<PAGE>
THE BENCHMARK FUNDS
Investment Adviser, Transfer Agent and Custodian:
The Northern Trust Company
50 S. LaSalle Street
Chicago, IL 60675
Administrator and Distributor:
Goldman, Sachs & Co.
4900 Sears Tower
Chicago, IL 60606
The
Benchmark
Funds
The
Intermediate Bond
Portfolio
PROSPECTUS
JULY 31, 1997
<PAGE>
THE BENCHMARK FUNDS
(Advised by The Northern Trust Company)
---------------
THE NORTHERN TRUST COMPANY INVESTMENT ADVISER, TRANSFER AGENT
50 S. LaSalle Street AND CUSTODIAN
Chicago, Illinois 60675
312-630-6000
This Prospectus describes the Intermediate Bond Portfolio (the "Portfolio")
offered by The Benchmark Funds (the "Trust") to institutional investors. The
Intermediate Bond Portfolio seeks to maximize total return consistent with
reasonable risk. The Fund seeks to achieve its investment objective by
investing in a broad range of bonds and other fixed income securities and
maintaining a dollar-weighted average maturity of between 3 and 10 years.
The Portfolio is advised by The Northern Trust Company ("Northern"). Units of
the Portfolio are sold and redeemed without any purchase or redemption charge
imposed by the Trust, although Northern and other institutions may charge
their customers for services provided in connection with their investments.
This Prospectus provides information about the Portfolio that you should know
before investing. It should be read and retained for future reference. If you
would like more detailed information, a Statement of Additional Information
(the "Additional Statement") dated July 31, 1997 is available upon request
without charge by writing to the Trust's distributor, Goldman, Sachs & Co.
("Goldman Sachs"), 4900 Sears Tower, Chicago, Illinois 60606 or by calling 1-
800-621-2550.
UNITS OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, THE NORTHERN TRUST COMPANY, ITS PARENT
COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE PORTFOLIO
INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is July 31, 1997.
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INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY OF EXPENSES 3
- -------------------
INVESTMENT INFORMATION 5
- ----------------------
Introduction 5
Special Risks and Other Considera-
tions 5
Description of Securities and
Investment Techniques 7
Investment Restrictions 17
TRUST INFORMATION 17
- -----------------
Board of Trustees 17
Investment Adviser, Transfer Agent
and Custodian 17
Portfolio Manager 18
Administrator and Distributor 18
Unitholder Servicing Plan 18
Service Information 19
Expenses 19
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
INVESTING 20
- ---------
Purchase of Units 20
Redemption of Units 22
Distributions 24
Taxes 25
NET ASSET VALUE 26
- ---------------
PERFORMANCE INFORMATION 26
- -----------------------
ORGANIZATION 27
- ------------
MISCELLANEOUS 29
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</TABLE>
2
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SUMMARY OF EXPENSES
The following table sets forth certain information regarding the unitholder
transaction expenses imposed by the Trust and the estimated annualized
operating expenses the Portfolio expects to incur during the current fiscal
year. Hypothetical examples based on the table are also shown. Investors
should note that units of the Portfolio have been classified into four
separate classes, Class A, B, C and D units. Each class is distinguished by
the level of administrative support and transfer agency services provided.
Class A, B, C and D units represent pro rata interests in the Portfolio except
that different unitholder servicing fees and transfer agency fees are payable
by Class A, B, C and D units in the Portfolio. See "Trust Information--
Unitholder Servicing Plan."
<TABLE>
<CAPTION>
Intermediate Bond Portfolio(1)
-------------------------------
Class A Class B Class C Class D
Units Units Units Units
------- ------- ------- -------
<S> <C> <C> <C> <C>
Unitholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases.... None None None None
Deferred Sales Charge Imposed on Reinvested
Distributions............................... None None None None
Deferred Sales Charge Imposed on Redemptions. None None None None
Redemption Fees.............................. None None None None
Exchange Fees................................ None None None None
Annual Operating Expenses After Expense
Reimbursements and Fee Reductions (as a
percentage of average daily net assets).
Management Fees After Fee Reductions(2)...... .25% .25% .25% .25%
12b-1 Fees................................... None None None None
Other Operating Expenses
Servicing Fees(3)........................... None .10% .15% .25%
Transfer Agency Fees(3)..................... .01% .05% .10% .15%
Other Expenses (After Expense Reimbursements
and Fee Reductions(4,5))................... .10% .10% .10% .10%
---- ---- ---- ----
Total Other Operating Expenses(4,5)......... .11% .25% .35% .50%
---- ---- ---- ----
Total Operating Expenses(2,3,4,5)............ .36% .50% .60% .75%
==== ==== ==== ====
Example of Expenses. Based on the foregoing
table, you would pay the following expenses
on a hypothetical $1,000 investment, assuming
a 5% annual return and redemption at the end
of each time period:
One Year..................................... $4 $5 $6 $8
Three Years.................................. $12 $16 $19 $24
</TABLE>
3
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- ----------
(1) Since the Portfolio does not yet have an operating history, the costs and
expenses included in the table and hypothetical example above are based on
estimated fees and expenses for the current fiscal year and should not be
considered as representative of past or future expenses. Actual fees and
expenses may be greater or less than those indicated.
(2) Northern has voluntarily agreed to reduce its advisory fee for the
Intermediate Bond Portfolio to .25% of the Portfolio's average daily net
assets for the current fiscal year (advisory fees are otherwise payable at
the annual rate of .60% of the Portfolio's average daily net assets).
(3) The Trust has adopted a Unitholder Servicing Plan pursuant to which the
Trust may enter into agreements with Institutions or other financial
intermediaries under which they render (or arrange to have rendered)
certain unitholder administrative support services for their Customers or
other Investors who beneficially own Class B, C and D units in return for
a fee ("Servicing Fee") of up to .10%, .15%, and .25%, respectively, per
annum of the value of the Portfolio's outstanding Class B, C and D units,
respectively. The Trust also allocates transfer agency fees, which are
attributable to the Class A, B, C and D units in the Portfolio, separately
to such units, as reflected in the table. For further information, see
"Investment Adviser, Transfer Agent and Custodian" and "Unitholder
Servicing Plan" under the heading "Trust Information" in this Prospectus.
(4) For the period ending November 30, 1997, Goldman Sachs is entitled to an
administration fee equal to .10% of the average daily net assets of the
Portfolio. In any fiscal year, Goldman Sachs has advised the Trust that it
intends to reimburse "Other Operating Expenses" for the Portfolio
(including fees payable to Goldman Sachs as administrator, but excluding
fees payable to Northern for its duties as adviser and transfer agent,
servicing fees and certain extraordinary expenses) which exceed on an
annualized basis .10% of the Portfolio's average daily net assets for such
fiscal year. The expense information in the table has, accordingly, been
presented to reflect the estimated fee reductions and expense
reimbursements.
(5) Without the undertakings of Northern and Goldman Sachs, it is estimated
that "Other Expenses" would be .46% and total annual operating expenses
for the Portfolio's Class A, B, C and D units would be 1.07%, 1.21%, 1.31%
and 1.46%, respectively, for the current fiscal year. See note (1) above.
For a more complete description of the Portfolio's expenses, see "Trust
Information" in this Prospectus.
----------------
THE PURPOSE OF THE FOREGOING TABLE IS TO ASSIST YOU IN UNDERSTANDING THE
VARIOUS UNITHOLDER TRANSACTION AND OPERATING EXPENSES OF THE PORTFOLIO THAT
UNITHOLDERS BEAR DIRECTLY OR INDIRECTLY. IT DOES NOT, HOWEVER, REFLECT ANY
CHARGES WHICH MAY BE IMPOSED BY NORTHERN, ITS AFFILIATES AND CORRESPONDENT
BANKS AND OTHER INSTITUTIONS ON THEIR CUSTOMERS AS DESCRIBED UNDER
"INVESTING--PURCHASE OF UNITS." THE EXAMPLE SHOWN ABOVE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RATE OF RETURN.
ACTUAL EXPENSES AND RATE OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN.
4
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INVESTMENT INFORMATION
INTRODUCTION
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940 (the "1940 Act"). The Portfolio is a separate
pool of assets in the Trust with its own separate investment objective and
policies. The Portfolio is classified as a diversified investment company.
