type of facility, increasing costs of
medical technology, utilization practices of physicians, the ability of the
facilities to provide the services required by patients, employee strikes and
other adverse labor actions, economic developments in the service area,
demographic changes, greater longevity and the higher medical expenses of
treating the elderly, increased competition from other health care providers and
rates that can be charged for the services provided. Additionally, a major
portion of hospital revenues typically is derived from federal or state programs
such as Medicare and Medicaid and from other insurers. The future solvency of
the Medicare trust fund is periodically subject to question. Changes in the
compensation and reimbursement formulas of these governmental programs or in the
rates of insurers may reduce revenues available for the payment of principal of
or interest on hospital revenue bonds. Governmental legislation or regulations
and other factors, such as the inability to obtain sufficient malpractice
insurance, may also adversely impact upon the revenues or costs of hospitals.
Future actions by the federal government with respect to Medicare and by the
federal and state governments with respect to Medicaid, reducing the total
amount of funds available for either or both of these programs or changing the
reimbursement regulations or their interpretation, could adversely affect the
amount of reimbursement available to hospital facilities. A number of
additional legislative proposals concerning health care are typically under
review by the United States Congress at any given time. These proposals span a
wide range of topics, including cost controls, national health insurance,
incentives for competition in the provision of health care services, tax
incentives and penalties related to health care insurance premiums and promotion
of prepaid health care plans.
20
<PAGE>
Geographic Concentrations
The following information is a brief summary of factors affecting Wisconsin
and Puerto Rico (certain jurisdictions in which the Fund invests) and does not
purport to be a complete description of such factors.
Factors Affecting Wisconsin. Wisconsin's economy, although fairly diverse,
is primarily concentrated in the manufacturing, services and trade sectors and
is influenced by the vast supply of resources in the State. This diversification
has caused the State's economy to continue to outperform the national economy.
Federal, state and local government is also a major employer. The top five
industrial output rankings, based on value of shipments, include dairy products,
motor vehicles and equipment, miscellaneous converted paper products, paper
mills and meat products.
Wisconsin continues to outperform the national economy. The State's annual
unemployment rate over the last ten years has been below the national average.
In October 1997, the State's unemployment rate was 2.8%, compared to a national
average unemployment rate of approximately 4.4%. The State is highly ranked in
terms of job creation, especially in the creation of manufacturing jobs. In
August 1997, Wisconsin set an all-time monthly record for manufacturing jobs
with 616,400 jobs created. Since 1987, the State's personal income tax rate has
been reduced from 7.9% to 6.87% (beginning calendar year 1998), and current
Governor, Tommy G. Thompson, has expressed his desire to implement further
reductions. At the same time, state spending has been controlled.
It is anticipated that the Wisconsin economy will experience continued
growth in the near future, with the State's labor market expected to remain
tight during those years.
The State has an extremely diverse revenue-raising structure. Approximately
thirty-five percent of the total revenue is delivered from the various taxes
levied by the State. The remainder comes from (i) the federal government, (ii)
various kinds of fees, licenses, permits, and service charges paid by
21
<PAGE>
users of specific services, privileges or facilities, (iii) investment income,
and (iv) gifts, donations and contributions.
Wisconsin's tax structure has a diverse underlying base consisting of
income, general and special product sales and property value. Over sixty-two
percent of all general-fund taxes collected by the State is returned to local
units of government. The remaining funds are used for payments to individuals
and organizations (sixteen percent) and state programs (twenty-one percent).
Future Federal budget proposals which include reductions in Federal aid
would have a more immediate effect on individuals, local governments and other
service providers than the State directly. Such proposals, if enacted, would
increase the likelihood that the State will be asked to increase its support of
the affected parties. Implementing choices posed by the Federal budget would
involve State legislative action.
Wisconsin may increase appropriations from or reduce taxes below the levels
established in its budget. In recent past years, Wisconsin has adopted
appropriation measures subsequent to passage of its budget act. However, it has
been the State's policy that supplemental appropriations adopted by the State
Legislature will be within revenue projections for that fiscal period or
balanced by reductions in other appropriations. Thus, spending from additional
appropriations historically has been matched by reduced disbursements, increased
revenues or a combination of both.
Wisconsin has experienced and expects to continue to experience certain
periods when its general fund is in a negative cash position. State statutes
provide certain administrative remedies to deal with these periods. The
Secretary of Administration may temporarily reallocate up to $400 million of
available cash in other funds to the general fund as well as prorate certain
payments. The statutes mandate that all payments shall be in accordance with the
following order of preference: (1) all direct and indirect payments of principal
on Wisconsin general obligation debt must have first priority and may not be
prorated or reduced; (2) all direct and indirect payments of principal and
interest on operating notes have second priority and may not be prorated or
reduced; (3) all Wisconsin employee payrolls have third priority and may not be
prorated or reduced;
22
<PAGE>
and (4) all other payments shall be paid in a priority determined by the
Secretary of Administration and may be prorated or reduced.
Unforeseen events or variations may cause a decrease in the receipts or
cash flow to the State's agencies. It is not clear what effect, if any, such
events would have on the Fund.
Factors Affecting Puerto Rico. The Fund may invest in obligations of the
Commonwealth of Puerto Rico and its political subdivisions, agencies and
instrumentalities, that qualify as Tax Exempt Obligations. The majority of
Puerto Rico's debt is issued by 10 of the major public agencies that are
responsible for many of its public functions, such as water, wastewater,
highways, telecommunications, education and public construction.
The Puerto Rico economy generally parallels the economic cycles of the
United States, as most goods are imported from the U.S. Interest rates also
generally mirror those of the United States. Once primarily supported by
agriculture, Puerto Rico's economy now has a diverse, technology-oriented
manufacturing base. In terms of Gross Domestic Product, manufacturing
contributes $16 billion, or 42% of GDP. Finance, insurance and real estate
services have undergone dynamic growth over the past decade and now account for
13% of GDP. The unemployment rate has remained at approximately 14% to 16%
during the past few years.
Puerto Rico's economy historically has benefited from tax incentives
contained in Section 936 of the Internal Revenue Code, which allows U.S.
domestic corporations with a substantial amount of their business operations in
Puerto Rico to claim a tax credit that effectively eliminates their U.S. income
tax on income from those operations. The enactment of the Omnibus Budget
Reconciliation Act of 1993 imposed certain limitations on the amount of the
credit available to domestic corporations. Legislation passed in 1996 further
reduces these tax incentives, with a general phaseout of the credit by the year
2006. It is impossible to predict with certainty what effect the elimination of
the Section 936 credit will have on the business operations of U.S. corporations
in Puerto Rico; however, it is likely to lessen Puerto Rico's competitive
advantage, especially in attracting new businesses to the Commonwealth.
23
<PAGE>
Factors Affecting Guam. Guam, the westernmost territory of the U.S., is
located 3,800 miles to the west-southwest of Honolulu, Hawaii and approximately
1,550 miles southeast of Japan. Guam's economy is heavily dependent upon the
U.S. military and tourism, particularly from Japan. Employment in Guam is
concentrated in the public sector with 28% in local government and federal jobs.
Major private sector employment categories include construction, trade and
services. Guam has experienced U.S. military reductions, and it is unclear
whether plans to increase tourism may succeed in limiting the negative effects
of such reductions. The government of Guam has taken steps to improve its
financial position which include the development of local labor; however, there
can be no assurances that an improvement will be realized.
