Q:  Would you provide a brief overview of the company and the fund? A : Heartland is an independent, employeeowned advisor founded in 1983, with approximately $3.0 billion under management in mutual funds and separately managed accounts. The Value Plus Fund is one of three funds at Heartland. The other two are the Heartland Value Fund, which invests in small and microcap value stocks, with less than $1.5 billion market cap and a significant number of holdings below $300 million, and the Heartland Select Value Fund, which invests in value stocks across all market capitalizations; market cap is generally more than $500 million. The Heartland Value Plus Fund invests in small-cap value stocks that pay dividends, and whose market cap ranges between $250 million and $4 billion. Q:  What is your investment philosophy? A : Our philosophy is to capture the long-term capital appreciation of small-cap stocks, while mitigating volatility by focusing on dividendpaying companies. We employ a contrarian investment approach which identifies companies that are currently oversold or out of favor and target stocks that we believe have a margin of safety to limit downside risk. Q:  Why do you focus on small-cap stocks that pay dividends? A : We believe small-cap companies that pay dividends tend to have more stable business models. The focus on dividends is intended to lower the volatility of returns as well as limit downside risk. Historically, returns from smallcap stocks have exceeded those of mid-cap and large-cap stocks and growth stocks of all sizes. We do not necessarily require a long dividend history, only that the firm currently pays a dividend. We do use the dividend history as an indication of likely dividend payment in the future. Typically most firms that raise the dividend every year will continue to do so. And one of the greatest indicators of superior longterm performance is higher dividend growth rates as opposed to the dividend yield. Dividend paying stocks tend to be less volatile in stock crisis. Additionally, reported earnings are inherently inaccurate because they are driven by accrual based accounting and not cash flow. Cash dividends are a more objective measure of a company’s value and profitability. Dividends create a capital discipline for managers because they know they have to return some capital back to shareholders. We believe this brings more discipline to growth expenditures. About 780 stocks with market caps between $250 million and $4 billion pay dividends today. The majority of these companies have been paying out dividends for a number of years. Historically, our universe of potential holdings is not that volatile. Last year was somewhat of an exception, and out of the portfolio of 30 to 60 names we only had one or two cut their dividend. Generally, we avoid companies who lower or drop the dividend because this signals either too high a payout ratio or high leverage. We’re typically not interested in companies that have the payout ratio greater than 50% of cash flow, and as a firm, we typically avoid highly levered companies. Finally, our emphasis on dividend-paying small caps is a signifi cant differentiator as we know of only a handful of small cap funds that have a dividend focus. Q:  How do you defi ne your investment strategy? A : The fund generally invests in companies with market capitalizations between $250 million and $4 billion, with a majority of its assets invested in companies that pay dividends. By investing in dividend paying companies, the fund intends to capture the long-term capital appreciation of small-cap companies, while minimizing the volatility of returns inherent in the small-cap market. Q:  Would you explain in detail your 10 Principles of Value Investing? A : Every company we buy is subject to the evaluative framework of our 10 Principles of Value investing. The fi rst principle is to identify stocks with a catalyst. We’re looking for a specifi c reason why shareholder value will be maximized. The next two principles are related to valuations: low price to earnings and cash flow. Historically, low price-to-earnings stocks have outperformed the overall market and provided investors with less downside risk. Strong cash flows give a company greater financial flexibility and in the hands of capable management, can be the foundation for stronger earnings and, in turn, higher stock prices. We are balance sheet investors first and foremost, rather than profit and loss statement investors, and we are willing to take risk with the profit and loss statement but not with the balance sheet. That said, we will invest in turnarounds if they have solid balance sheets with an expectation that they can improve earnings. The fourth principle is low price to book value. We’re mostly focused on tangible book and prefer to invest in companies that are trading below tangible book. If the company is having problems and the management can’t turn it around, theoretically it could be liquidated for more than the current share price. Principles five and six are related to financial soundness and earnings dynamics. We’re focused on investing in companies with debtto- equity ratios that are less than 25%. Once again this illustrates how we seek margins of safety. If a company doesn’t have any debt, it really can’t go bankrupt. We are not looking to get stuck in value traps. We try to focus on companies with improving earning or earnings that have a baseline. The seventh principle has to do with a sound business strategy. We are looking for companies that have the competitive advantage, that proverbial “moat around the business.” It means the company can maintain and even grow margins over the long-term if it has a competitive advantage. The eighth principle is capable management and high insider ownership. Capable management means effectively