<PAGE>
As filed with the Securities and Exchange Commission on October 6, 1999
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. 39 [X]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 41 [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 Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (414) 347-7777
JILAINE HUMMEL BAUER, Vice President and General Counsel
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
(Name and Address of Agent for Service)
Copy to:
CONRAD G. GOODKIND, ESQ.
Quarles & Brady LLP
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
It is proposed that this filing will become effective (check appropriate
box):
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[x] 60 days after filing 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>
PROSPECTUS/DECEMBER 6, 1999
SELECT VALUE FUND
(formerly the Large Cap Value Fund)
VALUE PLUS FUND
VALUE FUND
GOVERNMENT FUND
[LOGO APPEARS HERE]
-------------
AMERICA'S VALUE INVESTOR(R)
<PAGE>
PROSPECTUS/DECEMBER 6, 1999
Heartland Select Value Fund
Heartland Value Plus Fund
Heartland Value Fund
Heartland Government Fund
This Prospectus contains information you should know about the following mutual
fund portfolios of Heartland Group, Inc. (the "Funds") before you invest.
Investments for each of the Funds are selected on a value basis.
- - - Heartland Select Value Fund -- Its investment objective is long-term
capital appreciation. This Fund seeks to achieve its objective through
investing in equity securities whose current market prices, in Heartland
Advisors' judgment, are at significant discounts to their intrinsic value.
Heartland Advisors will consider companies of all market capitalization
sizes for investment for the Fund.
- - - Heartland Value Plus Fund -- Its investment objectives are capital
appreciation and current income. This Fund seeks to achieve its objectives
primarily through investing in income-producing equity securities of
smaller companies. This Fund also seeks to achieve its objectives through
investing in debt securities.
- - - Heartland Value Fund -- Its investment objective is long-term capital
appreciation. This Fund seeks to achieve its objective through investing
in small company stocks.
- - - Heartland Government Fund -- Its investment objectives are a high level of
current income, liquidity and safety of principal.
Heartland Advisors manage the Funds using its Ten-Point Value Investment
Grid(TM), a strict investment discipline designed to identify value. The
Government Fund also uses certain value criteria for selecting U.S. Government
securities. Each Fund offers investors an attractive investment opportunity
combined with active risk management. Each Fund is a no-load fund. Investors
pay no sales fees or changes to purchase, redeem or exchange their shares.
The Securities and Exchange Commission has not approved the shares of these
Funds or any other mutual fund, nor determined whether this or any other
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE HEARTLAND APPROACH TO INVESTING........................... 4
RISK/RETURN SUMMARY: INVESTMENTS, RISKS AND PERFORMANCE...... 5
Select Value Fund........................................ 5
Value Plus Fund.......................................... 7
Value Fund............................................... 9
Government Fund.......................................... 11
Investment Returns....................................... 14
Fees And Expenses of The Funds........................... 14
MANAGEMENT OF THE FUNDS....................................... 16
Heartland Group.......................................... 16
Heartland Advisors....................................... 16
PRINCIPAL INVESTMENT STRATEGIES AND INVESTMENT RISKS.......... 20
Heartland Advisors Ten-Point Value Investment Grids(TM).. 20
Other Investments and Investment Strategies.............. 23
Risks.................................................... 25
HOW TO INVEST................................................. 28
ACCOUNT POLICIES.............................................. 36
Redeeming Shares......................................... 37
Exchanging Shares........................................ 38
Share Price.............................................. 40
Service Fees............................................. 40
SHAREHOLDER INFORMATION AND REPORTING......................... 40
Heartland Value Source(TM)............................... 40
Investment Reports....................................... 41
Dividends and Capital Gain Distributions................. 41
Taxes.................................................... 42
Financial Highlights..................................... 42
</TABLE>
3
<PAGE>
THE HEARTLAND APPROACH TO INVESTING
Heartland Advisors, Inc. ("Heartland Advisors"), America's Value Investor(R),
selects investments for the Funds that it believes are undervalued as measured
by sets of criteria known as Heartland Advisors' Ten-Point Value Investment
Grids(TM). The portfolios of the Heartland Funds are actively managed.
Although no one can predict a Fund's future performance, Heartland Advisors
believes that the "value" style of investing will outperform over extended
periods, which may include bear markets as well as volatile or "sideways moving"
markets. The value style may perform less well in markets that favor faster
growing companies.
Heartland Advisors' Equity Ten-Point Value Investment Grid(TM) is used to
evaluate the relative worth of equity securities in the Funds' portfolios. The
criteria used are:
- - - Low price/earnings multiple - High insider ownership
- - - High cash flow - Capable management
- - - Positive earnings dynamics - Hidden assets
- - - Discount to book value - Positive technical analysis
- - - Financial soundness - Catalyst for recognition
Heartland Advisors' Fixed Income Ten-Point Value Investment Grid(TM) is used to
evaluate the relative worth of fixed-income securities in the Funds' portfolios.
The criteria used are:
- - - Economic trends - Financial soundness
- - - Federal Reserve policy - Market sponsorship
- - - "Real" interest rates - Positive technical analysis
- - - Attractive risk premiums - Innovative asset classes
- - - Sector outlook - Catalyst for recognition
Heartland Advisors typically sells securities in the Funds' portfolios when it
considers them to be overvalued relative to other investments using the above
criteria. It also may sell securities to raise cash in response to business
operating needs or, consistent with a Fund's investment objective, to reposition
the Fund's portfolio to maintain relative industry or market sector weightings
or because of market or economic factors.
Elsewhere in this prospectus you will find a discussion of the differences
between the performance of a mutual fund portfolio and the performance of a
market index, together with an explanation of the different measures of mutual
fund performance.
An investment in a Fund is not a deposit of a bank, nor insured or guaranteed by
the Federal Deposit Insurance Company (FDIC) or any other governmental agency.
No single Fund is designed to be a complete investment program, and while you
may make money, you could also lose money. Each Fund's share price will
fluctuate.
4
<PAGE>
RISK/RETURN SUMMARY: INVESTMENTS, RISKS AND PERFORMANCE
SELECT VALUE FUND (formerly the Large Cap Value Fund)
Investment Goal. The Select Value Fund seeks long-term capital appreciation by
investing in equity securities whose current market prices, in Heartland
Advisors' judgment, are at significant discounts to their intrinsic value.
Principal Investment Strategies. Heartland Advisors uses its strict value
criteria to identify what it believes are the best available investment
opportunities for the Select Value Fund. Normally, the Fund invests in common
stocks and other equity securities of companies with market capitalizations in
excess of $500 million, but it may invest in companies of all sizes. The median
market capitalization of the Fund is expected to fluctuate over time depending
on Heartland Advisors' perceptions of relative valuations, future prospects and
market conditions.
The Fund generally sells a stock when Heartland Advisors believes the stock has
reached its full valuation, a better valuation opportunity exists elsewhere or a
change in the investment thesis occurs which Heartland Advisors believes will
inhibit the stock's ability to realize its intrinsic value.
The Fund may invest in other equity securities and debt securities, and may
employ other investment techniques that are not principal investment strategies,
but could impact the Fund's performance.
Risks. The principal risk of investing in the Select Value Fund is that its
share price and investment return will fluctuate, and you could lose money.
Because the Fund invests in value stocks, it is subject to the risk that their
intrinsic values may never be recognized by the broad market or that their
prices may decline. While investing in value stocks may limit the overall
downside risk of the Fund over time, the Fund may produce more modest gains than
riskier equity funds in exchange for this potentially lower risk. At times the
Fund may invest in stocks of small or mid-sized companies, which are generally
more volatile and less liquid than stocks of larger, more established companies.
Who Should Consider Investing in the Fund? The Select Value Fund is designed
for investors who seek long-term capital appreciation from a diversified,
actively managed portfolio of stocks of companies of all sizes. The Fund's
investment style is constructed to fit the core value portion of an investor's
equity portfolio. The Fund is designed for investors who can accept the
volatility and other investment risks of the broad-based equity markets, but
want an investment strategy that seeks to manage these risks by investing in
companies believed to be undervalued relative to their intrinsic value.
5
<PAGE>
Past Performance. The following tables show historical performance of the Select
Value Fund. Table I provides some indication of the risks of investing in the
Fund by showing how the Fund's total returns have varied from year to year since
January 1, 1997. Table II shows how the Fund's average annual total returns
compared to those of two different broad-based securities market indices. The
S&P 500 Stock Index was selected as a benchmark believed to be representative of
the Fund as it was managed prior to investment policy and portfolio changes made
effective December 6, 1999. The S&P Midcap Barra Value Index was selected as a
benchmark for the Fund as managed beginning on that date.
The Fund commenced operations on October 11, 1996. The performance of a newer
mutual fund may be adversely affected by such factors as uneven cash flows and
absolute size. These factors may make it more difficult for a newer fund to
establish meaningful portfolio positions as quickly and as efficiently as a more
seasoned fund. Newer funds may also experience greater portfolio turnover.
Past performance cannot predict or guarantee future results, especially given
the changes to the Fund's investment objective and policies./1/
TABLE I
Select Value Fund - Year-by-Year Total Returns
Best Quarter:
[Chart appears here] Q2 '97 14.53%
1997--22.91% Worst Quarter:
1998--1.73% Q3 '98 -15.99%
_____________________
/1/Prior to December 6, 1999, the Fund was named the Heartland Large Cap Value
Fund and it invested at least 65% of its total assets in stocks of companies
whose market capitalizations exceeded $1 billion under the direction of a
different portfolio manager.
6
<PAGE>
TABLE II
Select Value Fund - Average Annual Total Return (through 12/31/98)
<TABLE>
<S> <C> <C>
Since inception
One Year (10/11/96)
-------- ----------
Select Value Fund 1.73% 13.04%
S&P Midcap Barra Value Index/(1)/ ____% ____%
S&P 500 Stock Index/(2)/ 28.57% 31.51%
</TABLE>
________________________
(1) The S&P Midcap Barra Value Index is an unmanaged index of companies within
the S&P Mid Cap 400 Index that have the lowest price-to-book ratios within
the lower 50 percentile of market capitalizations. [This index is
generally representative of the types of companies which the Select Value
Fund will consider for investment.].
(2) The S&P 500 Stock Index is an unmanaged index of 500 stocks representing
major U.S. industries.
VALUE PLUS FUND
Investment Goal. The Value Plus Fund seeks capital appreciation and current
income.
Principal Investment Strategies. The Value Plus Fund invests primarily in
income-producing equity securities of smaller companies selected on a value
basis. To further pursue its income objective, the Fund also invests up to
35%of its total assets in other securities, such as debt securities and cash
equivalents. Although it may invest in securities of larger companies, it
generally invests in companies with market capitalizations of less than $750
million. The Fund seeks to reduce the capitalizations of less than $750
million. The Fund seeks to reduce the risks associated with investing in small
companies through the income component of its portfolio. The Fund may employ
other investment techniques that are not principal investment strategies, but
could impact the Fund's performance.
Risks. The principal risk of investing in the Value Plus Fund is that its share
price and investment return will fluctuate, and you could lose money. Because
the Fund invests in value stocks, it is subject to the risk that their intrinsic
values may never be recognized by the broad market or that their prices
Madeline. While investing in value stocks may limit the overall downside risk
of the Fund over time, the Fund may produce more modest gains than riskier
equity funds in exchange for this potentially lower risk.
Investing in the equity securities of small cap companies involves a higher
degree of risk than investing in the securities of larger companies. In
general, the prices of securities of small cap companies may be more volatile
than those of larger companies, they may have less market liquidity, and they
may be more likely to be adversely affected by poor economic or market
conditions. There is no assurance that the income-producing features
7
<PAGE>
of the Fund will reduce the risks associated with investing in small companies
or the Fund's volatility.
Who Should Consider Investing in the Fund? The Value Plus Fund is designed for
investors who seek a combination of capital appreciation from small company
stocks and current dividend income. It is designed for long-term investors who
seek greater investment return potential than that which is normally available
from the broad-based equity markets and who can tolerate the greater investment
risk and market volatility associated with smaller companies. It is designed
for investors who want an investment strategy that seeks to manage these risks
by investing in companies believed to be undervalued relative to their intrinsic
value and who want to moderate these risks with the careful selection of income-
producing securities as an integral part of their investment portfolio.
Past Performance. The tables on the following page show historical performance
of the Value Plus Fund. Table I provides some indication of the risks of
investing in the Fund by showing how the Fund's total returns have varied from
year to year since January 1, 1994. Table II shows how the Fund's average
annual total returns compare to those of a broad- based securities market index.
Table III shows the annualized yield of the Fund and the index for the 30 days
ended December 31, 1998. Past performance cannot predict or guarantee future
results.
TABLE I
Value Plus Fund - Year-by-Year Total Returns
-----------------------
Best Quarter:
-----------------------
[Chart appears here] --------------------------
Q3 '97 15.47%
1994-- - 4.95%
1995-- 24.39% Worst Quarter:
1996-- 33.80%
1997-- 30.60% Q3 '98 -13.25%
1998-- -10.78% --------------------------
8
<PAGE>
TABLE II
Value Plus Fund - Average Annual Total Return (through 12/31/98)
<TABLE>
<CAPTION>
Since inception
One Year Five Year (10/23/93)
-------- --------- ----------
<S> <C> <C> <C>
Value Plus Fund -10.78% 13.01% 13.64%
Russell 2000 Index/(1)/ -2.55% 11.86% 11.74%
</TABLE>
________________________
(1) The Russell 2000 Index is an unmanaged index of 2,000 stocks considered
representative of the small cap market.
TABLE III
Yield for the 30 Days Ended 9/30/99 (annualized)
Value Plus Fund 2.58%
Russell 2000 Index _____%
For current yield information, please call 1.800.432.7856.
VALUE FUND
Investment Goal. The Value Fund seeks long-term capital appreciation through
investing in small companies.
Principal Investment Strategies. The Value Fund invests primarily in equity
securities of companies with market capitalizations of less than $750 million
selected on a value basis. It may, however, invest in other equity securities
and debt securities, and may employ other investment techniques that are not
principal investment strategies, but could impact the Fund's performance.
Risks. The principal risk of investing in the Value Fund is that its share
price and investment return will fluctuate, and you could lose money. Because
the Fund invests in value stocks, it is subject to the risk that their intrinsic
values may never be recognized by the broad market or that their prices may
decline. While investing in value stocks may limit the overall downside risk of
the Fund over time, the Fund may produce more modest gains than riskier equity
funds in exchange for this potentially lower risk.
Investing in the equity securities of small cap companies involves a higher
degree of risk than investing in the securities of larger companies. In
general, the prices of securities of small cap companies may be more volatile
than those of larger companies, they may have less market liquidity, and they
may be more likely to be adversely affected by poor economic or market
conditions.
9
<PAGE>
Who Should Consider Investing in The Fund? The Value Fund is designed for
investors who seek long-term capital appreciation from small company stocks. It
is designed for investors who seek greater investment return potential than that
which is normally available from the broad-based equity markets and who can
tolerate the greater investment risk and market volatility associated with
smaller companies. It is designed for investors who want an investment strategy
that seeks to manage these risks by investing in companies believed to be
undervalued relative to their intrinsic value.
Past Performance. The following tables show historical performance of the Value
Fund. Table I provides some indication of the risks of investing in the Fund by
showing how the Fund's total returns have varied from year to year over the
past10 years. Table II shows how the Fund's average annual total returns
compare to those of a broad-based securities market index. Past performance
cannot predictor guarantee future results.
TABLE I
Value Fund - Year-by-Year Total Returns
[Chart Appears Here] -----------------------
Best Quarter:
1989-- 6.57% -----------------------
1990-- -17.09%
1991-- 49.35% -------------------------------
1992-- 42.48% Q1 '91 29.24%
1993-- 18.77%
1994-- 1.71% Worst Quarter:
1995-- 29.80%
1996-- 20.99% Q3 '90 -24.39%
1997-- 23.19% -------------------------------
1998-- -11.46%
TABLE II
Value Fund - Average Annual Total Return (through 12/31/98)
<TABLE>
<CAPTION>
Since inception
One Year Five Year Ten Year (12/28/84)
-------- --------- -------- ----------
<S> <C> <C> <C> <C>
Value Fund -11.46% 11.74% 14.55% 14.99%
Russell 2000 Index/(1)/ -2.55% 11.86% 12.92% 12.74%
</TABLE>
________________________
(1) The Russell 2000 Index is an unmanaged index of 2,000 stocks considered
representative of the small cap market.
10
<PAGE>
GOVERNMENT FUND
Investment Goal. The Government Fund seeks a high level of current income,
liquidity and safety of principal.
Principal Investment Strategies. The Government Fund will invest at least 80% of
its total assets in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, or by other U.S. Government sponsored entities
and repurchase agreements for such securities ("Government securities"). These
securities include U.S. Treasury and agency securities, and mortgage-backed
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. They differ primarily in terms of interest rates, length of
maturities, the nature of the governmental obligation and issuance dates.
The balance of the Fund's assets may be invested in other securities such as
asset-backed and mortgage-backed securities issued by non-governmental entities;
other debt securities; certificates of deposit, bankers' acceptances and time
deposits; and convertible securities and preferred stocks. Any investments in
debt securities will, at the time of purchase, be rated investment grade or, if
unrated, be of comparable quality in the opinion of Heartland Advisors. The Fund
may employ other investment techniques that are not principal investment
strategies, but could impact the Fund's performance.
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 of three to six years.
Heartland Advisors believes that maintaining a portfolio duration within this
range allows the Fund to seek both high current income and preservation of
capital. Duration measures the rate of sensitivity of a bond or a mutual fund
that invests in bonds to rising or falling interest rates.
Risks. The principal risk of investing in the Government Fund is that its share
price and investment return will fluctuate, and you could lose money. The
principal risks associated with the fixed-income securities in which the Fund
invests are: interest rate movements; maturity; inflation; principal prepayment;
and the portfolio managers' skill in managing the Fund's portfolio duration.
U.S. Treasury obligations held by the Fund are backed by the "full faith and
credit" of the United States. In the case of U.S. Government agency obligations,
some are backed by the full faith and credit of the United States, while others
are backed only by the right of the issuer to borrow from the U.S. Government
and the credit of the issuing agency. Because there is no guarantee that the
U.S. Government will provide support to such agencies, such securities may
involve risk of loss of principal and interest.
Rising interest rates generally will decrease the value of debt securities held
by the Fund. In addition, debt securities with longer maturities held by the
Fund are more greatly affected by changes in interest rates than securities with
shorter maturities. Prepayment of high interest rate mortgage-backed and asset-
backed securities during times of declining interest rates will tend to lower
the Fund's return and may even result in losses to the Fund
11
<PAGE>
if those securities were acquired at a premium. During periods of rising
interest rates, prepayments of mortgage-backed and asset-backed securities may
decline, resulting in the security becoming less liquid and extending the Fund's
duration. As a result, the Fund's portfolio may experience greater volatility
during periods of rising interest rates than under normal market conditions.
Who Should Consider Investing in the Fund? The Government Fund is designed for
investors seeking a higher yield than a money market fund or an insured bank
certificate of deposit with less fluctuation in net asset value than a
longer-term bond fund. Unlike money market funds, however, the Fund does not
seek to maintain a stable net asset value and shares in the Fund are not insured
like a bank deposit account.
Past Performance. The tables below show historical performance of the Government
Fund. Table I provides some indication of the risks of investing in the Fund by
showing how the Fund's total returns have varied from year to year over the
past10 years. Table II shows how the Fund's average annual total returns compare
to those of a broad-based securities market index. Table III shows the yield for
the Fund and the index for the 30 days ended December 31, 1998. Past performance
cannot predict or guarantee future results.
TABLE I
Government Fund - Year-by-Year Total Returns
[Chart Appears Here]
1989 ------- 11.31% ---------------------
1990 ------- 9.98% Best Quarter:
1991 ------- 16.97% ---------------------
1992 ------- 10.08%
1993 ------- 17.82% ---------------------
1994 ------- -9.64%
1995 ------- 19.00% Q3 '91 7.10%
1996 ------- 2.00%
1997 ------- 9.69% Worst Quarter:
1998 ------- 8.15%
Q3 '94 -4.81%
---------------------
TABLE II
Government Fund - Average Annual Total Return (through 12/31/98)
One Five Ten Since inception
Year Year Year (4/9/87)
---- ---- ---- --------
12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Government Fund 8.15% 5.40% 9.22% 8.56%
Lehman Intermediate Treasury Index/(1)/ 8.62% 6.46% 8.34% 7.90%
</TABLE>
________________________
(1) The Lehman Intermediate Treasury Index is an unmanaged index of all
Treasury securities issued by the U.S. Government with maturities of
greater than one year but less than 10 years and at least $100 million in
outstanding issuance.
TABLE III
Yield for the 30 Days Ended 9/30/99 (annualized)
Government Fund 6.18%
Lehman Intermediate Treasury Index ____%
For current yield information, please call 1.800.432.7856.
13
<PAGE>
INVESTMENT RETURNS
- --------------------------------------------------------------------------------
Portfolio Performance vs. Index Performance. The information about each Fund's
past performance includes a comparison of the Fund's average annual total
returns to a broad-based market index believed to be representative of the
Fund's portfolio. An index is not available for direct investment, and past
performance cannot guarantee or predict future results. The securities included
in an index are not an exact match to the holdings in a mutual fund portfolio.
The performance of a mutual fund portfolio will differ from that of an index.
Unlike an index, a mutual fund portfolio is affected by operating expenses and
cash flow activity caused by daily purchases and redemptions. In addition, a
mutual fund portfolio will differ from the index in the number and size of
holdings or securities, their relative sector and industry weightings, the
market capitalization of individual securities and the median capitalization of
the index and fund overall. Fee waivers may have been in effect for the Funds
during the periods in which performance information is presented. Without fee
waivers, the Funds' returns and yields would have been lower.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Definitions. Total return measures the change in the share price of a Fund and
assumes the reinvestment of dividends and capital gains. Cumulative total return
is actual return for a given period, but does not indicate how much return
fluctuated during the period. Average annual total return is the hypothetical
constant annual return that would have produced a Fund's cumulative return for a
given period. It should not be confused with actual annual returns, the sum of
which over a given period produces a Fund's cumulative total return. Yield is
annualized net income of a Fund during a 30-day period as a percentage of the
Fund's share price.
- --------------------------------------------------------------------------------
14
<PAGE>
FEES AND EXPENSES OF THE FUNDS
This summary describes the fees and expenses that you would pay if you buy and
hold shares of the Funds.
Shareholder Fees, such as sales loads, redemption fees or exchange fees, are
fees you pay directly from your investment. Because all of the Heartland Funds
are no-load funds, you will not pay any fees when you buy or sell shares of the
Funds. However, to help control transaction expenses and facilitate portfolio
management, the Value Fund and the Value Plus Fund charge an early redemption
fee of 1% of the proceeds from shares redeemed or exchanged that were purchased
after October 1, 1999 and held for less than 270 days (with certain exceptions).
The other Heartland Funds reserve the right, upon notice to you, to charge an
early redemption fee as well.
Annual Fund Operating Expenses are paid out of a Fund's assets and include fees
for portfolio management, maintenance of shareholder accounts, shareholder
servicing, accounting and other services. You do not pay these expenses directly
but, as shown in the example below, all shareholders bear these costs
indirectly.
Annual Fund Operating Expenses (expenses that are deducted from fund assets).
\(1)\
<TABLE>
<CAPTION>
Select Value Value Plus Value Government
Fund Fund Fund Fund
---- ---- ---- ----
<S> <C> <C> <C> <C>
Management fees 0.75% 0.70% 0.75% 0.65%
Distribution (12b-1) fees 0.25% 0.25% 0.25% 0.25%
Other expenses 0.92% 0.26%(2) 0.15% 0.26%
Total annual fund operating expenses 1.92% 1.21% 1.15% 1.16%
Fee waiver and/or expense (0.97%) (0.00%) (0.00%) (0.36%)
reimbursement
Net expenses 0.95% 1.21% 1.15% 0.80%
</TABLE>
___________________________
(1) Heartland Advisors has contractually undertaken to waive fees paid to it by
the Funds and to pay other ordinary expenses of the Funds on an annual
basis through April 30, 2000 as follows: for the Select Value Fund,
expenses in excess of 0.95% of average net assets; and for the Government
Fund, expenses in excess of 0.80% of average net assets. After that date,
these fee waivers and expense reimbursement undertakings may be continued,
terminated or revised at any time. If a Fund's operating expenses fall
below the current expense limitation, the Fund will repay Heartland
Advisors for expenses previously reimbursed. Repayment will continue for
up to three years after the fiscal year in which the reimbursement
occurred, subject to any expense limitation then in effect. Repayment will
stop when the Fund has repaid the entire amount or the three-year period
ends.
(2) Not including interest expense of 0.03%.
15
<PAGE>
Example. (This example is intended to help you compare the cost of investing in
the Funds with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in each Fund for the time periods indicated and then
redeem all of your shares at the end of those time periods. The example also
assumes that (a) your investment has a 5% return each year, (b) any contractual
fee waivers will not be renewed after April 30, 2000, and (c) each Fund's total
annual fund operating expenses remain the same as shown in the table on the
preceding page for periods greater than one year. The assumed return in the
example does not represent actual or future performance, and your actual cost of
investing in the Funds may be higher or lower.)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Select Value Value Government
Value Fund Plus Fund Fund Fund
---------- --------- ---- ----
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year $ 97 $ 123 $ 117 $ 82
- -------------------------------------------------------------------------------
Three Years $ 509 $ 384 $ 365 $ 333
- -------------------------------------------------------------------------------
Five Years $ 947 $ 665 $ 633 $ 604
- -------------------------------------------------------------------------------
Ten Years $2,164 $1,466 $1,398 $1,377
- -------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
MANAGEMENT OF THE FUNDS
HEARTLAND GROUP
The Funds are mutual fund portfolio series of Heartland Group,
Inc.("Heartland"). For each of the Funds, the shares offered by this prospectus
are the "no-load" class. No other classes of shares have been authorized at this
time.
Heartland is governed by a Board of Directors that oversees its business
affairs. The Board meets regularly to review the Funds' investments, performance
and expenses. It elects the officers of Heartland and hires the Funds' service
providers, including the Funds' investment advisor. As a matter of policy,
Heartland requires that a majority of its Board members be independent of the
Funds' investment advisor.
HEARTLAND ADVISORS
Founded in 1982 by William J. Nasgovitz, Heartland Advisors, Inc., America's
Value Investor(R) , is an independent firm owned by its employees. It manages
the Funds' investments subject to the authority of and supervision by the Board
of Directors of Heartland. Heartland Advisors also distributes the Funds' shares
and provides administrative and accounting services to the Funds and shareholder
services to the Funds' investors. In addition to managing the Heartland family
of equity and fixed-income mutual funds, Heartland Advisors provides investment
advisory and brokerage services to individuals, institutions and retirement
plans. Its principal offices are located at, and its mailing address is, 789
North Water Street, Milwaukee, Wisconsin 53202.
Portfolio Managers. A portfolio management team, consisting of M. Gerard Sandel,
Eric J. Miller and William J. Nasgovitz, have managed the Select Value Fund
since September 1999, with Mr. Sandel serving as the lead portfolio manager for
the team and having final authority over investment decisions. Mr. Sandel,
Certified Financial Analyst (CFA), joined Heartland Advisors in August 1999 as
Senior Vice President and Director of Equity Research for Heartland Advisors. He
was previously a Senior Vice President and principal of Stein Roe & Farnham
Incorporated and portfolio manager for institutional and mutual fund accounts
since July 1997. Prior to that time, Mr. Sandel was Vice President of M&I
Investment Management Corporation since October 1993, where he was a portfolio
manager for institutional and mutual fund accounts.
Eric J. Miller, Certified Management Accountant (CMA), has also served as co-
portfolio manager of the Value Fund with William J. Nasgovitz since July 1997.
Mr. Miller is a Senior Vice President and a Director of Heartland Advisors,
having joined the firm as a portfolio manager and research analyst for advisory
clients in January 1994. Prior to that time, Mr. Miller had been with American
Appraisal Associates, Inc. since 1986, serving as Vice President, Head of U.S.
Appraisal Operations.
17
<PAGE>
William J. Nasgovitz is also co-portfolio manager for the Value Plus Fund and
the Value Fund and has been a portfolio manager of each Fund since commencement
of its operations. For the past five years, Mr. Nasgovitz has been President,
Chief Executive Officer and a Director of Heartland Advisors. During this same
period, he also has been President and a Director of Heartland.
Patrick J. Retzer, Certified Public Accountant (CPA), is co-portfolio manager of
the Government Fund with Lawrence J. Pavelec, and has been a manager of the Fund
since October 1988. Mr. Retzer also is co-portfolio manager of the Value Fund
with Mr. Nasgovitz and has been a manager of that Fund since July 1997. Mr.
Retzer is a Senior Vice President and a Director of Heartland Advisors, and has
been associated with the firm in various capacities since 1988.
Lawrence J. Pavelec, CFA, is co-portfolio manager of the Government Fund. Mr.