Limitation on Size of the Fund
The Fund may impose a limit on its size, which would have the effect of
limiting purchases by persons other than existing shareholders. Such a
limitation would not affect dividend reinvestments and purchases of additional
shares by persons who are already shareholders of the Fund when the limit is
imposed. Such a limitation may be imposed if Heartland Advisors, as investment
advisor, believes that the available supply of securities suitable for the
Fund's portfolio is limited or for other reasons.
As the Fund's net assets approached $50 million, Heartland's Board of
Directors determined that an adequate supply of suitable securities existed to
permit the Fund to continue accepting purchases by new shareholders. The Fund's
net assets are currently in excess of $100 million and the Board will continue
to monitor the size of the Fund. Factors that the Board will consider in
determining whether to continue to accept purchases from new shareholders of the
Fund include the availability of an adequate supply of securities of suitable
quality for the Fund's portfolio, adequate diversification of portfolio
holdings, and the liquidity of the portfolio's holdings.
If the Board determines to discontinue accepting purchases of the Fund's
shares from persons other than existing shareholders, the Fund will mail a
written notice of that fact to its existing shareholders at least ten (10) days
prior to the effective date of
24
<PAGE>
the limitation. When the Board determines to again accept purchases from new
shareholders, it will mail written notice of that fact to the Fund's existing
shareholders no later than the first day it again commences accepting such
purchases. If the Fund were to close to new investors and the amount of new
money flowing into the Fund were to decrease, there is a risk that redemptions
by existing shareholders might require the Fund to liquidate a portfolio
position at an inopportune time in order to effect the redemption.
Portfolio Turnover
Portfolio turnover for the Fund is the ratio of the lesser of annual
purchases or sales of portfolio securities by the Fund to the average monthly
value of portfolio securities owned by the Fund, not including securities
maturing in less than 12 months. A 100% portfolio turnover rate would occur, for
example, if the lesser of the value of purchases or sales of the Fund's
portfolio securities for a particular year were equal to the average monthly
value of the portfolio securities owned by the Fund during the year. The
portfolio turnover rate for the Fund for each of the fiscal years ended December
31, 1997 and 1996 was 8% and 14%, respectively.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions, which are
fundamental policies that cannot be changed without the approval of the holders
of the lesser of: (i) a majority of the outstanding shares of the Fund; or (ii)
67% of the shares represented at a meeting of shareholders at which the holders
of 50% or more of the outstanding shares of the Fund are represented. Any
investment restriction which involves a maximum percentage of securities or
assets will not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowing by, the Fund. The Fund may not:
(1) Purchase more than 10% of the outstanding voting securities of an
issuer, or invest in a company to get control or manage it.
25
<PAGE>
(2) Invest more than 25% of its total assets, based on current market value
at the time of purchase, in securities of issuers in any single industry;
provided that there shall be no such limitation on the purchase of Tax- Exempt
Obligations, housing obligations and securities issued or guaranteed by the
United States Government, its agencies or instrumentalities.
(3) Purchase securities of other investment companies if, as a result, more
than 10% of the value of the Fund's assets would be so invested; provided that
no investment will be made in the securities of any investment company if,
immediately after such investment, more than 3% of the outstanding voting
securities of such company would be owned by the Fund or more than 5% of the
value of the Fund's total assets would be invested in such company; provided
further, that no such restriction shall apply to a purchase of investment
company securities in connection with a merger, consolidation, acquisition or
reorganization.
(4) Borrow money or property except for temporary or emergency purposes. If
the Fund ever should borrow money it would only borrow from banks and in an
amount not exceeding 10% of the market value of its total assets (not including
the amount borrowed). The Fund will not pledge more than 10% of its net assets
to secure such borrowings. In the event the Fund's borrowings exceed 5% of the
market value of its total assets, the Fund will not invest in any additional
portfolio securities until its borrowings are reduced to below 5% of its total
assets.
(5) Make loans, except that the Fund may: (i) acquire publicly distributed
bonds, debentures, notes and other debt securities in which the Fund may invest
consistent with its investment policies described in the Prospectus; (ii) lend
portfolio securities, provided that no such loan may be made if as a result the
aggregate of such loans would exceed 30% of the value of the Fund's total
assets; and (iii) through repurchase agreements.
(6) Underwrite the securities of other issuers except where it might
technically be deemed to be an underwriter for purposes of the Securities Act of
1933 upon the disposition of certain securities.
26
<PAGE>
(7) Issue senior securities.
(8) Buy or sell real estate.
(9) Buy or sell commodities.
(10) Invest in a security if, as a result thereof, more than 25% of the
Fund's total assets would be invested in a single issuer, other than securities
issued or guaranteed by the United States government, or a state or territory of
the United States, or the District of Columbia, or their agencies,
instrumentalities, municipalities or political subdivisions.
(11) Invest in: (i) securities which, in the opinion of Heartland Advisors,
as the Fund's advisor, are not, at the time of such investment, readily
marketable; (ii) securities the disposition of which is restricted under federal
securities laws (as described in nonfundamental restriction (c) below); or (iii)
repurchase agreements maturing in more than seven days, if, as a result, more
than 10% of the Fund's net assets (taken at current value) would be invested in
securities described in clauses (i), (ii) and (iii) of this restriction (11).
In addition to the foregoing fundamental restrictions, Heartland's Board of
Directors has adopted the following restrictions for the Fund, which may be
changed without shareholder approval, in order to comply with the securities
laws of various states. The Fund may not:
(a) Invest more than 5% of its total assets in securities of companies
which, including any predecessors, have a record of less than three years of
continuous operations.
(b) Buy or sell real estate investment trusts, or oil and gas interests,
but this shall not prevent the Fund from investing in securities of companies
whose business involves the purchase or sale of real estate, except that the
Fund will not invest in real estate limited partnerships.
(c) Except with respect to investments in repurchase agreements, purchase
securities with legal or contractual restrictions on resale if, as a result of
such purchase, such investments would exceed 5% of the value of the Fund's net
assets.
27
<PAGE>
(d) Purchase securities on margin or effect short sales of securities,
except as required in connection with permissible options and futures activities
as described elsewhere in the Prospectus and Statement of Additional
Information.
(e) Purchase or retain the securities of any issuer if the officers,
directors, advisors or managers of the Fund owning beneficially more than one
and one-half of one percent of the securities of such issuer together own
beneficially 5% of such securities; provided no officer or director shall be
deemed to own beneficially securities held in other accounts managed by such
person or held in employee or similar plans for which such person acts as
trustee.
For the Fund's limitations on futures and options transactions, see
"Investment Objective and Policies - Limitations on Futures and Options
Transactions."
MANAGEMENT
The Board of Directors of Heartland provides broad supervision over the
affairs of the 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 the Fund.
<TABLE>
<CAPTION>
Principal
Occupation
Position with During Past Five
Name and Address Heartland Years
---------------- ------------- ----------------
<S> <C> <C>
William J. Nasgovitz President and President and Director, Heartland
790 N. Milwaukee St. Director* Advisors, Inc., since 1982;
Milwaukee, WI 53202 Senior Vice President-
Investments, Dain Bosworth
Incorporated from 1988 to June
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
1992; Director of Capital
Investments, Inc., since 1989
(small business investment
company).
Willard H. Davidson Director Financial and business consultant
3726 N. Lake Drive since 1984; prior thereto,
Milwaukee, WI 53211 Chairman and a Director, Marine
Corporation (a bank holding
company) and Marine Bank, N.A.
Hugh F. Denison Director* Vice President, Heartland
790 N. Milwaukee St. Advisors, Inc., since 1988;
Milwaukee, WI 53202 Director, Heartland Advisors,
Inc. from 1988 through 1996.