Units of the Portfolio have been classified into four classes--Class A units,
Class B units, Class C units and Class D units. Northern serves as investment
adviser, transfer agent and custodian. Goldman Sachs serves as distributor and
administrator. Except as expressly noted below, the investment objective and
policies of the Portfolio may be changed by the Board of Trustees of the Trust
without the approval of the unitholders of the Portfolio.
In pursuing its investment objective, the Intermediate Bond Portfolio invests
in a broad range of bonds and other fixed income securities. The Portfolio's
dollar-weighted average maturity will range between three and ten years.
The Portfolio will invest primarily in fixed income securities of all types
and in any proportion that generally are rated investment grade at the time of
purchase, and may include obligations of the U.S. Government, its agencies or
instrumentalities, obligations of foreign, state and local governments,
obligations of U.S. and foreign corporations and obligations of U.S. and
foreign banks. The Portfolio may invest up to 25% of its total assets in
foreign securities, including up to 15% of its total assets in securities of
issuers in countries with emerging economies or securities markets. The
obligations of a foreign issuer will not be purchased by the Portfolio if, as
a result of the purchase, more than 20% of the total assets of the Portfolio
will be invested in the obligations of issuers within a single foreign
country. The Portfolio may also invest up to 10% of its total assets in non-
investment grade securities. Under normal market conditions, at least 65% of
the Portfolio's total assets will be invested in bonds, debentures, mortgage
and other asset-related securities, zero coupon bonds and convertible
debentures. The Portfolio may also invest in short-term notes, bills,
commercial paper and certificates of deposits.
The Portfolio may enter into forward currency contracts and interest rate
swaps and may invest in options and futures contracts and related options. The
Portfolio may also invest in certain short-term fixed income securities as
cash reserves. See "Description of Securities and Investment Techniques" below
for more information.
SPECIAL RISKS AND OTHER CONSIDERATIONS
FOREIGN SECURITIES. The Portfolio may invest directly or indirectly in the
securities of foreign issuers, whether or not U.S. dollar-denominated. In
addition, the Portfolio may acquire the obligations of foreign banks and
foreign branches of U.S. banks as stated below under "Description of
Securities and Investment Techniques--Short-Term Obligations." There are
certain risks and costs involved in investing in securities of companies and
governments of foreign nations, which are in addition to the usual risks
inherent in U.S. investments. Foreign securities, and in particular foreign
debt securities, are sensitive to changes in interest rates and the interest
rate environment. In addition, investment in foreign debt, or the securities
of foreign governments, will subject the Portfolio to risks, including the
risk that foreign governments may default on their obligations, may not
respect the integrity of such debt, may attempt to renegotiate the debt at a
lower rate, and may not honor investments by United States entities or
citizens. The performance of investments in securities denominated in a
foreign currency will also depend, in part, on the strength of the foreign
currency against the U.S. dollar and the interest rate environment in the
country issuing the currency. Absent other events which could otherwise affect
the value of a
5
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foreign security (such as a change in the political climate or an issuer's
credit quality), appreciation in the value of the foreign currency generally
can be expected to increase the value of a foreign currency-denominated
security in terms of U.S. dollars. A rise in foreign interest rates or decline
in the value of the foreign currency relative to the U.S. dollar generally can
be expected to depress the value of a foreign currency-denominated security.
Investment in foreign securities also involves higher costs than investment in
U.S. securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments. Foreign investments may
also involve risks associated with the level of currency exchange rates, less
complete financial information about the issuers, less market liquidity, more
market volatility and political instability. Future political and economic
developments, the possible imposition of withholding taxes on dividend income,
the possible seizure or nationalization of foreign holdings, the possible
establishment of exchange controls or freezes on the convertibility of
currency, or the adoption of other governmental restrictions might adversely
affect an investment in foreign securities. Additionally, foreign banks and
foreign branches of domestic banks may be subject to less stringent reserve
requirements, and to different accounting, auditing and recordkeeping
requirements.
In addition, there are other risks of investing in countries with emerging
economies or securities markets. These countries are located in the
Asia/Pacific region, Eastern Europe, Latin and South America and Africa.
Political and economic structures in many such countries may be undergoing
significant evolution and rapid development, and such countries may lack the
social, political and economic stability characteristic of more developed
countries. Some of these countries may have in the past failed to recognize
private property rights and may have at times nationalized or expropriated the
assets of private companies. As a result, the risks described above, including
the risks of nationalization or expropriation of assets, may be heightened.
While the Portfolio's investments may be denominated in foreign currencies,
the portfolio securities and other assets held by the Portfolio are valued in
U.S. dollars. Currency exchange rates may fluctuate significantly over short
periods of time causing, together with other factors, the Portfolio's net
asset value to fluctuate as well. Currency exchange rates can be affected
unpredictably by the intervention or the failure to intervene by U.S. or
foreign governments or central banks, or by currency controls or political
developments in the U.S. or abroad. The Portfolio's net long and short foreign
currency exposure will not exceed its total asset value. To the extent that
the Portfolio is invested in foreign securities while also maintaining
currency positions, it may be exposed to greater combined risk. The
Portfolio's net currency positions may expose it to risks independent of its
securities positions.
DERIVATIVE INSTRUMENTS. The Portfolio may also purchase certain "derivative"
instruments. "Derivative" instruments are instruments that derive value from
the performance of underlying assets, interest or currency exchange rates, or
indices, and include interest rate swaps, futures contracts, options, forward
currency contracts and structured debt obligations (including collateralized
mortgage obligations and other types of asset-backed securities, "stripped"
securities and various floating rate instruments, including "inverse
floaters"). Derivative instruments present, to varying degrees, market risk
that the performance of the underlying assets, exchange rates or indices will
decline; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the derivative
instrument will decline more than the assets, rates or indices on which it is
based; liquidity risk that the Portfolio will be unable to sell a derivative
instrument when it wants because of lack of market depth or
6
<PAGE>
market disruption; pricing risk that the value of a derivative instrument
(such as an option) will not correlate exactly to the value of the underlying
assets, rates or indices on which it is based; and operations risk that loss
will occur as a result of inadequate systems and controls, human error or
otherwise. Some derivative instruments are more complex than others, and for
those instruments that have been developed recently, data is lacking regarding
their actual performance over complete market cycles. Northern will evaluate
the risks presented by the derivative instruments purchased by the Portfolio,
and will determine, in connection with its day-to-day management of the
Portfolio, how they will be used in furtherance of the Portfolio's investment
objectives. It is possible, however, that Northern's evaluations will prove to
be inaccurate or incomplete and, even when accurate and complete, it is
possible that the Portfolio will, because of the risks discussed above, incur
loss as a result of their investments in derivative instruments.
AVERAGE MATURITY. The Portfolio will normally maintain the dollar-weighted
average maturity of its portfolio within the specified range previously
described. The maturities of certain instruments, however, such as those
subject to prepayment or redemption by the issuers, are subject to estimation.
There can be no assurance that the estimates used by the Portfolio for such
instruments will, in fact, be accurate or that, if inaccurate, the Portfolio's
dollar-weighted average maturity will remain within the specified limits.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
UNITED STATES GOVERNMENT OBLIGATIONS. The Portfolio may invest, to the extent
consistent with its investment policies, in a variety of U.S. Treasury
obligations consisting of bills, notes and bonds, which principally differ
only in their interest rates, maturities and time of issuance. The Portfolio
may also invest in other securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities consisting of bills, notes and
bonds, which principally differ only in their interest rates, maturities and
time of issuance. Obligations of certain agencies and instrumentalities, such
as the Government National Mortgage Association ("GNMA"), are supported by the
full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association ("FNMA"), are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others are supported only by the credit of the instrumentalities. No assurance
can be given that the U.S. Government would provide financial support to its
agencies or instrumentalities if it is not obligated to do so by law. There is
no assurance that these commitments will be undertaken or complied with in the
future.
Securities guaranteed as to principal and interest by the U.S. Government, its
agencies or instrumentalities are deemed to include (a) securities for which
the payment of principal and interest is backed by an irrevocable letter of
credit issued by the U.S. Government or an agency or instrumentality thereof,
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed. The secondary market for certain of these
participations is limited. Such participations will therefore be regarded as
illiquid.