Pavelec is a Senior Vice President and Director of Fixed Income Research of
Heartland Advisors, which he joined in October1998. Prior to that time, Mr.
Pavelec was Director of Fixed Income at M&I Investment Management Corporation,
with which he was associated in various capacities since 1985.
Management Fee And Expense Limitation. For Heartland Advisors' investment
management services, each of the Funds pays an annual fee, accrued daily and
paid monthly, computed as a percentage of each Fund's average net assets. For
the fiscal year ended December 31, 1998, the Funds paid the following advisory
fees which are set forth as a percentage of average daily net assets:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Fund Advisory Fee
-------------------------------------------------------------------------
<S> <C>
Select Value Fund 0% (0.75% before fee waivers)
-------------------------------------------------------------------------
Value Plus Fund 0.70%
-------------------------------------------------------------------------
Value Fund 0.75%
-------------------------------------------------------------------------
Government Fund 0.25% (0.65% before fee waivers)
-------------------------------------------------------------------------
</TABLE>
Through April 30, 2000, Heartland Advisors has contractually agreed to waive
fees paid to it by each of the Select Value Fund and the Government Fund and/or
pay other Fund ordinary operating expenses (excluding brokerage commissions,
interest and taxes) to the extent necessary to ensure that the Fund's total
annual ordinary operating expenses do not exceed the percentage of average net
assets noted in "Fees and Expenses of the Funds." After such time, Heartland
Advisors may continue, modify or discontinue these waivers and/or
reimbursements. Any waiver of fees or reimbursement of expenses is made on an
annual basis. If any fees are owed to Heartland Advisors by a Fund, Heartland
Advisors may pay the Fund's expenses indirectly by reducing the amount of such
fees owed to it by the Fund. Waivers and reimbursements have the effect of
lowering the Fund's overall expense ratio and increasing the Fund's overall
return to investors.
18
<PAGE>
If a Fund's operating expenses fall below the expense limitation, the Fund will
begin paying Heartland Advisors for fees previously waived and expenses
previously reimbursed. This repayment will continue for up to three years after
the end of the fiscal year in which a fee is waived or an expense is paid,
subject to any expense limitation then in effect, until the Fund has repaid
Heartland Advisors for the entire amount or such three-year period expires.
Rule 12b-1 Fees. Each Fund has adopted a plan under Rule 12b-1 whereby the Fund
pays Heartland Advisors a fee of up to 0.25% of the Fund's daily net assets
computed on an annual basis and paid monthly for distributing its shares and
providing certain shareholder services. Because the fee is paid out of the
Fund's assets on an ongoing basis, fees paid under the Rule 12b-1 plan will
increase the cost of your investment and may cost you more over time than paying
other types of sales charges imposed by some mutual funds.
Year 2000 Readiness. Many computer systems use two digits rather than four to
identify the year in a date. These systems, if not modified, will not correctly
handle the change from "99" to "00" on January 1, 2000, causing them to be
unable to accurately perform certain functions ("Year 2000 processing"). This
problem affects virtually all companies and organizations, and, among other
things, could have a negative impact on the handling of securities trades,
payments of interest and dividends, and the pricing of and accounting for
securities portfolios.
Heartland Advisors has taken steps to help assure that its major computer
systems are capable of handling Year 2000 processing. It is also assessing the
readiness of the Funds' custodian and transfer and dividend disbursing agent and
other third parties performing major Year 2000 processing services for the Funds
and Heartland Advisors. Although Heartland Advisors expects all major Fund
computer systems to be ready in time, the Funds could be adversely affected if
Year 2000 processing systems are not properly modified in a timely manner.
In addition, the issuers of the Funds' portfolio securities could have Year 2000
processing issues, as could the service providers who administer the payment of
principal and interest on fixed-income securities owned by investors, such as
the Funds. These problems might negatively affect the value of the issuer's
securities, which, in turn, could adversely impact the Funds' performance.
Heartland Advisors has established a process to gather publicly available
information about the Year 2000 readiness of portfolio companies. However, this
process may not uncover all relevant information, and the information gathered
may not be complete or accurate. Moreover, an issuer's Year 2000 processing
readiness is only one of many factors a Fund's portfolio manager may have
considered when making investment decisions, and other factors may receive
greater weight.
19
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES AND INVESTMENT RISKS
Heartland Advisors, America's Value Investor(R), selects investments for the
Funds that it believes are undervalued as measured by sets of criteria known as
Heartland Advisors' Ten-Point Value Investment Grids(TM). The portfolios of the
Heartland Funds are actively managed. Although no one can predict a Fund's
future performance, Heartland Advisors believes that the"value" style of
investing will outperform over extended periods, which may include bear markets
as well as volatile or "sideways moving" markets. The value style may perform
less well in markets that favor faster growing companies.
HEARTLAND ADVISORS TEN-POINT VALUE INVESTMENT GRIDS(TM)
Equity Ten-Point Value Investment Grid(TM). Heartland Advisors' Equity Ten-Point
Value Investment Grid(TM) consists of the following criteria for selecting
equity securities.
- - - Low Price/Earnings Multiple. Is the stock's price/earnings ratio less than
the average in the marketplace? If so, and the stock is then "discovered"
by Wall Street, the low P/E provides an opportunity for a price increase.
Also, if the market drops, low P/E stocks have less downside risk.
- - - High Cash Flow. Does the company have high cash flow? Strong cash flow
permits a company to finance expansion internally, repurchase shares or
increase its dividends.
- - - Positive Earnings Dynamics. Does the company have improving earnings or
upwardly revised estimates? Heartland Advisors favors companies with
prospects for improved earnings.
- - - Discount to Book Value. Is the stock selling at prices below its tangible
book value? A company's book value -- assets minus liabilities -- gives an
indication of what it would be worth if liquidated. Heartland Advisors
likes to buy a stock for less than book value. Stocks that are very popular
with investors may sell at five or more times book value.
- - - Financial Soundness. How much debt does a company have relative to its
equity? Heartland Advisors prefers companies whose balance sheets have a
ratio of debt to total capital of no more than 25%.
- - - High Insider Ownership. Does management own a significant percentage of a
company's stock, and are they buying shares? Executives who invest in their
own companies usually have aligned their interests with those of other
shareholders.
20
<PAGE>
- - - Capable Management. Do the top decision-makers have a realistic vision for
the company as well as a history of success and the drive to accomplish
their goals? The ability of management and management's plans for the
company's prosperity are of paramount importance.
- - - Hidden Assets. Does the company have undervalued assets? These may include
understated natural resources, real estate, over funded pension plans or
fixed assets worth substantially more than their stated book value.
- - - Positive Technical Analysis. How has the stock's price performed over time?
Heartland Advisors prefers to buy stocks whose prices have experienced
limited fluctuation over long periods.
- - - Catalyst for Recognition. Is there a factor that could potentially ignite
market interest in the stock and close the gap between the stock's price
and Heartland Advisors' assessment of its true value? Examples of a
catalyst include a new product or technology, a large repurchase plan, or
merger activity.
Fixed Income Ten-Point Value Investment Grid(TM). Heartland Advisors' Fixed
Income Ten-Point Value Investment Grid(TM) consists of the following criteria
for selecting fixed-income securities.
- - - Economic Trends. Identifying the trend in economic growth is a main
determinant to formulating our investment strategy. Heartland Advisors
combines the perspectives of trusted outside economists with our own
independent analysis to develop a short- and long-term outlook.
- - - Federal Reserve Policy. The potential for the Federal Reserve to shift
monetary policy has significant implications for market interest rates, the
yield curve and sector weightings.
- - - "Real" Interest Rates. Over long periods of time the relationship between
inflation and nominal yields tends to reflect the relative value in fixed-
income investments. High "real" rates cushion investors against adverse
moves in inflation.
- - - Attractive Risk Premiums. The relative attractiveness of fixed-income
investments is gauged by the "risk premium," or additional yield to U. S.
Treasury securities. Heartland Advisors studies historical relationships in
an attempt to discover pricing anomalies and profit from their reversion to
the mean.
- - - Sector Outlook. Each of the fixed-income sectors offers different
risk/return attributes at different points of the economic and interest
rate cycle. Heartland Advisors typically favors corporate bonds during
periods of stronger economic growth, while Treasuries are favored in times
of slowing growth and uncertainty.
21
<PAGE>
- - - Financial Soundness. Heartland Advisors employs primary research to assess
an issuer's financial soundness, which is essential to evaluating the
quality and value of debt instruments.
- - - Market Sponsorship. Strong fundamental and technical support must be
accompanied by general market sponsorship for an investment to achieve full
value.
- - - Positive Technical Analysis. Technical analysis is employed to identify
turning points and confirm trends derived from fundamental analysis.
Technical analysis can be used as a tool to reveal market sentiment.
- - - Innovative Asset Classes. The capital markets are constantly evolving with
innovative securities and investment strategies. Discerning investors who
capitalize on the pricing inefficiencies that typically surround new
developments, such as commercial mortgage-backed securities and taxable
municipal bonds, may capture significant additional returns.
- - - Catalyst for Recognition. To maximize total return, Heartland Advisors not
only looks for undervalued securities, but tries to anticipate events which
will close the gap between an investment's current price and its intrinsic
value. For example, investing in securities disfavored by investors fleeing
the market for short-term, technical reasons may create opportunities for
"value" investors.
Market Capitalizations of Portfolio Securities. The following table shows the
median and weighted average market capitalizations as of September 30, 1999, For
the companies whose equity securities are owned by the Funds with equity
holdings and for the companies included in the index that is the benchmark for
each of those Funds.
Market Capitalization of Common Stocks in Portfolio (as of 9/30/99)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Median Weighted Average
------ ----------------
- -----------------------------------------------------------------------------
<S> <C> <C>
Select Value Fund $2.37 billion $4.68 billion
- -----------------------------------------------------------------------------
S&P Midcap Barra Value Index/(1)/ ___ billion ___ billion
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Value Plus Fund $ 96 million $ 248 million
- -----------------------------------------------------------------------------
Value Fund 86 million 316 million
- -----------------------------------------------------------------------------
Russell 2000 Index/(1)/ ___ million ___ million
- -----------------------------------------------------------------------------
</TABLE>
_________________________
(1) Source: Prudential Securities, Inc.
22
<PAGE>
OTHER INVESTMENTS AND INVESTMENT STRATEGIES
In addition to the investment strategies discussed under "The Heartland Approach
to Investing" in this prospectus, each Fund may engage in the strategies and may
purchase and sell the investments discussed below and in its statement of
additional information.
When-issued and Delayed-Delivery Securities; Forward Commitments. Each Fund may
purchase may purchase securities on a when-issued or delayed-delivery basis, and
may purchase forward commitments. Although the payment and interest terms of
these securities are established at the time the purchaser enters into the
commitment, the securities may be delivered and paid for a month or more after
the purchase date. The Funds purchase securities in this manner in order to
secure an advantageous price and yield but the value of the security could
change before settlement. Therefore, although a Fund will make such commitments
only with the intention of actually acquiring the securities, it may sell the
securities before settlement if it is deemed advisable for investment reasons.
When-issued or delayed-delivery securities may sometimes be purchased on a
"dollar roll" basis, meaning that a Fund will sell securities with a commitment
to purchase similar, but not identical, securities at a future date. Dollar
rolls are engaged in when Heartland Advisors believes securities similar to
those sold can be purchased a short time later at a lower price.
Borrowing. Each Fund may borrow from any bank or other person up to 5% of total
assets for temporary purposes. A borrowing is presumed to be for temporary
purposes if it is repaid by a Fund within 60 days and is not extended or
renewed. Each Fund also may borrow solely from banks to facilitate the
management of its investment portfolio to make other investments or engage in
other transactions permissible under the 1940 Act which may be considered a
borrowing (such as dollar rolls and reverse repurchase agreements), provided
such borrowings for these purposes do not exceed one-third of total assets.
Currently, each Fund intends to borrow only from banks, for periods of no longer
than 60 days, in amounts not to exceed 20% of total assets and only for the
following purposes: (a) to avoid liquidating securities under circumstances
which Heartland Advisors believes are unfavorable to shareholders, such as to
meet large or unexpected redemptions or to purchase debt obligations pending
receipt of proceeds in the settlement of the sale of other portfolio securities;
and (b) when the Fund is scheduled to receive cash in exchange for debt
obligations that are being retired, called or exchanged pursuant to a sinking
fund provision or put feature of the instrument. The extent to which a Fund will
borrow will depend, among other things, on market conditions and interest rates.
Duration Management. A Fund's share price is affected by changes in the value of
bonds held in its portfolio. In general, when interest rates rise, a bond's
value falls, and when interest rates fall, a bond's value rises. Duration
measures the approximate price sensitivity of a bond, or bond mutual fund, to a
one percent (1%) rise or fall in interest rates. For example, all else being
equal, if interest rates rise by 1%, a bond fund with a 3-year duration would
expect its share price to decline by about 3%; conversely, if interest rates
fall by 1%, the fund would expect to see about a 3% rise in price. When a change
in
23
<PAGE>
direction of, or degree of movement in interest rates is anticipated, the Fund
will shorten or lengthen its duration to help manage share price fluctuation.
Illiquid Securities. No Fund will invest more than 15% of its net assets in
illiquid securities. For purposes of applying this limitation, an "illiquid
security" means one that may not be sold or disposed of in the ordinary course
of business within seven days at a price approximating the value at which the
security is carried by a Fund. Each Fund may invest in debt obligations that are
purchased in private placements (that is, transactions in which securities have
not been registered under federal law) and that are subject to restrictions on
resale as a matter of contract or law. Private placement notes issued pursuant
to a private placement exemption provided by Section 4(2) of the Securities Act
of 1933 (the "1933 Act") have been determined to be liquid by Heartland's Board
of Directors. These securities and restricted securities issued under Rule
144Aof the 1933 Act that are deemed to be liquid by Heartland Advisors under
guidelines established by the Board of Directors are not subject to a Fund's
limitation on illiquid securities. Municipal lease obligations, which may be
considered illiquid, may similarly be determined to be liquid in accordance with
guidelines adopted by Heartland's Board of Directors. Absent such
determinations, such securities, and repurchase agreements maturing in more than
seven days, are considered illiquid.
Influence or Control over Portfolio Companies. As a shareholder of a portfolio
company, each Fund reserves the right to freely communicate its views as a
shareholder on matters of policy to the company's management, board of directors
and other shareholders when a policy may affect the value of the Fund's
investment. In exercising this right, each of the Funds (other than the
Government Fund) may, from time to time, use its ownership interest in a
portfolio company to seek to influence or control the company's management. For
example, a Fund might take steps, either individually or as part of a group, (a)
to actively support, oppose or influence a company's decision-making, (b) to
seek changes in a company's management or board of directors, (c) to effect the
sale of all or some of a company's assets or (d) to vote to participate in or
oppose a takeover of a portfolio company or an acquisition by a portfolio
company. A Fund would engage in such activities in an effort to protect and
maximize the value of its investment on behalf of the Fund's shareholders. The
extent to which a Fund might invest for purposes of obtaining control or
influencing management would depend, among other things, on facts and
circumstances specific to the issuer as well as general market conditions.
Investing for purposes of obtaining control or influencing management could
result in additional expense to a Fund, including expenses associated with
operational or regulatory requirements and the ongoing cost of potential
litigation. It could also restrict a Fund's ability to freely dispose of the
securities of a portfolio company with respect to which it is deemed to be
investing for control, which might adversely affect the Fund's liquidity as well
as the sales price of those securities. Finally, greater public disclosure is
required regarding a Fund's investment and trading strategies in regulatory
filings relating to such securities.
24
<PAGE>
It is expected that a Fund only would make investments for control on a
selective basis when Heartland Advisors believes it would be in the best
interests of the Fund and its shareholders.
Other Investments and Investment Techniques. Each Fund may utilize other
investments and investment techniques from time to time that may impact Fund
performance, including options, futures and other strategic transactions. Each
Fund is limited to 5% of net assets for initial margin and premium amounts on
futures positions considered speculative under regulations of the Commodities
futures Trading Commission ("CFTC").
25
<PAGE>
RISKS
Small Cap and Mid Cap Securities. Equity securities of small and mid cap
companies involve a higher degree of risk than investments in the broad-based
equity markets. In general, the prices of the securities of small and mid cap
companies may be more volatile than those of larger companies, they may have
less market liquidity, and they may be more likely to be adversely affected by
poor economic or market conditions. Small and mid cap companies may have
relatively lower revenues, limited product lines, less management depth and a
lower share of the market for their products or services as compared to larger
companies, any or all of which could give rise to their greater risk. A Fund's
position in such securities may be substantial in relation to the market for
such securities. As a result, it may be difficult at times for a Fund to dispose
of such securities at prevailing market prices in order to meet redemptions or
other cash needs.
Foreign Securities. Each Fund may invest in foreign securities (including
depository receipts) traded both within and, to a lesser degree, outside of the
United States. Investments in foreign securities may be subject to certain risks
in addition to those normally associated with domestic stocks. These risks are
greater with respect to companies domiciled in developing countries.
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 (particularly with regard to depository receipts in which the holders may
not have the same rights as shareholders); and the potential for less liquidity
and more volatility on foreign securities markets than on United States
securities markets. Moreover, brokerage commissions, fees for custodial services
and other costs related to foreign investments generally are greater than in the
United States. 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 trades. The inability to sell a portfolio security
due to settlement problems could result either in a loss to a 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.
European Economic and Monetary Union (EMU). Certain European countries have
joined the EMU in an effort to, among other things, reduce barriers between
countries and eliminate fluctuations in their currencies. The EMU has
established a single European currency, the euro, which was introduced on
January 1, 1999, and is scheduled to replace the existing national currencies of
all initial EMU participants by July 1, 2002. Certain securities, beginning with
government and corporate bonds, have now redenominated in the euro and trade and
make dividend and other payments only in euros. Major European markets now trade
securities in euro denominations. If the Funds hold investments in
26
<PAGE>
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted. Because this change to a single
currency is new and untested, the establishment of the euro may result in market
volatility. Accordingly, it is not possible to predict the impact of the euro on
the business or financial condition of European issuers which the Funds may hold
in their portfolios, and their impact on the value of the Funds' shares and
performance. To the extent the Funds hold non-United States dollar (euro or
other) denominated securities, they will continue to be exposed to currency risk
due to fluctuations in those currencies versus the United States dollar.
High-Yield and Unrated Securities. Each of the Funds may invest a portion of its
assets in non-investment grade debt securities, including securities in default.
Non-investment grade securities(commonly known as "junk bonds") in which each
Fund may invest may be regarded as predominantly speculative with regard 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 a Fund's net asset
value. Furthermore, higher yielding bonds may contain redemption or call
provisions which, if exercised in declining interest rate environment, may
require a Fund to replace the security with a lower yielding security, resulting
in a decreased return to the Fund. Finally, the secondary trading market for
higher yielding bonds may not be as active 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 a Fund's ability to
dispose of such bonds may be limited.
Debt securities purchased by each of the Funds (other than the Government Fund)
may be either unrated or rated by one or more independent rating organizations
that rate the issuer of a security based on the issuer's financial soundness.
Debt securities purchased by each Fund may be rated in any rating category
established by a rating organization. If a debt security is rated below
investment grade or unrated, Heartland Advisors conducts its own assessment of
the creditworthiness of the issuer.
Futures and Options. Each Fund may engage in transactions in options, futures
contracts and options on futures contracts to hedge against anticipated declines
in the market value of portfolio securities and increases in the market value of
securities it intends to acquire. Each Fund may also engage in such transactions
to protect against exposure to interest rate changes or changes in currency
exchange rates. Finally, the Funds may use these instruments to enhance total
return or to invest in eligible asset classes with greater efficiency and lower
cost than is believed to be possible through direct investments.
Options and futures can be highly volatile investments and involve certain
risks. These strategies require the ability to predict future movements
insecurities prices, interest rates, currency exchange rates and other economic
factors. Heartland Advisors' attempts to use such investments may not be
successful and could result in reduction of a Fund's total
27
<PAGE>
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(that is, the underlying investment moves in a direction
opposite or more than anticipated), or if the Fund were 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 United States authorities, and may
offer less liquidity and less protection to a Fund if the other party to the
contract defaults.
Temporary Positions. Under adverse market conditions, or other extraordinary
economic or market conditions, each Fund may take a temporary defensive position
and invest, without limitation, in liquid reserves such as money market
instruments, certificates of deposit, commercial paper, short term corporate
debt securities, variable rate demand notes, Government securities and
repurchase agreements. Taking a temporary defensive position is not required,
and may not be possible because of market conditions. It also might prevent a
Fund from achieving its investment objective.
Investment Objectives. Each Fund's investment goal may be changed by Heartland's
Board of Directors upon notice to shareholders, but without shareholder
approval.
28
<PAGE>
HOW TO INVEST
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
INSTRUCTIONS FOR REGULAR ACCOUNTS
- ------------------------------------------------------------------------------------------------------------------------------------
OPEN AN ACCOUNT ADD TO AN ACCOUNT SELL SHARES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
[PICTURE APPEARS HERE] By Telephone
- ------------------------------------------------------------------------------------------------------------------------------------
Wire Call 800.443.2862 to obtain an account number and Telephone Purchase Available for Check Call us to request your
provide your Social Security or tax ID number. Have your additional investments of $100 to transaction. A check will be
bank send your investment to Firstar Bank Milwaukee, N.A. $25,000. Contact us for a Bank sent to the address on the
with these instructions: Options Form. account Wire or Electronic Funds
. ABA #0750-00022 Wire Have your bank send your Transfer These services must
. A/C #112-952-137 investment to Firstar Bank be pre-authorized in writing.
. CREDIT TO: Heartland (name of fund) Milwaukee, N.A. with these Once the Fund has your bank
. your Heartland account number instructions: account information on file,
. name(s) of investor(s) account request your
transaction.
. ABA #0750-00022 Proceeds will be wired or
. A/C #112-952-137 transferred electronically to
. CREDIT TO: Heartland (name of your bank.
fund)
. your Heartland account number Telephone and Wire Redemptions
. name(s) of investor(s) are subject to a $1,000 minimum.
- ------------------------------------------------------------------------------------------------------------------------------------
[PICTURE APPEARS HERE] In Writing
- ------------------------------------------------------------------------------------------------------------------------------------
Mail a completed application form and a check. Fill out the Additional Investment Write a letter of instruction
Form and a check. attached to that includes:
your statement and write your
Heartland account number on your . the names and signatures of
check. all account holders
. your Heartland account
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Mail the form and the check. number
. the amount in dollars or
shares you want to sell
. how and where to send the
proceeds
We will mail the proceeds to the
address on the account unless
otherwise requested. A signature
guarantee may be required.
Mail the letter of instruction.
NOTE: See page 45 for special
information on redemptions
from IRA accounts.
- ------------------------------------------------------------------------------------------------------------------------------------
[PICTURE APPEARS HERE] Automatically
- ------------------------------------------------------------------------------------------------------------------------------------
Complete the application form, including Automatic All Services Call us to request a Systematic Withdrawal Plan Call us
Investment Plan section, and return it with your form to add the automatic to request a form to add the plan.
investment (minimum of $50 per transaction). investment plan feature (minimum of Complete the form, specifying the
$50 per transaction) to your amount and frequency of withdrawals
account (see "Services for Fund you would like.
Investors"). Complete and return
the form along with any other
required materials.
- ------------------------------------------------------------------------------------------------------------------------------------
[PICTURE APPEARS HERE] Via the Internet
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Visit the Internet web site
www.heartlandfunds.com and follow the instructions
to download an IRA account application.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
HOW MAY WE HELP YOU?
1.800.432.7856
www.heartlandfunds.com
Make a check payable to: Heartland Funds
ADDRESSES
Mailing Address
- ---------------
Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
Overnight Delivery
- ------------------
Firstar Mutual Fund Services, LLC
615 East Michigan St.
Milwaukee, WI 53202
CONCEPTS TO UNDERSTAND
Wire Transfer: the fastest way to transfer money from one financial institution
to another. Your bank may charge a fee to send or receive a wire transfer.
Mail the letter of Instruction.
Electronic Funds Transfer: transferring money to your bank account
electronically may take up to eight business days to clear. EFT usually is
available without a fee at all Automated Clearing House (ACH) banks.
Establishing EFT services requires approximately 15 days.
31
<PAGE>
HOW TO INVEST
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
INSTRUCTIONS FOR IRA ACCOUNTS
- ------------------------------------------------------------------------------------------------------------------------------------
OPEN AN ACCOUNT ADD TO AN ACCOUNT SELL SHARES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
[PICTURE APPEARS HERE] By Telephone
- ------------------------------------------------------------------------------------------------------------------------------------
Wire Call 800.443.2862 to obtain an account number and Telephone Purchase Available for IRA redemptions must be
provide your Social Security or tax ID number. Have your additional investments of $100 to requested in writing.
bank send your investment to Firstar Bank Milwaukee, N.A. $25,000. Contact us for a Bank
with these instructions: Options Form.
. ABA #0750-00022 Wire Have your bank send your
. A/C #112-952-137 investment to Firstar Bank
. CREDIT TO: Heartland (name of fund) Milwaukee, N.A. with these
. your Heartland account number instructions:
. name of investor
. ABA #0750-00022
. A/C #112-952-137
. CREDIT TO: Heartland (name of
fund)
. your Heartland account number
. name(s) of investor(s)
- ------------------------------------------------------------------------------------------------------------------------------------
[PICTURE APPEARS HERE] In Writing
- ------------------------------------------------------------------------------------------------------------------------------------
Mail a completed IRA application form, and a check or IRA Fill out the Additional Investment Write a letter of instruction
transfer form. For direct rollovers of assets from Form attached to your statement and that includes:
employer sponsored qualified plans, mail a completed IRA write your Heartland account number
application. on your check. . the name and signature of
account holder
Mail the form and the check. . your Heartland account
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
number
. the fund name
. the amount in dollars or
shares you want to sell
. how and where to send the
proceeds
. whether the distribution is
qualified
. whether taxes should be
withheld (we will withhold
10% if you do not give us
instructions)
We will mail the proceeds to the
address on the account, unless
otherwise requested. A signature
guarantee may be required.
Mail the letter of instruction.
- ------------------------------------------------------------------------------------------------------------------------------------
[PICTURE APPEARS HERE] Automatically
- ------------------------------------------------------------------------------------------------------------------------------------
Complete the IRA application form, and the Automatic All Services Call us to request a Systematic Withdrawal Plan Call
Investment Plan application, and return them with your form to add the automatic us to request a form to add the
investment (minimum $50 per transaction). investment plan feature (minimum of plan. Complete the form,
$50 per transaction) to your specifying the amount and
account (see "Services for Fund frequency of withdrawals you
Investors"). Complete and return would like.
the form along with any other
required materials.
- ------------------------------------------------------------------------------------------------------------------------------------
[PICTURE APPEARS HERE] Via the Internet
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Computer Visit the Internet web site www.heartlandfunds.com
and follow the instructions to download an IRA account
application.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
HOW MAY WE HELP YOU?
1.800.432.7856
www.heartlandfunds.com
Make checks payable to: Heartland Funds
ADDRESSES
Mailing Address
- ---------------
Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
Overnight Delivery
- ------------------
Firstar Mutual Fund Services, LLC
615 East Michigan St.
Milwaukee, WI 53202
CONCEPTS TO UNDERSTAND
Wire Transfer: the fastest way to transfer the amount and frequency of
withdrawals you would like from one financial institution to another. Your bank
may charge a fee to send or receive a wire transfer.
Electronic Funds Transfer: transferring money to your bank account
electronically may take up to eight business days to clear. EFT usually is
available without a fee at all Automated Clearing House (ACH) banks.
Establishing EFT services requires approximately 15 days.
35
<PAGE>
ACCOUNT POLICIES
If you wish to make a telephone transaction under one of the purchase or
redemption options described, please call Shareholder Services at 1.800.432.7856
or 414.289.7000. If you have a question about investing or need forms for
electing an option, call Shareholder Services at either number or visit our
website at www.heartlandfunds.com.
-----------------------
Please note that you may terminate or change any option you elect at any time
upon five days' advance notice to Heartland Advisors.
The Funds may suspend, modify or terminate any purchase or redemption option,
other than the option to redeem by mail, at any time without notice to you,
including but not limited to restricting excessive exchange activity that the
officers of Heartland determine is not in the best interests of the Funds or
their shareholders. The Funds also reserve the right to waive or lower any
minimum dollar amounts applicable to the transactions discussed.
Time of Purchase and Form of Payment. Shares of the Funds are sold without a
sales charge. Your purchase of a Fund's shares will, therefore, be made at the
net asset value per share next determined after the Fund or its authorized agent
receives your payment. Payment must be in U.S. dollars by check drawn on a bank
in the United States, wire transfer or electronic transfer. Usually, a Fund will
not accept payment in the form of a check payable to you or a third party, and
endorsed over to the Fund. Shares purchased by checks that are returned will be
canceled and you will be liable for any losses or fees incurred by the Fund or
its agents, including bank handling charges for returned checks.