Jon D. Hammes Director President, The Hammes Company,
Suite 305 since 1991; prior thereto,
18000 West Sarah Lane Managing Partner, Trammell, Crow
Brookfield, WI 53045 Co.
Patrick J. Retzer Vice President, Senior Vice President and
790 N. Milwaukee St. Treasurer and Treasurer, Heartland Advisors,
Milwaukee, WI 53202 Director* Inc. since 1987; Director of
Heartland Advisors, Inc. since
1988.
A. Gary Shilling Director President, A. Gary Shilling &
500 Morris Avenue Company, Inc. (economic
Springfield, NJ 07081 consultants and investment
advisors), since 1978.
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C>
Linda F. Stephenson Director President and Chief Executive
100 E. Wisconsin Avenue Officer, Zigman Joseph
Milwaukee, WI 53202 Stephenson (a public relations
and marketing communications
firm), since 1989.
Jilaine Hummel Bauer Vice President Senior Vice President, Heartland
790 North Milwaukee St. Advisors, Inc., since January
Milwaukee, WI 53202 1998; Senior Vice President,
Stein Roe & Farnham Incorporated,
1992 through 1997.
Paul T. Beste Vice President Investment Operations Officer,
790 North Milwaukee St. and Principal Heartland Advisors, Inc. since
Milwaukee, WI 53202 Accounting 1997; Director of
Officer Taxes/Compliance, Strong Capital
Management, Inc., 1992 to June
1997.
Kenneth J. Della Vice President Chief Financial Officer,
790 North Milwaukee St. Heartland Advisors, Inc. since
Milwaukee, WI 53202 July 1995. Employed by Heartland
Advisors, Inc. since May 1992.
Lois Schmatzhagen Secretary Secretary, Heartland Advisors,
790 N. Milwaukee St. Inc. since 1988.
Milwaukee, WI 53201
</TABLE>
- ------------
*Directors who are "Interested Persons" (as defined in the Investment
Company Act of 1940) of Heartland Advisors.
30
<PAGE>
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, 1997:
<TABLE>
<CAPTION>
Total
Aggregate Pension or Estimated Actual Compensation
Compensation Retirement Benefits Upon from Heartland
Director from Heartland Benefits Retirement and Fund Complex
-------- -------------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Willard H. Davidson $16,000 None None $16,000
Jon D. Hammes $16,000 None None $16,000
A. Gary Shilling $16,000 None None $16,000
Linda F. Stephenson $16,000 None None $16,000
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 31, 1998, the directors and officers of Heartland, as a group
(9 persons), owned beneficially less than 1% of the shares of the Fund. As of
that date, no person was known to own, of record or beneficially, as much as
five percent (5%) of the outstanding shares of the Fund.
THE INVESTMENT ADVISOR
The Fund is managed by Heartland Advisors pursuant to an Investment
Advisory Agreement (the "Agreement"). The Agreement was approved most recently
on behalf of the Fund by the Board of Directors, including a majority of the
Directors who are not interested persons of the Fund or of Heartland Advisors,
on July 15, 1997. Heartland Advisors also serves as distributor for the Fund.
Heartland Advisors is controlled by William J. Nasgovitz, the President and
a Director of Heartland, by virtue of his ownership of a majority of its
outstanding capital stock. Heartland Advisors, founded in 1982, serves as the
investment advisor for the Heartland Small Cap Contrarian, Value, Mid Cap Value,
Large Cap Value, Value Plus, U.S. Government Securities, Short Duration High-
Yield Municipal and High-Yield Municipal Bond
31
<PAGE>
Funds, eight additional series of Heartland, and also provides investment
management services for individuals, and institutional accounts, such as pension
funds and profit-sharing plans. As of March 31, 1998, Heartland Advisors had
approximately $4.5 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.
Pursuant to the Agreement, Heartland Advisors provides each Fund with
overall investment advisory and administrative services. Subject to such
policies as the Board of Directors of Heartland may determine, Heartland
Advisors makes investment decisions on behalf of the Fund, makes available
research and statistical data in connection therewith, and supervises the
acquisition and disposition of investments by the Fund, including the selection
of broker-dealers to carry out portfolio transactions. Heartland Advisors will
permit any of its officers or employees to serve without compensation from the
Fund as directors or officers of Heartland if elected to such positions.
Heartland Advisors bears all of its own expenses in providing services
under the Agreement and pays all salaries, fees and expenses of the officers and
directors of the Fund who are affiliated with Heartland Advisors. The 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 portfolio securities; expenses of registering and
qualifying shares for sale with the Securities and Exchange Commission and state
securities commissions; accounting and legal costs; insurance premiums; expenses
of maintaining the Fund's legal existence and of shareholders' meetings;
expenses of preparation and distribution to existing shareholders of reports,
proxies and prospectuses; and fees and expenses of membership in industry
organizations.
32
<PAGE>
The Fund pays Heartland Advisors an annual fee (payable in monthly
installments) for its services at the rate of 0.65 of 1% of the Fund's average
daily net assets. For the fiscal years ended December 31, 1997, 1996 and 1995,
the Wisconsin Fund paid advisory fees of $819,186, $789,698 and $728,848,
respectively.
The Agreement provides that Heartland Advisors' fee will be reduced, or
that Heartland Advisors will reimburse the Fund (up to the amount of its fee),
by an amount necessary to prevent the total expenses of the Fund (excluding
taxes, interests, brokerage commissions or transactions costs, distribution fees
and extraordinary expenses) from exceeding limits applicable to the Fund in any
state in which its shares are then qualified for sale. No state in which shares
of the Fund are qualified for sale has such an expense limitation.
The Agreement will continue in effect from year to year, as long as it is
approved at least annually by Heartland's Board of Directors or by a vote of the
outstanding voting securities of the Fund, and in either case by a majority of
the Directors who are not parties to the Agreement or interested persons of any
such party. The Agreement terminates automatically if it is assigned and may be
terminated without penalty by either party on not more than 60 nor less than 30
days' notice. The Agreement provides that neither Heartland Advisors nor its
personnel shall be liable for any error of judgment or mistake of law or for any
loss arising out of any investment or for any act or omission in the execution
and management of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of its obligations and duties under the Agreement.
PERFORMANCE INFORMATION
General.
- -------
From time to time the Fund may advertise "yield," "taxable equivalent
yield," "average annual total return" and "cumulative total return." Yield is
based on historical earnings and total return is based on historical
distributions; neither is intended to indicate future performance. The "yield"
of the Fund refers to the income generated by an investment in the Fund over a
one-
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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
Fund refers to the annual average return for 1, 5 and 10-year periods or the
portion thereof during which the Fund has been in existence). Total return is
the change in redemption value of shares purchased with an initial $1,000
investment, assuming the reinvestment of dividends and capital gain
distributions, after giving effect to the maximum applicable sales charge.
Performance information should be considered in light of the Fund's
investment objective 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 the Fund's
performance to performance figures published for other investment vehicles.
Yield.
- -----
Yield quotations are based on a 30-day (or one-month) period, and are
computed by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
Yield = 2[(a-b + 1)/6/ - 1]
---
cd
Where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
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<PAGE>
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the
period.
The yield for the Fund for the month ended December 31, 1997 was 4.76%.
When advertising yield, the Fund will not advertise a one-month or a 30-day
period which ends more than 45 days before the date on which the advertisement
is published.
Taxable Equivalent Yield.
- ------------------------
Taxable equivalent yield is computed by dividing that portion of the yield
of the 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. Based upon a combined Wisconsin rate of 6.9% and a
federal tax rate of 39.6%, adjusted to reflect the deductibility of state taxes,
resulting in an effective combined rate of 43.79%, the taxable equivalent yield
for the Fund for the 30 days ended December 31, 1997 was 8.47%.