CONVERTIBLE SECURITIES. The Portfolio may acquire convertible securities. A
convertible security is a security that may be converted either at a stated
price or rate within a specified period of time into a specified number of
shares of common stock. By investing in convertible securities, the Portfolio
seeks the opportunity, through the conversion feature, to participate in the
capital appreciation of the common stock into which the securities are
convertible, while earning higher current income than is available from the
common stock. Convertible securities
7
<PAGE>
acquired by the Portfolio will be subject to the same rating requirements as
the Portfolio's investments in its fixed income securities, or if unrated,
will be of comparable quality as determined by Northern in accordance with
guidelines approved by the Board of Trustees, except that the Portfolio may
acquire convertible securities rated below investment grade so long as the
Portfolio's investments in all non-investment grade securities do not exceed
the limitations set forth below under "Non-Investment Grade Securities." The
Portfolio will ordinarily sell units of common stock received upon conversion.
CORPORATE OBLIGATIONS. The Portfolio may purchase debt obligations of domestic
or foreign corporations subject to the Portfolio's minimum rating requirements
for purchases of debt securities. See discussion of "Investment Grade
Securities" and "Non-Investment Grade Securities" below.
INVESTMENT GRADE SECURITIES. The Portfolio may invest in fixed income
securities of all types and may invest a portion of its assets in convertible
securities. Such securities will generally be investment grade. Investment
grade securities include those securities which are rated BBB or higher by
Standard and Poor's Ratings Group ("S&P"), Baa or higher by Moody's Investors
Service, Inc. ("Moody's"), BBB or higher by Duff & Phelps Credit Rating Co.
("Duff") or BBB or higher by Fitch Investors Service, Inc. ("Fitch") at the
time of purchase, or if unrated, are of comparable quality as determined by
Northern. Securities rated BBB by S&P, Duff or Fitch, or Baa by Moody's have
certain speculative characteristics and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher rated securities.
Commercial paper and other short-term obligations acquired by the Portfolio
will be rated A-2 or higher by S&P, P-2 or higher by Moody's, D-2 or higher by
Duff, or F-2 or higher by Fitch at the time of purchase or, if unrated,
determined to be of comparable quality by Northern. Subsequent to its purchase
by the Portfolio, a rated security may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by the Portfolio.
Northern will consider such an event in determining whether the Portfolio
should continue to hold such security. In addition, the Portfolio may acquire
fixed income securities rated below investment grade when Northern believes
that the investment characteristics of such securities make them desirable
acquisitions. In either case, the Portfolio's total investment in non-
investment grade securities will not exceed the limitations set forth below
under "Non-Investment Grade Securities."
NON-INVESTMENT GRADE SECURITIES. Although the fixed income securities and
convertible securities in which the Portfolio may invest will normally be
rated investment grade at the time of purchase, the Portfolio may invest in
non-investment grade securities when Northern believes that the investment
characteristics of such securities make them desirable in light of the
Portfolio's investment objective and current portfolio mix, so long as under
normal market and economic conditions, (i) no more than 10% of the total
assets of the Portfolio are invested in non-investment grade securities and
(ii) such securities are rated "B" or higher at the time of purchase by at
least one major rating agency, or if unrated will be of comparable quality as
determined by Northern. Non-investment grade securities (those that are rated
"Ba" or lower by Moody's or "BB" or lower by S&P, Duff or Fitch) are commonly
referred to as "junk bonds." To the extent that securities, including
convertible securities, acquired by the Portfolio are not rated investment
grade, there is a greater risk as to the timely repayment of the principal on,
and timely payment of interest or dividends with respect to, such securities.
Particular risks associated with lower-rated securities are (a) the relative
youth and growth of the market for such securities, (b) the sensitivity of
such securities to interest rate and economic changes, (c) the lower degree of
protection of principal and interest payments, (d) the relatively low trading
market liquidity for the securities, (e) the impact that legislation may have
on the high yield bond market (and, in turn, on the Portfolio's net asset
value and
8
<PAGE>
investment practices), and (f) the creditworthiness of the issuers of such
securities. During an economic downturn or substantial period of rising
interest rates, leveraged issuers may experience financial stress which would
adversely affect their ability to service their principal and interest payment
obligations, to meet projected business goals, and to obtain additional
financing. An economic downturn could also disrupt the market for lower-rated
securities and adversely affect the value of outstanding securities and the
ability of the issuers to repay principal and interest. If the issuer of a
security held by the Portfolio defaulted, the Portfolio could incur additional
expenses to seek recovery.
FORWARD CURRENCY EXCHANGE CONTRACTS. The Portfolio may enter into forward
currency exchange contracts for hedging purposes and in an effort to reduce
the level of volatility caused by changes in foreign currency exchange rates
or where such transactions are economically appropriate for the reduction of
risks inherent in the ongoing management of the Portfolio.
A forward currency exchange contract is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the
time of contract. Although such contracts tend to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the value of
such currency increase. Consequently, the Portfolio may choose to refrain from
entering into such contracts. In connection with forward currency exchange
contracts, the Portfolio will create a segregated account of liquid assets in
accordance with applicable requirements of the Securities and Exchange
Commission (the "SEC").
OPTIONS. The Portfolio may write covered call options, buy put options, buy
call options and write secured put options for hedging (or cross-hedging)
purposes or for the purpose of earning additional income. Such options may
relate to particular securities, foreign or domestic securities indices,
financial instruments or foreign currencies and may or may not be listed on a
foreign or domestic securities exchange and issued by the Options Clearing
Corporation. The Portfolio will not purchase put and call options in an amount
that exceeds 5% of its net assets at the time of purchase. The aggregate value
of the Portfolio's assets that will be subject to options written by the
Portfolio will not exceed 25% of its net assets at the time the option is
written.
In the case of a call option on a security or currency, the option is
"covered" if the Portfolio owns the security or currency underlying the call
or has an absolute and immediate right to acquire that security or currency
without additional cash consideration (or, if additional cash consideration is
required, liquid assets in such amount are held in a segregated account by its
custodian) upon conversion or exchange of other securities or instruments held
by it. For a call option on an index, the option is covered if the Portfolio
maintains with its custodian a portfolio of securities substantially
replicating the movement of the index, or liquid assets equal to the contract
value. A call option is also covered if the Portfolio holds a call on the same
security, currency or index as the call written where the exercise price of
the call held is (i) equal to or less than the exercise price of the call
written, or (ii) greater than the exercise price of the call written provided
the difference is maintained by the Portfolio in liquid assets in a segregated
account with its custodian. Put options written by the Portfolio are "secured"
if the Portfolio maintains liquid assets in a segregated account with its
custodian in an amount not less than the exercise price of the option at all
times during the option period.
Options trading is a highly specialized activity which entails greater than
ordinary investment risks. A call option for a particular security or currency
gives the purchaser of the option the right to buy, and a writer the
obligation
9
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to sell, the underlying security or currency at the stated exercise price at
any time prior to the expiration of the option, regardless of the market price
of the security or currency. The premium paid to the writer is in
consideration for undertaking the obligation under the option contract. A put
option for a particular security or currency gives the purchaser the right to
sell the security or currency at the stated exercise price to the expiration
date of the option, regardless of the market price of the security or
currency. In contrast to an option on a particular security, an option on an
index provides the holder with the right to make or receive a cash settlement
upon exercise of the option. The amount of this settlement will be equal to
the difference between the closing price of the index at the time of exercise
and the exercise price of the option expressed in dollars, times a specified
multiple.
The Portfolio will invest and trade in unlisted over-the-counter options only
with firms deemed creditworthy by Northern. However, unlisted options are not
subject to the protections afforded purchasers of listed options by the
Options Clearing Corporation, which performs the obligations of its members
which fail to perform them in connection with the purchase or sale of options.
FUTURES CONTRACTS AND RELATED OPTIONS. The Portfolio may invest in futures
contracts and options on futures contracts for hedging purposes, to increase
total return (i.e., for speculative purposes) or to maintain liquidity to meet
potential unitholder redemptions, invest cash balances or dividends or
minimize trading costs. The value of the Portfolio's contracts may equal or
exceed 100% of its total assets, although the Portfolio will not purchase or
sell a futures contract unless immediately after any such transaction the sum
of the aggregate amount of margin deposits on its existing futures positions
and the amount of premiums paid for related options entered into for other
than bona fide hedging purposes is 5% or less of its total assets.