If your payment is received after 4:00 p.m., Eastern Time, your purchase will be
effective on the next business day. Purchase orders for a Fund are not binding
until accepted by the Fund or its authorized agent, and entered on the Fund's
books. A Fund may reject any order its officers determine is not in the best
interests of the Fund or its shareholders, and the offering of Fund shares maybe
suspended or limited at any time without notice to shareholders. The Fund also
may reject any order not accompanied by instructions in English. Once accepted,
you may not cancel or revoke your purchase order, but you may redeem your
shares.
Investment Minimums. If you purchase shares directly from a Fund, your initial
investment must be for a minimum of $1,000 or $5,000 for the Value Fund), except
for accounts opened under prototype Individual Retirement Accounts ("IRAs") or
tax-sheltered retirement plans sponsored by Heartland, and accounts opened with
an automatic investment plan. Subsequent purchases made by mail, other than
through dividend reinvestment, must be for a minimum of $100. Each Fund may
waive or lower its investment minimums for any reason. Different minimums may
apply to accounts opened through third parties.
Tax Identification Numbers. Under IRS rules, we must receive your correct
social security or tax identification number on a signed Account Application or
IRS Form W9 when you open your account. Otherwise, you may be subject to an IRS
fine, and we may be
36
<PAGE>
required to withhold a percentage (currently 31%) of your dividend and capital
gain distributions and of your redemption proceeds.
Purchases Through Third Parties. You may purchase shares through a third party
broker-dealer or other financial intermediary, but Heartland reserves the right
to refuse purchases through any intermediary arrangement that the officers of
Heartland determine employs investment strategies which are not in the best
interests of the Funds or their shareholders. Shares purchased through third
parties may be subject to special fees and conditions that do not apply if you
purchase your shares directly from the Fund. Third parties also may place limits
on your ability to use the shareholder services or receive shareholder
information described in this prospectus. Heartland has allowed some third
parties to authorize selected designees to accept purchase orders for the third
party on the Fund's behalf. If you purchase shares through a third party which
is also an authorized agent of the Funds, your order will be processed at the
net asset value per share next determined after the third party (or its
authorized designee) receives your order; other orders will be processed at the
net asset value next determined after receipt by the Funds.
REDEEMING SHARES
Redemptions by Shareholders Who Are Not Individuals. For corporate, trust,
partnership, and other institutional accounts, the persons signing should also
indicate their office or other fiduciary capacity. A certified corporate
resolution evidencing the signing officer's authority to sign on behalf of a
shareholder corporation also is required. Executors, administrators, guardians,
trusts, and other institutional shareholders should call Heartland Advisors
prior to mailing their instructions to determine if other documentation may be
required.
Time of Redemption; Form of Instructions and Payment. Your shares will be
redeemed at the net asset value per share next determined after your
instructions, in English, are received by your Fund or its authorized agent in
good order as further explained below. The Funds will not accept an order with
instructions for redemption on a particular date or at a particular price. The
Funds use procedures reasonably designed to authenticate telephone instructions
including, for example, requesting personal identification information from
callers. The Funds are not liable for any losses due to unauthorized or
fraudulent telephone instructions if these procedures are followed. Once
accepted, you may not cancel or revoke your redemption order.
Usually, proceeds are mailed within one or two days of redemption or wired on
the next business day, but in no event are proceeds remitted to you later than
seven business days after redemption. In limited circumstances, the Funds may
elect to suspend the redemption of shares.
Generally, proceeds will be paid in cash, but the Funds reserve the right to pay
redemptions in the amount of $250,000 or more "in kind," which means you would
be paid in portfolio securities. If this occurred, you might incur transaction
costs when you sell the portfolio securities.
37
<PAGE>
If redemption instructions are received in good order for shares that have not
been paid for, your shares will be redeemed, but the Funds reserve the right to
hold the proceeds until payment of the purchase price can be confirmed. This
type of delay can be avoided by purchasing shares by federal funds wire. If you
choose to have your redemption proceeds mailed to you and either the United
States Postal Service is unable to deliver the redemption check to you or the
check remains outstanding for at least six months, the Funds reserve the right
to reinvest the check in shares of the particular Fund at their then current net
asset value until you give the Funds different instructions. No interest will
accrue on amounts represented by uncashed redemption checks.
Early Redemption Fee. To defray certain transaction expenses and facilitate
portfolio management, each of the Value Fund and the Value Plus Fund will charge
you an early redemption fee of 1% of the current net asset value of shares being
redeemed or exchanged that were purchased on or after October 1, 1999 and held
for less than 270 days. The fee applies to shares being redeemed or exchanged in
the order in which they were purchased. The Funds reserve the right to modify
the terms of or terminate the fee at any time. The fee is normally waived for
Value Fund or Value Plus Fund shares purchased on or after October 1, 1999 as
follows:
- - - For an account registered as either an Individual Retirement Account (IRA)
or a tax-qualified retirement plan on the books of the Fund's transfer
agent or on the books of other third parties who are authorized agents of
the Fund;
- - - Shares purchased by automatic reinvestment of income or capital gains
distributions from the Fund, another Heartland Fund or the Firstar Money
Market Fund;
- - - Shares purchased through an automatic purchase plan offered by the Fund;
and
- - - Shares redeemed through an automatic redemption plan offered by the Fund.
If you purchase shares through a broker-dealer or other financial intermediary
who maintains your individual account on its books and an omnibus account with
the Fund's transfer agent, your record keeper may not be able to apply the fee
waiver in all of the circumstances discussed above. Before purchasing shares,
please check with your account representative to determine if the fee waiver is
available.
The other Heartland Funds reserve the right to charge you an early redemption
fee of 1% of the proceeds of shares being redeemed or exchanged that are held
for less than a certain number of days.
EXCHANGING SHARES
Unless you instruct the Funds that you do not want this service, you are
automatically permitted to purchase shares of a Fund with the proceeds of
redemption for your account in any other Heartland Fund or the Firstar Money
Market Fund, a money market fund sponsored by an affiliate of the Transfer
Agent. This type of transaction is referred to as an "exchange" and may be
effected by writing or calling Heartland Advisors. Written
38
<PAGE>
exchanges may be for any amount, but telephone exchanges may be for not less
than $1,000 and not more than $500,000.
Exchanges with the Firstar Money Market Fund are subject to the terms and
conditions of that fund's prospectus, which may be obtained from Heartland
Advisors. Heartland Advisors receives an annual fee from Firstar Money Market
Fund for shareholder account servicing and record keeping and distribution
services in the amount of 0.20% of the average daily net assets of shares for
which Heartland Advisors is the holder or dealer of record.
IRAs and Tax-sheltered Retirement Plans. Heartland sponsors an IRA plan for
individual investors as well as SIMPLE IRAs and other tax-sheltered retirement
plans for self-employed persons and employers. Each Fund is available for
investment under these programs at the reduced initial investment minimum of
$500. Booklets describing the programs and the forms necessary for establishing
accounts under them are available on request from Heartland Advisors. The
annual maintenance fee of IRAs is waived for account holders whose IRA assets at
Heartland total $10,000 or more.
Signature Guarantees. To protect your account, the Funds reserve the right to
require a signature guarantee for written redemption instructions. Normally, a
signature guarantee will be required if the redemption proceeds will exceed
$50,000. A signature guarantee will also be required if the proceeds are being
paid to a third party, mailed to an address other than the address listed on the
Fund's records or forwarded to a bank not identified on the Fund's records as
authorized to receive the proceeds. Acceptable guarantors include, among
others, banks and brokerage firms that are members of a domestic stock exchange.
Signature witnesses by notaries public are not acceptable for this purpose.
Redemptions Through Third Parties. You may redeem shares through a third party
broker-dealer or other financial institution provided the third party presents
documentation satisfactory to the Funds indicating it is your authorized agent.
Third parties may charge fees for their services and impose terms or conditions
that do not apply if you do business directly with the Funds. Heartland has
allowed some third parties to authorize selected designees to accept redemption
orders for the third party on the Fund's behalf. If you redeem shares through a
third party which is also an authorized agent of the Funds, your order will be
processed at the net asset value per share next determined after the third party
(or its authorized designee) receives your order; other orders will be processed
at the net asset value per share next determined after receipt by the Funds.
Involuntary Redemption. If your account value in any Fund falls below $500 for
three months or more, the Funds may redeem all of your shares in that Fund upon
60 days' advance notice to you. You may avoid involuntary redemption by making
additional investments to bring your account value up to at least $1,000.
39
<PAGE>
SHARE PRICE
Shares of a Fund are purchased and redeemed at the net asset value per share
next determined following receipt of your order in proper form by the Fund or
its authorized agent. Net asset value is the difference between the values of
the Fund's assets and liabilities divided by the number of shares outstanding.
It is determined at the close of regular trading on the New York Stock Exchange
(generally 4:00 p.m., Eastern Time). Orders received after 4:00 p.m., Eastern
Time, are priced at the net asset value per share determined on the next
business day of the Fund.
If you purchase or redeem shares through a third party which is an authorized
agent of the Funds, your order will be processed at the net asset value per
share next determined after the third party receives your order; other purchases
and redemptions through third parties are processed at the net asset value per
share next determined after receipt by the Fund. Third parties acting as
authorized agents of the Funds are required to segregate orders received after
the close of regular trading on the New York Stock Exchange and transmit those
orders separately for execution at the net asset value per share next
subsequently determined.
Portfolio securities are valued on the basis of market quotations or at fair
value using methods determined by Heartland's Board of Directors. Like most
mutual funds, the Funds generally use a "fair value" methodology to value debt
obligations because market quotations are generally not available for most debt
obligations. Fair values are normally determined by using valuations furnished
by one or more pricing services approved by Heartland's Board of Directors.
Debt securities purchased with remaining maturities of 60 days or less are
valued at acquisition cost, plus or minus any amortized discount or premium.
SERVICE FEES
If your electronic funds transfer order cannot be processed because of
insufficient funds or a stop payment, Firstar Mutual Fund Services, LLC (the
"Transfer Agent") will charge your account a service fee of $20.00. If you
direct that your redemption proceeds be wired to your bank, the Transfer Agent
will charge a service fee (currently $12.00).
SHAREHOLDER INFORMATION AND REPORTING
HEARTLAND VALUE SOURCE(TM)
Heartland Advisors' website, Heartland Value Source(TM), located at
www.heartlandfunds.com, provides investors with a variety of information about
the Funds, including daily share prices, market updates and shareholder reports.
By calling 1.800.432.7856 and requesting a personal identification number,
shareholders can access their accounts directly to review current balances,
recent transactions and other account information.
40
<PAGE>
INVESTMENT REPORTS
Shareholder Reports. The Funds' portfolio managers review their strategies and
results in quarterly Value Reports. In addition, semiannually these reports
contain schedules of investments and Fund financial statements. If several
members of a household own a Fund, only one Value Report is mailed to that
address. To receive additional copies, you may call Shareholder Services at
1.800.432.7856 or 414.289.7000, or write to Heartland Advisors at 789 North
Water Street, Milwaukee, WI 53202.
Other Reports. Heartland Advisors also publishes and mails to shareholders News
& Views, a quarterly investment newsletter providing market analysis and
commentary. In addition, it publishes investment research pieces that are mailed
to shareholders periodically.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
A dividend from net investment income represents the income a Fund earns from
dividends and interest paid on its investments, after payment of Fund expenses.
A capital gain or loss is the increase or decrease in the value of a security
that a Fund holds compared to its original purchase price. The gain or loss
is"unrealized" until the security is sold. Each realized capital gain or loss is
either short term or long term depending on whether the Fund held the security
for one year or less, or more than one year. This is the case regardless of how
long you hold your Fund shares.
Substantially all of the net investment income of the Select Value and Value
Funds will be paid to shareholders annually as a dividend. The Value Plus Fund
will pay dividends from net investments income quarterly. The Government Fund
will declare dividends from net investment income daily and pay them monthly. If
a Fund has net capital gains for a year, the Fund normally will distribute
substantially all of its net capital gains at the end of the year. Both types of
distributions are automatically invested in additional shares for your account
unless you elect on your Account Application to have them invested in another
Heartland Fund or to have them paid to you in cash.
"Buying a Dividend." Please note that if you purchase shares of a Fund just
before the record date of a capital gain distribution, you will receive a
portion of your purchase price back as a taxable distribution. The Fund's net
asset value per share on the record date will be reduced by the amount of the
dividend. This is sometimes referred to as "buying a dividend."
If you choose to have dividends or capital gains distribution, or both, mailed
to you and either the United States Postal Service is unable to deliver the
distribution check to you or the check remains outstanding for least six months,
the Funds reserve the right to reinvest the check and future distributions in
shares of the particular Fund at their then current net asset value until you
give the Funds different instructions. No interest will accrue on amounts
represented by uncashed distribution checks.
TAXES
41
<PAGE>
All income dividend distributions and short term capital gains will be taxable
to shareholders as ordinary income for federal income tax purposes. Long term
capital gain will be taxable as long term capital gains to shareholders. If a
Fund declares a distribution in December, but does not pay it until January of
the following year, you still will be taxed as if the distribution were paid in
December. The Transfer Agent will process your distribution and send you a
statement for tax purposes each year showing the source of distributions for the
preceding year.
If you redeem or exchange your shares, the transaction is a taxable event.
Special tax rules apply to non-individual shareholders and shareholders owning
Fund shares in IRAs and tax-sheltered retirement plans. State and local tax
rules differ from the federal tax rules described in this prospectus. Because
this tax information is only a general overview, you should consult with your
own tax advisor about the tax consequences of your investment in the Funds.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past 5 years or since inception, and
for the six months ended June 30, 1999. Certain information reflects financial
results for a single Fund share. The total returns in the tables represent the
rate that an investor would have earned or lost on an investment in the Funds
over the period presented (assuming reinvestment of all dividends and
distributions). The annual financial information (other than financial
information for the six months ended June 30, 1999, which is unaudited) has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Funds'
financial statements, are included in the Annual Report to Shareholders, which
is available upon request. The Fund's unaudited financial statements for the
six months ended June 30, 1999 are included in the Semi-Annual Report to
Shareholders, which is also available upon request.
42
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Select Value Fund (formerly the Large Cap Value Fund)
- -----------------------------------------------====================================================================================
For the six months ended For the year ended December 31, October 11, 1996/(1)/
- ----------------------------------------------- -----------------
June 30, 1999 through
(Unaudited) 1998 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value beginning of period $ 11.94 $ 12.30 $ 10.50 $ 10.00
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.11 0.30 0.11 --
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses) 0.81 (0.10) 2.28 0.50
---- ------ ---- ----
on investments
- -----------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment
0.92 (0.20) 2.39 0.50
operations ---- ------ ---- ----
- -----------------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.00 (0.30) (0.11) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized gains on investments (0.25) (0.26) (0.48) -
------ ------ ------ ----
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.25) (0.56) (0.59) -
------ ------ ------ ----
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 12.61 $ 11.94 $ 12.30 $ 10.50
-------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return 8.0%/(2)/ 1.7% 22.9% 5.0%/(2)/
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 9,656 $ 8,025 $ 7,665 $ 2,441
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net expenses to average net 0.53%/(3)(4)/ 0.00%/(4)/ 1.36/(4)/ 2.73%/(3)/
assets
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to 1.62%/(3)(4)/ 2.37%/(4)/ 1.14%/(4)/ (0.25)%/(3)/
average net assets
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 51% 48% 30% 1%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) If there had been no expense reimbursement or management fee waiver by
the Advisor, the ratios of net expenses to average net assets for the
period ended June 30, 1999 and the years ended December 31, 1998 and 1997
would have been 2.25%, 1.92% and 2.00%, respectively, and the ratios of
net investment income to average net assets would have been 0.00%, 0.45%
and 0.50%, respectively.
43
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Value Plus Fund
=====================================================================
For the six
months ended For the year ended December 31,
June 30, 1999 ----------------------------------------
(Unaudited) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value beginning of period $ 13.80 $ 16.13 $ 13.73 $ 11.17 $ 9.53 $10.45
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.27 0.62 0.48 0.38 0.41 0.41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses) on investments 0.95 (2.32) 3.66 3.33 1.89 (0.92)
---- ------ ---- ---- ---- ------
- ------------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 1.22 (1.70) 4.14 3.71 2.30 (0.51)
---- ------ ---- ---- ---- ------
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (0.29) (0.60) (0.48) (0.38) (0.41) (0.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gains on investments - (0.03) (1.26) (0.77) (0.25) -
---- ------ ---- ---- ---- ------
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.29) (0.63) (1.74) (1.15) (0.66) (0.41)
---- ------ ---- ---- ---- ------
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 14.73 $ 13.80 $ 16.13 $ 13.73 $ 11.17 $ 9.53
======== ======== ======== ======= ======= ======
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return/(1)/ 9.1%/(2)/ (10.8)% 30.6% 33.8% 24.4% (4.9)%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $160,233 $174,314 $336,281 $66,582 $19,123 $9,884
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets 1.24%/(3)/ 1.21% 1.12% 1.45% 1.54% 1.80%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of interest expense to average net assets 0.07%/(3)/ 0.03% - - - -
---- ---- ---- ------
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 3.65%/(3)/ 3.77% 3.32% 3.23% 3.90% 4.39%
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 52% 64% 74% 73% 150% 127%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The contingent deferred sales charge in effect for the Fund prior to June
1, 1994 is not reflected in Total Return.
(2) Not annualized.
(3) Annualized.
44
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Value Fund
==================================================================
For the six
months ended For the year ended December 31,
June 30, 1999 -------------------------------------
(Unaudited) 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value beginning of period
$ 29.29 $ 33.87 $ 31.65 $ 27.95 $ 22.72
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.13) 0.08 0.17 0.06 0.13
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses) on investments 3.55 (3.97) 7.09 5.78 6.63
---- ------ ---- ---- ----
- -----------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment operations 3.42 (3.89) 7.26 5.84 6.76
---- ------ ---- ---- ----
- -----------------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income - (0.06) (0.17) (0.06) (0.13)
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized gains on investments - (0.63) (4.87) (2.08) (1.40)
--- ----- ------ ------ ------
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions - (0.69) (5.04) (2.14) (1.53)
--- ----- ------ ------ ------
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 32.71 $ 29.29 $ 33.87 $ 31.65 $ 27.95
========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return/(1)/ 11.7% (11.5)% 23.2% 21.0% 29.8%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $1,321,487 $1,545,495 $2,126,715 $1,626,760 $1,190,926
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets 1.24%/(3)/ 1.15% 1.12% 1.23% 1.29%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of interest expense to average net assets 0.17%/(3)/ - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (0.78)%/(3)/ 0.22% 0.49% 0.22% 0.61%
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 11% 36% 55% 31% 31%
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
========================================================================
1994
- ------------------------------------------------------------------------
<S> <C>
Per Share Data
- ------------------------------------------------------------------------
Net asset value beginning of period $ 23.22
- ------------------------------------------------------------------------
Income (loss) from investment operations:
- ------------------------------------------------------------------------
Net investment income (loss) (0.09)
- ------------------------------------------------------------------------
Net realized and unrealized gains (losses) on investments 0.47
----
- ------------------------------------------------------------------------
Total income (loss) from investment operations 0.38
----
- ------------------------------------------------------------------------
Less distributions from:
- ------------------------------------------------------------------------
Net investment income -
- ------------------------------------------------------------------------
Net realized gains on investments (0.88)
------
- ------------------------------------------------------------------------
Total distributions (0.88)
------
- ------------------------------------------------------------------------
Net asset value, end of period $ 22.72
========
- ------------------------------------------------------------------------
Total Return/(1)/ 1.7%
- ------------------------------------------------------------------------
Ratios and Supplemental Data
- ------------------------------------------------------------------------
Net assets, end of period (in thousands) $339,364
- ------------------------------------------------------------------------
Ratio of operating expenses to average net assets 1.39%
- ------------------------------------------------------------------------
Ratio of interest expense to average net assets -
- ------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (0.52)%
- ------------------------------------------------------------------------
Portfolio turnover rate 35%
- ------------------------------------------------------------------------
</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.
(2) Not annualized.
(3) Annualized.
45
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Government Fund
- ---------------------------------------------------------==========================================================================
For the six
months ended For the year ended December 31,
- ------------------------------------------------------------- June 30, 1999 -----------------------------------
(Unaudited) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value beginning of period $ 10.06 $ 9.85 $ 9.54 $ 9.96 $ 8.91 10.50
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.28 0.57 0.58 0.59 0.60 0.59
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses) on
investments (0.54) 0.21 0.31 (0.42) 1.05 (1.59)
------ ---- ---- ------ ---- ------
- -----------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment
operations (0.26) 0.78 0.89 0.17 1.65 (1.00)
------ ---- ---- ---- ---- ------
- -----------------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income (0.28) (0.57) (0.58) (0.59) (0.60) (0.59)
------ ------ ------ ------ ------ ------
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.28) (0.57) (0.58) (0.59) (0.60) (0.59)
------ ------ ------ ------ ------ ------
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.52 $ 10.06 $ 9.85 $ 9.54 $ 9.96 $ 8.91
======== ======= ======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return/(1)/ (2.6)%/(2)/ 8.1% 9.7% 2.0% 19.0% (9.6)%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 51,068 $54,886 $48,562 $51,713 $66,261 $64,807
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net expenses to average net assets/(4)/ 0.80%/(3)/ 0.76% 0.87% 1.06% 1.07% 1.07%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets/(4)/ 5.85%/(3)/ 5.73% 6.12% 6.36% 6.31% 6.30%
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 83% 90% 143% 30% 97% 95%
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
(2) Not annualized.
(3) Annualized.
(4) If there had been no expense reimbursement or management fee waiver by the
Advisor, the ratios of net expenses to average net assets for the period
ended June 30, 1999 and the years ended December 31, 1998, 1997, 1996, 1995
and 1994 would have been 1.24%, 1.16%, 1.20%, 1.21%, 1.22% and 1.22%,
respectively, and the ratios of net investment income to average net assets
would have been 5.40%, 5.33%, 5.79%, 6.21%, 6.16% and 6.15%, respectively.
46
<PAGE>
- --------------------------------------------------------------------------------
HEARTLAND FUNDS
General Information and Account/Price Information (24 hours):
1.800.432.7856 or 414.289.7000
www.heartlandfunds.com
- --------------------------------------------------------------------------------
HEARTLAND FUNDS
789 North Water Street
Milwaukee, Wisconsin 53202
INVESTMENT ADVISOR AND DISTRIBUTOR
Heartland Advisors, Inc.
789 North Water Street
Milwaukee, Wisconsin 53202
CUSTODIAN
Firstar Bank Milwaukee, N.A.
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
TRANSFER AND DIVIDEND DISBURSING AGENT
Firstar Mutual Fund Services, LLC
615 East Michigan Street, 3rd Floor
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
100 East Wisconsin Avenue,
Milwaukee, Wisconsin 53202
COUNSEL
Quarles & Brady LLP
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
47
<PAGE>
If you have any questions about the Heartland Funds or would like more
information, including a free copy of the Funds' Statement of Additional
Information ("SAI"), or their Annual or Semi Annual Reports, you may call or
write Heartland Advisors at:
Heartland Advisors, Inc.
789 North Water Street
Milwaukee, Wisconsin 53202
1.800.432.7856 or 414.289.7000
You may also obtain the Annual and Semi-Annual Reports and other relevant
information at Heartland Funds' website (www.heartlandfunds.com).
The SAI, which contains more information on the Funds, has been filed with the
Securities and Exchange Commission ("SEC"), and is legally a part of this
prospectus. The Annual and Semi Annual Reports, also filed with the SEC,
discuss market conditions and investment strategies that affected each Fund's
performance during the prior fiscal year and six month fiscal period,
respectively.
To view these documents, along with other related documents, you can visit the
SEC's Internet website (http://www.sec.gov) or the SEC's Public Reference Room
in Washington, D.C. Information on the operation of the Public Reference Room
can be obtained by calling 1.800.SEC.0330. Additionally, copies of this
information can be obtained, for a duplicating fee, by writing the Public
Reference Section of the SEC, Washington, D.C. 20549-6009.
Investment Company Act File No. 811-4982
48
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED DECEMBER 6, 1999
Heartland Select Value Fund
Heartland Value Plus Fund
Heartland Value Fund
Heartland Government Fund
Heartland Taxable Short Duration Municipal Fund
Heartland Short Duration High-Yield Municipal Fund
Heartland High-Yield Municipal Bond Fund
Heartland Wisconsin Tax Free Fund
789 North Water Street, Milwaukee, Wisconsin 53202
(414) 289-7000 or 1-800-432-7856
www.heartlandfunds.com
Heartland Group, Inc. ("Heartland") is registered as an open-end,
management investment company consisting of the separate mutual fund series
listed above ("Funds"). This Statement of Additional Information ("SAI") relates
to all of the Funds, each of which has a distinct investment objective and
program.
This SAI is not a prospectus, but provides you with additional information
that should be read in conjunction with the Prospectus for the Heartland Select
Value, Value Plus, Value and Government Funds, dated December 6, 1999; the
Prospectus for the Heartland Taxable Short Duration Municipal Fund, dated
December 29, 1998; the Prospectus for the Heartland Short Duration High-Yield
Municipal and High-Yield Municipal Bond Funds, dated May 1, 1999; and the
Prospectus for the Heartland Wisconsin Tax Free Fund, dated May 1, 1999. You may
obtain a free copy of any Fund's Prospectus and an account application by
contacting the distributor, Heartland Advisors, Inc. ("Heartland Advisors"), at
the street or website address, or at either telephone number listed above.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
INTRODUCTION TO THE FUNDS............................................................................ 3
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS...................................................... 3
TYPES OF SECURITIES.................................................................................. 11
Convertible Securities...................................................................... 11
Custodial Receipts and Participation Interests.............................................. 12
Debt Securities............................................................................. 12
Derivative Instruments...................................................................... 20
Foreign Investments......................................................................... 27
Illiquid Securities......................................................................... 28
Indexed Securities.......................................................................... 28
Investment Companies........................................................................ 29
Loan Interests.............................................................................. 29
Real Estate Investment Trusts............................................................... 30
Rights and Warrants......................................................................... 30
When-Issued and Delayed-Delivery Securities; Forward Commitments............................ 30
PORTFOLIO MANAGEMENT STRATEGIES...................................................................... 31
Borrowing................................................................................... 31
Concentration............................................................................... 31
Duration.................................................................................... 32
Foreign Currency Transactions............................................................... 32
Influence or Control over Portfolio Companies............................................... 33
Lending Portfolio Securities................................................................ 34
Repurchase Agreements....................................................................... 34
Reverse Repurchase Agreements and Dollar Rolls.............................................. 34
Short Sales................................................................................. 35
Standby Commitments......................................................................... 35
INVESTMENT RESTRICTIONS.............................................................................. 35
PORTFOLIO TURNOVER................................................................................... 39
MANAGEMENT........................................................................................... 40
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.................................................. 43
INVESTMENT ADVISORY AND OTHER SERVICES............................................................... 44
DISTRIBUTION OF SHARES............................................................................... 47
PORTFOLIO TRANSACTIONS............................................................................... 48
DESCRIPTION OF SHARES................................................................................ 52
PURCHASES AND SALES.................................................................................. 52
ADDITIONAL INCOME TAX CONSIDERATIONS................................................................. 54
PERFORMANCE INFORMATION.............................................................................. 54
FINANCIAL STATEMENTS................................................................................. 57
</TABLE>
2
<PAGE>
INTRODUCTION TO THE FUNDS
The Heartland family of funds consists of eight separate series of
Heartland Group, Inc., a Maryland corporation formed in 1986 and registered as
an open-end, management investment company under the Investment Company Act of
1940 (the "1940 Act"). Each Fund is a diversified fund (other than the Wisconsin
Tax Free Fund, which is non-diversified) and has a distinct investment objective
and program. The Heartland Select Value Fund (formerly the Heartland Large Cap
Value Fund) commenced operations on October 11, 1996. The Heartland Value Plus
Fund commenced operations on October 26, 1993. The Heartland Value Fund
commenced operations on December 28, 1984. The Heartland Government Fund
commenced operations on April 9, 1987. The Heartland Taxable Short Duration
Municipal Fund commenced operations on December 29, 1998. The Heartland Short
Duration High-Yield Municipal and High-Yield Municipal Bond Funds commenced
operations on January 2, 1997. The Heartland Wisconsin Tax Free Fund commenced
operation on April 3, 1992.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
Heartland Select Value Fund (formerly the Heartland Large Cap Value Fund)
The Heartland Select Value Fund seeks long-term capital appreciation by
investing in equity securities whose current market prices, in Heartland
Advisors' judgment, are at significant discounts to their intrinsic value.
Heartland Advisors uses its strict value criteria to identify what it believes
are the best available investment opportunities for the Fund. Normally, the Fund
invests in common stocks and other equity securities of companies with market
capitalizations in excess of $500 million, but it may invest in companies of all
sizes. The median market capitalization of the Fund is expected to fluctuate
over time depending on Heartland Advisor's perceptions of relative valuations,
future prospects and market conditions. The Fund generally sells a stock when
Heartland Advisors believes the stock has reached its full valuation, a better
valuation opportunity existing elsewhere, or a change in the investment thesis
occurs which Heartland Advisors believes will inhibit the stock's ability to
realize its intrinsic value.