implementing sound business strategies. In addition, we believe meaningful and increasing stock ownership by company officers and directors is tangible evidence of their personal commitment. Moreover, it aligns their longterm interest with the shareholders’ interest. The ninth principle is the value of the company. We synthesize all the valuation metrics into one. In addition to low price-toearnings, price-to-book and price-to-cash where we’re looking at whether a company has non-operating losses that can be utilized to offset future taxes, we’re looking at enterprise value to EBITDA ratios, private market valuations, breakup values, or hidden assets. And then finally, the last principle is positive technical analysis. Having identified stocks that we believe are undervalued and have potential for price appreciation we use technical analysis as a tool for avoiding those investments that may already be subject to undue speculation. We are attracted to stocks that have “bases,” trading within a narrow price range which has typically followed a down trend, or bear market. Q:  Would you explain your research process with an example? A : The fund utilizes the aforementioned framework to identify companies with strong financial profiles and low prices relative to their earnings, cash flows and book values. We believe this value-based investment approach provides a margin of safety and limits downside risk relative to other equity investment strategies. Every portfolio manager is also an analyst. We believe that’s important because it really allows for a good debate on every name that we discuss. We have a weekly investment meeting where the entire investment management team discusses the analysts’ recommendations. Our process begins with the 780 stocks whose market caps are between $250 million and $4 billion that pay a dividend. We narrow that down, based on valuation metrics, to about 600, which we call our watch list. We further narrow that list down to create grids for about 300 names. These are presented to the other managers for additional discussion. Our portfolio is concentrated between 30 and 60 names which are monitored on a daily basis. We go to a number of conferences and meet with over eight hundred management teams, from all over the world. We do extensive due diligence with management regarding their business model, financial profile, and industry dynamics. We prepare detailed financial statements, review conference call transcripts and attend corporate presentations. We build our own models, and we do not rely on Wall Street research. For every company we create our own model based on the income statement, cash flow statement and the balance sheet and construct a diversified portfolio of 30 to 60 stocks that we believe offers upside potential while potentially limiting downside risk. For instance, we bought a company, Datascope Corp. towards the mid-to-late 2007. The company traded at the low end of its historical valuation range, and at a discount to its peer group. We believed new product launches and margin improvement opportunities were the catalysts, and strong financial profile of the company was attractive as well. The company had no debt, and $50 million in cash and was in the process of divesting money losing business. These are the kinds of qualities we look for. Q:  What is your buy-and-sell discipline? A : Our portfolio managers and analysts meet regularly to discuss new and existing holdings as well as overall market environment. The portfolio management team identifies stocks to buy and sell based on current portfolio positioning. The team leader gathers consensus and finalizes any additions/deletions for portfolio. There are a number of reasons why we would sell a company - valuation targets being achieved, change in investment thesis, deteriorating financial position, and meeting fewer criteria of 10 Principles of Value Investing. Our number one focus is the balance sheet, so if the balance sheet is deteriorating it’s a major red flag for us. And if we are invested in a company that has any leverage, getting too close to the debt covenants because the business is deteriorating is another reason to consider selling. We meet with management teams on a regular basis, and we are sensitive to their consistency and the reliability of their guidance. Finally, we may sell a company if we find a better value or a company with a more favorable risk reward balance. Q:  How do you go about your portfolio construction? A : We invest in a smaller number of stocks, typically 30 to 60. We target 80% to 90% of portfolio holdings to pay dividends. Individual stocks generally represent 2% of portfolio. We are not benchmark huggers; we are benchmark aware. Our industry weightings typically represent less than 25% of the portfolio. Cash levels generally represent less than 5% of the portfolio, although we may build cash to more significant levels. We target a two to three year investment horizon. Our turnover ratio has averaged between about 30% and 50%, so our holding timeframe has historically been between two to three years. With the extreme market volatility of last year, we have experienced higher turnover. Q:  What is your risk management discipline? A : First, we don’t take greater than 5% position in any one company and we stick to the limit of 25% for our industry weights. Second, our 10 Principles of Value Investing is our first line of defense. We’re trying to prevent a loss of capital by avoiding highly levered companies and by finding companies with quantifiable margins of safety. Our team-based approach brings disparate points of view to bear in our decision process, and we have regular investment policy committee meetings to review any and all concentrations. Essentially, our contrarian value investment approach limits downside risk.