Futures contracts obligate the Portfolio, at maturity, to take or make
delivery of certain domestic or foreign securities or the cash value of a
securities index. When used as a hedge, the Portfolio may sell a futures
contract in order to offset a decrease in the market value of its portfolio
securities that might otherwise result from a market decline or currency
exchange fluctuations. The Portfolio may do so either to hedge the value of
its portfolio of securities as a whole, or to protect against declines,
occurring prior to sales of securities, in the value of the securities to be
sold. Conversely, the Portfolio may purchase a futures contract as a hedge in
anticipation of purchases of securities. In addition, the Portfolio may
utilize futures contracts in anticipation of changes in the composition of its
portfolio holdings.
The Portfolio may purchase and sell call and put options on futures contracts
traded on a domestic or foreign exchange or board of trade. When the Portfolio
purchases an option on a futures contract, it has the right to assume a
position as a purchaser or seller of a futures contract at a specified
exercise price during the option period. When the Portfolio sells an option on
a futures contract, it becomes obligated to purchase or sell a futures
contract if the option is exercised. In connection with the Portfolio's
position in a futures contract or option thereon, the Portfolio will create a
segregated account of liquid assets, in accordance with applicable
requirements of the SEC.
The primary risks associated with the use of futures contracts and options
are: (i) imperfect correlation between the change in market value of the
securities held by the Portfolio and the price of futures contracts and
options; (ii) possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures contract when desired;
(iii) losses due to unanticipated market movements which are potentially
unlimited; and
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<PAGE>
(iv) Northern's ability to predict correctly the direction of securities
prices, interest rates, currency exchange rates and other economic factors.
For a further discussion see "Additional Investment Information--Futures
Contracts and Related Options" and Appendix B in the Additional Statement.
The Portfolio intends to comply with the regulations of the Commodity Futures
Trading Commission exempting the Portfolio from registration as a "commodity
pool operator."
INTEREST RATE SWAPS, FLOORS AND CAPS. The Portfolio may, in order to protect
its value from interest rate fluctuations and to hedge against fluctuations in
the floating rate market, enter into interest rate swaps or purchase interest
rate floors or caps. The Portfolio expects to enter into these hedging
transactions primarily to preserve a return or spread of a particular
investment or portion of its holdings and to protect against an increase in
the price of securities the Portfolio anticipates purchasing at a later date.
Interest rate swaps involve the exchange by the Portfolio with another party
of their respective commitments to pay or receive interest (e.g., an exchange
of floating rate payments for fixed rate payments). The purchase of an
interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate floor. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate cap.
The net amount of the excess, if any, of the Portfolio's obligations over its
entitlements with respect to each interest rate swap will be accrued on a
daily basis and an amount of liquid assets having an aggregate net asset value
at least equal to such accrued excess will be maintained in a segregated
account by the Portfolio's custodian. If the other party to an interest rate
swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. The
Portfolio will not enter into any interest rate swap, floor or cap transaction
unless the unsecured commercial paper, senior debt, or claims paying ability
of the other party is rated either A or A-1 or better by S&P, Duff or Fitch,
or A or P-1 or better by Moody's.
SECURITIES LENDING. The Portfolio may seek additional income from time to time
by lending its portfolio securities on a short-term basis to banks, brokers
and dealers under agreements requiring that the loans be secured by collateral
in the form of cash, cash equivalents, U.S. Government securities or
irrevocable bank letters of credit maintained on a current basis equal in
value to at least the market value of the securities loaned. The Portfolio may
not make such loans in excess of 33 1/3% of the value of the Portfolio's total
assets. Loans of securities involve risks of delay in receiving additional
collateral or in recovering the securities loaned, or possible loss of rights
in the collateral should the borrower of the securities become insolvent. The
proceeds received by the Portfolio in connection with loans of portfolio
securities may be invested in U.S. Government securities and other liquid high
grade debt obligations.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS.
The Portfolio may purchase or sell securities on a when-issued or delayed-
delivery basis and make contracts to purchase or sell securities for a fixed
price at a future date beyond customary settlement time. Securities purchased
on a when-issued, delayed-delivery or forward commitment basis involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date. Conversely, securities sold on a delayed-delivery or forward
commitment basis involve the risk that the value of the security to be sold
may increase prior to the settlement date. Securities purchased on a forward
commitment basis also involve the risk that the seller may fail to deliver the
security on the agreed upon future date. The Portfolio is required to hold and
maintain liquid assets in a
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<PAGE>
segregated account with the Portfolio's custodian until the settlement date
having a value (determined daily) at least equal to the amount of the
Portfolio's purchase commitments. In the case of a forward commitment to sell
portfolio securities, the Portfolio is required to hold the portfolio
securities themselves in a segregated account with the custodian while the
commitment is outstanding. Although the Portfolio would generally purchase
securities on a when-issued, delayed-delivery or a forward commitment basis
with the intention of acquiring the securities, the Portfolio may dispose of
such securities prior to settlement if Northern deems it appropriate to do so.
BORROWINGS. The Portfolio is authorized to make limited borrowings for
temporary purposes to the extent described below under "Investment
Restrictions." If the securities held by the Portfolio should decline in value
while borrowings are outstanding, the net asset value of the Portfolio's
outstanding units will decline in value by proportionately more than the
decline in value suffered by the Portfolio's securities. Borrowings may be
effected through reverse repurchase agreements under which the Portfolio would
sell portfolio securities to financial institutions such as banks and broker-
dealers and agree to repurchase them at a particular date and price. The
Portfolio may utilize reverse repurchase agreements when it is anticipated
that the interest income to be earned from the investment of the proceeds of
the transaction is greater than the interest expense of the reverse repurchase
transaction. See "Description of Securities and Investment Techniques--Reverse
Repurchase Agreements" below for additional information concerning reverse
repurchase agreements. For additional information on borrowings, see
"Additional Investment Information--Investment Restrictions" in the Additional
Statement.
SHORT-TERM OBLIGATIONS. Subject to the Portfolio's investment objective and
policies, the Portfolio may also invest in short-term U.S. government
obligations, high quality money market instruments and repurchase agreements,
pending investment, to meet anticipated redemption requests, or as a temporary
defensive measure. Such obligations may include those issued by foreign banks
and foreign branches of U.S. banks. See "Special Risks and Other
Considerations--Foreign Securities" above.
REPURCHASE AGREEMENTS. The Portfolio may agree to purchase portfolio
securities from financial institutions such as banks and broker/dealers which
are deemed to be creditworthy by Northern under guidelines approved by the
Board of Trustees subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price ("repurchase agreements"). Although the
securities subject to a repurchase agreement may bear maturities exceeding one
year, settlement for the repurchase agreement will never be more than one year
after the Portfolio's acquisition of the securities and normally will be
within a shorter period of time. Securities subject to repurchase agreements
are held either by the Trust's custodian or subcustodian (if any), or in the
Federal Reserve/Treasury Book-Entry System. The seller under a repurchase
agreement will be required to maintain the value of the securities which are
subject to the agreement and held by the Portfolio in an amount that exceeds
the agreed upon repurchase price (including accrued interest). Default by or
bankruptcy of the seller would, however, expose the Portfolio to possible loss
because of adverse market action or delays in connection with the disposition
of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse repurchase
agreements which involve the sale of securities held by it, with an agreement
to repurchase the securities at an agreed upon price (including interest) and
date. The Portfolio will use the proceeds of reverse repurchase agreements to
purchase other securities either maturing, or under an agreement to resell, at
a date simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Portfolio will utilize reverse repurchase agreements, which may
be viewed as borrowings (or leverage), when it is anticipated that the
interest income to be earned from the
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<PAGE>
investment of the proceeds of the transaction is greater than the interest
expense of the reverse repurchase transaction. Reverse repurchase agreements
involve the risks that the interest income earned from the investment of the
proceeds of the transaction will be less than the interest expense of the
reverse repurchase agreement, that the market value of the securities sold by
the Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase and that the securities may not be returned to the
Portfolio. During the time a reverse repurchase agreement is outstanding, the
Portfolio will maintain a segregated account with the Trust's custodian
containing liquid assets having a value at least equal to the repurchase
price. The Portfolio may enter into reverse repurchase agreements with banks,
brokers and dealers, and has the authority to enter into reverse repurchase
agreements in amounts not exceeding in the aggregate one-third of the
Portfolio's total assets. See "Additional Investment Information--Investment
Restrictions" in the Additional Statement.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolio may purchase rated and
unrated variable and floating rate instruments. These instruments may include
variable amount master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
The Portfolio may also invest in leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate on an inverse floater
resets in the opposite direction from the market rate of interest to which the
inverse floater is indexed. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that
exceeds the magnitude of the change in the index rate of interest. The higher
degree of leverage inherent in inverse floaters is associated with greater
volatility in their market values. Accordingly, the duration of an inverse
floater may exceed its stated final maturity. Unrated variable and floating
rate instruments will be determined by Northern to be of comparable quality at
the time of the purchase to rated instruments which may be purchased by the
Portfolio.