The Fund may invest in other securities, including, without limitation,
debt securities, warrants, convertible securities, foreign securities and cash
equivalents. There are no credit quality limitations on the convertible or debt
securities in which the Fund may invest. Although not a principal investment
strategy, the Fund may utilize other investments and investment techniques from
time to time which may impact Fund performance, including options, futures and
other structured transactions. The Fund is limited to 5% of net assets for
initial margin and premium amounts on futures positions considered speculative
under regulations of the Commodities Futures Trading Commission ("CFTC").
Under adverse market conditions or other extraordinary economic or market
conditions, the Fund may take a temporary defensive position and hold assets in
liquid reserves such as money market instruments, certificates of deposit,
commercial paper, short-term corporate debt securities, variable rate demand
notes, U.S. Government securities and repurchase agreements. Taking a temporary
defensive position is not required, and may not be possible because of market
conditions. It also might prevent the Fund from achieving its investment
objective.
In pursuing its objective, the Fund may, from time to time, use its
ownership interest in a portfolio company to seek to influence or control the
company's management. The Fund also may employ the investment techniques
described in its Prospectus and in the sections of this SAI titled "Types of
Securities" and "Portfolio
3
<PAGE>
Management Strategies." The Fund's investment objective may be changed with the
approval of the Board of Directors and notice to shareholders, but without
shareholder approval.
Heartland Value Plus Fund
The Heartland Value Plus Fund seeks capital appreciation and current
income. The Fund invests primarily in income-producing equity securities of
smaller companies. To further pursue its income objective, the Fund also invests
up to 35% of its total assets in other securities, including, without
limitation, debt securities and cash equivalents. Although it may invest in
securities of larger companies, it generally invests in those companies with
market capitalizations of less than $750 million selected on a value basis.
There are no credit quality limitations on the convertible or debt securities on
which the Fund may invest.
The equities in which the Fund invests include dividend-paying common
stocks, preferred stocks, warrants, convertible securities and real estate
investment trusts. Debt securities purchased by the Fund may be either unrated
or rated by one or more independent rating organizations that rate the issuer of
the security based on the issuer's financial soundness. Debt securities
purchased by the Fund may be rated in any rating category established by a
rating organization. If a debt security is rated below investment grade or is
unrated, Heartland Advisors conducts its own assessment of the creditworthiness
of the issuer.
Although not a principal investment strategy, the Fund may utilize other
investments and investment techniques from time to time which may impact Fund
performance, including options, futures and other structured transactions. The
Fund is limited to 5% of net assets for initial margin and premium amounts on
futures positions considered speculative under regulations of the CFTC.
Under adverse market conditions or other extraordinary economic or market
conditions, the Fund may take a temporary defensive position and hold assets in
liquid reserves such as money market instruments, certificates of deposit,
commercial paper, short-term corporate debt securities, variable rate demand
notes, U.S. Government securities and repurchase agreements. Taking a temporary
defensive position is not required, and may not be possible because of market
conditions. It also might prevent the Fund from achieving its investment
objective.
In pursuing its objective, the Fund may, from time to time, use its
ownership interest in a portfolio company to seek to influence or control the
company's management. The Fund also may employ the investment techniques
described in its Prospectus and in the sections of this SAI titled "Types of
Securities" and "Portfolio Management Strategies." The Fund's investment
objective may be changed with the approval of the Board of Directors and notice
to shareholders, but without shareholder approval.
Heartland Value Fund
Heartland Value Fund seeks long-term capital appreciation through investing
in small companies. The Fund invests primarily in equity securities of companies
with market capitalizations of less than $750 million selected on a value basis.
It may, however, invest in other securities, including, without limitation,
equity securities of larger companies, debt securities, warrants, convertible
securities, foreign securities and cash equivalents. There are no credit quality
limitations on the convertible or debt securities in which the Fund may invest.
4
<PAGE>
Although not a principal investment strategy, the Fund may utilize other
investments and investment techniques from time to time which may impact Fund
performance, including options, futures and other structured transactions. The
Fund is limited to 5% of net assets for initial margin and premium amounts on
futures positions considered speculative under regulations of the CFTC.
Under adverse market conditions or other extraordinary economic or market
conditions, the Fund may take a temporary defensive position and hold assets in
liquid reserves such as money market instruments, certificates of deposit,
commercial paper, short-term corporate debt securities, variable rate demand
notes, U.S. Government securities and repurchase agreements. Taking a temporary
defensive position is not required, and may not be possible because of market
conditions. It also might prevent the Fund from achieving its investment
objective.
In pursuing its objective, the Fund may, from time to time, use its
ownership interest in a portfolio company to seek to influence or control the
company's management. The Fund also may employ the investment techniques
described in its Prospectus and in the sections of this SAI titled "Types of
Securities" and "Portfolio Management Strategies." The Fund's investment
objective may be changed with the approval of the Board of Directors and notice
to shareholders, but without shareholder approval.
Heartland Government Fund
The Heartland Government Fund seeks a high level of current income,
liquidity and safety and principal. The Fund will invest at least 80% of its
total assets in obligations issued or guaranteed by the U.S. Government, by its
agencies or instrumentalities or by other U.S. Government sponsored entities,
and repurchase agreements for such securities ("Government securities"). These
securities include, without limitation, U. S. Treasury and agency securities,
and mortgage-backed securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. They differ primarily in terms of interest rates,
length of maturities, the nature of the governmental obligation and issuance
dates.
Mortgage-backed securities may include hybrid and structured mortgage
related instruments, such as collateralized mortgage obligations ("CMOs") and
stripped mortgaged-backed securities ("SMBs"). SMBs may be divided into
different classes each of which might receive a different combination of the
interest and principal from the underlying mortgage loans. In certain cases, a
class may receive either all of the interest ("interest only" or "IO" class) or
all of the principal ("principal only" or "PO" class). The Fund will limit its
aggregate investments in IO and PO classes to 10% of net assets.
The balance of the Fund's assets may be invested in other securities
including, without limitation, pooled debt securities, such as asset-backed and
mortgage-backed securities issued by non-governmental entities; commercial paper
and other debt obligations of foreign governments, domestic and foreign
corporations and other business organizations; certificates of deposit, bankers'
acceptances and time deposits; and convertible securities and preferred stocks.
Any investments in debt securities will, at the time of purchase, be rated
investment grade or, if unrated, be of comparable quality in the opinion of
Heartland Advisors.
Heartland Advisors buys and sells securities for the Government Fund after
considering economic conditions, liquidity factors and interest rate trends. It
also may use sector rotation, security selection, duration management and yield-
curve positioning strategies.
5
<PAGE>
Although there are no duration restrictions for the Government 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 three
to six years. Heartland Advisors believes that maintaining a portfolio duration
within this range allows the Fund to seek both high current income and
preservation of capital.
Although not a principal investment strategy, the Fund may utilize other
investments and investment techniques from time to time which may impact Fund
performance, including options, futures and other structured transactions. The
Fund is limited to 5% of net assets for initial margin and premium amounts on
futures positions considered speculative under regulations of the CFTC.
Under adverse market conditions or other extraordinary economic or market
conditions, the Fund may take a temporary defensive position and hold assets in
liquid reserves such as money market instruments, certificates of deposit,
commercial paper, short-term corporate debt securities, variable rate demand
notes, U.S. Government securities and repurchase agreements. Taking a temporary
defensive position is not required, and may not be possible because of market
conditions. It also might prevent the Fund from achieving its investment
objective.
In pursuing its objective, the Fund may, from time to time, use its
ownership interest in a portfolio company to seek to influence or control the
company's management. The Fund also may employ the investment techniques
described in its Prospectus and in the sections of this SAI titled "Types of
Securities" and "Portfolio Management Strategies." The Fund's investment
objective may be changed with the approval of the Board of Directors and notice
to shareholders, but without shareholder approval.
Heartland Taxable Short Duration Municipal Fund
The Heartland Taxable Short Duration Municipal Fund seeks a high level of
current income with a low degree of share price fluctuation. The Fund seeks to
achieve this objective by investing primarily in a diversified portfolio of
taxable medium and lower quality obligations issued by municipalities
("Municipal Obligations"), and maintains an average portfolio duration of three
years or less.
Under normal market conditions, the Fund invests at least 65% of net assets
in taxable Municipal Obligations. Consistent with its investment objective, the
Fund also may invest up to 35% of net assets in other debt securities;
convertible securities; preferred and common stocks, and other equity
securities; warrants or other securities exchangeable for shares of equity
securities; foreign securities; options; futures; and other structured
transactions. When Heartland Advisors considers the yield on Municipal
Obligations exempt from federal income tax to be high in relation to taxable
Municipal Obligations, the Fund may invest in tax-exempt Municipal Obligations.
The Fund invests primarily in medium and lower quality debt obligations.
Medium and lower quality debt obligations are those rated as such by a
nationally recognized statistical rating organization ("NRSRO"); for example,
BBB by Standard & Poors' Ratings Service ("S&P"). The Fund may not invest more
than 20% of its total assets in debt obligations rated lower than B-by S&P or a
comparable rating by another NRSRO. It may invest in debt obligations that are
in default, but such obligations are not expected to exceed 10% of total assets.
Taxable Municipal Obligations are rated using the same criteria as
corporate obligations. NRSROs publishing rating information on which Heartland
Advisors may rely include S&P, Moody's Investors Service, Inc., Duff & Phelps
Rating Co., Thomson BankWatch, Inc., and Fitch IBCA, Inc., among others. The
Fund also may invest in unrated
6
<PAGE>
securities if Heartland Advisors believes that such securities are of comparable
quality so as to satisfy the foregoing requirements.
Any assets not otherwise invested will be held in liquid reserves. Liquid
reserves include, but are not limited to, money market instruments, repurchase
agreements, certificates of deposit, commercial paper, short-term corporate debt
securities, variable rate demand notes and U.S. Government securities. Under
adverse market conditions, other extraordinary economic or market conditions, or
when the spreads between the yields on medium and high quality taxable municipal
obligations are relatively narrow, the Fund may take a temporary defensive
position and invest without limitation in higher quality taxable or tax-exempt
Municipal Obligations and other debt securities, or hold assets in liquid
reserves. Taking a temporary defensive position is not required, and may not be
possible because of market conditions. It also might prevent the Fund from
achieving its investment objective.
In pursuing its objective, the Fund may employ the investment techniques
described in the Prospectus and in the sections of this SAI titled "Types of
Securities" and "Portfolio Management Strategies." The Fund's investment
objective may be changed with the approval of the Board of Directors and notice
to shareholders, but without shareholder approval.
Heartland Short Duration High-Yield Municipal Fund
The Heartland Short Duration High-Yield Municipal Fund seeks 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. Under normal market conditions, the
Fund invests at least 65% of its total assets in medium and lower quality
Municipal Obligations. However, the Fund may not invest more than 20% of its
total assets in Municipal Obligations rated lower than B- by S&P or a comparable
rating by another NRSRO. It may invest in debt obligations that are in default,
but such obligations are not expected to exceed 10% of total 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.
As a fundamental policy, under normal market conditions, the Fund will
invest at least 80% of its net assets in Municipal Obligations. The Fund may
invest, without limitation, in Municipal Obligations whose interest is a tax-
preference item for purposes of the federal alternative minimum tax.
Consistent with its investment objectives, the Fund also may invest in
other debt securities; taxable Municipal Obligations; convertible securities;
preferred and common stocks, and other equity securities; warrants or other
securities exchangeable for shares of equity securities; foreign securities;
options; futures; and other structured transactions.
Under adverse market conditions or other extraordinary economic or market
conditions, the Fund may take a temporary defensive position and hold assets in
liquid reserves such as money market instruments, certificates of deposit,
commercial paper, short-term corporate debt securities, variable rate demand
notes, U.S. Government securities and repurchase agreements. Taking a temporary
defensive position is not required, and may not be possible because of market
conditions. It also might prevent the Fund from achieving its investment
objective.
7
<PAGE>
In pursuing its objective, the Fund may employ the investment techniques
described in its Prospectus and in the sections of this SAI titled "Types of
Securities" and "Portfolio Management Strategies." The Fund's investment
objective may be changed with the approval of the Board of Directors and notice
to shareholders, but without shareholder approval.
Heartland High-Yield Municipal Bond Fund
Heartland High-Yield Municipal Bond Fund seeks 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. Under normal market conditions, the Fund invests at least 65% of its
total assets in medium and lower quality Municipal Obligations. However, the
Fund may not invest more than 20% of its total assets in Municipal Obligations
rated lower than B- by S&P or a comparable rating by another NRSRO. It may
invest in debt obligations that are in default, but such obligations are not
expected to exceed 10% of total assets. The Fund may also 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.
As a fundamental policy, under normal market conditions, the Fund will
invest at least 80% of its net assets in Municipal Obligations. The Fund may
invest without limitation in Municipal Obligations whose interest is a tax-
preference item for purposes of the federal alternative minimum tax.
Consistent with its investment objective, the Fund also may invest in other
debt securities; taxable Municipal Obligations; convertible securities;
preferred and common stocks, and other equity securities; warrants or other
securities exchangeable for shares of equity securities; foreign securities;
options; futures; and other structured transactions.
Under adverse market conditions or other extraordinary economic or market
conditions, the Fund may take a temporary defensive position and hold assets in
liquid reserves such as money market instruments, certificates of deposit,
commercial paper, short-term corporate debt securities, variable rate demand
notes, U.S. Government securities and repurchase agreements. Taking a temporary
defensive position is not required, and may not be possible because of market
conditions. It also might prevent the Fund from achieving its investment
objective.
In pursuing its objective, the Fund may employ the investment techniques
described in its Prospectus and in the sections of this SAI titled "Types of
Securities" and "Portfolio Management Strategies." The Fund's investment
objective may be changed with the approval of the Board of Directors and notice
to shareholders, but without shareholder approval.
Heartland Wisconsin Tax Free Fund
Heartland Wisconsin Tax Free Fund seeks 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 Obligations that are
exempt from personal income tax in Wisconsin and under federal law, including
certain Municipal Obligations issued by Wisconsin entities and securities of
other entities meeting such criteria. The Fund invests primarily in Municipal
Obligations judged by Heartland Advisors to be of investment grade quality.
8
<PAGE>
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 tax. 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 taxes. The Fund may invest in Municipal
Obligations the interest on which is a tax-preference item for purposes of the
federal alternative minimum tax, although as a matter of policy will limit its
investments in such securities to not more than 20% of the Fund's net assets.
Only limited categories of Municipal Obligations 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 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 Wisconsin. Although most
of the Municipal Obligations held by the Fund will be issued by Wisconsin
entities, it is possible that the Fund may invest a significant portion of its
assets and obligations issued by territories and possessions of the United
States, the District of Columbia, and their respective agencies or
instrumentalities. The Fund may invest up to 100% of its assets in tax-exempt
securities of issuers outside Wisconsin if such securities bear interest which
is exempt from federal and Wisconsin personal income taxes.
The Fund may invest up to 20% of net assets in other debt securities;
convertible securities; preferred and common stocks, and other equity
securities; warrants or other securities exchangeable for shares of equity
securities; foreign securities; options; futures; and other structured
transactions. The Fund may invest up to 35% of its total assets in non-
investment grade debt securities. However, the Fund may not invest more than 20%
of its total assets in debt obligations rated lower than B- by S&P or a
comparable rating by another NRSRO.
Any assets not otherwise invested will be held in liquid reserves. Liquid
reserves include, but are not limited to, money market instruments, repurchase
agreements, certificates of deposit, commercial paper, short-term corporate debt
securities, variable rate demand notes and U.S. Government securities. Under
adverse market conditions or other extraordinary economic or market conditions,
the Fund may take a temporary defensive position and hold assets in liquid
reserves. Taking a temporary defensive position is not required, and may not be
possible because of market conditions. It also might prevent the Fund from
achieving its investment objective.
In pursuing its objective, the Fund may employ the investment techniques
described in its Prospectus and in the sections of this SAI titled "Types of
Securities" and "Portfolio Management Strategies." The Fund's investment
objective may be changed with the approval of the Board of Directors and notice
to shareholders, but without shareholder approval.
Diversification. The number of issues of securities which meet the
Wisconsin Tax Free 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.
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The Wisconsin Tax Free 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 currently require that, at the end
of each quarter of the Fund's taxable year: (a) 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 (b) 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). In addition, as a
matter of fundamental policy, the Fund may not purchase more than 10% of the
outstanding voting securities of an issuer or 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 U.S.
Government, a state or territory of the United States, the District of Columbia,
or their respective agencies, instrumentalities, municipalities or political
subdivisions).
Geographic Concentrations. The following information is a brief summary of
factors affecting Wisconsin, Puerto Rico, Guam and the Virgin Islands,
jurisdictions in which the Wisconsin Tax Free Fund may invest a portion of its
assets, 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 10 years has been below the national average. In
December 1998, the state's unemployment rate was 3.1%, compared to a national
average unemployment rate of approximately 4.0%. The state is highly ranked in
terms of job creation, especially in the creation of manufacturing jobs. Since
1987, the state's personal income tax rate has been reduced from 7.9% to 6.77%
(for 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 (although possibly at a slower rate) 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
36% of the total revenue is delivered from the various taxes levied by the
state. The remainder comes from (i) investment income, (ii) various kinds of
fees, licenses, permits, and service charges paid by 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 60% of all
general fund taxes collected by the state are returned to local units of
government. The remaining funds are used for payments to individuals and
organizations (16%) and state programs (24%).
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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. The State Constitution requires the
Legislature to provide for an annual tax sufficient to defray the estimated
expenses of the state for each year, and when the expenses of any year exceed
income, the Legislature must provide for a tax for the ensuing year sufficient,
with other sources of income, to pay such deficiency as well as the estimated
expenses for the ensuing year.
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 5% of the general
purpose revenue appropriations then in effect. This amount is nearly $500
million for the fiscal year ending June 30, 1999. 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; 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 Wisconsin Tax Free Fund may invest
-----------------------------
in obligations of the Commonwealth of Puerto Rico and its political
subdivisions, agencies and instrumentalities, that qualify as double tax-exempt
Municipal 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 $19 billion, or 41% of GDP. Finance, insurance and real estate
services have undergone dynamic growth over the past decade and now account for
14% of GDP. The unemployment rate (seasonally adjusted) has remained at
approximately 14% during the past few years.
Puerto Rico's economy historically has benefitted 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.
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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. corporation in Puerto Rico; however, it is likely to
lessen Puerto Rico's competitive advantage, especially in attracting new
businesses to the Commonwealth.
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 approximately 30% 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.
Factors Affecting the Virgin Islands. The United States Virgin Islands
-------------------------------------
include St. Thomas, St. John and St. Croix. The islands are located in the
Lesser Antilles, 1,100 east, southeast of Miami. Historically a center of sugar
production and commerce, by the 1980s tourism had become the leading economic
factor in the Virgin Islands. The Caribbean's most popular tourist destination,
the Virgin Islands received over 1.5 million visitors in 1997. Circumstances
which negatively impact the tourism industry, such as natural disasters and
economic difficulties in the United States generally, and to a lesser extent
other countries, could have a negative impact on the overall economy of the
Virgin Islands.
TYPES OF SECURITIES
The following information supplements the discussion of the Funds'
investments described in their respective Prospectuses.
Convertible Securities
Convertible securities in which the Funds may invest include any bonds,
debentures, notes, preferred stocks or other securities that may be converted
into or exchanged for a specified amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. By investing in convertible securities, a Fund obtains the right to
benefit from the capital appreciation potential in the underlying common stock
upon exercise of the conversion right, while generally earning higher current
income than would be available if the stock were purchased directly. In
determining whether to purchase a convertible security, Heartland Advisors will
look to the conversion feature and consider substantially the same investment
criteria it would consider if purchasing the underlying common stock. However,
these securities will nevertheless be subject to the same quality and investment
limitations applicable to the Funds' investments in debt securities.
The value of a convertible security is a function of its "investment
value," which is determined by its yield in comparison with the yields of other
securities of comparable quality and maturity that do not have the conversion
privilege, and its "conversion value," which is the security's worth if
converted into the underlying common stock. Investment value is typically
influenced by interest rates and the credit standing of the issuer. Conversion
value is determined by the market price of the underlying common stock and
generally decreases as the convertible security approaches maturity.
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Custodial Receipts and Participation Interests
Each Fund may invest in custodial receipts which represent ownership in
future interest or principal payments, or both, on certain securities that are
underwritten by securities dealers or banks.
Each Fund may also invest in participation interests in securities.
Participation interests give a Fund an undivided interest in a security in the
proportion that the Fund's participation interest bears to the principal amount
of the security.
Debt Securities
The Funds may invest in debt securities of corporate and governmental
issuers. The Select Value, Value Plus and Value Funds may invest up to 35% of
their respective total assets in debt securities. The other Funds may invest all
of their assets in debt securities. The risks inherent in short-, intermediate-
and long-term debt securities depend on a variety of factors, including the term
of the obligations, the size of a particular offering and the credit quality and
rating of the issuer, in addition to general market conditions.
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. A decline in the prevailing levels of interest rates will
generally increase the value of the securities held by the Fund, and an increase
in rates will generally have the opposite effect.
Yields on debt securities depend 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.
Debt obligations rated in the highest through the medium quality
categories are commonly referred to as "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. Each
Fund's investment program permits it to invest in securities rated below
investment grade (or unrated securities believed to be of comparable quality by
Heartland Advisors). Each of the Select Value, Value Plus, Value and Wisconsin
Tax Free Funds may invest up to 35% of its total assets in non-investment grade
debt securities. The Government Fund may not invest in non-investment grade debt
securities. Under normal market conditions, the Taxable Short Duration
Municipal, Short Duration High-Yield Municipal and High-Yield Municipal Bond
Funds invest at least 65% of their respective assets in non-investment grade
debt securities. The Taxable Short Duration Municipal, Short Duration High-Yield
Municipal, High-Yield Municipal Bond and Wisconsin Tax Free Funds may not invest
more than 20% of their respective total assets in debt obligations rated lower
than B- by S&P or a comparable rating by another NRSRO. The principal value of
lower-rated securities generally will fluctuate more widely than higher-quality
securities. Lower-quality securities entail a higher degree of risk as to the
payment of interest and return of principal. Such securities are also subject to
special risks, discussed below. To compensate investors for taking on such
increased risk, issuers deemed to be less creditworthy generally must offer
their investors higher interest rates than do issuers with better credit
ratings.
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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 NRSROs.
All ratings limitations are applied at the time of purchase. Subsequent
to purchase, a debt security may cease to be rated or its rating may be reduced
below the minimum required for purchase by a Fund. Neither event will require
the sale of such a security, but it will be a factor in considering whether to
continue to hold the security. To the extent that ratings change as a result of
changes in a rating organization or their rating systems, the Fund will attempt
to use comparable ratings as standards for selecting investments.
"High-Yield" Risk. Each Fund's investment program (other than that of
the Government Fund) permits it to invest in non-investment grade debt
obligations, sometimes referred to as "junk bonds" (hereinafter referred to as
"lower-quality securities"). Lower-quality securities are those securities that
are rated lower than investment grade and unrated securities believed 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 more
speculative with respect to the issuer's capacity to pay interest and repay
principal. Other potential risks associated with investing in high-yield
securities include:
. Effect of Interest Rates and Economic Changes. The
market for lower-quality and comparable unrated
securities is relatively new and its growth has
paralleled a long economic expansion. As a result, it
is not clear how this market would 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
price appreciation when interest rates decline and
price 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
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
expense to seek recovery. Periods of economic
uncertainty and changes would also generally result
in
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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, it 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 Risk. 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, including, for example, those
published by Standard & Poor's, Moody's Investors
Service and Fitch ICBA, Inc., 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 a 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.
. Legal Risk. Securities in which a Fund 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 principal and interest
payments on their debt securities may be materially
impaired.
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.
. Liquidity Risk. 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
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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 and
disposition of the security may involve time-
consuming negotiation and legal expense. 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.
Municipal Obligations. Each Fund may, and the Taxable Short Duration
Municipal, Short Duration High-Yield Municipal, High-Yield Municipal Bond and
Wisconsin Tax Free Funds will primarily, invest in Municipal Obligations. The
term "Municipal Obligations" as used in the Funds' Prospectuses and this SAI
means debt obligations issued by or on behalf of states, territories or
possessions of the United States and sovereign nations within the territorial
boundaries of the United States, the District of Columbia and their respective
political subdivisions, agencies, and instrumentalities, and corporations duly
authorized by them. 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, nursing homes, mental health facilities, mass transportation,
schools, 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. Municipal Obligations may also 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 two principal classifications of Municipal Obligations are "general
obligations," which are secured by the municipality's pledge of its credit and
taxing power for the payment of principal and interest, and "revenue
obligations," which are generally payable only from the revenues from a
particular facility or project, or, in some cases, from the proceeds of a
special excise tax or other specific revenue source. In addition, certain kinds
of "private activity bonds" ("industrial revenue bonds" or "IRBs") are issued by
public authorities to provide funding for various privately operated industrial
facilities. In most cases, IRBs are not secured by the credit of the
municipality, but rather the payment of principal and interest is dependent
solely upon payments by the user of the industrial facility financed by the bond
or a separate guarantor of the bond. In some instances, real and personal
property is pledged as security for principal and interest payments.
Taxable Municipal Obligations. There is another type of Municipal
Obligation, which is subject to federal income tax for a variety of reasons. The
Taxable Short Duration Municipal Fund focuses on this type. These Municipal
Obligations do not qualify for the federal exemption because (a) they did not
receive necessary authorization for tax-exempt treatment from state or local
government authorities, (b) they exceed certain regulatory limitations on the
cost of issuance for tax-exempt financing or (c) they finance public or private
activities that do not qualify for the federal income tax exemption. These
non-qualifying activities might include, for example, certain types of
multi-family housing, certain professional and local sports facilities,
refinancing of certain municipal debt, and borrowing to replenish a
municipality's underfunded pension plan.
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Each Fund may also invest in the following types of Municipal
Obligations:
Municipal Notes. The principal kinds of municipal notes in which
the Funds may invest include tax anticipation notes, bond anticipation notes,
revenue anticipation notes and project notes. Notes sold in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project notes, which
are guaranteed by the United States Department of Housing and Urban Development
and secured by the full faith and credit of the United States, are issued by
local agencies.
Municipal Commercial Paper. Municipal commercial paper typically
represents very short-term, unsecured, negotiable promissory notes. These
obligations are often issued to provide interim construction financing or to
meet seasonal working capital needs of municipalities and are paid from general
revenues of municipalities or are refinanced with long-term debt. In most cases,
municipal commercial paper is backed by letters of credit, lending agreements,
note repurchase agreements or other credit facility agreements offered by banks
or other institutions which may be called upon in the event of default by the
issuer of the commercial paper.
Municipal Lease Obligations. The Funds may invest in state or
local municipal leases. Municipal 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 other public
authorities to purchase or lease land, equipment or facilities, such as fire,
sanitation or police vehicles or telecommunications equipment, buildings or
other capital assets. Municipal lease obligations, which are secured by payments
by the municipality under the lease or sales contract but are not backed by the
municipality's credit, frequently have the special risks described below.
Municipal lease obligations that are illiquid are subject to each Fund's
limitation on investments in illiquid securities. See the section of this SAI
titled "Illiquid Securities."
Leases and installment purchase or conditional sale contracts
(which usually provide for title to the leased asset to pass eventually to the
governmental issuer) 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. Often municipal leases
contain "non-appropriation" clauses that provide that the public body has no
obligation to make future payments under the lease unless money is specifically
appropriated for such purpose each year (the "non-appropriation" clause). In
addition, protections extended to holders of indebtedness under relevant state
law do not extend to owners of municipal leases. Finally, municipal leases may
provide for termination at the option of the municipality at the end of each
fiscal year for any reason or, in some cases, automatically if not affirmatively
renewed. If a lease is terminated or not renewed, the lessor is without recourse
to the general credit of the municipality 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.
Mortgage-Backed Municipal Obligations. The Funds may invest in
mortgage-backed Municipal Obligations, which finance residential housing
mortgages to target groups, generally low income individuals who are first-time
home buyers. An investment in such obligations represents an undivided interest
in a pool of mortgages. Payments made on the underlying mortgages and passed
through to the investor represent both regularly scheduled principal and
interest payments, as well as additional principal payments representing
prepayments of the underlying mortgages. While a certain level of prepayments
can be expected regardless of the interest rate environment, prepayment of the
underlying mortgages usually accelerates in periods of declining interest rates.
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Accelerated prepayment could result in a Fund having 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 other types of Municipal Obligations.
Credit Enhanced Securities. The Funds may invest in credit
enhanced securities, which are Municipal Obligations that are either insured as
to the timely payment of principal and interest or backed by (a) the full faith
and credit of the U.S. Government, (b) agencies or instrumentalities of the U.S.