Total Return.
- ------------
Average annual total return is computed by finding the average annual
compounded rates of return over the 1, 5 and 10-year periods (or the portion
thereof during which the Fund has been in operation) ended on the date of the
Fund's balance sheet that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1 + T)/n/ = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
35
<PAGE>
ERV = ending redeemable value for a hypothetical $1,000 payment made
at the beginning of the 1, 5 and 10-year periods at the end of
the 1, 5 and 10-year period (or fractional portion thereof).
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts. A sales
load of 3% was charged with respect to purchases of shares of the Fund prior to
June 1, 1994, which is not reflected in the total return figures.
The average annual total return for the Fund for the one-year and five-year
periods ending December 31, 1997 were 8.06% and 6.48%, respectively, and for the
period from April 3, 1992 (commencement of operations) to December 31, 1997 was
6.60%.
Cumulative Total Return.
- -----------------------
Cumulative total return is computed by finding the cumulative compounded
rate of return over the period indicated in the advertisement that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
CTR=(ERV-P) 100
-----
P
Where:
CTR = Cumulative Total Return;
ERV = Ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of the period;
P = Initial payment of $1,000.
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and
36
<PAGE>
management fees, charged as expenses to all shareholder accounts. A sales load
of 3% was charged with respect to purchases of shares of the Fund prior to June
1, 1994, which is not reflected in the total return figures.
The cumulative total return for the Fund for the one-year and five-year
periods ending December 31, 1997 were 8.06% and 36.89%, respectively, and for
the period from April 3, 1992 (commencement of operations) to December 31, 1997
was 44.36%.
The 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 and Business
Week, Value Line, Inc. and the Wall Street Journal. These rating services and
magazines rank the performance of the Fund against all funds over specified
periods and in specified categories. In general, the Fund would appear in the
Municipal Bond Single-State Long-Term or Single-State Municipal Debt Funds
Categories. The Fund may also compare its performance to recognized bond market
indices, such as the Lehman Brothers Municipal Bond Index.
DETERMINATION OF NET ASSET VALUE PER SHARE
The Fund's shares are sold at their next determined net asset value per
share. The Fund determines the net asset value per share by subtracting its
liabilities (including accrued expenses and dividends payable) from its total
assets (the value of the securities the Fund holds plus cash or other assets,
including interest accrued but not yet received) and dividing the result by the
total number of shares outstanding.
The next determined net asset value per share will be calculated for the
Funds as of the close of the New York Stock Exchange regular trading (generally
4:00 p.m. New York time) at least once every weekday, Monday through Friday,
except on: (i) customary national business holidays which result in the closing
of the New York Stock Exchange, which are New Year's Day, 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.
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<PAGE>
Portfolio securities will be valued as described in the Prospectus for the
purpose of calculating net asset value on any day.
DISTRIBUTION OF SHARES
Heartland Advisors, the Fund's investment advisor, also acts as the
distributor of the shares of all of the Heartland funds, including the Fund.
Heartland Advisors has agreed to use its "best efforts" to distribute the Fund's
shares, but has not committed to purchase or sell any specific number of shares.
The Distribution Agreement for the Fund 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 Distribution
Agreement, Heartland Advisors, as distributor, 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.
TAX STATUS
The information in this section supplements the discussion of applicable
taxes found in the Prospectus (see "DIVIDENDS, DISTRIBUTIONS AND TAXES").
Each series of a series company, such as Heartland, is treated as a single
entity for federal income tax purposes, so that the net realized capital gains
and losses of one series are not combined with those of another series in the
same company.
Gain or loss on the sale of securities held by the Fund for more than
eighteen months will generally be long-term capital gain or loss. Gains and
losses on the sale of securities held by
38
<PAGE>
the Fund for more than one year but not more than eighteen months are classified
as 28% gain or loss, also known as "mid-term gains or losses." Gain or loss on
the sale of securities held for one year or less will be short-term capital gain
or loss.
If a shareholder exchanges shares of one Heartland fund for shares of
another Heartland fund, the shareholder will recognize gain or loss for federal
income tax purposes. That gain or loss will be measured by the difference
between the shareholder's basis in the shares exchanged and the value of the
shares acquired.
It is possible that the 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. The 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.
The Fund may enter into certain options and futures contracts which may or
may not 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 the 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 recognize net gains or losses on such
transactions when determining the Fund's distribution requirements even though
it may not have closed the transaction and received cash to pay such
distribution.
An option or future may be considered a position in a straddle for tax
purposes, in which case a loss on any position in the straddle may be subject to
deferral to the extent of unrealized gain in an offsetting position.
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<PAGE>
In order for the 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). Options, futures and forward foreign exchange contracts entered
into for an investment purpose are qualifying income.
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale
treatment for federal income tax purposes on certain hedging strategies with
respect to appreciated securities. Under these rules, taxpayers will recognize
gain, but not loss, with respect to securities if they enter into short sales of
"offsetting notional principal contracts" (as defined by the Act) or futures or
"forward contracts" (as defined by the Act) with respect to the same or
substantially identical property, or if they enter into such transactions and
then acquire the same or substantially identical property. These changes
generally apply to constructive sales after June 8, 1997. Furthermore, the
Secretary of the Treasury is authorized to promulgate regulations that will
treat as constructive sales certain transactions that have substantially the
same effect as short sales, offsetting notional principal contracts, and futures
or forward contracts to deliver the same or substantially similar property.
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.
40
<PAGE>
Shareholders have the right to vote on the election of Directors at each
meeting of shareholders at which Directors are to be elected and on other
matters as provided by law or the Articles of Incorporation or Bylaws of
Heartland. Heartland's Bylaws do not require that meetings of shareholders be
held annually. However, special meetings of shareholders may be called for
purposes such as electing or removing Directors, changing fundamental policies
or approving investment advisory contracts. Shareholders of each series of a
series company, such as Heartland, vote together with each share of each series
in the company on matters affecting all series (such as election of Directors),
with each share entitled to a single vote. On matters affecting only one series
(such as an increase in that series' investment advisory fees or a change in its
fundamental investment restrictions), only the shareholders of that series are
entitled to vote. On matters relating to all the series but affecting the series
differently (such as a new Investment Advisory Agreement), separate votes by
series are required.
PORTFOLIO TRANSACTIONS
The information in this section supplements the information in the
Prospectus under "PORTFOLIO TRANSACTIONS."
Allocation of the portfolio brokerage transactions, including their
frequency, to various dealers is determined by Heartland Advisors, as investment
advisor, in its best judgment and in a manner deemed fair and reasonable to
shareholders. The primary consideration is prompt and efficient execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, brokers who provide supplemental investment research, statistical
or other services to Heartland Advisors may receive orders for transactions by
the Fund. 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 the Fund. 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,
41
<PAGE>
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. 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. The Fund may also consider sales of its own
shares 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 Fund may pay higher commissions to brokers
(other than to Heartland Advisors) than might be charged if a
different broker had been selected, if, in Heartland Advisors' opinion, this
policy furthers the objective of obtaining best price and execution. The
allocation of orders among brokers and the commission rates paid will be
reviewed periodically by Heartland's Board of Directors.