The absence of an active secondary market with respect to particular variable
and floating rate instruments could make it difficult for the Portfolio to
dispose of the instruments if the issuer defaulted on its payment obligation
or during periods that the Portfolio is not entitled to exercise its demand
rights, and the Portfolio could, for these or other reasons, suffer a loss
with respect to such instruments. Variable and floating rate instruments
including inverse floaters held by the Portfolio will be subject to the
Portfolio's 15% limitation on illiquid investments when the Portfolio may not
demand payment of the principal amount within seven days absent a reliable
trading market.
INVESTMENT COMPANIES. In connection with the management of its daily cash
position, the Portfolio may invest in securities issued by other investment
companies which invest in short-term, high-quality debt securities and which
determine their net asset value per share based on the amortized cost or
penny-rounding method of valuation. In addition, the Portfolio may invest in
securities issued by other investment companies if otherwise consistent with
its investment objective and policies. As a shareholder of another investment
company, the Portfolio 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 fees and other expenses
the Portfolio bears directly in connection with its own operations. To the
extent required by the 1940 Act and the regulations and orders of the SEC
thereunder, the Portfolio currently intends to limit its investments in
securities issued by other investment companies so that, as determined
immediately after a purchase is made, not more than 3% of the total
outstanding stock of any investment company will be owned by the Portfolio,
the Trust as a whole and their affiliated persons (as defined in the 1940
Act). The Portfolio is authorized, however, to invest substantially all of its
assets in one or more investment companies in the future.
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<PAGE>
ILLIQUID OR RESTRICTED SECURITIES. The Portfolio may invest up to 15% of its
net assets in securities which are illiquid. Illiquid securities would
generally include repurchase agreements and time deposits with
notice/termination dates in excess of seven days, unlisted over-the-counter
options, certain guaranteed investment contracts and other securities that are
traded in the United States but are subject to trading restrictions because
they are not registered under the Securities Act of 1933 (the "1933 Act"),
interest rate swaps and stripped mortgage-backed securities ("SMBS") issued by
private issuers.
If otherwise consistent with its investment objectives and policies, the
Portfolio may purchase domestically-traded securities which are not registered
under the 1933 Act but which can be sold to "qualified institutional buyers"
in accordance with Rule 144A under the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by Northern, under guidelines
approved by the Board of Trustees, that an adequate trading market exists for
that security. This investment practice could have the effect of increasing
the level of illiquidity in the Portfolio during any period that qualified
institutional buyers become uninterested in purchasing these restricted
securities.
STRIPPED OBLIGATIONS. To the extent consistent with its investment objective
and policies, the Portfolio may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government and other
domestic and foreign obligations. These participations, which may be issued by
the U.S. Government (or a U.S. Government agency or instrumentality), foreign
governments or by private issuers such as banks and other financial
institutions, are issued at a discount to their "face value," and may include
SMBS, which are derivative multi-class mortgage securities. Stripped
securities, particularly SMBS, may exhibit greater price volatility than
ordinary debt securities because of the manner in which their principal and
interest are returned to investors.
CUSTODIAL RECEIPTS FOR TREASURY SECURITIES. The Portfolio may also purchase
participations in trusts that hold U.S. Treasury securities (such as TIGRs and
CATS) where the trust participations evidence ownership in either the future
interest payments or the future principal payments on the U.S. Treasury
obligations. Like other stripped securities, these participations are also
normally issued at a discount to their "face value," and may exhibit greater
price volatility than ordinary debt securities because of the manner in which
their principal and interest are returned to investors. Investments by the
Portfolio in such receipts will not exceed 5% of the value of the Portfolio's
total assets.
BANK OBLIGATIONS. The Portfolio may invest in domestic and foreign bank
obligations, including certificates of deposit, bank and deposit notes,
bankers' acceptances and fixed time deposits. Such obligations may be general
obligations of the parent bank or may be limited to the issuing branch or
subsidiary by the terms of the specific obligation or by government
regulation.
ASSET-BACKED SECURITIES. The Portfolio may purchase asset-backed securities
that are secured or backed by mortgages or other assets (e.g., automobile
loans, credit card receivables and other financial assets) and are issued by
entities such as GNMA, FNMA, FHLMC, commercial banks, financial companies,
finance subsidiaries of industrial companies, savings and loan associations,
mortgage banks, investment banks and certain special purpose entities. Asset-
backed securities acquired by the Portfolio will be rated BBB or better by
S&P, Duff or Fitch, or Baa or better by Moody's at the time of purchase or, if
not rated, will be determined by Northern to be of comparable quality. The
Portfolio will not purchase non-mortgage asset-backed securities that are not
rated by S&P, Duff, Fitch or Moody's.
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Presently there are several types of mortgage-backed securities that may be
acquired by the Portfolio, including guaranteed mortgage pass-through
certificates, which provide the holder with a pro rata interest in the
underlying mortgages, and collateralized mortgage obligations ("CMOs"), which
provide the holder with a specified interest in the cash flow of a pool of
underlying mortgages or other mortgage-backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways. The Portfolio will not purchase "residual" CMO
interests, which normally exhibit greater price volatility.
The yield characteristics of asset-backed securities differ from traditional
debt securities. A major difference is that the principal amount of the
obligations may be prepaid at any time because the underlying assets (i.e.,
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster
than expected prepayments will increase, while slower than expected
prepayments will decrease, yield to maturity. In calculating the average
weighted maturity of the Portfolio, the maturity of asset-backed securities
will be based on estimates of average life.
Prepayments on asset-backed securities generally increase with falling
interest rates and decrease with rising interest rates; furthermore,
prepayment rates are influenced by a variety of economic and social factors.
In general, the collateral supporting non-mortgage asset-backed securities is
of shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. Like other fixed income securities, when interest
rates rise the value of an asset-backed security generally will decline;
however, when interest rates decline, the value of an asset-backed security
with prepayment features may not increase as much as that of other fixed
income securities.
The value of asset-backed securities may change because of actual or perceived
changes in the creditworthiness of the originator, servicing agent, or of the
financial institution providing credit support. In addition, non-mortgage
asset-backed securities involve certain risks not presented by mortgage-backed
securities. Primarily, these securities, do not have the benefit of the same
security interest in the underlying collateral. Credit card receivables are
generally unsecured, and the debtors are entitled to the protection of a
number of state and Federal consumer credit laws many of which give debtors
the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of automobile receivables permit the
servicers to retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have
an effective security interest in all of the obligations backing such
receivables. Therefore, there is a possibility that recoveries on repossessed
collateral may not, in some cases, be able to support payment on these
securities.
EXCHANGE RATE-RELATED SECURITIES. The Portfolio may invest in securities for
which the principal repayment at maturity, while paid in U.S. dollars, is
determined by reference to the exchange rate between the U.S. dollar and the
currency of one or more foreign countries ("Exchange Rate-Related
Securities"). The interest payable on these securities is denominated in U.S.
dollars and is not subject to foreign currency risk and, in most cases, is
paid at rates higher than most other similarly rated securities in recognition
of the foreign currency risk
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component of Exchange Rate-Related Securities. Investments in Exchange Rate-
Related Securities entail certain risks. There is the possibility of
significant changes in rates of exchange between the U.S. dollar and any
foreign currency to which an Exchange Rate-Related Security is linked. In
addition, potential illiquidity in the forward foreign exchange market and the
high volatility of the foreign exchange market may from time to time combine
to make it difficult to sell an Exchange Rate-Related Security prior to
maturity without incurring a significant price loss.
GUARANTEED INVESTMENT CONTRACTS. The Portfolio may make limited investments in
guaranteed investment contracts ("GICs") issued by U.S. insurance companies.