Government or (c) U.S. Government securities. Municipal Obligations may be
insured when purchased by a Fund or a Fund may purchase insurance in order to
turn an uninsured Municipal Obligation into an insured Municipal Obligation.
Government Obligations. Each Fund may, and the Government Fund will
primarily, 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.
Floating and Variable Rate Securities. Each Fund may invest in
securities which offer a variable or floating rate of interest. Floating rate
securities generally provide for automatic adjustment of the interest rate
whenever some specified interest rate index changes. Variable rate securities,
on the other hand, provide for automatic establishment of a new interest rate at
fixed intervals. Interest rates on floating and variable rate securities are
based on a designated rate or a specified percentage thereof, such as a bank's
prime rate.
Floating or variable rate securities typically include a demand feature
entitling the holder to demand payment of the obligation on short notice at par
plus accrued interest. Some securities which do not have floating or variable
interest rates may be accompanied by puts producing similar results and price
characteristics. The issuer of these securities 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. When considering the maturity of any instrument
which may be sold or put to the issuer or a third party, the Fund may consider
the instrument's maturity to be shorter than its stated maturity.
Deferrable Subordinated Securities. Certain securities have been issued
recently which have long maturities and are deeply subordinated in the issuer's
capital structure. They generally have 30-year maturities and permit the issuer
to defer distributions for up to five years. These characteristics give the
issuer more financial flexibility than is typically the case with traditional
bonds. As a result, the securities may be viewed by rating agencies and bank
regulators as possessing certain "equity-like" features. However, the securities
are treated as debt securities by market participants,
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and each Fund intends to treat them as such as well. These securities may offer
a mandatory put or remarketing option that creates an effective maturity date
significantly shorter than the stated one. Each Fund may invest in these
securities to the extent their yield, credit and maturity characteristics are
consistent with the Fund's investment objective and strategies.
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 a Fund's gross income for the relevant tax year, the excess will
be treated as an ordinary loss.
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 a 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.
Mortgage-Related and Asset-Backed Securities. Mortgage-related
securities in which the Funds 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, or by private issuers,
generally originators and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers, and
special purpose entities (collectively, "private lenders"). Mortgage-backed
securities issued by private lenders may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. Government or one of its agencies or instrumentalities, or they may
be issued without any governmental guarantee of the underlying mortgage assets
but with some form of non-governmental credit enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or are secured by and payable from, assets such as
motor vehicle installment sales contracts, other installment loan contracts,
home equity loans, leases of various types of property, and receivables from
credit card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on asset-backed
debt obligations may be supported by non-governmental credit enhancements
including letters of credit, reserve funds, overcollateralization, and
guarantees by third parties.
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The market for privately issued asset-backed debt obligations is smaller and
less liquid than the market for government sponsored mortgage-backed securities.
In general, mortgage-related and asset-backed 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 and asset-backed securities include both interest and a partial
repayment of principal. Besides the scheduled repayment of principal, repayments
of principal on mortgage-related and asset-backed securities may result from the
voluntary prepayment, refinancing, or foreclosure of the underlying mortgage
loans or other assets. Prepayments may result in early payment of the applicable
mortgage-related or asset-backed securities. In that event, a Fund may be unable
to invest the proceeds from the early payment of the mortgage-related or
asset-backed securities in an investment that provides as high a yield as the
mortgage-related or asset-backed securities. Consequently, early payment
associated with mortgage-related and asset-backed securities may cause these
securities to experience significantly greater price and yield volatility than
that experienced by traditional fixed-income securities. During periods of
falling interest rates, the rate of prepayments generally tends to increase,
thereby tending to decrease the life of mortgage-related and asset-backed
securities. During periods of rising interest rates, the rate of prepayments
generally decreases, thereby tending to increase the life of mortgage-related
and asset-backed securities. If the life of a mortgage-related or asset-backed
security is inaccurately predicted, a Fund may not be able to realize the rate
of return it expected.
Mortgage-related and asset-backed 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,
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 and asset-backed securities in which a 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 and asset-backed securities may
change due to changes in the market's perception of the creditworthiness of the
issuer, and the mortgage-related and asset-backed securities markets in general
may be adversely affected by changes in governmental regulation or tax policies.
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 a 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.
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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 a 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 and asset-backed securities. Stripped mortgage-backed and asset-backed
securities are commonly structured with two classes that receive different
portions of the interest and principal distributions on a pool of loans. A Fund
may invest in both the interest-only or "IO" class and the principal-only or
"PO" class, although the Government Fund will limit its aggregate investments in
IO and PO classes to 10% of net assets. The yield to maturity on an IO class of
stripped mortgage-backed or asset-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 a 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, a 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. Complex instruments such as CMOs and
stripped mortgage-backed securities may have a structure that makes their
reaction to interest rates and other factors difficult to predict, potentially
making their price highly volatile.
The secondary market for stripped mortgage-backed and asset-backed
securities may be more volatile and less liquid than that for other securities,
potentially limiting the Funds' ability to obtain market quotations for those
securities or to buy or sell those securities at any particular time.
It is anticipated that certain entities may create loan pools offering
pass-through investments in addition to the types discussed above, including
securities with underlying
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pools of derivative mortgage-related and asset-backed securities. As new types
of mortgage-related and asset-backed securities are developed and offered to
investors, Heartland Advisors will, consistent with each Fund's objective and
investment policies, consider making investments in such new types of
securities.
Zero-Coupon, Step-Coupon and Pay-in-Kind Securities. Each Fund 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 issue 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, a Fund 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.
Derivative Instruments
Each Fund may invest in a broad array of financial instruments and
securities, the value of which is "derived" from the performance of an
underlying asset or a "benchmark" such as a security index, an interest rate, or
a currency. In particular, each Fund may engage in transactions in options,
futures contracts, options on futures contracts and hybrid instruments to (a)
hedge against anticipated declines in the market value of its portfolio
securities or currencies and against increases in the market values of
securities or currencies it intends to acquire, (b) to manage exposure to
changing interest rates (duration management), (c) to enhance total return or
(d) to invest in eligible asset classes with greater efficiency and lower cost
than is possible through direct investment.
Some options and futures strategies, including selling futures, buying puts
and writing calls, tend to hedge a Fund's investments against price
fluctuations. Other strategies, including buying futures, writing puts, and
buying calls, tend to increase market exposure. Options and futures may be
combined with each other in order to adjust the risk and return characteristics
of a Fund's overall strategy. Futures, options and options on futures have
durations which, in general, are closely related to the duration of the
underlying securities. Holding long futures or call option positions will
lengthen the duration of a Fund's portfolio by approximately the same amount of
time that holding an equivalent amount of the underlying securities would.
Writing Covered Options. Each Fund may write covered put and call options
on any securities or futures contracts in which it may invest, on any securities
index based on or related to securities in which it may invest, or on any
currency in which Fund investments may be denominated. A call option on an asset
written by a Fund obligates the Fund to sell the specified asset to the holder
(purchaser) at a stated price (the exercise price) if the option is exercised
before a specified date (the expiration date). A put option on an asset written
by a Fund obligates the Fund to buy the specified asset from the purchaser at
the exercise price if the option is exercised before the expiration date.
The term "covered" means that a Fund will (a) in the case of a call option,
own the asset subject to the option or have an unconditional right to purchase
the same underlying asset at a price equal to or less than the exercise price of
the "covered"
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option or, in the case of a put option, have an unconditional right to sell the
same underlying asset at a price equal to or greater than the exercise price of
the "covered" option, or (b) establish and maintain, for the term of the option,
a segregated account consisting of cash or other liquid assets, either of which
may be quoted or denominated in any currency, having a value at least equal to
the Fund's obligation under the option, or (c) purchase an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position. A Fund may cover call
options on a securities index by owning securities whose price changes are
expected to be similar to those of the underlying index.
Writing put or call options can enable a Fund to enhance income by reason
of the premiums paid by the purchaser of such options. 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
asset 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 asset. Conversely, if the price of the underlying asset 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 asset and therefore would not benefit from the appreciation in
price. If the price of the underlying asset falls, the put writer would expect
to suffer a loss, which loss could be substantial, because a put writer must be
prepared to pay the exercise price for the option's underlying asset if the
other party to the option chooses to exercise it. However, the loss should be
less than the loss experienced if a Fund had purchased the underlying asset
directly because the premium received for writing the option will mitigate the
effects of the decline.
A Fund may enter into closing transactions with respect to options by
purchasing an option identical to the one it has written (for exchange-listed
options) or by entering into an offsetting transaction with the counterparty to
such option (for over-the-counter, or "OTC" options). A Fund's ability to
establish and close out positions in exchange-listed options depends on the
existence of a liquid market; however, there can be no assurance that such a
market will exist at any particular time or that a Fund will be able to effect
such closing transactions at a favorable price. In addition, although a Fund
will enter into OTC options only with counterparties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option position
at any time prior to its expiration or that the Fund will be able to effect such
closing transactions at a favorable price.
Purchasing Options. Each Fund may purchase put and call options on any
securities or futures contracts in which it may invest, on any securities index
based on or related to securities in which it may invest or on any currency in
which Fund investments may be denominated. A Fund would normally purchase call
options in anticipation of an increase, or put options in anticipation of a
decrease, in the market value of securities or currencies of the type in which
it may invest. A Fund may enter into closing transactions with respect to such
options by writing an option identical to the one it has purchased (for
exchange-listed options) or by entering into an offsetting transaction with the
counterparty to such option (for OTC options). A Fund may also exercise such
options or allow them to expire.
A Fund would normally purchase call options in anticipation of an increase
in the market value of the underlying assets. As the holder of a call option, a
Fund has the right to purchase the underlying asset at the exercise price at any
time during the option period. A call buyer typically attempts to participate in
potential price increases of the underlying asset with risk limited to the cost
of the option, including the premium paid and transaction costs, if such asset
prices fall. At the same time, the buyer can expect
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to suffer a loss if such asset prices do not rise sufficiently to offset the
cost of the option.
A Fund would normally purchase put options in anticipation of a decrease in
the market value of the underlying assets. As the holder of a put option, a Fund
has the right to sell the underlying asset at any time during the option period.
A Fund may also purchase put options on a security or currency related to its
investments as a defensive technique in order to protect against an anticipated
decline in the value of the underlying asset. Such hedge protection is provided
only during the life of the put option when a Fund, as holder of the put option,
is able to sell the underlying asset at the put exercise price regardless of any
decline in the underlying asset's market price. The premium paid for the put
option and any transaction costs would reduce any gain otherwise available for
distribution when the asset is eventually sold.
Futures Contracts. Each Fund may purchase and sell futures contracts,
including, but not limited to, interest rate, index or foreign currency 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 may engage
in transactions in futures contracts for "short" hedging or "long" strategies as
described below.
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 a
Fund enters into the contract. While a Fund may make or take delivery of the
underlying instrument whenever it appears economically advantageous to do so,
positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or loss as discussed below.
A Fund may take a "short" position in the futures market by selling futures
contracts in an attempt to hedge against an anticipated rise in interest rates
or a decline in market prices or foreign currency rates that would adversely
affect the value of the Fund's portfolio securities. As part of its hedging
strategy, a Fund may sell futures contracts on (i) securities held by the Fund
or securities with characteristics similar to those of the Fund's portfolio
securities, (ii) currencies in which its portfolio securities are quoted or
denominated or on one currency to hedge against fluctuations in the value of
securities denominated in a different currency if there is an established
historical pattern of correlation between the two currencies, or (iii) other
financial instruments, securities indices or other indices, if, in the opinion
of Heartland Advisors, there is a sufficient degree of correlation between price
trends for the Fund's portfolio securities and such futures contracts. A
successful short hedging position would result in any depreciation in the value
of portfolio securities being substantially offset by appreciation in the value
of the futures position. Conversely, any unanticipated appreciation in the value
of a Fund's portfolio securities would be substantially offset by a decline in
the value of the futures position.
A Fund may also take a "long" position in the futures market by purchasing
futures contracts. This strategy would be employed, for example, when interest
rates are falling or securities prices are rising and a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available. A Fund may
also purchase futures contracts to alter the investment characteristics of or
currency exposure associated with portfolio securities, as a substitute for
transactions in securities or foreign currencies, or to gain or increase
exposure to a particular securities market or currency.
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The purchaser of a futures contract is not required to pay for and the
seller of a futures contract is not required to deliver 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. There may be certain circumstances, such as periods of high
volatility, that cause an exchange to increase the level of a Fund's initial
margin payment. Unlike margin in securities transactions, initial margin on
futures contracts does not represent a borrowing to a Fund, but rather is in the
nature of a performance bond or good-faith deposit that is returned to the Fund
upon termination of the transaction assuming all contractual obligations have
been satisfied.
Each day that a Fund has an open position in a futures contract or an
option on a futures contract it will pay or receive cash, called "variation
margin," to or from the futures broker equal to the daily change in value of the
futures contract. This process is known as "marking to market." Variation margin
paid or received by a Fund does not represent a borrowing or a loan, but rather
represents settlement between the Fund and the broker of the amount one would
owe the other if the futures contract had expired at the close of the previous
day. When a Fund purchases an option on a future, all that is at risk is the
premium paid plus transaction costs. Alternatively, when a Fund purchases or
sells a futures contract or writes a call or put option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. A Fund may be required to sell securities at a time
when such sales are disadvantageous in the event the Fund has insufficient cash
to meet daily variation margin requirements. In computing daily net asset value,
each Fund will mark to market the current value of any 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; however, there can be
no assurance that such a market will exist at any particular time or that a Fund
will be able to effect such closing transactions at a favorable price. 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, the Fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, a 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
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if the underlying instrument had been sold. Movements in the prices of futures
contracts or options on futures contracts may not correlate perfectly with
movements in the prices of the underlying instruments due to certain
characteristics of the futures markets. In particular, daily variation margin
calls may cause certain participants in futures markets to liquidate futures or
options on futures contracts positions to avoid being subject to further calls.
These liquidations could distort the normal price relationship between the
futures or options and the underlying instruments by increasing price
volatility. Temporary price distortion may also be caused by increased
participation by speculators in the futures markets as a result of initial
margin deposit requirements being less onerous than in the securities markets.
Limitations on Futures and Options on Futures Transactions. The Funds will
engage in transactions in futures contracts and options thereon either for bona
fide hedging purposes or to seek to increase total return, in each case in
accordance with the rules and regulations of the Commodity Futures Trading
Commission. A Fund may hold positions in futures contracts and related options
that do not qualify as bona fide hedging positions if, as a result, the sum of
initial margin deposits and premiums paid to establish such positions, after
taking into account unrealized profits and unrealized losses on such contracts,
does not exceed 5% of the Fund's net 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.
Combined Positions. Each Fund 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 about whether,
when and how to use options and futures 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 options and
futures strategies require the ability to predict future movements in securities
prices, interest rates and other economic factors. There are significant
differences between the securities markets, the currency markets and the options
and futures markets that could result in an imperfect correlation between the
markets, causing a given transaction not to achieve its objectives. 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 or suspensions 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. A Fund may invest
in options and
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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 securities index may result in an imperfect
correlation since the index generally will be composed of a much broader range
of securities than the securities in which a Fund likely is to be invested. To
the extent that a Fund's options or futures positions 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, a Fund may purchase or sell options and futures contracts with a
greater or lesser value than the securities it wishes to hedge or intends to
purchase in order to attempt to compensate for differences in volatility between
the contract and the securities, although this may not be successful in all
cases.
Because of the low margin deposits required, futures trading involves a
high degree of leverage. A relatively small price movement in futures contracts
could result in an immediate and substantial gain or loss to a Fund. Therefore,
a purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract by a 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 or
suspension is imposed, it may be impossible for a Fund to enter into new
positions, close out existing positions or dispose of assets held in a
segregated account. These events may also make an option or futures contract
difficult to price. 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. Similarly, if a Fund is unable to
effect a closing sale transaction with respect to options it has purchased, it
would have to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying securities or
currencies.
Federal Tax Treatment of Options and Futures 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 and 40% short-term regardless of the holding
period of the instrument. A 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 (that is, 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. See
"Portfolio Management Strategies - Foreign Currency Transactions" for a
discussion of forward foreign exchange contracts.
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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.
Hybrid Instruments. Each Fund may invest in hybrid instruments, a type of
potentially high-risk derivative which combines the characteristics of futures
contracts or options with those of debt, preferred equity, or a depository
instrument. Generally, a hybrid instrument will be a debt security or other
evidence of indebtedness on which a portion of or all interest payments, and/or
the principal or stated amount payable at maturity, redemption, or retirement,
is determined by reference to prices, securities, currencies, intangibles,
goods, articles, or commodities, or by another objective index, economic factor,
or other measure, such as interest rates, currency exchange rates, commodity
indexes and securities indexes. Thus, hybrid instruments may take a variety of
forms, including, but not limited to, debt instruments with interest or
principal payments or redemption terms determined by reference to the value of a
currency, or commodity or securities index at a future point in time, preferred
stock with dividend rates determined by reference to the value of a currency or
convertible securities with the conversion terms related to a particular
commodity.
Since hybrid instruments reflect a combination of the characteristics of
futures or options with those of securities, hybrid instruments may entail
significant risks that are not associated with a similar investment in a
traditional debt instrument that has a fixed principal amount, is denominated in
U.S. dollars or bears interest either at a fixed rate or a floating rate
determined by reference to a common, nationally published benchmark. Although
the risks of a particular hybrid instrument will depend upon the terms of the
instrument, such risks may include, without limitation, the possibility of
significant changes in the benchmarks or underlying assets to which the
instrument is linked. Such risks generally depend upon factors that are
unrelated to the operations or credit quality of the issuer (although credit
risk of the issuer is a consideration) of the hybrid instrument and that may not
be readily foreseen by the purchaser, such as economic and political events, the
supply and demand for the underlying assets and interest rate movements. The
benchmarks and underlying assets to which hybrid instruments are linked may also
result in greater volatility and market risk, including leverage risk which may
occur when the hybrid instrument is structured so that a given change in a
benchmark or underlying asset is multiplied to produce greater change in the
value of the hybrid instrument, thereby magnifying the risk of loss as well as
the potential for gain. In addition, hybrid instruments may also carry liquidity
risk since the instruments are often "customized" to meet the needs of the
particular investor. See the section of this SAI titled "Types of Securities
Derivative Instruments - Risks in Options and Futures Transactions" above.
Swap Agreements. Each Fund may enter into swap agreements and may purchase
or sell related caps, floors and collars. It would enter into these transactions
primarily to preserve a desired return or spread on a particular investment or
portion of its portfolio, as a duration management technique or to protect
against any increase in the price of, or the currency exchange rate applicable
to, securities it anticipates
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purchasing at a later date. The Funds intend to use these techniques for hedging
purposes and not for speculation.
Swap agreements are generally individually negotiated agreements, primarily
entered into by institutional investors, in which the parties agree to exchange
the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount" (that is, the return on, or increase in, value of a particular
dollar amount invested at a particular interest rate) in a particular foreign
currency or in a "basket" of securities representing a particular index. A
Fund's successful use of these instruments will depend, in part, on Heartland
Advisors' ability to predict correctly whether certain types of investments are
likely to produce greater returns than other investments.
Depending on its structure, a swap agreement may increase or decrease the
exposure to changes in the value of an index of securities, the value of a
particular security or group of securities or foreign currency values. Depending
on how it is used, a swap agreement may increase or decrease the overall
volatility of a Fund's investments and its net asset value. The performance of a
swap agreement is determined by the change in the specific currency, market
index or security, or other factors that determine the amounts of payments due
to and from a Fund. A Fund's obligation under a swap agreement, which is
generally equal to the net amount to be paid or received under the agreement
based on the relative values of the positions held by each party to the
agreement, will be accrued daily (offset against amounts owed to the Fund) and
any accrued but unpaid net amounts owed to a swap counterparty will be covered
by the maintenance of the segregated account consisting of cash and/or other
appropriate liquid assets having a value at least as great as the commitment
underlying the obligations.
Swap agreements may include interest rate caps, which entitle the purchaser
to receive payments on a notional principal amount from the party selling the
cap to the extent that a specified index exceeds a predetermined interest rate
or amount; interest rate floors, which entitle the purchaser to receive payments
on a notional principal amount from the party selling such floor to the extent
that a specified index falls below a predetermined interest rate or amount; and
interest rate collars, under which a party sells a cap and purchases a floor, or
vice versa, in an attempt to protect itself against interest rate movements
exceeding given minimum or maximum levels.
If a swap agreement calls for payments by a Fund, it must be prepared to
make such payments when due. If the counterparty's creditworthiness declines, or
in the event of a default of the counterparty, the value of the swap agreement
would likely decline, potentially resulting in a loss of the amount expected to
receive under a swap agreement. A Fund will enter into swap agreements only with
counterparties that Heartland Advisors reasonably believes are capable of
performing under the swap agreements. The swap market is largely unregulated and
swap agreements may be considered to be illiquid.
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Foreign Investments
Each Fund may invest up to 25% of its assets directly in the securities of
foreign issuers traded outside the United States (Non-U.S. Traded Foreign
Securities), except that the Government Fund may invest up to 20% of its assets
in Non-U.S. Traded Foreign Securities. Each Fund may also invest without
limitation in foreign securities through depository receipts, as discussed
below; securities of foreign issuers that are traded on a registered U.S. stock
exchange or the Nasdaq National Market; and foreign securities guaranteed by a
United States person.
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. 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 may 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,
auditing 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
investing overseas, including non-U.S. withholding taxes, brokerage commissions,
and custodial costs, are generally higher than for U.S. investments. 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 a 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.
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 than their U.S. counterparts. 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, or
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 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.
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The Funds 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 where the issuer is domiciled, they may
be less liquid than foreign securities of the same class that are not subject to
such restrictions.
American Depository Receipts ("ADRs") are certificates evidencing
ownership of shares of a foreign-based issuer held by a U.S. bank or similar
financial institution as depository. Designed for use in U.S. securities
markets, ADRs are alternatives to the direct purchase of the underlying
securities in their national markets and currencies. The limitations on the
Funds' investments in foreign securities do not apply to investments in ADRs or
to securities of foreign issuers that are traded on a registered U.S. stock
exchange or the NASDAQ National Market. However, ADR holders may not have all of
the legal rights of shareholders.
A Depository Receipt may be sponsored or unsponsored. If a Fund is
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.
Illiquid Securities
Each Fund may invest in illiquid securities. However, no Fund may
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. For purposes of applying
this limitation, an "illiquid security" means one that may not be sold or
disposed of in the ordinary course of business within seven days at a price
approximating the value at which the security is carried by a Fund.
Under guidelines established by, and the oversight of, Heartland's
Board of Directors, Heartland Advisors determines which securities are illiquid
for purposes of this limitation. Certain securities exempt from registration or
issued in transactions exempt from registration under the Securities Act of
1933, as amended (the "Securities Act"), such as securities that may be resold
to institutional investors under Rule 144A under the Securities Act and
municipal lease obligations, 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 generally are readily marketable even though they are
subject to certain legal restrictions on resale. These securities, as well as
Rule 144A securities and municipal lease obligations, deemed to be liquid
pursuant to the guidelines adopted by Heartland's Board of Directors, are not
treated as being subject to the limitation on illiquid securities.
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act, 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, a Fund might obtain a less favorable price than prevailed when it
decided to seek registration of the security.
Repurchase agreements maturing in more than seven days are deemed to be
illiquid.
To the extent it invests in illiquid or restricted securities, a Fund
may encounter difficulty in determining a market value for such securities.
Disposing of illiquid or restricted invests may involve time-consuming
negotiations and legal expense, and it may be difficult or impossible for a Fund
to sell such an investment promptly and at an acceptable price. In addition, if
a Fund holds a material percentage of its assets in
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illiquid or restricted securities, it may experience difficulty meeting its
redemption obligations.
Indexed Securities
Each Fund may purchase securities whose prices are indexed to the
prices of other securities, securities indexes, or other financial indicators.
Indexed securities typically 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 a Fund may invest may
include securities whose interest rates are determined by reference to one or
more specific financial indicators, such as LIBOR, resulting in a security whose
interest payments tend to rise and fall together with the financial indicator.
Indexed securities may be positively or negatively indexed; that is, their
maturity value may increase when the specified underlying instrument's value
increases, resulting in a security that performs similarly to the underlying
instrument, or their maturity value may decline when the underlying instrument
increases, resulting in a security whose price characteristics are similar to a
put on the underlying instrument.
The performance of indexed securities depends to a great extent on the
performance of the security or other instrument to which they are indexed, and
may also be influenced by interest rate changes in the U.S. and abroad. At the
same time, indexed securities are subject to the credit risks associated with
the issuer of the security, and their values may decline substantially if the
issuer's creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. government agencies.
The market for indexed securities may be thinner and less active than
the market for securities in general, which can adversely affect the prices at
which indexed securities are sold. 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 to value
accurately indexed securities and a Fund's ability to dispose of these
securities.
Investment Companies
Each Fund may invest in the securities of other investment companies,
including unit investment trust or closed-end management companies, as permitted
under the 1940 Act. At present, the 1940 Act provisions limit a 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, a 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.
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Loan Interests
Each Fund may invest in loan interests, which are interests in amounts
owed by a municipality or other borrower to lenders or lending syndicates. Loan
interests purchased by a Fund will vary in maturity, may be subject to
restrictions on resale, are not readily marketable and may be secured or
unsecured. They involve the risk of loss in case of default or bankruptcy of the
borrower or, if in the form of a participation interest, the insolvency of the
financial intermediary. If a Fund acquires a loan interest under which the Fund
derives its rights directly from the borrower, such loan interests are
separately enforceable by the Fund against the borrower and all payments of
interest and principal are typically made directly to the Fund from the
borrower. In the event that a Fund and other lenders become entitled to take
possession of shared collateral being held in connection with a loan interest as
a result of default or insolvency, it is anticipated that such collateral would
be held in the custody of an institution for their mutual benefit.
Typically, the U.S. or foreign commercial bank, insurance company,
finance company, or other financial institution that originates, negotiates and
structures the loan interest (the "Agent") administers the terms of the loan
agreement. As a result, a Fund will generally rely on the Agent to receive and
forward to the Fund its portion of the principal and interest payments on the
loan. A Fund may also rely on the Agent and the other members of the lending
syndicate to use appropriate credit remedies against the borrower, if necessary.
However, a Fund may be required to perform certain tasks on its own behalf in
the event the Agent does not perform certain administrative or enforcement
functions.
A Fund may incur certain costs and delays in realizing payment on a
loan interest, or suffer a loss of principal and/or interest, in the event the
Agent becomes insolvent or enters into receivership or bankruptcy proceedings.
Indebtedness of borrowers whose creditworthiness is poor involves substantially
greater risks, and may be highly speculative. In addition, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
borrower's obligation, or that the collateral can be liquidated.
Real Estate Investment Trusts
Each Fund may invest up to 10% of its total assets in real estate
investment trusts ("REITs") which may own real estate properties ("equity
REITs") or may make or purchase mortgages on real estate ("mortgage REITs"). The
Government Fund has no present intent to invest in 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. Equity REITs may be adversely affected by rising interest rates,
which may increase the costs of obtaining financing for real estate projects or
cause investors to demand a high annual yield from future distributions.
Mortgage REITs may experience diminished yields during periods of declining
interest rates if they hold mortgages that the mortgagors elect to prepay during
such periods. In addition, the failure of a REIT in which a 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.
Some REITs have relatively small market capitalizations, which could
increase their market volatility. REITs tend to depend upon specialized
management skills and may have limited diversification causing them to be
subject to risks inherent in operating and financing a limited number of
properties.
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Rights and Warrants
Each Fund may purchase rights and warrants, which are securities giving
the holder the right, but not the obligation, to purchase the underlying
securities at a predetermined price during a specified period or perpetually.
Rights and warrants are considered more speculative than certain other types of
investments because they generally have no voting rights, pay no dividends, and
have no rights with respect to the assets of the corporation issuing them. In
addition, the prices or rights and warrants do not necessarily move parallel to
the prices of the underlying securities, and they cease to have value if they
are not exercised on or prior to their expiration dates.
The Government Fund has no present intent to invest in warrants.
When-Issued and Delayed-Delivery Securities; Forward Commitments
Each Fund may purchase securities on a when-issued or delayed-delivery
basis, and may purchase forward commitments. Payment and interest terms of these
securities are set out at the time a Fund enters into the commitment to
purchase, but normally the securities are not issued, and delivery and payment
for such obligations normally does not take place, for a month or more after the
purchase date. In a forward commitment transaction, a Fund contracts to purchase
securities for a fixed price at a future date beyond customary settlement time.
Obligations purchased on a when-issued or forward commitment basis involve a
risk of loss if the value of the security purchased declines prior to the
settlement date, and may increase fluctuation in a Fund's net asset value.
On the date a Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, it will record the transaction and
reflect the value of the obligation in determining its net asset value. In
addition, a Fund will establish and maintain, for the term of the position, a
segregated account consisting of cash or other liquid assets, either of which
may be quoted or denominated in any currency, having a value at least equal to
the Fund's obligation under the position.