Subject to the above considerations, Heartland Advisors may itself
occasionally effect portfolio transactions as a broker for the Fund. The
commissions, fees or other remuneration received by Heartland Advisors must be
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange or on the National
Association of Securities Dealers Automated Quotation System during a comparable
period of time. This standard would allow Heartland Advisors to receive no more
than the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arms' length transaction. Furthermore, the Board of
Directors of Heartland, including a majority of the directors who are not
interested persons, have adopted procedures which are reasonably designed to
provide that any commissions, fees or other remuneration paid to Heartland
Advisors are consistent with the foregoing standard. Brokerage transactions with
Heartland Advisors are also subject to such fiduciary
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<PAGE>
standards as may be imposed upon Heartland Advisors by applicable law.
The Fund 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 the Fund in over-the-counter transactions conducted on an agency
basis. Pursuant to plans adopted by Heartland's Board of Directors under, and
subject to, the provisions of Rule 10f-3 under the Investment Company Act of
1940, the Fund may purchase securities in an offering from an underwriter which
is a member of an underwriting syndicate of which Heartland Advisors is also a
member. The plans and Rule 10f-3 limit the securities that may be so purchased,
the time and manner of purchase, the underwriting discount and amount of
purchase, and require a review by the Board of Directors of any such
transactions at least quarterly.
For the fiscal years ended December 31, 1997, 1996 and 1995, the Wisconsin
Fund paid $34,385, $31,509 and $1,968, respectively, in brokerage
commissions.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
Firstar Trust Company acts as Custodian of the Fund's investments and acts
as Transfer and Dividend Disbursing Agent. Its address is Firstar Trust Company,
Mutual Funds Services, 3rd Floor, P.O. Box 701, Milwaukee, Wisconsin 53201-0701.
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS
Quarles & Brady serves as legal counsel for the Fund. Arthur Andersen LLP,
independent public accountants, served as auditors of the Fund through calendar
year 1996. Price Waterhouse LLP have been selected as independent public
accountants for the Fund beginning with fiscal year 1997.
FINANCIAL STATEMENTS
The financial statements and related report of Price Waterhouse LLP,
independent public accountants, contained in the
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<PAGE>
Annual Report to Shareholders of the Fund for the fiscal year ended December 31,
1997 are hereby incorporated by reference. Copies of the Annual Report may be
obtained without charge by writing to Heartland Advisors, Inc., 790 North
Milwaukee Street, Milwaukee, Wisconsin 53202, or by calling 1-800-432-7856 or
(414) 289-7000.
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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
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, Fitch Investors
Service, Inc. and Duff & Phelps.
CORPORATE AND MUNICIPAL BOND RATINGS
Ratings by Moody's
Aaa -- Bonds which are rated Aaa are judged to be of the best quality, they
carry the smallest degree of investment risk, and are generally referred to as
"gilt edged." 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 Aa are judged to be of high quality by all
standards. Together with the Aaa group they
A-1
<PAGE>
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities.
A -- Bonds which are rated 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 Baa are considered as 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 future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both 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.
A-2
<PAGE>
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 Caa
rating classifications except with respect to Caa ratings of U.S. municipal bond
securities. 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 assigned by Standard & Poor's to a debt
obligation. The obligor's capacity to meet its financial commitment is extremely
strong.
AA -- An obligation rated AA differs from AAA issues only in small degree.
The obligor's capacity to meet its financial commitment is very strong.
A -- Debt rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment is still very strong.
BBB -- Debt rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on an
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. "BB" indicates the least degree of speculation and
"C" the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB -- Debt rated BB is less vulnerable to default on payment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to the
obligor's inadequate
A-3
<PAGE>
capacity to meet its financial commitment.
B -- Debt rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment.
Adverse business, financial or economic conditions will likely impair the
obligor's capacity or willingness to meet its financial commitment.
CCC -- Debt rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment. In the event of adverse business,
financial, or economic conditions, it is not likely for the obligor to meet its
financial commitment
CC -- Debt rated CC is currently highly vulnerable to nonpayment.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
D -- Debt rated D is in payment default. The D rating category is used when
payments on an obligation 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 or the taking of a similar action if payments on an
obligation 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 within the major categories.
The symbol "r" is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
Ratings by Fitch IBCA ("Fitch")
A-4
<PAGE>
Investment Grade
AAA - Highest credit quality. Denotes the lowest expectation of credit risk.
Assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
AA - Very high credit quality. - Denotes a very low expectation of credit risk.
Indicates very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events
A - High credit quality. Denotes a low expectation of credit risk. The capacity
for timely payment of financial commitments is considered strong. This capacity
may, nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
BBB - Good credit quality. Indicates that there is currently a low expectation
of credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB - Speculative. Indicates that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B - Highly speculative. Indicates that significant credit risk is present, but a
limited margin of safety remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a sustained,
favorable business and economic environment.
CCC, CC, C - High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon
A-5
<PAGE>
sustained, favorable business or economic developments. A "CC" rating indicates
that default of some kind appears probable. "C" ratings signal imminent default.
DDD, DD, and D - Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, "DD" indicates expected recovery of 50% - 90% of such outstandings, and
"D" the lowest recovery potential, i.e. below 50%.
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+.
A-6
<PAGE>
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
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 - Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 - Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
F3 - Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
B - Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C - High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D - Default. Denotes actual or imminent payment default.
A-7
<PAGE>
VARIABLE RATE DEMAND SECURITIES
Ratings by Moody's
Moody's may assign a separate rating to the demand feature of a variable
rate demand security. Such a rating may include:
VMIG 1. This designation 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.
VMIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
VMIG 3. This designation 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
S&P assigns a dual rating to all long-term debt issues that have as part of
their provisions a demand feature. The first rating addresses the likelihood of
repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term debt rating symbols are used for bonds to
denote the long-term maturity and the commercial paper rating symbols are
usually used to denote the put (demand) option (for example, AAA/A-1+).
Normally, demand notes receive note rating symbols combined with commercial
paper symbols (for example, SP-1/A-1+).
COMMERCIAL PAPER RATINGS
Ratings by Duff & Phelps
Category 1: Top Grade
A-8
<PAGE>
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. If an issuer represents that its commercial
paper obligations are supported by the credit of another entity or entities,
Moody's, in assigning ratings to such issuer evaluates the financial strength of
the indicated affiliate, commercial bank, insurance company, foreign government,
or other entity, but only as one factor in the total rating assessment.
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.
A-9
<PAGE>
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
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.
A-10
<PAGE>
Part C. Other Information.
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements included in Part A are: Financial Highlights
(b) 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
(c) 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, 1998, 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 16,943
Heartland Value Fund 65,835
Heartland Mid Cap Value Fund 1,542
Heartland Large Cap Value Fund 676
Heartland Value Plus Fund 10,554
Heartland U.S. Government Securities Fund 2,421
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Heartland Wisconsin Tax Free Fund 3,365
Heartland Short Duration High-Yield Municipal Fund 1,195
Heartland High-Yield Municipal Bond Fund 400
</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
C-2
<PAGE>
are neither interested persons of the Corporation as defined
in 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.
Reference is made to Section 6 of the Registrant's Distribution Agreement with
Heartland Advisors, Inc. filed as Exhibit No. 6(a)(i) to Registrant's
Registration Statement with respect to the indemnification of Registrant's
directors and officers, which is set forth below.:
C-3
<PAGE>
Section 6. Indemnification.