Pursuant to such contracts, the Portfolio makes cash contributions to a
deposit fund of the insurance company's general account. The insurance company
then credits to the Portfolio on a monthly basis interest which is based on an
index (in most cases this index is expected to be the Salomon Brothers CD
Index), but is guaranteed not to be less than a certain minimum rate. A GIC is
normally a general obligation of the issuing insurance company and not a
separate account. The purchase price paid for a GIC becomes part of the
general assets of the insurance company, and the contract is paid from the
company's general assets. The Portfolio will only purchase GICs from insurance
companies which, at the time of purchase, have assets of $1 billion or more
and meet quality and credit standards established by Northern. Generally, GICs
are not assignable or transferable without the permission of the issuing
insurance companies, and an active secondary market in GICs does not currently
exist. Therefore, GICs will be subject to the Portfolio's limitation on
investments in illiquid securities when the Portfolio may not demand payment
of the principal amount within seven days and a reliable trading market is
absent.
FIXED INCOME INVESTMENTS. Even though interest-bearing securities are
investments which often offer a stable stream of income, the prices of fixed
income securities will vary inversely with changes in the prevailing level of
interest rates. These securities experience appreciation when interest rates
decline and depreciation when interest rates rise. An investment portfolio
consisting of fixed income securities will react in a similar manner.
Generally, the longer the maturity of a fixed income security, the higher its
yield and the greater its price volatility. Conversely, the shorter the
maturity, the lower the yield but the greater the price stability. The values
of fixed income securities also may be affected by changes in the credit
rating or financial condition of the issuing entities. A security's rating
normally depends on the likelihood that the borrower will meet each interest
and principal installment on a timely basis. As a result, lower-rated bonds
typically yield more than higher-rated bonds of the same maturity. Credit
ratings evaluate the safety of principal and interest payments, not market
risk, and rating agencies may or may not make timely changes in a rating to
reflect economic or company conditions that affect a security's market value.
As a result, the ratings of rating services are used by Northern only as
indicators of investment quality. For a more complete discussion of ratings,
see Appendix A to the Additional Statement.
PORTFOLIO TURNOVER. The Trust cannot accurately predict the turnover rate for
the Portfolio, which may vary from year to year. It is expected that the
portfolio turnover rate for the Portfolio will not exceed 100% during the
current fiscal year. High portfolio turnover (in excess of 100%) may result in
the realization of short-term capital gains which are taxable to unitholders
as ordinary income (see "Taxes"). In addition, high portfolio turnover rates
may result in corresponding increases in brokerage commissions and other
transaction costs. The Portfolio will not consider portfolio turnover rate a
limiting factor in making investment decisions consistent with its objective
and policies.
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MISCELLANEOUS. The Portfolio does not intend to purchase certificates of
deposit of Northern or its affiliate banks, commercial paper issued by
Northern's parent holding company or other securities issued or guaranteed by
Northern, its parent holding company or their subsidiaries or affiliates.
INVESTMENT RESTRICTIONS
The Portfolio is subject to certain investment restrictions which, as
described in more detail in the Additional Statement, are fundamental policies
that cannot be changed without the approval of a majority of the outstanding
units of the Portfolio. The Portfolio will not make any investment
inconsistent with its classification as a diversified investment company under
the 1940 Act. In addition, the Portfolio will not invest more than 25% of its
total assets in the securities (other than investment company securities, U.S.
Government securities and repurchase agreements collateralized by U.S.
Government securities) of issuers in any one industry. The Portfolio may also
borrow money from banks for temporary or emergency purposes or to meet
redemption requests, provided that the Portfolio maintains asset coverage of
at least 300% for all such borrowings.
TRUST INFORMATION
BOARD OF TRUSTEES
The business and affairs of the Trust and the Portfolio are managed under the
direction of the Trust's Board of Trustees. The Additional Statement contains
the name of each Trustee and background information regarding the Trustees.
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern, which has offices at 50 S. LaSalle Street, Chicago, Illinois 60675,
serves as investment adviser, transfer agent and custodian for the Portfolio.
As transfer agent, Northern performs various administrative servicing
functions, and any unitholder inquiries should be directed to it.
Northern, a member of the Federal Reserve System, is an Illinois state-
chartered commercial bank and the principal subsidiary of Northern Trust
Corporation, a bank holding company. Northern was formed in 1889 with
capitalization of $1 million. As of June 30, 1997, Northern Trust Corporation
and its subsidiaries had approximately $23.9 billion in assets, $15.9 billion
in deposits and employed over 7,200 persons.
Northern and its affiliates administered in various capacities (including as
master trustee, investment manager or custodian) approximately $889 billion of
assets as of June 30, 1997, including approximately $149 billion of assets for
which Northern and its affiliates had investment management responsibility.
Under its Advisory Agreement with the Trust, Northern, subject to the general
supervision of the Trust's Board of Trustees, is responsible for making
investment decisions for the Portfolio and placing purchase and sale orders
for portfolio securities. Northern is also responsible for monitoring and
preserving the records required to be maintained under the regulations of the
SEC (with certain exceptions unrelated to its activities for the Trust). As
compensation for its advisory services and its assumption of related expenses,
Northern is entitled to a fee, computed daily and payable monthly, at an
annual rate of .60% of the average daily net assets of the Portfolio. Northern
has voluntarily agreed to reduce its advisory fee for the Portfolio to .25% of
the Portfolio's average daily net assets for the current fiscal year. See
"Summary of Expenses" above.
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PORTFOLIO MANAGER
The table below sets forth information on the person primarily responsible for
the day-to-day management of the Portfolio:
<TABLE>
<CAPTION>
YEARS PRIMARILY FIVE YEAR
NAME AND TITLE RESPONSIBLE EMPLOYMENT HISTORY
--------------------- --------------- ------------------
<S> <C> <C>
Steven Schafer Since 1997 During the past five years, Mr.
Second Vice President Schafer has managed various fixed
income portfolios, including
common and collective funds and a
portfolio of another investment
company, as portfolio manager in
Northern's Fixed Income
Management Group. In addition,
Mr. Schafer served as Credit
Analyst at Northern following
both industrial companies and
utilities prior thereto.
</TABLE>
Northern also receives compensation as the Trust's custodian and transfer
agent under separate agreements. The fees payable by the Portfolio for these
services are described in this Prospectus under "Summary of Expenses" and in
the Additional Statement. Different transfer agency fees are payable with
respect to the Class A, B, C and D units in the Portfolio.
ADMINISTRATOR AND DISTRIBUTOR
Goldman Sachs, 85 Broad Street, New York, New York 10004, acts as
administrator and distributor for the Portfolio. As compensation for its
administrative services (which include supervision with respect to the Trust's
non-investment advisory operations) and the assumption of related expenses,
Goldman Sachs is entitled to a fee from the Portfolio, computed daily and
payable monthly, at an annual rate of .10% of the average daily net assets of
the Portfolio. No compensation is payable by the Trust to Goldman Sachs for
its distribution services. Goldman Sachs has agreed for the current fiscal
year that it will reimburse the Portfolio for all expenses (including the fees
payable to Goldman Sachs as administrator, but excluding the fees payable to
Northern for its duties as investment adviser and transfer agent, servicing
fees and extraordinary expenses, such as litigation, interest, taxes and
indemnification expenses) which exceed on an annualized basis .10% of the
Portfolio's average daily net assets. In addition, as stated under "Summary of
Expenses," Northern intends to voluntarily reduce its advisory fee for the
Portfolio during the Trust's current fiscal year. The result of these
reimbursements and fee reductions will be to increase the performance of the
Portfolio during the periods for which the reimbursements and reductions are
made.
UNITHOLDER SERVICING PLAN
Pursuant to a Unitholder Servicing Plan ("Servicing Plan") adopted by the
Board of Trustees, the Trust may enter into agreements ("Servicing
Agreements") with banks, corporations, brokers, dealers and other financial
institutions which may include Northern and its affiliates ("Servicing
Agents"), under which they will render (or arrange for the rendering of)
administrative support services for investors who beneficially own Class B, C
and D units of the Portfolio. Beneficial owners of Class C and D units require
extensive administrative support services while beneficial owners of Class B
units need only some of these services. Administrative support services, which
are described more fully in the Additional Statement, may include processing
purchase and
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<PAGE>
redemption requests from investors, placing net purchase and redemption orders
with Northern acting as the Trust's transfer agent, providing necessary
personnel and facilities to establish and maintain investor accounts and
records, and providing information periodically to investors showing their
positions in Portfolio units.