PORTFOLIO MANAGEMENT STRATEGIES
The following information supplements the discussion of the Funds'
investment objectives and policies in their respective prospectuses.
Borrowing
Each Fund may borrow from any bank or other person up to 5% of its
total assets for temporary purposes. A borrowing is presumed to be for temporary
purposes if it is repaid by the Fund within 60 days and is not extended or
renewed.
Each Fund also may borrow solely from banks to facilitate the
management of its investment portfolio and make other investments or engage in
other transactions permissible under the 1940 Act which may be considered a
borrowing (such as dollar rolls and reverse repurchase agreements), provided
such borrowings for these purposes do not exceed one-third of total assets.
Currently, each Fund intends to borrow only from banks, for periods not
longer than 60 days, in amounts not to exceed 20% of total assets and only for
the following purposes: (a) to avoid liquidating securities under circumstances
that Heartland Advisors believes are unfavorable to shareholders, such as to
meet large or unexpected redemptions or to purchase debt obligations pending
receipt of proceeds in the settlement of the sale of other portfolio securities;
(b) when the Fund is scheduled to receive cash in exchange for debt obligations
that are being retired, called or
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exchanged pursuant to a sinking fund or put feature of the instrument. The
extent to which a Fund will borrow will depend, among other things, on market
conditions and interest rates.
Concentration
The Taxable Short Duration Municipal, Short Duration High-Yield
Municipal, High-Yield Municipal Bond and Wisconsin Tax Free Funds may invest 25%
or more of their respective total assets in Municipal Obligations that finance
similar types of projects or projects in related industry sectors. These could
include, for example, projects involving community development, education,
health care, hospitals, retirement, single-family or multi-family housing,
redevelopment, transportation or various types of 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 a Fund's overall performance.
These Funds also may invest 25% or more of their respective total
assets in Municipal Obligations whose issuers or projects financed are located
in the same state or other geographic region. If a Fund were to concentrate its
investments in such a geographic territory, developments and events that have a
greater effect on the economy of that geographic territory than on 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. These Funds may not invest more than 25% of their respective total
assets in securities of non-governmental issuers whose principal business
activities are in the same industry.
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Duration
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 sensitivity of a bond (or bond
mutual fund) to a one percent (1%) rise or fall in interest rates. The
Government Fund generally maintains a duration of three to six years, the
Taxable Short Duration Municipal Fund and Short Duration High-Yield Municipal
Fund will have an average portfolio duration of three years or less, and the
High-Yield Municipal Bond Fund will have an average portfolio duration of
greater than five years. None of the other Funds has specific portfolio duration
limitations.
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 that, 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.
Foreign Currency Transactions
To manage the currency risk accompanying investments in foreign
securities and to facilitate the purchase and sale of foreign securities, the
Funds may engage in foreign currency transactions on a spot, or cash, basis at
the spot rate prevailing in the foreign currency exchange market or through
forward foreign currency exchange contracts ("forward contracts"). Forward
contracts are contractual obligations to purchase or sell a specific currency at
a future date (or within a specified time period) at a price set at the time of
the contract. These contracts are usually entered into with banks and
broker-dealers, are not exchange traded and are usually for less than one year,
but may be renewed.
The Funds may use these instruments for hedging or any other lawful
purpose consistent with their respective investment objectives.
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, a 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.
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In addition, when Heartland Advisors believes that the currency of a
particular foreign country may suffer a substantial decline against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of a Fund's portfolio securities denominated in such foreign
currency. Alternatively, where appropriate, a Fund may hedge all or part of its
foreign currency exposure through the use of a basket of currencies or a proxy
currency where such currency or currencies act as an effective proxy for other
currencies. In such a case, a Fund may enter into a forward contract where the
amount of the foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging technique may be
more efficient and economical than entering into separate forward contracts for
each currency it holds.
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.
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. There might be imperfect correlation, or even no
correlation, between price movements of an instrument and price movements of
investments being hedged. Such a lack of correlation might occur due to factors
unrelated to the value of the investments being hedged, such as speculative or
other pressures on the markets in which these instruments are traded. In
addition, a Fund's use of currency-related derivative instruments is always
subject to the risk that the currency in question could be devalued by the
foreign government. In such a case, any long currency positions would decline in
value and could adversely affect any hedging position maintained by a Fund.
There is no assurance that Heartland Advisors' use of forward currency contracts
will be advantageous to a Fund or that it will hedge at an appropriate time.
Forward foreign exchange contracts may or may not be treated as Section
1256 contracts or straddles under the Internal Revenue Code. See "Types of
Securities - Derivative Instruments - Federal Tax Treatment of Options and
Futures Contracts."
Influence or Control over Portfolio Companies
As a shareholder of a portfolio company, each Fund reserves the right
to freely communicate its views on matters of policy to the company's
management, board of directors and other shareholders when a policy may affect
the value of the Fund's investment. In exercising this right, each of the Funds
(other than the Government Fund) may, from time to time, use its ownership
interest in a portfolio company to seek to influence or control the company's
management. For example, a Fund might take steps, either individually or as part
of a group, (a) to actively support, oppose or influence a company's
decision-making, (b) to seek changes in a company's management or board of
37
<PAGE>
directors, (c) to effect the sale of all or some of a company's assets or (d) to
vote to participate in or oppose a takeover of a portfolio company or an
acquisition by a portfolio company. A Fund would engage in such activities in an
effort to protect and maximize the value of its investment on behalf of the
Fund's shareholders. The extent to which a Fund might invest for purposes of
obtaining control or influencing management would depend, among other things, on
facts and circumstances specific to the issuer as well as general market
conditions.
It is expected that only the Select Value, Value and Value Plus Funds
would make investments for control on a selective basis when Heartland Advisors
believes it would be in the best interests of the Fund and its shareholders.
Lending Portfolio Securities
Each Fund may lend its portfolio securities to institutional investors
or broker-dealers up to a maximum of one-third of its total 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
lent. The collateral received by a Fund will be invested in short-term debt
instruments. A Fund receives amounts equal to earned income for having made the
loans. A 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, a 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. A Fund may pay a fee to placing brokers in connection with
loans of its portfolio securities.
Repurchase Agreements
Each Fund may enter into repurchase agreements with certain banks or
nonbank dealers. In a repurchase agreement, a Fund buys a security at one price,
and at the time of sale the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The repurchase
agreement thereby determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. Repurchase agreements which mature in more than seven days
will be treated as illiquid securities under the guidelines adopted by
Heartland's Board of Directors and will be subject to each Fund's limitation on
investments in illiquid securities. See "Types of Securities - Illiquid
Securities" above.
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. Since the underlying securities are not owned by a
Fund but only constitute collateral for the seller's obligation to repay the
purchase price, 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 the Fund's ability to dispose of and costs
in connection with the disposal 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 and Dollar Rolls
Each Fund 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 agrees to repurchase the instrument at a particular price
and time. A Fund
38
<PAGE>
generally retains the right to interest and principal payments on the security.
While a reverse repurchase agreement is outstanding, a Fund will establish and
maintain a segregated account consisting of cash or other liquid assets, either
of which may be quoted or denominated in any currency, having a value at least
equal to the Fund's obligation under the agreement.
Each Fund may also enter into dollar rolls, in which the Fund would
sell securities for delivery in the current month and simultaneously contract to
purchase substantially similar securities on a specified future date. While a
Fund would forego principal and interest paid on the securities during the roll
period, the Fund would be compensated by the difference between the current
sales price and the lower price for the future purchase as well as by any
interest earned on the proceeds of the initial sale. A Fund also could be
compensated through the receipt of fee income equivalent to a lower forward
price. At the time of entering into a dollar roll, a Fund will establish and
maintain a segregated account consisting of cash or other liquid assets, either
of which may be quoted or denominated in any currency, having a value at least
equal to the Fund's obligation to buy the securities.
To the extent the value of the security that a Fund agrees to purchase
pursuant to a reverse repurchase agreement or a dollar roll declines, the Fund
may experience a loss. Reverse repurchase transactions and dollar rolls 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 or dollar roll, a Fund will take into account the creditworthiness of
the counterparty.
Short Sales
Each Fund (other than the Government Fund) may engage in short sales of
securities under certain circumstances. Selling securities "short against the
box" involves selling a security that a 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. A Fund may also engage in short sales of securities of an issuer
("acquirer") 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
acquirer. A Fund will maintain a segregated collateral account with its
custodian to cover open short positions in acquirer securities. If the value of
an acquirer'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.
Standby Commitments
To facilitate portfolio liquidity, the Funds may obtain standby
commitments from brokers, dealers or banks with respect to debt securities in
their portfolios. A standby commitment gives the holder the right to sell the
underlying security to the seller at an agreed-upon price, generally equal to
the amortized cost of the underlying security plus accrued interest, on certain
dates or within a specified period. Standby commitments generally increase the
cost of the acquisition of the underlying security, thereby reducing its 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 evaluates those risks by reviewing the creditworthiness
of the brokers, dealers and banks from which a Fund obtains standby commitments
to evaluate those risks.
39
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund has adopted the following investment restrictions. Unless
otherwise expressly provided herein, any restriction that is expressed as a
percentage is adhered to at the time of investment or other transaction; a later
change in percentage resulting from changes in the value of a Fund's assets will
not be considered a violation of the restriction. Calculations based on total
assets do not include cash collateral held in connection with portfolio lending
activities.
Restrictions that are designated as fundamental policies cannot be
changed without the majority approval of shareholders as defined in the 1940
Act. Non-fundamental restrictions may be changed by the Heartland Board of
Directors without shareholder approval.
Under the 1940 Act, "majority approval of shareholders" means approval
by the lesser of (1) the holders of 67% or more of a Fund's shares represented
at a meeting of shareholders at which the holders of at least 50% of the Fund's
outstanding shares are present in person or by proxy or (2) more than 50% of the
Fund's outstanding shares.
Fundamental Restrictions Common to the Funds
As a matter of fundamental policy, which may not be changed without
shareholder approval, no Fund may:
1. Concentration. Invest more than 25% of total assets in securities of
-------------
non-governmental issuers whose principal business activities are in the same
industry; provided, however, that there shall be no limitation on the purchase
of Municipal Obligations and of securities issued or guaranteed by national
governments1, their agencies or instrumentalities.
2. Real Estate. Purchase or sell real estate, except the Fund may (i)
-----------
acquire real estate as a result of ownership of securities or other instruments,
(ii) invest in securities or other instruments backed by real estate, and (iii)
invest in securities of companies that are engaged in the real estate business
and those that invest in real estate, including, but not limited to, real estate
investment trusts.
3. Borrowing. Borrow money or property, except the Fund may (i) make
---------
investments or engage in other transactions permissible under the 1940 Act which
may involve borrowing, provided that the combination of such activities shall
not exceed 33 1/3% of total assets (including the amount borrowed), less the
Fund's liabilities (other than borrowings), and (ii) borrow up to an additional
5% of its total assets (not including the amount borrowed) from a bank for
temporary purposes. Any borrowing which comes to exceed these limits shall be
reduced in accordance with applicable law.
4. Loans. Make loans, except the Fund may (i) acquire publicly
-----
distributed or privately placed debt securities and purchase debt, (ii) purchase
money market instruments and enter into repurchase agreements, and (iii) lend
portfolio securities. No Fund may lend portfolio securities if, as a result
thereof, the aggregate of all such loans would exceed 33 1/3% of total assets
taken at market value at the time of such loan.
- ----------------------
(1) For so long as it is the position of the staff of the SEC that foreign
governments are industries for purposes of mutual fund policies concerning
concentration, they shall not be included within the types of governmental
issuers excluded from the Funds' concentration policies.
40
<PAGE>
5. Underwriting. Underwrite the securities of other persons, except to
------------
the extent that the Fund may be deemed to be an underwriter within the meaning
of the Securities Act in connection with the purchase and sale of portfolio
securities.
6. Senior Securities. Issue senior securities, except to the extent
-----------------
permitted under the 1940 Act.
7. Commodity Interests. Purchase or sell physical commodities unless
-------------------
acquired as a result of ownership of securities or other instruments, except the
Fund may purchase or sell futures contracts, options on futures contracts and
other derivative instruments, and it may invest in securities or other
instruments backed by physical commodities or in the securities of companies
engaged in commodities businesses.
Other Fundamental Restrictions
In addition to the fundamental restrictions common to all the Funds,
the Funds have fundamental policies on diversification, pledging of assets,
short sales and affiliate transactions, as described below.
41
<PAGE>
Diversification. Each of the Select Value, Short Duration High-Yield
Municipal and High-Yield Municipal Bond Funds (a) may not, with respect to 75%
of its total assets, invest more than 5% of the fair market of its assets in
securities of any one issuer, other than securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities; and (b) may not, with
respect to 75% of its total assets, purchase more than 10% of the outstanding
voting securities of an issuer.
The Value Plus Fund (a) may not, 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, and (b) may not 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. The Value Plus Fund also may not purchase more
than 10% of the outstanding voting securities of an issuer.
Each of the Value and Government Funds may not invest more than 5% of
the fair market value of its assets in securities of any one issuer, except for
U.S. Government agency securities and securities backed by the U.S. 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.
In addition, each of the Value and Government Funds may not purchase more than
10% of the outstanding voting securities of an issuer.
The Taxable Short Duration High-Yield Municipal Fund may not, with
respect to 75% of total assets, purchase the securities of any one issuer,
except for securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, if, as a result, (a) more than 5% of total assets would be
invested in the securities of that issuer, or (b) the Fund would hold more than
10% of the outstanding voting securities of that issuer.
The Wisconsin Tax Free Fund may not 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 U.S.
Government, or a state or territory of the United States, or the District of
Columbia, or their agencies, instrumentalities, municipalities or political
subdivisions. In addition, the Wisconsin Tax Free Fund may not purchase more
than 10% of the outstanding voting securities of an issuer.
Pledging of Assets. The Select Value Fund may not 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. The
Select Value Fund also will not pledge more than 15% of its net assets to secure
its permitted borrowings.
Each of the Value Plus, Value and Government Funds may not pledge more
than 15% of its net assets to secure its permitted borrowings.
The Taxable Short Duration Municipal Fund has no fundamental policy on
pledging of assets.
Each of the Short Duration High-Yield Municipal and High-Yield
Municipal Bond Funds may not 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.
42
<PAGE>
The Wisconsin Tax Free Fund may not pledge more than 10% of its net
assets to secure its permitted borrowings.
43
<PAGE>
Short Sales. The Government Fund may not effect short sales of
securities.
The Value Fund may sell securities short when 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
all of its open short positions would exceed 5% of the Fund's total assets, or
if more than 10% of its net assets would be held as collateral for such short
positions.
The other Funds do not have a fundamental restriction governing short
sales.
Affiliate Purchases. The Government Fund may not purchase or retain the
securities of any issuer if the officers, directors, advisors or managers of the
Fund owning beneficially more than 1.5% 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.
The other Funds do not have a fundamental restriction governing
affiliate purchases.
Non-Fundamental Restrictions
Each Fund's investment objective (set forth in its Prospectus) and the
following non-fundamental restrictions are subject to change by Heartland's
Board of Directors without shareholder approval.
No Fund may:
1. Investment Companies. Purchase securities of other open-end or
--------------------
closed-end investment companies, except as permitted by the 1940 Act. Subject to
approval by the Heartland Board of Directors, the Fund may invest all (or
substantially all) of its assets in the securities of a single open-end
investment company (or series thereof) with the same investment objective and
substantially the same investment policies and restrictions as the Fund in
connection with a "master/feeder" arrangement. The Fund and one or more other
mutual funds or other eligible investors with identical investment objectives
("Feeders") would invest all (or a portion) of their respective assets in the
shares of another investment company (the "Master") that had the same investment
objective and substantially the same investment policies and restrictions as the
Feeders. The Fund would invest in this manner in an effort to achieve economies
of scale associated with having the Master make investments in portfolio
companies on behalf of the Feeders.
2. Illiquid Securities. Purchase a security if, as a result, more than
-------------------
15% of net assets would be invested in illiquid securities.
3. Margin Purchases. Purchase securities on margin, except that the
----------------
Fund may (i) obtain short-term credit necessary for the clearance and settlement
of purchases and sales of portfolio securities, and (ii) make margin deposits as
required in connection with permissible options, futures, options on futures,
short selling and other arbitrage activities.
4. Short Sales. Sell securities short, unless the Fund owns or has the
-----------
right to obtain securities equivalent in kind and amount to the securities sold
short, or unless
44
<PAGE>
it covers such short sale as required by the current rules and positions of the
Securities and Exchange Commission ("SEC") or its staff, and provided that
transactions in options, futures, options on futures, or other derivative
instruments are not deemed to constitute selling securities short.
5. Concentration. For purposes of a Fund's fundamental restriction on
-------------
concentration, industries shall be determined by reference to the
classifications specified in the Fund's annual and semiannual reports. For so
long as it is the position of the staff of the SEC that foreign governments are
industries for purposes of such restriction, investments in foreign governments
shall be so limited.
6. Futures Contracts. Purchase a futures contract or an option on a
-----------------
futures contract if, with respect to positions in futures and futures options
which do not represent bona fide hedging transactions, the aggregate initial
margin and premiums required to establish such positions, less the amount by
which such positions are in the money within the meaning of the Commodity
Exchange Act, would exceed 5% of the Fund's net assets.
7. Real Estate Investment Trusts. Invest more than 10% of its total
-----------------------------
assets in real estate investment trusts.
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 years
ended December 31, 1998 and 1997, the portfolio turnover rates for the Funds
were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1998 1997
---- ----
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Select Value Fund 48% 30%
- -------------------------------------------------------------------------------------------------
Value Plus Fund 64% 74%
- -------------------------------------------------------------------------------------------------
Value Fund 36% 55%
- -------------------------------------------------------------------------------------------------
Government Fund 90% 143%
- -------------------------------------------------------------------------------------------------
Taxable Short Duration Municipal Fund N/A N/A
- -------------------------------------------------------------------------------------------------
Short Duration High-Yield Municipal Fund 215% 175%
- -------------------------------------------------------------------------------------------------
High-Yield Municipal Bond Fund 223% 439%
- -------------------------------------------------------------------------------------------------
Wisconsin Tax-Free Fund 16% 8%
- -------------------------------------------------------------------------------------------------
</TABLE>
No information regarding portfolio turnover rates for 1997 and 1998 is available
for the Taxable Short Duration Municipal Fund because it did not commence
operations until December 29,1998.
45
<PAGE>
MANAGEMENT
Heartland is governed by a Board of Directors that oversees its
business affairs, and meets regularly to review the Funds' investments,
performance and expenses. The Board elects the officers of Heartland and hires
the Funds' service providers, including the Funds' investment advisor, Heartland
Advisors, Inc. The policy of Heartland is that the majority of Board members are
independent of Heartland Advisors. The Directors and officers of Heartland are
listed below, together with their principal occupations during the past five
years.
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Age Position with Heartland During Past Five Years
- ---------------- --- ----------------------- ----------------------
<S> <C> <C> <C>
William J. Nasgovitz 54 President and Director* President, Chief Executive Officer and Director,
790 North Milwaukee Street Heartland Advisors, Inc., since 1982; Director of
Milwaukee, WI 53202 Capital Investments, Inc., since 1989 (small
business investment company).
Willard H. Davidson 80 Director Director of Artos Engineering Company since 1984;
3726 North Lake Drive financial and business consultant since 1984.
Milwaukee, WI 53211
Hugh F. Denison 53 Director* Educator; Shareholder Ombudsman, Heartland Advisors,
790 North Milwaukee Street Inc., since January 1998; Vice President, Director
Milwaukee, WI 53202 of Research and Director, Heartland Advisors, 1988
to 1996.
Jon D. Hammes 51 Director President, The Hammes Company (a commercial real
Suite 305 estate development company) since 1991.
18000 West Sarah Lane
Brookfield, WI 53045
Patrick J. Retzer 41 Vice President, Treasurer and Senior Vice President and Director of Heartland
790 North Milwaukee Street Director* Advisors, Inc. since 1987; Treasurer, Heartland
Milwaukee, WI 53202 Advisors, 1987 to September 1998.
A. Gary Shilling 62 Director President, A. Gary Shilling & Company, Inc.
500 Morris Avenue (economic consultants and investment advisors) since
Springfield, NJ 07081 1978.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Age Position with Heartland During Past Five Years
- ---------------- --- ----------------------- ----------------------
<S> <C> <C> <C>
Allan H. Stefl 55 Director Senior Vice President, Communications, Nestle
800 North Brand Boulevard USA, since 1993.
Glendale, CA 91203
Linda F. Stephenson 58 Director President and Chief Executive Officer, Zigman
100 East Wisconsin Avenue Joseph Stephenson (a public relations and
Milwaukee, WI 53202 marketing marketing
communications firm) since 1989.
Jilaine Hummel Bauer 43 Vice President and Secretary Senior Vice President and General Counsel,
790 North Milwaukee Street Heartland Advisors, Inc. since January 1998;
Milwaukee, WI 53202 Secretary, Heartland Advisors, Inc. since
August 1999; Senior Vice President, Stein
Roe & Farnham Incorporated, 1992 to 1998.
Paul T. Beste 43 Vice President and Principal Senior Vice President--Investment Operations,
790 North Milwaukee Street Accounting Officer Heartland Advisors, Inc. since September 1998;
Milwaukee, WI 53202 Investment Operations Officer, Heartland
Advisors, 1997 to 1998; Director of Taxes/Compliance,
Strong Capital Management, Inc., 1992 to 1997.
Kenneth J. Della 36 Vice President Senior Vice President and Treasurer, Heartland
790 North Milwaukee Street Advisors, Inc. since September 1998; Chief Financial
Milwaukee, WI 53202 Officer, Heartland Advisors, 1995 to 1998; employed
by Heartland Advisors since 1992.
</TABLE>
______________
* Directors who are "interested persons" (as defined in the 1940 Act) of
Heartland Advisors.
47
<PAGE>
Heartland pays the compensation of the five Directors who are not
officers, directors or employees of Heartland Advisors. The following
compensation was paid to the other Directors who are not "interested persons" of
Heartland Advisors for their services during the fiscal year ended December 31,
1998:
<TABLE>
<CAPTION>
Total
Aggregate Pension or Compensation
from Compensation Retirement from Heartland
Director Heartland Benefits and Fund Complex
-------- --------- -------- ----------------
<S> <C> <C> <C>
Willard H. Davidson $32,000 None $32,000
Jon D. Hammes $32,000 None $32,000
A. Gary Shilling $30,000 None $30,000
Linda F. Stephenson $32,000 None $32,000
Allen H. Stefl* $ 6,000 None $ 6,000
</TABLE>
- --------------------
* Mr. Stefl joined the Board in October 1998.
48
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of September 17, 1999, no person controlled any of the Funds. As of
September 17, 1999, the Directors and officers of Heartland Group, Inc. as a
group (11 persons) owned less than 1% of the outstanding shares of the Value
Plus Fund, Value Fund, Short Duration High-Yield Municipal Fund, High-Yield
Municipal Bond Fund and Wisconsin Tax Free Fund, and owned 5.78% of the Select
Value Fund, 2.49% of the Government Fund and 3.24% of the Taxable Short
Duration Municipal 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 as follows:
<TABLE>
<CAPTION>
Record or Beneficial Holder Fund No. of Shares (%)
- --------------------------- ---- ------------- -----
<S> <C> <C> <C>
Charles Schwab & Co., Inc. Select Value 61,449 10.6%
Attn: Mutual Funds Value Plus 1,404,693 15.6%
101 Montgomery Street Value 5,637,161 15.0%
San Francisco, CA 94104-4122 Government 722,657 13.9%
Taxable Short Duration Municipal 232,466 16.2%
Short Duration High-Yield Municipal 4,089,065 26.3%
High-Yield Municipal Bond 2,682,505 27.7%
National Financial Services Corp. Value Plus 698,264 7.8%
FBO The Exclusive Benefit of Our Customers Value 2,656,026 7.1%
One World Financial Ctr., 5th Floor Government 270,599 5.2%
200 Liberty Street Taxable Short Duration Municipal 159,572 11.1%
New York, NY 10281-1003 Short Duration High-Yield Municipal 2,009,981 12.9%
High-Yield Municipal Bond 1,392,963 14.4%
The Trust Company of Knoxville Value Plus 1,407,098 15.6%
P.O. Box 789
Knoxville, TN 37901-0789
Washington State Funeral Directors Government 363,843 7.0%
Association - Master Trust
2950 Northup Way, Ste. 105
Bellevue, WA 98004-1406
Donaldson, Lufkin & Jenrette Taxable Short Duration Municipal 92,623 6.5%
Securities Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Catherine J. Polaski Select Value 42,851 7.4%
5329 Highway 38
Franksville, WI 53126-9312
Merle F. Cook Select Value 32,611 5.6%
Sharon L. Cook JT Ten
5666 W. Greenbrook Drive
Brown Deer WI 53223-2331
</TABLE>
49
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
Heartland Advisors provides investment management and administrative
services to the Funds pursuant to identical Investment Advisory Agreements with
respect to all of the Funds, except the Taxable Short Duration Municipal Fund,
for which it provides such services pursuant to a separate Investment Management
Agreement and an Administration Agreement. All of these agreements are
collectively referred to as the "Management Agreements." William J. Nasgovitz, a
Director and the President of Heartland, controls Heartland Advisors by virtue
of his ownership of a majority of its outstanding capital stock and serves as
its President and a Director. In addition to serving as investment advisor to
the Funds, Heartland Advisors also serves as the distributor for the shares of
the Funds. Heartland Advisors, founded in 1982, serves as the investment advisor
for Heartland's nine equity and fixed income mutual funds, and also provides
investment management services for individuals, institutions and retirement
plans. As of September 30, 1999 Heartland Advisors had approximately $__ 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.
Under the Management Agreements, each of the Select Value and Value
Funds pays Heartland Advisors an annual management fee at the rate of 0.75% of
the respective Fund's average daily net assets; the Value Plus Fund pays
Heartland Advisors an annual management fee at the rate of 0.70% of the Fund's
average daily net assets; the Government Fund pays Heartland Advisors an annual
management fee at the rate of 0.65% of the first $100 million of the Fund's
average daily net assets, 0.50% of the next $400 million of assets, and 0.40% of
assets in excess of $500 million; the Taxable Short Duration Municipal Fund pays
Heartland Advisors an annual fee for its investment management services at the
rate of 0.45% of the average of the Fund's average daily net assets and an
annual fee for its administrative services at the rate of 0.15% of the Fund's
average daily net assets; the Short Duration High-Yield Municipal Fund pays
Heartland Advisors an annual management fee at the rate of 0.40% of the Fund's
average daily net assets; the High-Yield Municipal Bond Fund pays Heartland
Advisors an annual management fee at the rate of 0.60% of the Fund's average
daily net assets; and the Wisconsin Tax Free Fund pays Heartland Advisors an
annual management fee at the rate of 0.65% of the Fund's average daily net
assets. The fees are paid in monthly installments. Heartland Advisors has agreed
to certain contractual fee waivers and expense reimbursements as discussed in
the Funds` Prospectuses.
The following table sets forth the management fees actually paid by
each Fund to Heartland Advisors and the amount of management fees waived by
Heartland Advisors for the last three fiscal years or, if shorter, since
commencement of the Fund's operations:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Select Value Fund (10/11/96):
Fees actually paid $2,325 $26,585 $0
Fees waived $0 $13,774 $63,119
Value Plus Fund:
Fees actually paid $218,448 $1,292,331 $2,030,188
Fees waived $0 $0 $0
Value Fund:
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Fees actually paid $10,877,255 $14,673,206 $14,781,523
Fees waived $0 $0 $0
Government Fund:
Fees actually paid $291,423 $146,128 $133,403
Fees waived $87,427 $155,522 $219,542
Taxable Short Duration Municipal Fund
(12/28/98):
Fees actually paid N/A N/A $0
Fees waived N/A N/A $30
Short Duration High-Yield Municipal Fund
(1/2/97):
Fees actually paid N/A $0 $443,079
Fees waived N/A $214,608 $144,279
High-Yield Municipal Bond Fund (1/2/97):
Fees actually paid N/A $0 $255,237
Fees waived N/A $82,569 $77,559
Wisconsin Tax-Free Fund:
Fees actually paid $789,698 $819,186 $889,967
Fees waived $0 $0 $0
</TABLE>
Under the Management Agreements, Heartland Advisors manages the investment
operations of the Funds and provides administrative services. Subject to the
supervision and control of the Board of Directors, Heartland Advisors is
authorized to formulate and maintain a continuing investment program with
respect to the Funds and to determine the selection, amount, and time to buy,
sell or lend securities or other investments for the Funds, including the
selection of entities with or through which such purchases, sales or loans are
to be effected. In addition, Heartland Advisors supervises the business and
affairs of the Funds and provides such services and facilities as may be
required for effective administration of the Funds. 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 at its own expense furnishes all executive and other
personnel to the Funds, paying all salaries and fees of the officers and
directors of Heartland who are employed by Heartland Advisors or its affiliates.