----------------
(a) The Distributor agrees to indemnify and hold harmless the Fund
and each of its present or former directors, officers, employees,
representatives and each person, if any, who controls or previously
controlled the Fund within the meaning of Section 15 of the 1933 Act
against any and all losses, liabilities, damages, claims or expenses
(including the reasonable costs of investigating or defending any alleged
loss, liability, damage, claims or expense and reasonable legal counsel
fees incurred in connection therewith) to which the Fund or any such person
may become subject under the 1933 Act, under any other statute, at common
law, or otherwise, arising out of the acquisition of any Shares by any
person which (i) may be based upon any wrongful act by the Distributor or
any of the Distributor's directors, officers, employees or representatives,
or (ii) may be based upon any untrue statement or alleged untrue statement
of a material fact contained in a registration statement, prospectus,
shareholder report or other information covering Shares filed or made
public by the Fund or any amendment thereof or supplement thereto, or the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading if such statement or omission was made in reliance upon
information furnished to the Fund by the Distributor. In no case (i) is a
Distributor's indemnity in favor of the Fund, or any person indemnified to
be deemed to protect the Fund or such indemnified person against any
liability to which the Fund or such person would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the
performance of his duties or by reason of his reckless disregard of his
obligations and duties under this Agreement or (ii) is the Distributor to
be liable under its indemnity agreement contained in this Paragraph with
respect to any claim made against the Fund or any person indemnified unless
the Fund or such person, as the case may be, shall have notified the
Distributor in writing of the claim within a reasonable time after the
summons or other first written notification giving information of the
nature of the claim shall have been served upon the Fund or upon such
person (or after the Fund or such person shall have received notice to such
service on any designated agent). However, failure to notify the
Distributor of any such claim shall not relieve the Distributor from any
liability which the Distributor may have to the Fund or any person against
whom such action is brought otherwise than on account of the Distributor's
indemnity agreement contained in this Paragraph.
The Distributor shall be entitled to participate, at its own expense, in
the defense, or, if the Distributor so elects, to assume the defense of any
suit brought to enforce any such claim, but, if the Distributor elects to
assume the defense, such defense shall be conducted by legal counsel chosen
by the Distributor and satisfactory to the Fund, to the persons indemnified
defendant or defendants, in the suit. In the event that the Distributor
elects to assume the defense of any such suit and retain such legal
counsel, the Fund, the persons indemnified defendant or defendants in the
suit, shall bear the fees and expenses of any additional legal counsel
retained by them. If the
C-4
<PAGE>
Distributor does not elect to assume the defense of any such suit, the
Distributor will reimburse the Fund and the persons indemnified defendant
or defendants in such suit for the reasonable fees and expenses of any
legal counsel retained by them. The Distributor agrees promptly to notify
the Fund of the commencement of any litigation of proceedings against it or
any of its officers, employees or representatives in connection with the
issue or sale of any Shares.
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 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, 1998, 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:
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH
NAME HEARTLAND ADVISORS, INC. OTHER
- ------------------------- -------------------------------------------- ------------------------------------------
<S> <C> <C>
William J. Nasgovitz Director and President President and Director, Heartland Group,
Inc.
Patrick J. Retzer Director and Senior Vice President, Vice President, Treasurer, and Director,
Treasurer Heartland Group, Inc.
Kevin D. Clark Senior Vice President, Trading None
Kenneth J. Della Chief Financial Officer None
Jilaine Hummel Bauer Senior Vice President and General Counsel Chief Compliance Officer and General
Counsel, Stein Roe & Farnham
Incorporated (8/80 - 12/97)
Paul T. Beste Investment Operations Officer Director of Taxes/Compliance, Strong
Capital Management, Inc. (3/92 - 6/97)
Lois J. Schmatzhagen Secretary Secretary, Heartland Group, Inc.
Eric J. Miller Director and 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
C-6
<PAGE>
Item 31. Management Services
-------------------
Not applicable
Item 32. Undertakings
------------
If requested to do so by the holders of at least 10% of the
Registrant's outstanding shares, the Registrant will call a special
meeting for the purpose of voting upon the question of removal of a
Director or Directors and will assist in the communications with other
shareholders as if the Registrant were subject to Section 16(c) of the
Investment Company Act of 1940.
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-7
<PAGE>
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 29th day of April, 1998.
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 29th day of April, 1998,
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
- --------------------------------------------------------------
PATRICK J. RETZER Accounting Officer)
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
</TABLE>
* By: /s/ William J. Nasgovitz
-------------------------------------------------------------------
WILLIAM J. NASGOVITZ
Pursuant to Power of Attorney dated April 27, 1995
C-8
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- --------
1(a) Articles of Incorporation*
1(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*
3 None
4 None
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.*
6(a)(ii) Amendment No. 1 to Distribution
Agreement between Heartland Group,
Inc. and Heartland Advisors, Inc.*
6(b) Form of Selected Dealer Agreements*
6(c) Form of Selling Agreement for Banks*
7 None
8 Custodian Agreement*
9(a) Transfer Agent/Dividend Disbursing Agent Agreement*
9(b) Heartland Group, Inc.'s Rule 10f-3 Plan*
<PAGE>
9(c) Heartland Value Fund, Inc.'s Rule 10f-3 Plan*
10 Opinion of Quarles & Brady*
11(a)(1) Consent of Arthur Andersen LLP
(a)(2) Consent of Price Waterhouse LLP
11(b) Consent of Quarles & Brady*
12 None
13 Subscription Agreements*
14(a) Form of Model Retirement Plans*
14(b) Form of Heartland Funds Individual
Retirement Account Agreement and
Forms*
14(c) Form of Heartland Funds Section
403(b)(7) Custodial Account
Agreement and Forms*
14(d) Form of Heartland Funds SIMPLE
IRA Attachment to IRS
Form 5305-SA*
15(a) The Value Fund's Rule 12b-1 Plan*
15(b) Heartland Group Inc.'s Amended and
Restated Rule 12b-1 Plan*
15(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*
16(b) Schedules for Computation of
Performance Information for the
Heartland Wisconsin Tax Free Fund*
16(c) Schedules for Computation of
Performance Information for the
Heartland Value Plus Fund*
<PAGE>
16(d) Schedules for Computation of
Performance Information for the
Heartland Small Cap Contrarian
Fund*
16(e) Schedules for Computation of Performance
Information for the Heartland Short
Duration High-Yield Municipal Fund *
16(f) Schedules for Computation of Performance
Information for the Heartland High-Yield
Municipal Bond Fund *
17 Financial Data Schedules (See Exhibit 27)
18 None
27.1 Financial Data Schedule for the Heartland
Value Fund
27.2 Financial Data Schedule for the Heartland
U.S. Government Securities Fund
27.3 Financial Data Schedule for the Heartland
Wisconsin Tax Free Fund
27.5 Financial Data Schedule for the Heartland
Value Plus Fund
27.6 Financial Data Schedule for the Heartland
Small Cap Contrarian Fund
27.7 Financial Data Schedule for the Heartland
Mid Cap Value Fund
27.8 Financial Data Schedule for the Heartland
Large Cap Value Fund
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
__________________
* Previously filed and incorporated herein by reference.
<PAGE>
Exhibit 11(a)(1)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports,
dated February 7, 1997, on the financial statements and related notes of
Heartland Small Cap Contrarian Fund, Heartland Value Fund, Heartland Mid Cap
Value Fund, Heartland Large Cap Value Fund, Heartland Value Plus Fund, Heartland
U.S. Government Securities Fund and Heartland Wisconsin Tax Free Fund appearing
in the Funds' December 31, 1996 Annual Reports to Shareholders, and to all
references to our Firm included in or made a part of Post-Effective Amendment
No. 34 to Heartland Group, Inc.'s Registration Statement on Form N-1A.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
April 29, 1998
<PAGE>
Exhibit 11(a)(2)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No. 34 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated February 6, 1998, relating to the financial
statement and financial highlights appearing in the December 31, 1997 Annual
Reports to Shareholders of the Heartland Small Cap Contrarian Fund, Heartland
Value Fund, Heartland Mid Cap Value Fund, Heartland Large Cap Value Fund,
Heartland Value Plus Fund, Heartland U.S. Government Securities Fund, Heartland
Short Duration High-Yield Municipal Fund, Heartland High-Yield Municipal Bond
Fund and the Heartland Wisconsin Tax Free Fund (portfolios of Heartland Group,
Inc.), which are also incorporated by reference into the Registration Statement.