For these services, fees are payable by the Trust to Servicing Agents at an
annual rate of up to .10%, .15% and .25% of the average daily net asset value
of Class B units, Class C units and Class D units, respectively, held or
serviced by such Servicing Agents for beneficial unitholders ("Servicing
Fees"). Servicing Agents are required to provide investors with a schedule of
any credits, fees or other conditions that may be applicable to the investment
of their assets in Portfolio units.
Conflict of interest restrictions may apply to the receipt of compensation
paid by the Trust to a Servicing Agent in connection with the investment of
fiduciary funds in Portfolio units. Banks and other institutions regulated by
the Office of Comptroller of the Currency, Board of Governors of the Federal
Reserve System and state banking commissions, and investment advisers and
other money managers subject to the jurisdiction of the SEC, the Department of
Labor or state securities commissions, are urged to consult legal counsel
before entering into Servicing Agreements.
SERVICE INFORMATION
Class A units are designed to be purchased by institutional investors or
others who can obtain information about their unitholder accounts and who do
not require the Transfer Agent or Servicing Agent services that are provided
for Class B, C and D unitholders.
Class B units are designed to be purchased by organizations maintaining record
ownership on behalf of beneficial owners where certain services of the
Transfer Agent and a Servicing Agent are required that are incident to the
separation of record and beneficial ownership.
Class C units are designed to be purchased by institutional investors who
require certain account related services of the Transfer Agent and a Servicing
Agent that are incident to the investor being the beneficial owner of units.
Class D units are designed to be purchased by investors having a relationship
with an organization which requires that account related services and
information be provided to the investor and organization by the Transfer Agent
and a Servicing Agent.
Any person entitled to receive compensation for selling or servicing units of
the Portfolio may receive different compensation with respect to one
particular class of units over another in the Portfolio.
EXPENSES
Except as set forth above and in the Additional Statement under "Additional
Trust Information," the Portfolio is responsible for the payment of its
expenses. Such expenses include, without limitation, the fees and expenses
payable to Northern and Goldman Sachs, brokerage fees and commissions, fees
for the registration or qualification of Portfolio units under Federal or
state securities laws, expenses of the organization of the Portfolio, taxes,
interest, costs of liability insurance, fidelity bonds, indemnification or
contribution, any costs, expenses or losses arising out of any liability of,
or claim for damages or other relief asserted against, the Trust
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for violation of any law, legal, tax and auditing fees and expenses, Servicing
Fees, expenses of preparing and printing prospectuses, statements of
additional information, proxy materials, reports and notices and the printing
and distributing of the same to the Trust's unitholders and regulatory
authorities, compensation and expenses of its Trustees, expenses of industry
organizations such as the Investment Company Institute, miscellaneous expenses
and extraordinary expenses incurred by the Trust.
INVESTING
PURCHASE OF UNITS
Units of the Portfolio are sold on a continuous basis by the Trust's
distributor, Goldman Sachs, to institutional investors that either maintain
certain qualified accounts at Northern or its affiliates or invest an
aggregate of at least $5 million in one or more investment portfolios of the
Trust. Goldman Sachs has established several procedures for purchasing
Portfolio units in order to accommodate different types of institutional
investors.
PURCHASE OF UNITS THROUGH QUALIFIED ACCOUNTS. Class A, B, C and D units of
the Portfolio are offered to Northern, its affiliates and other institutions
and organizations (the "Institutions") acting on behalf of their customers,
clients, employees and others (the "Customers") and for their own account.
Institutions may purchase units of the Portfolio through procedures
established in connection with the requirements of their qualified accounts or
through procedures set forth herein with respect to Institutions that invest
directly. Institutions should contact Northern or an affiliate for further
information regarding purchases through qualified accounts. There is no
minimum initial investment for Institutions that maintain qualified accounts
with Northern or its affiliates.
PURCHASE OF UNITS DIRECTLY FROM THE TRUST. An Institution that purchases units
directly may do so by means of one of the following procedures, provided that
it makes an aggregate minimum initial investment of $5 million in one or more
investment portfolios of the Trust:
PURCHASE BY MAIL. An Institution desiring to purchase units of the
Portfolio by mail should mail a check or Federal Reserve draft payable to
the Portfolio together with a completed and signed new account application
to The Benchmark Funds, c/o The Northern Trust Company, P.O. Box 75943,
Chicago, Illinois 60675-5943. An application will be incomplete if it does
not include a corporate resolution with the corporate seal and secretary's
certification within the preceding 30 days, or other acceptable evidence of
authority. If an Institution desires to purchase the units of more than one
investment portfolio of the Trust, the Institution should send a separate
check for each portfolio. All checks must be payable in U.S. dollars and
drawn on a bank located in the United States. A $20 charge will be imposed
if a check does not clear. The Trust may delay transmittal of redemption
proceeds for units recently purchased by check until such time as it has
assured itself that good funds have been collected for the purchase of such
units. This may take up to fifteen (15) days. Cash and third party checks
are not acceptable for the purchase of Trust units.
PURCHASE BY TELEPHONE. An Institution desiring to purchase units of the
Portfolio by telephone should call Northern acting as the Trust's transfer
agent ("Transfer Agent") at 1-800-637-1380. Please be prepared to identify
the name of the Portfolio and the manner of payment. Please indicate
whether a new account is being established or an additional payment is
being made to an existing account. If an additional payment is
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being made to an existing account, please provide the Institution's name
and Portfolio Account Number. Purchase orders are effected upon receipt by
the Transfer Agent of Federal funds or other immediately available funds in
accordance with the terms set forth below.
PURCHASE BY WIRE OR ACH TRANSFER. An Institution desiring to purchase units
of the Portfolio by wire or ACH Transfer should call the Transfer Agent at
1-800-637-1380 for instructions if it is not making an additional payment
to an existing account. An Institution that wishes to add to an existing
account should wire Federal funds or effect an ACH Transfer to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152
(Reference 10 Digit Portfolio Account Number)
(Reference Unitholder's Name)
For more information concerning requirements for the purchase of units,
call the Transfer Agent at 1-800-637-1380.
EFFECTIVE TIME OF PURCHASES. A purchase order for Portfolio units received by
the Transfer Agent by 3:00 p.m., Chicago time, on a Business Day (as defined
under "Miscellaneous") will be effected on that Business Day at the net asset
value determined on that day; provided that either: (a) the Transfer Agent
receives the purchase price in Federal funds or other immediately available
funds prior to 3:00 p.m., Chicago time, on the same Business Day such order is
received; or (b) payment is received on the next Business Day in the form of
Federal funds or other immediately available funds in a qualified account
maintained by an Institution with Northern or an affiliate. Orders received
after 3:00 p.m. will be effected at the next determined net asset value,
provided that payment is made as provided herein. If an Institution accepts a
purchase order from a Customer on a non-Business Day, the order will not be
executed until it is received and accepted by the Transfer Agent on a Business
Day in accordance with the foregoing procedures.
MISCELLANEOUS PURCHASE INFORMATION. Units are purchased without a sales charge
imposed by the Trust. The minimum initial investment is $5 million for
Institutions that invest directly in one or more investment portfolios of the
Trust. The Trust reserves the right to waive this minimum and to determine the
manner in which the minimum investment is satisfied. There is no minimum for
subsequent investments.
Institutions may impose different minimum investment and other requirements on
Customers purchasing units through them. Depending on the terms governing the
particular account, Institutions may impose account charges such as asset
allocation fees, account maintenance fees, compensating balance requirements
or other charges based upon account transactions, assets or income which will
have the effect of reducing the net return on an investment in the Portfolio.
In addition, certain Institutions may enter into Servicing Agreements with the
Trust whereby they will perform (or arrange to have performed) various
administrative support services for Customers who are the beneficial owners of
Class B, C and D units and receive fees from the Portfolio for such services;
such fees will be borne exclusively by the beneficial owners of Class B, C and
D units, respectively. See "Trust Information--Unitholder Servicing Plan." The
level of administrative support services, as well as transfer agency services,
required by an Institution and its Customers generally will determine whether
they purchase units of Class A, B, C or D. The exercise of voting rights and
the delivery to Customers of unitholder communications from the Trust will be
governed by the Customers' account agreements with the Institutions.