In addition, Heartland Advisors provides office space and other facilities
required to render the services set forth above. Heartland Advisors is not
required to pay or provide any credit for services provided by Heartland's
custodian, transfer agent or other agents without additional costs to Heartland.
Moreover, if Heartland Advisors pays or assumes any expenses of Heartland or a
Fund which it is not required to pay or assume under the Management Agreements,
Heartland Advisors will not be obligated to pay or assume the same or similar
expense in the future.
The Funds bear all their other expenses including all charges of
depositories, custodians and other agencies for the safekeeping and servicing of
their cash, securities and other property; all expenses of maintaining and
servicing shareholder
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<PAGE>
accounts, including all charges for transfer, shareholder recordkeeping,
dividend disbursing, redemption and other agents for the benefit of the Funds;
all charges for equipment or services used for obtaining price quotations or for
communication with the Funds' custodian, transfer agent or any other agent
selected by Heartland; all charges for accounting services provided to the Funds
by Heartland Advisors or any other provider of such services; all charges for
services of Heartland's independent auditors and legal counsel; all compensation
of directors and officers (other than those employed by or who serve as
directors of Heartland Advisors or its affiliates), all expenses of Heartland's
officers and directors incurred in connection with their services to the Funds,
and all expenses of meetings of the directors or committees thereof; all
expenses incidental to holding meetings of shareholders, including expenses of
printing and supplying to each record-date shareholder notice and proxy
solicitation materials, and all other proxy solicitation expenses; all expenses
of printing of annual or more frequent revisions of the Funds' prospectuses,
statements of additional information and shareholder reports, and of supplying
to each then existing shareholder copies of such materials as required by
applicable law; all expenses of bond and insurance coverage required by law or
deemed advisable by the Heartland Board of Directors; all brokers' commissions
and other normal charges incident to the purchase, sale or lending of portfolio
securities; all taxes and governmental fees payable to federal, state or other
governmental agencies, domestic or foreign, including all stamp or other
transfer taxes; all expenses of registering and maintaining the registration of
Heartland under the 1940 Act and, to the extent no exemption is available,
expenses of registering shares under the Securities Act of 1933, of qualifying
and maintaining qualification of Heartland and of shares of the Funds for sale
under the securities laws of various states or other jurisdictions, and of
registration and qualification of Heartland under all other laws applicable to
Heartland or its business activities; all interest on indebtedness and
commitment fees for lines of credit, if any, incurred by Heartland or the Funds;
and all fees, dues and other expenses incurred by Heartland in connection with
membership in any trade association or other investment company organization.
Any expenses that are attributable solely to the organization, operation or
business of a particular Fund shall be paid solely out of that Fund's assets.
Any expenses incurred by Heartland that are not solely attributable to a
particular Fund are apportioned in such a manner as Heartland Advisors
determines is fair and appropriate, or as otherwise specified by the Board of
Directors.
The Management Agreements provide that neither Heartland Advisors, nor any
of its directors, officers, shareholders, agents or employees shall have any
liability to Heartland or any shareholder of Heartland for any error of
judgment, mistake of law, loss arising out of any investment, or any other act
or omission in the performance by Heartland Advisors of its duties under the
agreement, except for loss or liability resulting from willful misfeasance, bad
faith or gross negligence on Heartland Advisors' part or from reckless disregard
by Heartland Advisors of its obligations and duties under the agreement.
Bookkeeping and Accounting Agreement
Heartland Advisors receives a fee for performing certain bookkeeping and
accounting services for the Funds pursuant to a separate agreement with
Heartland. For services provided to each Fund, Heartland Advisors receives a
monthly fee at an annual rate of $12,500 plus: in the case of the Government
Fund, Taxable Short Duration Municipal Fund, Short Duration High-Yield Municipal
Fund, High-Yield Municipal Bond Fund and Wisconsin Tax Free Fund, 0.0085 of 1%
of each such Fund's average daily net assets over $50 million; in the case of
the Select Value Fund and Value Fund 0.0075 of 1% of each such Fund's average
daily net assets over $50 million; and in the case of the Value Plus Fund,
0.008 of 1% of such Fund's average daily net assets over $50 million.
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<PAGE>
Custodian and Transfer and Dividend Disbursing Agent
Firstar Bank Milwaukee, N.A. acts as custodian for the Funds (the
"Custodian"). The Custodian is responsible for, among other things, holding all
securities and cash, handling the receipt and delivery of securities, and
receiving and collecting income from investments. Subcustodians may provide
custodial services for certain assets of the Funds held domestically and outside
the U.S. Firstar Mutual Fund Services, LLC acts as transfer and dividend
disbursing agent for the Funds. The address for Firstar Bank Milwaukee, N.A. is
777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202, and the address for
Firstar Mutual Fund Services, LLC is P.O. Box 701, Milwaukee, Wisconsin 53201-
0701.
Independent Public Accountants
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, serves as independent public accountants for the Funds. In this capacity,
the accountants audit the annual financial statements of the Funds and report
thereon, prepare and/or review certain regulatory reports and the federal income
tax returns, and perform other professional accounting, auditing, tax and
accounting services when engaged by Heartland to do so.
DISTRIBUTION OF SHARES
Heartland Advisors acts as principal underwriter and distributor of the
shares of the Funds. Heartland Advisors has agreed to use its "best efforts" to
distribute the Funds' shares, but has not committed to purchase or sell any
specific number of shares. The Distribution Agreement for each Fund will
continue in effect from year to year as long as it is approved at least annually
by the vote of a majority of the members of Heartland's Board who are not
interested persons of Heartland Advisors or the Fund and by the vote of either a
majority of Heartland's Board or a majority of the outstanding voting securities
of the Fund. The Distribution Agreement may be terminated upon 60 days' written
notice by either party and will automatically terminate in the event of its
assignment. Under the Distribution Agreement, Heartland Advisors will pay for
the costs and expenses of preparing, printing and distributing materials not
prepared by a 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.
Rule 12b-1 Plan
Each Fund (other than the Wisconsin Tax Free Fund) has adopted a
distribution plan (the "Rule 12b-1 Plan") which, among other things, requires it
to pay Heartland Advisors, as distributor, a monthly fee of up to 0.25% of its
average daily net assets computed on an annual basis. Heartland Advisors has
agreed to certain voluntary fee waivers and expense reimbursements as discussed
in the Funds' respective Prospectuses.
The fee represents compensation for distributing and servicing each Fund's
shares. Covered distribution expenses include, but are not limited to, the
printing of prospectuses and reports used for sales purposes, advertisements,
expenses of preparation and printing of sales literature, expenses associated
with electronic marketing and sales media and communications, and other sales or
promotional expenses, including compensation paid to any securities dealer or
other person who renders assistance in distributing or promoting the sale of
Fund shares, who has incurred any
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<PAGE>
of the aforementioned expenses on behalf of the Fund pursuant to either a Dealer
Agreement or other authorized arrangement. Covered servicing expenses include,
but are not limited to, costs associated with relationship management,
retirement plan enrollment meetings, investment and educational meetings,
conferences and seminars, and the cost of collateral materials for such events.
Each Fund is obligated to pay fees under the Rule 12b-1 Plan 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.
No fee paid by a Fund under the Rule 12b-1 Plan may be used to reimburse
Heartland Advisors for expenses incurred in connection with another Fund.
Under the Rule 12b-1 Plan, Heartland Advisors provides the Directors for
their review promptly after the end of each quarter a written report on
disbursements under the Rule 12b-1 Plan and the purposes for which such payments
were made, plus a summary of the expenses incurred by Heartland Advisors under
the Rule 12b-1 Plan. In approving the Rule 12b-1 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 Rule 12b-1 Plan will benefit each Fund and its
shareholders.
The Rule 12b-1 Plan will remain in effect until April 30, 2000 and will
continue in effect from year to year thereafter only so long as such continuance
is specifically approved at least annually by the vote of the Directors,
including a majority of the Directors who are not interested persons of
Heartland, cast in person at a meeting called for such purpose.
The Rule 12b-1 Plan may be terminated with respect to each Fund, without
penalty, 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 and
shall terminate automatically in the event of any act that terminates the
Distribution Agreement with Heartland Advisors relating to that Fund. Any change
in the Rule 12b-1 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 the Rule 12b-1 Plan is in effect, the selection or
nomination of the Directors who are not interested persons is committed to the
discretion of such Directors.
During the fiscal year ended December 31, 1998, the Funds paid the
following amounts under the Rule 12b-1 Plan, all of which was spent on
compensation to dealers, financial institutions and other service providers,
including Heartland Advisors: $0 for the Select Value Fund; $725,067 for the
Value Plus Fund; $4,927,174 for the Value Fund; $133,425 for the Government
Fund; $0 for the Taxable Short Duration Municipal Fund; $341,659 for the Short
Duration High-Yield Municipal Fund; and $131,814 for the High-Yield Municipal
Bond Fund. During the fiscal year ended December 31, 1998, Heartland Advisors
waived a portion of its fees; had no fee waivers been in effect, the Select
Value Fund, the Taxable Short Duration Municipal Fund, the Short Duration High-
Yield Municipal Fund and the High-Yield Municipal Bond Fund would have paid
$21,040, $18, $366,790 and $138,665, respectively, pursuant to the Rule 12b-1
Plan.
PORTFOLIO TRANSACTIONS
As provided in the Management Agreements, Heartland Advisors is responsible
for the Funds' portfolio decisions and the placing of portfolio transactions. In
executing such transactions, Heartland Advisors seeks to obtain the best net
results for the Funds, taking into account such factors as price (including the
brokerage commission or dealer spread), size of order, competitive commissions
on similar transactions,
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<PAGE>
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.
Allocation of 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 the Funds' shareholders. The primary
consideration is prompt and efficient execution of orders in an effective manner
at the most favorable price. Where more than one broker or dealer is believed to
be capable of providing a combination of best net price and execution with
respect to a particular portfolio transaction, Heartland Advisors often selects
a broker or dealer that has furnished it with investment research products or
services such as: economic, industry or company research reports or investment
recommendations; subscriptions to financial publications or research data
compilations; compilations of securities prices, earnings, dividends and similar
data; computerized databases; quotation equipment and services; research or
analytical computer software and services; or services of economic and other
consultants. 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 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). Such selections are not
made pursuant to any agreement or understanding with any of the brokers or
dealers. However, Heartland Advisors does in some instances request a broker to
provide a specific research or brokerage product or service which may be
proprietary to the broker or produced by a third party and made available by the
broker and, in such instances, the broker in agreeing to provide the research or
brokerage product or service frequently will indicate to Heartland Advisors a
specific or minimum amount of commissions which it expects to receive by reason
of its provision of the product or service. Heartland Advisors does not agree
with any broker to direct such specific or minimum amounts of commissions;
however, Heartland Advisors does maintain an internal procedure to identify
those brokers who provide it with research products or services and the value of
such products or services, and Heartland Advisors endeavors to direct sufficient
commissions on client transactions (including commissions on transactions in
fixed income securities effected on an agency basis and, in the case of
transactions for certain types of clients, dealer selling concessions on new
issues of securities) to ensure the continued receipt of research products or
services Heartland Advisors feels are useful.
In a few instances, Heartland Advisors receives from brokers products or
services which are used by the Adviser both for investment research and for
administrative, marketing, or other non-research or brokerage purposes.
Heartland Advisors has a policy of not allocating brokerage business in return
for products or services other than brokerage or research services in accordance
with the provisions of Section 28(e) of the Securities Exchange Act of 1934. In
such instances, Heartland Advisors makes a good faith effort to determine the
relative proportion of its use of such product or service which is for
investment research or brokerage, and that portion of the cost of obtaining such
product or service may be defrayed through brokerage commissions generated by
client transactions, while the remaining portion of the costs of obtaining the
product or service is paid by Heartland Advisors in cash.
Heartland does not believe the Funds pay brokerage commissions higher than
those obtainable from other brokers in return for research or brokerage products
or
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<PAGE>
services provided by brokers. Research or brokerage products or services
provided by brokers may be used by Heartland Advisors in servicing any or all of
its clients (including the Funds), and such research products or services may
not necessarily be used by Heartland Advisors in connection with client accounts
(including the Funds) which paid commissions to the brokers providing such
product or service.
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 Advisors' opinion, this policy
furthers the objective of obtaining best price and execution. The allocation of
orders among brokers and the commission rates paid is 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 Nasdaq
Stock Market 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 arm's-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.
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<PAGE>
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 the Funds in over-the-counter transactions conducted on an agency
basis. Pursuant to plans adopted by Heartland's Board of Directors for the Funds
under, and subject to, the provisions of Rule 10f-3 under the 1940 Act, 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 last three fiscal years, the aggregate commissions on portfolio
transactions paid by the Funds were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Select Value Fund $ 4,995 $ 16,006 $ 20,765
Value Plus Fund 149,195 830,002 1,021,269
Value Fund 2,822,252 3,925,925 3,453,660
Government Fund 75 6,222 5,009
Taxable Short Duration Municipal Fund N/A N/A 13
Short Duration High-Yield Municipal Fund N/A 13,133 28,206
High-Yield Municipal Bond Fund N/A 6,730 12,847
Wisconsin Tax Free Fund 31,509 34,385 12,475
</TABLE>
Of the aggregate commissions on portfolio transactions paid by the Funds
during the last three fiscal years, the following amounts were paid to Heartland
Advisors as broker:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Select Value Fund $ 0 $ 0 $ 0
Value Plus Fund 4,028 12,093 25,357
Value Fund 285,057 159,609 99,091
Government Fund 0 0 0
Taxable Short Duration Municipal Fund N/A N/A 0
Short Duration High-Yield Municipal Fund N/A 0 0
High-Yield Municipal Bond Fund N/A 0 0
Wisconsin Tax Free Fund 0 0 0
</TABLE>
For the fiscal year ended 1998, the following table presents additional
information regarding brokerage commissions paid to Heartland Advisors:
57
<PAGE>
<TABLE>
<CAPTION>
% of Aggregate Dollar Amount
of Transactions Involving
Payment of Commissions
% of Aggregate Brokerage Commissions Effected through
Paid to Heartland Advisors Heartland Advisors
-------------------------- ------------------
<S> <C> <C>
Value Plus Fund 2.5% 3.0%
Value Fund 2.9% 3.3%
</TABLE>
The table below shows information on brokerage commissions paid by the
Funds to brokers or dealers who supplied research services to Heartland Advisors
during the fiscal year ended December 31, 1998:
<TABLE>
<CAPTION>
Amount of
Commissions Paid to
Brokers
or Dealers Who Total Dollar
Supplied Research Amount Involved
Services to in such
Fund Transactions Heartland Advisors
- ---- ------------ -------------------
<S> <C> <C>
Select Value Fund $ 20,474 $ 6,265,777
Value Plus Fund 814,732 201,652,895
Value Fund 2,665,993 558,915,742
Government Fund 1,640 8,437,890
Taxable Short Duration Municipal Fund 0 0
Short Duration High-Yield Municipal Fund 0 0
High-Yield Municipal Bond Fund 0 0
Wisconsin Tax Free Fund 0 0
</TABLE>
Under the 1940 Act, American Physicians Services Group, Inc. may be deemed
an affiliated broker-dealer of Heartland Advisors since Heartland Advisors holds
or controls more than 5% of its outstanding voting shares. During the Funds'
three most recent fiscal years, the Funds placed no portfolio transactions with
and paid no broker commissions to American Physicians Services Group, Inc.
During 1998, the Value Fund owned securities of Dain Rauscher Corporation,
one of its regular brokers or dealers (as defined in Rule 10b-1 under the 1940
Act); as of December 31, 1998 the value of those securities was $2,994,250.
Trade Allocation Policy
Heartland Advisors will seek to treat each client (including the Funds)
fairly and equitably, consistent with its obligations under Section 206 of the
Investment Advisers Act of 1940, and where applicable, Sections 17(d) and 17(j)
of the 1940 Act. In making such allocations, it is recognized that Heartland
Advisors will not generally be able to allocate trades pro rata among all
accounts (including the Funds) with similar investment objectives and comparable
investment positions, especially in small and micro cap securities and certain
fixed income investments.
The principal factors that Heartland Advisors will consider in making
allocations among client accounts (including the Funds) are the characteristics
and needs of the clients, including: (a) their respective investment objectives,
(b) current
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securities positions, (c) cash availability for investment or cash needs, and
(d) similar factors.
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<PAGE>
DESCRIPTION OF SHARES
Heartland Group, Inc. is a series company, which means the Board of
Directors may establish additional series and classes within series, and may
increase or decrease the number of shares in each class or series, all without
shareholder approval. The Funds are each a separate mutual fund series of
Heartland. Currently, eight series are authorized and outstanding, and there is
only one class within each series. The authorized common stock of Heartland
consists of one billion shares, par value $0.001 per share. 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. In the
interest of economy and convenience, certificates representing shares purchased
are not issued. However, such purchases are confirmed to the investor and
credited to their accounts on the books maintained by the Funds' transfer agent.
The investor will have the same rights of ownership with respect to shares as if
certificates had been issued.
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. Heartland may fill vacancies on the
Board or appoint new directors; provided, however, that at all times at least
two-thirds of the directors have been elected by shareholders. Moreover,
pursuant to Heartland's Bylaws, any director may be removed by the affirmative
vote of a majority of the outstanding shares of Heartland; and holders of 10% or
more of the outstanding shares of Heartland can require that a special meeting
of shareholders be called for the purpose of voting upon the question of removal
of one or more directors.
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.
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<PAGE>
PURCHASES AND SALES
Determination of Net Asset Value
Each Fund's shares are sold at the 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 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.
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 is valued at that price, or, lacking any sales, at the latest bid 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 market quotations are not readily
available will be valued at their fair value as determined in good faith by
Heartland's Board of Directors or its designee.
Debt Securities. Debt securities are valued by a pricing service approved
by Heartland's Board of Directors that uses various valuation methodologies such
as matrix pricing and other analytical pricing models as well as market
transactions and dealer quotations. Debt securities purchased with maturities of
60 days or less shall be valued at acquisition cost, plus or minus any amortized
discount or premium. Because Heartland Advisors believes that there currently is
no uniform methodology for valuing foreign debt, such securities must be valued
pursuant to the fair value procedures adopted by Heartland's Board of Directors.
Illiquid and Thinly Traded Securities. The lack of a liquid secondary
market for certain securities may make it more difficult for a Fund to obtain
accurate market quotations for purposes of valuing a Fund's portfolio. 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. 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.
Foreign Investments. In the event that (i) a foreign investment held by a
Fund is traded in both a local and foreign form, (ii) each such form may be
converted or exchanged for the other, and (iii) Heartland Advisors reasonably
determines that the rights and privileges of holders of either form are
comparable for valuation purposes, then Heartland Advisors may value the Fund's
investment based on the form for which current market quotes are most readily
available even if such form is not the form of investment held by the Fund. If
Heartland Advisors has reason to believe that circumstances exist which could
reasonably be expected to have a material impact on the valuation of one form
over the other, such as limitations on the ability to convert or exchange
between forms, limitations on foreign ownership of securities or currency
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<PAGE>
regulations, Heartland Advisors shall value the particular investment based on
market quotations or a fair value determination with respect to the same form as
that held by the Fund.
On any business day of a Fund on which the principal exchange on which a
foreign security is traded is closed (for example, a local holiday), but trading
occurs in the U.S. on either a national exchange or over-the-counter as reported
by the exchange or through Nasdaq, respectively, then the last sales price from
such source shall be used. If no sales price is available from such source, then
the prior day's valuation of the security shall be used.
Redemption-in-Kind
Each Fund intends to pay all redemptions in cash and is obligated to
redeem shares solely in cash up to the lesser of $250,000 or one percent of the
net assets of the Fund during any 90-day period for any one shareholder.
However, redemptions in excess of such limit may be paid wholly or partly by a
distribution in kind of securities or other Fund assets if Heartland Advisors
determines that existing conditions make cash payments undesirable. If
redemptions were made in kind, the redeeming shareholders may incur a gain or
loss for tax purposes and transaction costs.
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ADDITIONAL INCOME TAX CONSIDERATIONS
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 as a regular corporation 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 series of a series company, such as Heartland, is treated as a single
entity for federal income tax purposes, so that the net investment income and
the net realized capital gains and losses of one series are not combined with
those of another series in the same company.
To the extent a Fund invests in foreign securities, it may be subject to
withholding and other taxes imposed by foreign countries. Tax treaties between
certain countries and the United States may reduce or eliminate such taxes.
Investors may be entitled to claim U.S. foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in the Code.
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 12
month period and is shown as a percentage of the investment. "Total return" of a
Fund refers to the annual average return for 1-, 5-, and 10-year periods (or for
the periods the Fund has been in operation). 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 a 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 for the
periods a Fund has been in operation) ended on the date of the respective Fund's
balance sheet that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
63
<PAGE>
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-, or 10-year periods at the end of
the 1-, 5-, or 10-year periods (or fractional portion).
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.
The average annual total returns for the Funds for the one, five and
ten-year periods, or, if less, from commencement of operations through September
30, 1999 are as follows:
<TABLE>
<CAPTION>
10 Years, or,
if Less, From
Commencement
Fund 1 Year 5 Years of Operations
---- ------ ------- -------------
<S> <C> <C> <C>
Select Value Fund (10/11/96) 11.23% N/A 8.55%
Value Plus Fund (10/26/93) -2.74% 12.17% 10.65%
Value Fund 8.14% 11.66% 13.03%
Government Fund -2.41% 7.16% 8.19%
Short Duration High-Yield Municipal Fund (1/2/97) 3.33% N/A 4.92%
High-Yield Municipal Bond Fund (1/2/97) 2.08% N/A 6.94%
Wisconsin Tax Free Fund (4/3/92) -0.45% 6.26% 5.60%
</TABLE>
Because the Taxable Short Duration Municipal Fund first commenced the
public offering of its shares on December 28, 1998, no total return information
is quoted herein.
A Fund may also advertise its cumulative total return, which represents
the simple change in value of an investment in the Fund over a stated period and
may be quoted as a percentage or as a dollar amount. Total returns and
cumulative total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) in order to
illustrate the relationship between these factors and their contributions to
total return.
64
<PAGE>
Yield
Yield quotations are based on a 30-day (or one-month) period, and are
computed by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
Yield= 2[( a-b
-----+1)/6/-1]
cd
Where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the
period.
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.
Although they may do so in the future, the Select Value and Value Funds
typically have not calculated or advertised their yields. The yields (including,
where applicable, taxable equivalent yields) for the remaining Funds for the 30
days ended September 30, 1999, were as follows:
<TABLE>
<CAPTION>
Taxable Equivalent
30-Day Yield ended ------------------
Fund September 30, 1999 Yield
---- ------------------ -----
<S> <C> <C>
Value Plus Fund 2.58% N/A
Government Fund 6.18% N/A
Taxable Short Duration Municipal Fund 10.66% N/A
Short Duration High-Yield Municipal Fund 6.01% 9.95%/(1)/
High-Yield Municipal Bond Fund 6.56% 10.86%/(1)/
Wisconsin Tax Free Fund 5.19% 9.53%/(2)/
</TABLE>
______________________
(1) Based on a federal tax rate of 39.6%.
(2) Based on a combined Wisconsin tax rate of 6.77% and a federal tax rate of
39.60%, adjusted for the maximum phase-out of itemized deductions and
personal exemptions and adjusted to reflect the deductibility of state
taxes, resulting in an effective combined rate of 45.54%.
65
<PAGE>
Comparisons
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, Inc., Morningstar,
Inc., CDA Technologies, Forbes, Fortune, Money, Business Week, Value Line, Inc.,
Kiplinger's, Smart Money, Financial World, Barron's and The Wall Street Journal.
These rating services and periodicals rank the performance of the Funds against
all funds over specified periods and in specified categories. Each Fund also may
compare its performance to a wide variety of indexes or averages. There are
similarities and differences between the investments that a Fund may purchase
and the investments measured by the indexes or averages and the composition of
the indexes or averages will differ from that of a Fund.
From time to time, marketing materials may portray the historical returns
of various asset classes. Such presentations will typically compare the average
annual rates of return of inflation, U.S. Treasury bills, long-term corporate
bonds, long-term government bonds, intermediate-term government bonds, common
stocks and small stocks. There are important differences between each of these
investments that should be considered in viewing any such comparison. The market
value of stocks will fluctuate with market conditions, and investments in
smaller-capitalization companies involve investment risks in addition to those
presented by investments in larger-capitalization companies, including the
potential or greater price volatility and lower market liquidity. In exchange
for greater volatility, stocks have generally performed better than bonds or
cash over time. Bond prices generally will fluctuate inversely with interest
rates and other market conditions, and the prices of bonds with longer
maturities generally will fluctuate more than those of shorter-maturity bonds.
Interest rates for bonds may be fixed at the time of issuance, and payment of
principal and interest may be guaranteed by the issuer and, in the case of U.S.
Treasury obligations, backed by the full faith and credit of the U.S. Treasury.
FINANCIAL STATEMENTS
The financial statements, related notes and related reports of
PricewaterhouseCoopers, LLP, independent public accountants, contained in the
Annual Reports to Shareholders of the Funds as of December 31, 1998 and for the
fiscal year or period then ended are hereby incorporated by reference. The
unaudited financial statements and related notes contained in the Semi-Annual
Reports to Shareholders of the Fund as of June 30, 1999 and for the period then
ended are also hereby incorporated by reference. Copies of the Funds' Annual and
Semi-Annual Reports may be obtained without charge by writing to Heartland
Advisors, Inc., 789 North Water Street, Milwaukee, Wisconsin 53202, by calling
1-800-432-7856 or (414) 289-7000, or by visiting the Heartland website at
www.heartlandfunds.com.
66
<PAGE>
Part C. Other Information.
Item 23 Exhibits
- ------- --------
(a.1) Articles of Incorporation/(4)/
(a.2) Articles Supplementary to withdraw the designation of, and to
discontinue, the series known as the Heartland Nebraska Tax Free
Fund/(3)/
(a.3) Articles Supplementary to withdraw the designation of, and to
discontinue, the series known as the Heartland Small Cap
Contrarian Fund, and to create a series known as the Heartland
Taxable Short Duration Municipal Fund/(5)/
(a.4) Certificate of Correction to Articles Supplementary to correct the
name of the Heartland Taxable Short Duration Municipal Fund and to
correct the provision regarding a small account fee
(a.5) Articles Supplementary to add a provision regarding an early
redemption fee
(a.6) Articles of Amendment to change the name of the Heartland U.S.
Government Securities Fund series to the Heartland Government Fund
(a.7) Articles of Amendment to change the name of the Heartland Large
Cap Value Fund series to the Heartland Select Value Fund
(a.8) Articles Supplementary to withdraw the designation of, and to
discontinue, the series known as the Heartland Mid Cap Value Fund
(b.1) Amended and Restated Bylaws/(4)/
(b.2) Amendment of Bylaws
(c.1) Articles Sixth through Eighth and Article Tenth of the Articles of
Incorporation (see Exhibit (a.1))
(c.2) Articles Supplementary (see Exhibits a.2, a.3 and a.8)
(c.3) Articles II, VI, IX and X of the Bylaws (see Exhibit (b))
(d.1) Investment Advisory Agreement for the Heartland Value Fund/(4)/
(d.2) Investment Advisory Agreement for Heartland U.S. Government,
Wisconsin Tax Free, Value Plus, Mid Cap Value and Large Cap Value
Funds/(2)/
(d.3) Amended Schedule A to Investment Advisory Agreement adding
Heartland Short Duration High-Yield Municipal and Heartland
High-Yield Municipal Bond Funds/(2)/
C-2
<PAGE>
(d.4) Investment Management Agreement for the Heartland Taxable Short
Duration Municipal Fund/(5)/
(e.1) Distribution Agreement between Heartland Group, Inc. and Heartland
Advisors, Inc./(1)/
(e.2) Amendment No. 1 to Distribution Agreement between Heartland Group,
Inc. and Heartland Advisors, Inc./(1)/
(e.3) Form of Selected Dealer Agreement/(4)/
(e.4) Form of Selling Agreement for Banks/(4)/
(e.5) Distribution Agreement for the Heartland Taxable Short Duration
Municipal Fund/(5)/
(f) Not applicable
(g) Custodian Agreement/(4)/
(h.1) Transfer Agent/Dividend Disbursing Agent Agreement/(4)/
(h.2) Heartland Group, Inc.'s Rule 10f-3 Plan/(4)/
(h.3) Heartland Value Fund, Inc.'s Rule 10f-3 Plan(4)
(h.4) Administrative Agreement/(5)/
(h.5) Accounting and Bookkeeping Agreement/(5)/
(i) Opinion and Consent of Counsel
(j) Not applicable
(k) Not applicable
(l) Not applicable
(m.1) Heartland Group Inc.'s Amended and Restated Rule 12b-1 Plan (as of
March 1, 1999)/(6)/
(m.2) Form of Related Distribution Agreement for Rule 12b-1 Plan/(6)/
(n) Not applicable
C-3
<PAGE>
_________________________________
(1) Incorporated herein by reference to Post-Effective Amendment No. 26 to
the Registration Statement on Form N-1A of Registrant filed on or about
August 9, 1996.