We also consent to the references to us under the heading "Financial Highlights"
in the Prospectuses and under the headings "Counsel and Independent Public
Accountants" and "Financial Statements" in the Statements of Additional
Information.
Price Waterhouse LLP
Milwaukee, Wisconsin
April 29, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 001
<NAME> HEARTLAND VALUE FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 1,717,219,260
<INVESTMENTS-AT-VALUE> 2,144,546,343
<RECEIVABLES> 10,225,099
<ASSETS-OTHER> 16,457
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,154,787,899
<PAYABLE-FOR-SECURITIES> 22,988,630
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,084,589
<TOTAL-LIABILITIES> 28,073,219
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,696,855,751
<SHARES-COMMON-STOCK> 62,792,924
<SHARES-COMMON-PRIOR> 51,400,775
<ACCUMULATED-NII-CURRENT> (90,025)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,621,871
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 427,327,083
<NET-ASSETS> 2,126,714,680
<DIVIDEND-INCOME> 8,641,499
<INTEREST-INCOME> 23,084,192
<OTHER-INCOME> 0
<EXPENSES-NET> 22,134,864
<NET-INVESTMENT-INCOME> 9,590,827
<REALIZED-GAINS-CURRENT> 273,233,950
<APPREC-INCREASE-CURRENT> 109,578,793
<NET-CHANGE-FROM-OPS> 392,403,570
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9,680,852
<DISTRIBUTIONS-OF-GAINS> 270,393,704
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 14,506,622
<NUMBER-OF-SHARES-REDEEMED> 10,516,915
<SHARES-REINVESTED> 7,402,442
<NET-CHANGE-IN-ASSETS> 499,954,844
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (218,750)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 14,673,206
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 22,134,864
<AVERAGE-NET-ASSETS> 1,971,310,669
<PER-SHARE-NAV-BEGIN> 31.65
<PER-SHARE-NII> .17
<PER-SHARE-GAIN-APPREC> 7.09
<PER-SHARE-DIVIDEND> .17
<PER-SHARE-DISTRIBUTIONS> 4.87
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 33.87
<EXPENSE-RATIO> 1.12
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 002
<NAME> HEARTLAND U.S. GOVERNMENT SECURITIES FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 47,129,819
<INVESTMENTS-AT-VALUE> 48,661,706
<RECEIVABLES> 727,307
<ASSETS-OTHER> 4,495
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 49,393,508
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 831,423
<TOTAL-LIABILITIES> 831,423
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 53,186,199
<SHARES-COMMON-STOCK> 4,930,091
<SHARES-COMMON-PRIOR> 5,418,511
<ACCUMULATED-NII-CURRENT> 2,197
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,158,198)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,531,887
<NET-ASSETS> 48,562,085
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,246,148
<OTHER-INCOME> 0
<EXPENSES-NET> 402,690
<NET-INVESTMENT-INCOME> 2,843,458
<REALIZED-GAINS-CURRENT> (374,326)
<APPREC-INCREASE-CURRENT> 1,726,965
<NET-CHANGE-FROM-OPS> 4,196,097
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,825,690
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,555,341
<NUMBER-OF-SHARES-REDEEMED> 2,258,183
<SHARES-REINVESTED> 214,422
<NET-CHANGE-IN-ASSETS> (3,150,878)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (5,799,443)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 301,650
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 558,212
<AVERAGE-NET-ASSETS> 46,473,987
<PER-SHARE-NAV-BEGIN> 9.54
<PER-SHARE-NII> .58
<PER-SHARE-GAIN-APPREC> .31
<PER-SHARE-DIVIDEND> .58
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.85
<EXPENSE-RATIO> .87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 003
<NAME> HEARTLAND WISCONSIN TAX FREE FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 127,286,658
<INVESTMENTS-AT-VALUE> 132,964,362
<RECEIVABLES> 1,750,943
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 134,715,305
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,367,263
<TOTAL-LIABILITIES> 3,367,263
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 126,931,163
<SHARES-COMMON-STOCK> 12,582,408
<SHARES-COMMON-PRIOR> 12,257,701
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,317,613)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,734,492
<NET-ASSETS> 131,348,042
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,391,498
<OTHER-INCOME> 0
<EXPENSES-NET> 1,020,156
<NET-INVESTMENT-INCOME> 6,371,342
<REALIZED-GAINS-CURRENT> (782,935)
<APPREC-INCREASE-CURRENT> 4,203,774
<NET-CHANGE-FROM-OPS> 9,792,181
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,371,342
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,831,502
<NUMBER-OF-SHARES-REDEEMED> 1,946,717
<SHARES-REINVESTED> 439,922
<NET-CHANGE-IN-ASSETS> 6,803,279
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (534,678)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 819,186
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,031,733
<AVERAGE-NET-ASSETS> 126,199,811
<PER-SHARE-NAV-BEGIN> 10.16
<PER-SHARE-NII> .52
<PER-SHARE-GAIN-APPREC> .28
<PER-SHARE-DIVIDEND> .52
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.44
<EXPENSE-RATIO> .81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 005
<NAME> HEARTLAND VALUE PLUS FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 307,411,617
<INVESTMENTS-AT-VALUE> 332,525,397
<RECEIVABLES> 11,343,092
<ASSETS-OTHER> 30,253
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 343,898,742
<PAYABLE-FOR-SECURITIES> 5,340,842
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,276,534
<TOTAL-LIABILITIES> 7,617,376
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 310,615,357
<SHARES-COMMON-STOCK> 20,844,713
<SHARES-COMMON-PRIOR> 4,850,879
<ACCUMULATED-NII-CURRENT> 12,685
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 539,544
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25,113,780
<NET-ASSETS> 336,281,366
<DIVIDEND-INCOME> 4,242,426
<INTEREST-INCOME> 4,450,456
<OTHER-INCOME> 0
<EXPENSES-NET> 2,188,645
<NET-INVESTMENT-INCOME> 6,504,237
<REALIZED-GAINS-CURRENT> 23,512,585
<APPREC-INCREASE-CURRENT> 18,312,281
<NET-CHANGE-FROM-OPS> 48,329,103
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,491,552
<DISTRIBUTIONS-OF-GAINS> 22,973,041
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23,437,762
<NUMBER-OF-SHARES-REDEEMED> 9,180,571
<SHARES-REINVESTED> 1,736,643
<NET-CHANGE-IN-ASSETS> 269,699,180
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,292,331
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,188,645
<AVERAGE-NET-ASSETS> 195,947,006
<PER-SHARE-NAV-BEGIN> 13.73
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> 3.66
<PER-SHARE-DIVIDEND> .48
<PER-SHARE-DISTRIBUTIONS> 1.26
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.13
<EXPENSE-RATIO> 1.12
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 006
<NAME> HEARTLAND SMALL CAP CONTRARIAN FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 253,877,303
<INVESTMENTS-AT-VALUE> 266,982,063
<RECEIVABLES> 102,586,235
<ASSETS-OTHER> 9,209,309
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 378,777,607
<PAYABLE-FOR-SECURITIES> 4,507,722
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 97,627,991
<TOTAL-LIABILITIES> 102,135,713
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 279,160,217
<SHARES-COMMON-STOCK> 21,888,487
<SHARES-COMMON-PRIOR> 19,623,261
<ACCUMULATED-NII-CURRENT> (287,387)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,394,883
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (6,625,819)
<NET-ASSETS> 276,641,894
<DIVIDEND-INCOME> 1,582,223
<INTEREST-INCOME> 2,895,441
<OTHER-INCOME> 0
<EXPENSES-NET> 3,804,143
<NET-INVESTMENT-INCOME> 673,521
<REALIZED-GAINS-CURRENT> 50,933,962
<APPREC-INCREASE-CURRENT> (19,529,344)
<NET-CHANGE-FROM-OPS> 32,078,139
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 960,908
<DISTRIBUTIONS-OF-GAINS> 46,539,079
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,427,314
<NUMBER-OF-SHARES-REDEEMED> 12,721,002
<SHARES-REINVESTED> 3,558,914
<NET-CHANGE-IN-ASSETS> 13,630,498
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,109,857
<INTEREST-EXPENSE> 29,490
<GROSS-EXPENSE> 3,804,143
<AVERAGE-NET-ASSETS> 280,912,518
<PER-SHARE-NAV-BEGIN> 13.40
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 1.77
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> 2.52
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.64
<EXPENSE-RATIO> 1.30
<AVG-DEBT-OUTSTANDING> 1,058,475<F1>
<AVG-DEBT-PER-SHARE> .05<F2>
<FN>
<F1>AMOUNT REPRESENTS AVERAGE OUTSTANDING BALANCE FOR THE PERIOD BEGINNING
SEPTEMBER 5, 1997 (INCEPTION OF CREDIT AGREEMENT) THROUGH DECEMBER 31, 1997.