(2) Incorporated herein by reference to Post-Effective Amendment No. 28 to
the Registration Statement on Form N-1A of Registrant filed on or about
October 18, 1996.
(3) Incorporated herein by reference to Post-Effective Amendment No. 29 to
the Registration Statement on Form N-1A of Registrant filed on or about
January 30, 1997.
(4) Incorporated herein by reference to Post-Effective Amendment No. 35 to
the Registration Statement on Form N-1A of Registrant filed on or about
October 13, 1998.
(5) Incorporated herein by reference to Post-Effective Amendment No. 36 to
the Registration Statement on Form N-1A of Registrant filed on or about
October 15, 1998.
(6) Incorporated by reference to Post-Effective Amendment No. 39 to the
Registration Statement on Form N-1A of Registrant filed on or about
February 26, 1999.
Item 24. Persons Controlled by or Under Common Control with the Fund
-----------------------------------------------------------
Not Applicable. See "Control Persons and Principal Holders of
Securities" in Part B.
Item 25. Indemnification
---------------
Reference is made to Article IX of the Fund's Amended and Restated
Bylaws filed as Exhibit (b) to Post-Effective Amendment No. 35 to the Fund's
Registration Statement with respect to the indemnification of the Fund'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
C-4
<PAGE>
office or under any contract or agreement with the
Corporation ("disabling conduct"); and
(b) the Corporation shall not indemnify any person unless:
(1) the court or other body before which the
Proceeding was brought (i) dismisses the
Proceeding for insufficiency of evidence of any
disabling conduct, or (ii) reaches a final
decision on the merits that such person was not
liable by reason of disabling conduct; or
(2) absent such a decision, a reasonable determination
is made, based upon a review of the facts, by (i)
the vote of a majority of a quorum of the
Directors of the Corporation who are neither
interested persons of the Corporation as defined
in 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), if:
(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.
C-5
<PAGE>
Reference is made to Section 6 of the Fund's Distribution Agreement
with Heartland Advisors, Inc. filed as Exhibit (e)(1) to Post-Effective
Amendment No. 35 to the Fund's Registration Statement (and for the Heartland
Taxable Short Duration Municipal Fund, filed as Exhibit (e)(5) to Post-Effective
Amendment No. 38 to the Fund's Registration Statement) with respect to the
indemnification of the Fund's directors and officers, which is set forth below:
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 such 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.
C-6
<PAGE>
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 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 or
proceedings against it or any of its officers, employees
or representatives in connection with the issue or sale
of any Shares.
In addition, the Fund maintains an Investment
Advisor/Mutual Fund Professional Liability insurance
policy with a $10 million limit of liability under which
the Fund and its affiliate, Heartland Advisors, Inc.,
and each of their respective directors and officers are
named insureds.
The Fund undertakes that insofar as indemnification for
liability 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 26. Business and Other Connections of the Investment Adviser
--------------------------------------------------------
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
C-7
<PAGE>
indicated he intends to retain control of Heartland Advisors, Inc.
through continued ownership of a majority of its outstanding voting
stock.
Set forth below is a list of the officers and directors of
Heartland Advisors, Inc. as of September 30, 1999, together with
information as to any other business, profession, vocation or
employment of a substantial nature of those officers and
directors during the past two years:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
POSITION AND OFFICES WITH
NAME HEARTLAND ADVISORS, INC. OTHER
- ---- ------------------------ -----
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
William J. Nasgovitz Director, President and Chief Executive Officer President and Director,
Heartland Group, Inc.
- --------------------- ----------------------------------------
Jilaine Hummel Bauer Senior Vice President, General Counsel and Vice President, Heartland Group,
Secretary Inc. since January 1998;
Secretary, Heartland Group, Inc.
since August 1999; Senior Vice
President, Stein Roe & Farnham
Incorporated, 1992 to 1997
- --------------------- ---------------------------------------
Paul T. Beste Senior Vice President - Investment Operations Vice President, Heartland Group,
Inc. since September 1998;
Investment Operations Officer,
Heartland Group, Inc., 1997 to
1998; Director of Taxes/
Compliance, Strong Capital
Management, Inc., 1992 to 1997
- ----------------------------------------------------------------------------------------------------------------------------
Kevin D. Clark Senior Vice President - Trading None
- ----------------------------------------------------------------------------------------------------------------------------
Kenneth J. Della Senior Vice President and Treasurer Vice President, Heartland Group, Inc.
- ----------------------------------------------------------------------------------------------------------------------------
Robert E. Furst Senior Vice President Managing Director, Bankers Trust New
York Corporation, 1995 to 1998
- ----------------------------------------------------------------------------------------------------------------------------
Eric J. Miller Director and Senior Vice President None
- ----------------------------------------------------------------------------------------------------------------------------
Scott R. Powell Senior Vice President Vice President of CIMCO, Inc./CUNA
Mutual, 1997 to 1999
- ----------------------------------------------------------------------------------------------------------------------------
Senior Vice President and Director Director of Fixed Income
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
POSITION AND OFFICES WITH
NAME HEARTLAND ADVISORS, INC. OTHER
- ---- ------------------------ -----
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lawrence J. Paulek of Fixed Income Research and other capacities, M&I Investment
Management Corporation, 1985 to 1998
- -----------------------------------------------------------------------------------------------------------------------------
Patrick J. Retzer Director and Senior Vice President Vice President, Treasurer and
Director, Heartland Group, Inc.
- --------------------- ---------------------------------------
M. Gerard Sandel Senior Vice President and Director of Equity Senior Vice President, Stein Roe
Research & Farnham Incorporated, 1997 to 1999
- --------------------- ---------------------------------------
</TABLE>
Item 27. Principal Underwriters
----------------------
(a) Heartland Advisors, Inc. acts as the Distributor of the shares
of each of the Heartland Funds. 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 26 above.
(c) Not applicable.
Item 28. Location of Accounts and Records
--------------------------------
(a) Heartland Group, Inc.
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
(b) Firstar Mutual Fund Services, LLC
615 East Michigan Street
Milwaukee, Wisconsin 53202
(c) Firstar Bank Milwaukee, N.A.
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Item 29. Management Services
-------------------
Not applicable
Item 30. Undertakings
------------
Not applicable
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Fund has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned, duly
authorized, in the City of Milwaukee, and State of Wisconsin, on the 5th day of
October, 1999.
HEARTLAND GROUP, INC.
/s/ William J. Nasgovitz
By:-----------------------------
William J. Nasgovitz, President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below on the 5th day of
October, 1999, 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
- ---------------------------------- Officer)
Patrick J. Retzer
- -----------------------------------------------------------------------------------------------------------------
/s/ Paul T. Beste Vice President and Principal Accounting Officer (Chief
- ---------------------------------- Accounting Officer)
Paul T. Beste
- -----------------------------------------------------------------------------------------------------------------
/s/ Hugh F. Denison* Director
- ----------------------------------
Hugh F. Denison
- -----------------------------------------------------------------------------------------------------------------
/s/ A. Gary Shilling* Director
- ----------------------------------
A. Gary Shilling
- -----------------------------------------------------------------------------------------------------------------
/s/ Willard H. Davidson* Director
- ----------------------------------
Willard H. Davidson
- -----------------------------------------------------------------------------------------------------------------
/s/ Jon D. Hammes* Director
- ----------------------------------
Jon D. Hammes
- -----------------------------------------------------------------------------------------------------------------
/s/ Allan H. Stefl* Director
- ----------------------------------
Allan H. Stefl
- -----------------------------------------------------------------------------------------------------------------
/s/ Linda F. Stephenson* Director
- ----------------------------------
Linda F. Stephenson
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
*By: /s/ William J. Nasgovitz
-------------------------------------
William J. Nasgovitz
Pursuant to Powers of Attorney
C-11
<PAGE>
William J. Nasgovitz
Pursuant to Powers of Attorney
EXHIBIT INDEX
-------------
- --------------------------------------------------------------------------------
Exhibit No. Description
----------- -----------
- --------------------------------------------------------------------------------
(a.4) Certificate of Correction to Articles
Supplementary to correct the name of the
Heartland Taxable Short Duration
Municipal Fund and to correct the
provision regarding a small account fee
- --------------------------------------------------------------------------------
(a.5) Articles Supplementary to add a provision
regarding an early redemption fee
- --------------------------------------------------------------------------------
(a.6) Articles of Amendment to change the name
of the Heartland U.S. Government
Securities Fund series to the Heartland
Government Fund
- --------------------------------------------------------------------------------
(a.7) Articles of Amendment to change the name
of the Heartland Large Cap Value Fund
series to the Heartland Select Value Fund
- --------------------------------------------------------------------------------
(a.8) Articles Supplementary to withdraw the
designation of, and to discontinue, the
series known as the Heartland Mid Cap
Value Fund
- --------------------------------------------------------------------------------
(b.2) Amendment of Bylaws
- --------------------------------------------------------------------------------
(i) Opinion and Consent of Counsel
- --------------------------------------------------------------------------------
(n) Financial Data Schedules
- --------------------------------------------------------------------------------
C-12
<PAGE>
EXHIBIT (a.4)
HEARTLAND GROUP, INC.
CERTIFICATE OF CORRECTION
TO
ARTICLES SUPPLEMENTARY
This Certificate of Correction hereby corrects certain provisions
contained in the Articles Supplementary of Heartland Group, Inc. ("Heartland
Group") filed with the Maryland Department of Assessments and Taxation on
December __, 1998 (the "Articles Supplementary").
The Articles Supplementary erroneously provided that the name of a new
series designated by the Board of Directors of Heartland Group was "Heartland
Taxable Municipal Fund." The correct name is "Heartland Taxable Short Duration
Municipal Fund." Two corrections to the Articles Supplementary are needed for
this purpose. The first erroneous provision was contained in clause (ii) of the
first paragraph of the Articles Supplementary and stated as follows (the error
being highlighted):
...(ii) to designate a new series, effective as of October 22, 1998, to
be known as the Heartland Taxable Municipal Fund and to allocate 100
million shares of stock held in treasury for issuance in such
series;...
As corrected, clause (ii) of the first paragraph of the Articles
Supplementary shall state in its entirety as follows (the correction being
highlighted):
...(ii) to designate a new series, effective as of October 22, 1998, to
be known as the Heartland Taxable Short Duration Municipal Fund and to
allocate 100 million shares of stock held in treasury for issuance in
such series;...
The second erroneous provision was contained in the table setting forth
the various series of Heartland Group and the number of shares authorized for
each series and stated as follows (the error being highlighted):
Series No. of Shares
------ -------------
Heartland Value Fund 150 Million
Heartland Mid Cap Value Fund 100 Million
Heartland Large Cap Value Fund 50 Million
Heartland Value Plus Fund 100 Million
Heartland U.S. Government Securities Fund 100 Million
Heartland Wisconsin Tax Free Fund 100 Million
Heartland Short Duration High-Yield Municipal Fund 100 Million
Heartland High-Yield Municipal Bond Fund 100 Million
Heartland Taxable Municipal Fund 100 Million
(a.4)-1
<PAGE>
As corrected, the provision contained in the table shall state as
follows (the correction being highlighted):
Series No. of Shares
------ -------------
Heartland Value Fund 150 Million
Heartland Mid Cap Value Fund 100 Million
Heartland Large Cap Value Fund 50 Million
Heartland Value Plus Fund 100 Million
Heartland U.S. Government Securities Fund 100 Million
Heartland Wisconsin Tax Free Fund 100 Million
Heartland Short Duration High-Yield Municipal Fund 100 Million
Heartland High-Yield Municipal Bond Fund 100 Million
Heartland Taxable Short Duration Municipal Fund 100 Million
The Articles Supplementary also failed to include a provision affecting
the terms and conditions of shares of the Heartland Taxable Short Duration
Municipal Fund which was approved by the Board of Directors of Heartland Group
and should have been included in the Articles Supplementary. The erroneous
provision stated as follows:
All of such designated series of shares have the
relative preferences, rights, voting powers,
restrictions, limitations as to dividends,
qualifications and terms and conditions of
redemption as set forth in Section 7.2 of Heartland
Group's Articles of Incorporation.
As corrected, the provision shall state in its entirety as follows (the
change being highlighted):
All of such designated series of shares have the
relative preferences, rights, voting powers,
restrictions, limitations as to dividends,
qualifications and terms and conditions of
redemption as set forth in Section 7.2 of Heartland
Group's Articles of Incorporation; provided,
however, that the Board of Directors of Heartland
Group may cause Heartland Group to collect fees to
be paid to Heartland Group (and allocated to
Heartland Taxable Short Duration Municipal Fund) by
a shareholder where the aggregate current net asset
value of such shareholder's shares of Heartland
Taxable Short Duration Municipal Fund is less than
such amount as may be fixed from time to time by the
Board of Directors. Collection of these fees may be
effected by redeeming at current net asset value, in
whole or in part, the shares of the Heartland
Taxable Short Duration Municipal Fund from a
shareholder.
(a.4)-2
<PAGE>
HEARTLAND GROUP, INC.
By:___________________________________
William J. Nasgovitz, President
Attest:
By:___________________________________
Lois J. Schmatzhagen, Secretary
Dated: February __, 1999.
STATE OF WISCONSIN )
) SS
COUNTY OF MILWAUKEE )
on this ___ day of February, 1999, before me, a Notary Public for the
State and County set forth above, personally came William J. Nasgovitz, as
President of Heartland Group, Inc., and Lois J. Schmatzhagen, as Secretary of
Heartland Group, Inc., and in their said capacities each acknowledged the
foregoing Certificate of Correction to be the act and deed of said corporation
and further acknowledged that, to the best of their knowledge, the matters and
facts set forth therein are true in all material respects under the penalties of
perjury.
IN WITNESS WHEREOF, I have signed below in my own hand and attached my
official seal on the day and year set forth above.
-------------------------------------------
Notary Public
My Commission Expires_____________________
(SEAL)
(a.4)-3
<PAGE>
EXHIBIT (a.5)
ARTICLES SUPPLEMENTARY
OF
HEARTLAND GROUP, INC.
The Board of Directors of Heartland Group, Inc. ("Heartland Group"), a
corporation organized and existing under the laws of the State of Maryland and
registered as an open-end investment company under the Investment Company Act of
1940, by resolutions unanimously adopted at its meeting on February 11, 1999,
has taken action to amend the Articles of Incorporation of Heartland Group by
adding a new paragraph (l) of Section 7.2 thereof, which shall read in its
entirety as follows:
(l) Early Redemption Fee. The Board of Directors of the Corporation may
--------------------
cause the Corporation to impose and collect a fee to be paid to the
Corporation on the aggregate current net asset value of Shares of any
class or series which are redeemed by a Shareholder within a certain
number of days after such Shares have been purchased (the "holding
period"). The amount of such fee and the length of the holding period
may be determined and modified by the Board of Directors from time to
time upon notice to the Shareholders. Collection of this fee may be
effected through the retention by the Corporation of a portion of the
redemption proceeds equal to the fee or through the redemption by the
Corporation at current net asset value, in whole or in part, other
Shares of any such class or series from the Shareholder and the
retention by the Corporation of the proceeds from such redemption.
The Board of Directors has taken this action pursuant to the powers
conferred upon it under Section 7.1 of Heartland Group's Articles of
Incorporation and Sections 2-105(a)(9) and 2-208 of the Maryland General
Corporation Law.
HEARTLAND GROUP, INC.
By:__________________________________
William J. Nasgovitz, President
Attest:
By:___________________________________
Lois J. Schmatzhagen, Secretary
(a.5)-1
<PAGE>
Dated: February __, 1999.
STATE OF WISCONSIN )
) SS
COUNTY OF MILWAUKEE )
on this ___ day of February, 1999, before me, a Notary Public for the
State and County set forth above, personally came William J. Nasgovitz, as
President of Heartland Group, Inc., and Lois J. Schmatzhagen, as Secretary of
Heartland Group, Inc., and in their said capacities each acknowledged the
foregoing Articles Supplementary to be the act and deed of said corporation and
further acknowledged that, to the best of their knowledge, the matters and facts
set forth therein are true in all material respects under the penalties of
perjury.
IN WITNESS WHEREOF, I have signed below in my own hand and attached my
official seal on the day and year set forth above.
-------------------------------------------
Notary Public
My Commission Expires_____________________
(SEAL)
(a.5)-2
<PAGE>
EXHIBIT (a.6)
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
HEARTLAND GROUP, INC.
Heartland Group, Inc. ("Heartland Group"), a corporation organized and
existing under the laws of the State of Maryland, is filing these Articles of
Amendment to its Articles of Incorporation for the following purposes:
To change the name of Heartland U.S. Government Securities Fund, a
series of Heartland Group, to Heartland Government Fund. This amendment
was approved by a majority of the entire Board of Directors of
Heartland Group at a meeting on February 11, 1999, pursuant to Section
2-605(a)(4) of the Maryland General Corporation Law, and this amendment
is limited to a change expressly permitted by Section 2-605 of the
Maryland General Corporation Law to be made without action by the
stockholders. Heartland Group is an open-end investment company under
the Investment Company Act of 1940.
HEARTLAND GROUP, INC.
By:___________________________________
William J. Nasgovitz, President
Attest:
By:___________________________________
Lois J. Schmatzhagen, Secretary
Dated: April 28, 1999.
STATE OF WISCONSIN )
) SS
COUNTY OF MILWAUKEE )
On this 28th day of April, 1999, before me, a Notary Public for the
State and County set forth above, personally came William J. Nasgovitz, as
President of Heartland Group, Inc., and Lois J. Schmatzhagen, as Secretary of
Heartland Group, Inc., and in their said capacities each acknowledged the
foregoing Articles of Amendment to be the act and deed of said
(a.6)-1
<PAGE>
corporation and further acknowledged that, to the best of their knowledge, the
matters and facts set forth therein are true in all material respects under the
penalties of perjury.
IN WITNESS WHEREOF, I have signed below in my own hand and attached my
official seal on the day and year set forth above.
-------------------------------------------
Notary Public
(SEAL)
My Commission Expires____________________
(a.6)-2
<PAGE>
EXHIBIT (a.7)
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
HEARTLAND GROUP, INC.
Heartland Group, Inc. ("Heartland Group"), a corporation organized and
existing under the laws of the State of Maryland, is filing these Articles of
Amendment to its Articles of Incorporation for the following purposes:
To change the name of Heartland Large Cap Value Fund, a series
of Heartland Group, to Heartland Select Value Fund. This
amendment was approved by a majority of the entire Board of
Directors of Heartland Group at a meeting on November 16,
1999, pursuant to Section 2-605(a)(4) of the Maryland General
Corporation Law, and this amendment is limited to a change
expressly permitted by Section 2-605 of the Maryland General
Corporation Law to be made without action by the stockholders.
Heartland Group is an open-end investment company under the
Investment Company Act of 1940.
HEARTLAND GROUP, INC.
By:__________________________________
William J. Nasgovitz, President
Attest:
By:___________________________________
Jilaine Hummel Bauer, Secretary
Dated: November __, 1999.
STATE OF WISCONSIN )
) SS
COUNTY OF MILWAUKEE )
On this ____ day of November, 1999, before me, a Notary Public for the
State and County set forth above, personally came William J. Nasgovitz, as
President of Heartland Group, Inc., and Jilaine Hummel Bauer, as Secretary of
Heartland Group, Inc., and in their said capacities each acknowledged the
foregoing Articles of Amendment to be the act and
(a.7)-1
<PAGE>
deed of said corporation and further acknowledged that, to the best of their
knowledge, the matters and facts set forth therein are true in all material
respects under the penalties of perjury.
IN WITNESS WHEREOF, I have signed below in my own hand and attached my
official seal on the day and year set forth above.
-----------------------------------------
Notary Public
(SEAL)
My Commission Expires____________________
(a.7)-2
<PAGE>
EXHIBIT (a.8)
ARTICLES SUPPLEMENTARY
OF
HEARTLAND GROUP, INC.
The Board of Directors of Heartland Group, Inc. ("Heartland Group"), a
corporation organized and existing under the laws of the State of Maryland and
registered as an open-end investment company under the Investment Company Act of
1940, by resolutions unanimously adopted at its meeting on November 16, 1999,
has taken action (i) to withdraw the designation of and to discontinue its
series known as the Heartland Mid Cap Value Fund (the "Mid Cap Fund"); and (ii)
to reallocate 50 million shares of capital stock of Heartland Group from the Mid
Cap Fund to the Heartland Select Value Fund, a separate series of Heartland
Group. The shareholders of the Heartland Mid Cap Fund, voting separately,
approved such withdrawal and discontinuance at a special meeting held on
November 30, 1999. Heartland Group, having been authorized to issue one billion
(1,000,000,000) shares of capital stock with a par value of one-tenth of one
cent ($.001) per share, or an aggregate par value of one million dollars
($1,000,000), has the following eight series in existence as of the effective
date hereof:
Series No. of Shares
------ -------------
Heartland Value Fund 150 Million
Heartland Select Value Fund 100 Million
Heartland Value Plus Fund 100 Million
Heartland Government Fund 100 Million
Heartland Wisconsin Tax Free Fund 100 Million
Heartland Short Duration High-Yield Municipal Fund 100 Million
Heartland High-Yield Municipal Bond Fund 100 Million
Heartland Taxable Short Duration Municipal Fund 100 Million
All of such designated series of shares have the relative preferences,
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption as set forth in Section 7.2 of Heartland
Group's Articles of Incorporation, as amended.
The Board of Directors has taken this action pursuant to the powers
conferred upon it under Section 7.1 of Heartland Group's Articles of
Incorporation and Sections 2-105(c) and 2-208 of the Maryland General
Corporation Law, and with respect to the withdrawal and discontinuance of the
series know as the Mid Cap Fund only, subject to approval by the shareholders of
the Mid Cap Fund, which shareholder approval has been obtained.
(a.8)-1
<PAGE>
HEARTLAND GROUP, INC.
By:__________________________________
William J. Nasgovitz, President
Attest:
By:___________________________________
Jilaine Hummel Bauer, Secretary
Dated: December __, 1999.
STATE OF WISCONSIN )
) SS
COUNTY OF MILWAUKEE )
On this ___ day of December, 1999, before me, a Notary Public for the
State and County set forth above, personally came William J. Nasgovitz, as
President of Heartland Group, Inc., and Jilaine Hummel Bauer, as Secretary of
Heartland Group, Inc., and in their said capacities each acknowledged the
foregoing Articles Supplementary to be the act and deed of said corporation and
further acknowledged that, to the best of their knowledge, the matters and facts
set forth therein are true in all material respects under the penalties of
perjury.
IN WITNESS WHEREOF, I have signed below in my own hand and attached my
official seal on the day and year set forth above.
__________________________________________
Notary Public
My Commission Expires_____________________
(SEAL)
(a.8)-2
<PAGE>
EXHIBIT (b.2)
HEARTLAND GROUP, INC.
Secretary's Certificate
Amendment of Bylaws
Effective August 2, 1999
The undersigned, Jilaine Hummel Bauer, Secretary of Heartland Group,
Inc. ("Corporation"), hereby certifies that the following is a true and correct
copy of Sections 6.1 through 6.5 of Article VI of the Bylaws of the Corporation
with new Section 6.1 and amended Section 6.4 renumbered as Section 6.5 being
duly adopted by the Board of Directors at a meeting on July 29, 1999 pursuant to
Section 2-408(c) of the Maryland General Corporation Law.
Section 6.1. Certificates. Effective as of August 2, 1999, the
------------ ------------
Corporation will no longer issue certificates evidencing the ownership of shares
purchased or otherwise acquired. Any certificate issued by the Corporation to a
stockholder prior to such effective date shall continue to represent and certify
the number, series, and class of shares owned. The ownership of shares, full or
fractional, shall be recorded on the books of the Corporation or its agent. The
record books of the Corporation as kept by the Corporation or its agent, as the
case may be, shall be conclusive as to the number of shares held from time to
time by each such stockholder. Upon adoption of a resolution by the Board of
Directors, the Corporation may at any time resume the issuance of share
certificates. The Corporation may, by written notice to each stockholder,
require the surrender of share certificates to the Corporation for cancellation.
Any such surrender and cancellation shall not affect the ownership of shares in
the Corporation.
Sections 6.1, 6.2 and 6.3 of Article VI remain unchanged but renumbered
Sections 6.2, 6.3 and 6.4 as set forth below.
Section 6.2. Stock Ledgers. The stock ledgers of the Corporation,
------------ -------------
containing the names and addresses of the Stockholders and the number of shares
held by them respectively, shall be kept at the principal offices of the
Corporation or at the offices of the transfer agent of the Corporation.
Section 6.3. Transfer Agents and Registrars. The Board of Directors may
------------ -------------------------------
from time to time appoint or remove transfer agents and/or registrars of
transfers of shares of stock of the Corporation, and it may appoint the same
person as both transfer agent and registrar.
Section 6.4. Fixing of Record Date. The Board of Directors may fix in
------------ ---------------------
advance a date as a record date for the determination of the Stockholders
entitled to notice of or to vote at Stockholders' meeting or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or to receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any change, conversion or
exchange of stock, or for the purpose of any other lawful action, provided that
(1) such record date shall be within 60 days prior to the date on which the
particular action requiring such
(b.2)-1
<PAGE>
determination will be taken, (2) the transfer books shall not be closed for a
period longer than 20 days, and (3) in the case of a meeting of Stockholders,
the record date or any closing of the transfer books shall be at least 10 days
before the date of the meeting.
Section 6.5. Lost, Stolen or Destroyed Certificates. Before issuing a
------------ --------------------------------------
new certificate for stock of the Corporation alleged to be lost, stolen or
destroyed, or permitting redemption of any shares represented by such
certificate or recording the transfer thereof on the books, the Board of
Directors or any officer authorized by the Board may, in its discretion, require
the owner of the lost, stolen or destroyed certificate (or his legal
representative) to give the Corporation a bond or other indemnity, in such form
and in such amount as the Board or any such officer may direct and with such
surety or sureties as may be satisfactory to the Board or any such officer,
sufficient to indemnify the Corporation against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
In WITNESS WHEREOF, the undersigned has executed this Certificate in
her own hand on this 2nd day of August, 1999.
_________________________________
Jilaine Hummel Bauer, Secretary
(b.2)-2
<PAGE>
EXHIBIT (I)
October 5, 1999
Heartland Group, Inc.
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Ladies and Gentlemen:
In connection with the filing of Post-Effective Amendment No.
39 to the Registration Statement on Form N-1A (as amended, the "Registration
Statement") (1933 Act Registration No. 33-11371) which covers the registration
of one billion (1,000,000,000) shares of common stock, par value $.01 per share
("Common Stock"), of Heartland Group, Inc., a Maryland corporation (the
"Registrant"), under the Securities Act of 1933, you have requested that we
furnish you with the following opinion, which we understand will be used in
connection with and filed with the Securities and Exchange Commission as an
exhibit to the Registration Statement.
We understand that the Common Stock to which the Registration Statement
relates are currently issued and offered to the public in nine series of the
Registrant, Heartland Large Cap Value Fund (to be renamed Heartland Select Value
Fund), Heartland Mid Cap Value Fund, Heartland Value Plus Fund, Heartland Value
Fund, Heartland Government Fund, Heartland Wisconsin Tax Free Fund, Heartland
Taxable Short Duration Municipal Fund, Heartland Short Duration High-Yield
Municipal Fund and Heartland High Yield Municipal Bond Fund, in the manner and
on the terms described in the Registration Statement. For purposes of rendering
this opinion, we have examined originals or copies of such documents as we
consider necessary, including those listed below. In conducting such
examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity to
original documents of all documents submitted to us as copies.
The documents we have examined include:
1. The Registration Statement;
2. The Registrant's Articles of Incorporation, including
all amendments and supplements thereto, filed with
Maryland Department of Assessments and Taxation;
3. A certificate of good standing, as recently issued by
the Maryland Department of Assessments and Taxation;
and
(i)-1
<PAGE>
4. Such other documents and certificates as to matters
of fact and such matters of law as we have deemed
relevant to the opinions expressed herein.
Based upon and subject to the foregoing, after having given due regard
to such issues of law as we have deemed relevant, and assuming that:
1. The Registration Statement remains effective, and the
Prospectus which is a part thereof and your
Prospectus delivery procedures with respect thereto
fulfill all the requirements of the Securities Act of
1933 and the Investment Company Act of 1940
throughout all periods relevant to this opinion;
2. All offers and sales of Common Stock of the
Registrant (including each series thereof) registered
by means of the Registration Statement are conducted
in a manner complying with the terms of the
Registration Statement; and
3. All offers and sales of Common Stock of the
Registrant are made in compliance with the securities
laws of the states having jurisdiction thereof;
we are of the opinion that the Common Stock of the Registrant (including each
series thereof), when issued, will be legally and validly issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the references to our firm in the Prospectus and
Statement of Additional Information constituting parts of the Registration
Statement.
Very truly yours,
QUARLES & BRADY LLP
(i)-2