<F2>SHARES OUTSTANDING AT DECEMBER 31, 1997 WAS USED TO CALCULATE AVERAGE DEBT
OUTSTANDING PER SHARE.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 007
<NAME> HEARTLAND MID CAP VALUE FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 34,171,660
<INVESTMENTS-AT-VALUE> 38,356,772
<RECEIVABLES> 617,490
<ASSETS-OTHER> 14,916
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 38,989,178
<PAYABLE-FOR-SECURITIES> 2,311,680
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 119,457
<TOTAL-LIABILITIES> 2,431,137
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32,432,417
<SHARES-COMMON-STOCK> 2,861,166
<SHARES-COMMON-PRIOR> 650,201
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (59,488)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,185,112
<NET-ASSETS> 36,558,041
<DIVIDEND-INCOME> 325,658
<INTEREST-INCOME> 147,975
<OTHER-INCOME> 0
<EXPENSES-NET> 332,977
<NET-INVESTMENT-INCOME> 140,656
<REALIZED-GAINS-CURRENT> 657,060
<APPREC-INCREASE-CURRENT> 3,851,838
<NET-CHANGE-FROM-OPS> 4,649,554
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 140,668
<DISTRIBUTIONS-OF-GAINS> 712,944
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,574,129
<NUMBER-OF-SHARES-REDEEMED> 430,675
<SHARES-REINVESTED> 67,511
<NET-CHANGE-IN-ASSETS> 29,624,079
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,604)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 184,843
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 342,478
<AVERAGE-NET-ASSETS> 25,875,630
<PER-SHARE-NAV-BEGIN> 10.66
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 2.38
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> .26
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.78
<EXPENSE-RATIO> 1.29
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 008
<NAME> HEARTLAND LARGE CAP VALUE FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 7,128,347
<INVESTMENTS-AT-VALUE> 7,682,840
<RECEIVABLES> 42,127
<ASSETS-OTHER> 14,805
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,739,772
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 74,416
<TOTAL-LIABILITIES> 74,416
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,977,568
<SHARES-COMMON-STOCK> 623,302
<SHARES-COMMON-PRIOR> 232,419
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 133,295
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 554,493
<NET-ASSETS> 7,665,356
<DIVIDEND-INCOME> 97,643
<INTEREST-INCOME> 42,738
<OTHER-INCOME> 0
<EXPENSES-NET> 76,339
<NET-INVESTMENT-INCOME> 64,042
<REALIZED-GAINS-CURRENT> 419,278
<APPREC-INCREASE-CURRENT> 475,417
<NET-CHANGE-FROM-OPS> 958,737
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 64,103
<DISTRIBUTIONS-OF-GAINS> 284,851
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 520,287
<NUMBER-OF-SHARES-REDEEMED> 157,719
<SHARES-REINVESTED> 28,315
<NET-CHANGE-IN-ASSETS> 5,223,881
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,071)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 40,359
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 112,462
<AVERAGE-NET-ASSETS> 5,610,246
<PER-SHARE-NAV-BEGIN> 10.50
<PER-SHARE-NII> .11
<PER-SHARE-GAIN-APPREC> 2.28
<PER-SHARE-DIVIDEND> .11
<PER-SHARE-DISTRIBUTIONS> .48
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.30
<EXPENSE-RATIO> 1.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 009
<NAME> HEARTLAND SHORT DURATION HIGH-YIELD MUNICIPAL FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 117,495,977
<INVESTMENTS-AT-VALUE> 118,641,015
<RECEIVABLES> 3,615,900
<ASSETS-OTHER> 124,748
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 122,381,663
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,439,845
<TOTAL-LIABILITIES> 1,439,845
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 120,043,520
<SHARES-COMMON-STOCK> 11,918,669
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 4,729
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 29,263
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 864,306
<NET-ASSETS> 120,941,818
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,076,220
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 3,076,220
<REALIZED-GAINS-CURRENT> 29,263
<APPREC-INCREASE-CURRENT> 864,306
<NET-CHANGE-FROM-OPS> 3,969,789
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,076,220
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16,144,715
<NUMBER-OF-SHARES-REDEEMED> 4,493,392
<SHARES-REINVESTED> 267,346
<NET-CHANGE-IN-ASSETS> 120,941,818
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 214,608
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 483,257
<AVERAGE-NET-ASSETS> 57,669,968
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .57
<PER-SHARE-GAIN-APPREC> .15
<PER-SHARE-DIVIDEND> .57
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.15
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 010
<NAME> HEARTLAND HIGH-YIELD MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 32,585,846
<INVESTMENTS-AT-VALUE> 33,107,756
<RECEIVABLES> 862,378
<ASSETS-OTHER> 100,755
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 34,070,889
<PAYABLE-FOR-SECURITIES> 3,237,581
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 225,234
<TOTAL-LIABILITIES> 3,462,815
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 29,897,943
<SHARES-COMMON-STOCK> 2,929,781
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 4,729
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 258,095
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 447,307
<NET-ASSETS> 30,608,074
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 887,447
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 887,447
<REALIZED-GAINS-CURRENT> 345,439
<APPREC-INCREASE-CURRENT> 447,307
<NET-CHANGE-FROM-OPS> 1,680,193
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 887,447
<DISTRIBUTIONS-OF-GAINS> 87,344
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,358,272
<NUMBER-OF-SHARES-REDEEMED> 512,100
<SHARES-REINVESTED> 83,609
<NET-CHANGE-IN-ASSETS> 30,608,074
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 82,569
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 184,058
<AVERAGE-NET-ASSETS> 14,766,816
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .68
<PER-SHARE-GAIN-APPREC> .48
<PER-SHARE-DIVIDEND> .68
<PER-SHARE-DISTRIBUTIONS> .03
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.45
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