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Customers should read this Prospectus in connection with any relevant
agreement describing the services provided by an Institution and any related
requirements and charges, or contact the Institution at which the Customer
maintains its account for further information.
Institutions that purchase units on behalf of Customers are responsible for
transmitting purchase orders to the Transfer Agent and delivering required
funds on a timely basis. An Institution will be responsible for all losses and
expenses of the Portfolio as a result of a check that does not clear, an ACH
transfer that is rejected, or any other failure to make payment in the time
and manner described above, and Northern may redeem units from an account it
maintains to protect the Portfolio and Northern against loss. The Trust
reserves the right to reject any purchase order. Federal regulations require
that the Transfer Agent be furnished with a taxpayer identification number
upon opening or reopening an account. Purchase orders without such a number or
an indication that a number has been applied for will not be accepted. If a
number has been applied for, the number must be provided and certified within
sixty days of the date of the order.
Payment for units of the Portfolio may, in the discretion of Northern, be made
in the form of securities that are permissible investments for the Portfolio.
For further information about the terms of such purchases, see the Additional
Statement.
In the interests of economy and convenience, certificates representing units
of the Portfolio are not issued.
Institutions investing in the Portfolio on behalf of their Customers should
note that state securities laws regarding the registration of dealers may
differ from the interpretations of Federal law and such Institutions may be
required to register as dealers pursuant to state law.
Northern may, at its own expense, provide compensation to certain dealers
whose customers purchase significant amounts of units of the Trust. The amount
of such compensation may be made on a one-time and/or periodic basis, and may
represent all or a portion of the annual fees that are earned by Northern as
investment adviser (after adjustments) and are attributable to units held by
such customers. Such compensation will not represent an additional expense to
the Trust or its unitholders, since it will be paid from assets of Northern or
its affiliates.
REDEMPTION OF UNITS
REDEMPTION OF UNITS THROUGH QUALIFIED ACCOUNTS. Institutions may redeem units
of a class through procedures established by Northern and its affiliates in
connection with the requirements of their qualified accounts. Institutions
should contact Northern or an affiliate for further information regarding
redemptions through qualified accounts.
REDEMPTION OF UNITS DIRECTLY. Institutions that purchase units directly from
the Trust through the Transfer Agent may redeem all or part of their Portfolio
units in accordance with procedures set forth below.
REDEMPTION BY MAIL. An Institution may redeem units by sending a written
request to The Benchmark Funds, c/o The Northern Trust Company, P.O. Box
75943, Chicago, Illinois 60675-5943. Redemption requests must be signed by
a duly authorized person, and must state the number of units or the dollar
amount to be redeemed and identify the Portfolio Account Number. See "Other
Requirements."
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REDEMPTION BY TELEPHONE. An Institution may redeem units by placing a
redemption order by telephone by calling the Transfer Agent at 1-800-637-
1380. During periods of unusual economic or market changes, telephone
redemptions may be difficult to implement. In such event, unitholders
should follow procedures outlined above under "Redemption by Mail."
REDEMPTION BY WIRE. If an Institution has given authorization for expedited
wire redemption, units can be redeemed and the proceeds sent by Federal
wire transfer to a single previously designated bank account. The minimum
amount which may be redeemed by this method is $10,000. The Trust reserves
the right to change or waive this minimum or to terminate the wire
redemption privilege. See "Other Requirements."
TELEPHONE PRIVILEGE. An Institution that has notified the Transfer Agent in
writing of the Institution's election to redeem or exchange units by
placing an order by telephone may do so by calling the Transfer Agent at
1-800-637-1380. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that
are reasonably believed to be genuine. To the extent that the Trust fails
to use reasonable procedures to verify the genuineness of telephone
instructions, it or its service providers may be liable for such
instructions that prove to be fraudulent or unauthorized. In all other
cases, the unitholder will bear the risk of loss for fraudulent telephone
transactions. However, the Transfer Agent has adopted procedures in an
effort to establish reasonable safeguards against fraudulent telephone
transactions. The proceeds of redemption orders received by telephone will
be sent by check, by wire or by transfer pursuant to proper instructions.
All checks will be made payable to the unitholder of record and mailed only
to the unitholder's address of record. See "Other Requirements."
Additionally, the Transfer Agent utilizes recorded lines for telephone
transactions and retains such tape recordings for six months, and will
request a form of identification if such identification has been furnished
to the Transfer Agent or the Trust.
OTHER REQUIREMENTS. A change of wiring instructions and a change of the
address of record may be effected only by a written request to the Transfer
Agent accompanied by (i) a corporate resolution which evidences authority
to sign on behalf of the Institution (including the corporate seal and
secretary's certification within the preceding 30 days), (ii) a signature
guarantee by a financial institution that is a participant in the Stock
Transfer Agency Medallion Program ("STAMP") in accordance with rules
promulgated by the SEC (a signature notarized by a notary public is not
acceptable) or (iii) such other evidence of authority as may be acceptable
to the Transfer Agent. A redemption request by mail will not be effective
unless signed by a person authorized by the corporate resolution or other
acceptable evidence of authority on file with the Transfer Agent.
EXCHANGE PRIVILEGE. Institutions and, to the extent permitted by their account
agreements, Customers, may, after appropriate prior authorization, exchange
Class A, B, C or D units of the Portfolio having a value of at least $1,000
for Class A, B, C or D units, respectively, of other equity and fixed income
portfolios of the Trust as to which the Institution or Customer maintains an
existing account with an identical title.
Exchanges will be effected by a redemption of Class A, B, C or D units of the
investment portfolio held and the purchase of units of the investment
portfolio acquired. Customers of Institutions should contact their
Institutions for further information regarding the Trust's exchange privilege
and Institutions should contact the Transfer Agent as appropriate. The Trust
reserves the right to modify or terminate the exchange privilege at any time
upon 60 days' written notice to unitholders and to reject any exchange
request. Exchanges are only available in states where an exchange can legally
be made.
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EFFECTIVE TIME OF REDEMPTIONS AND EXCHANGES. Redemption orders of Portfolio
units are effected at the net asset value per unit next determined after
receipt in good order by the Transfer Agent. Good order means that the request
includes the following: the account number and Portfolio name; the amount of
the transaction (as specified in dollars or units); and the signature of a
duly authorized person (except for telephone and wire redemptions). See
"Investing--Redemption of Units--Other Requirements." Exchange orders are
effected at the net asset value per unit (plus any additional transaction fee
payable in connection with the purchase of units in certain portfolios of the
Trust) next determined after receipt in good order by the Transfer Agent. If
received by Northern with respect to a qualified account it maintains or the
Transfer Agent by 3:00 p.m., Chicago time, on a Business Day, a redemption
request normally will result in proceeds being credited to such account or
sent on the next Business Day. Proceeds for redemption orders received on a
non-Business Day will normally be sent on the second Business Day after
receipt in good order.
MISCELLANEOUS REDEMPTION INFORMATION. All redemption proceeds will be sent by
check unless Northern or the Transfer Agent is directed otherwise. The ACH
system may be utilized for payment of redemption proceeds. Redemption of units
may not be effected if a unitholder has failed to submit a completed and
properly executed (with corporate resolution or other acceptable evidence of
authority) new account application. If units to be redeemed were recently
purchased by check, the Trust may delay transmittal of redemption proceeds
until such time as it has assured itself that good funds have been collected
for the purchase of such units. This may take up to fifteen (15) days. The
Trust reserves the right to defer crediting, sending or wiring redemption
proceeds for up to seven days after receiving the redemption order if, in its
judgment, an earlier payment could adversely affect the Portfolio.
The Trust may require any information reasonably necessary to ensure that a
redemption has been duly authorized.
It is the responsibility of Institutions acting on behalf of Customers to
transmit redemption orders to the Transfer Agent and to credit Customers'
accounts with the redemption proceeds on a timely basis. If a Customer has
agreed with a particular Institution to maintain a minimum balance in his
account at such Institution and the balance in such account falls below that
minimum, such Customer may be obliged to redeem all or part of his units to
the extent necessary to maintain the required minimum balance. The Trust also
reserves the right to redeem units held by any unitholder who provides
incorrect or incomplete account information or when such involuntary
redemptions are necessary to avoid adverse consequences to the Trust and its
unitholders.
DISTRIBUTIONS
Distributions from the Portfolio's net investment income and annualized
capital gains are made as follows:
<TABLE>
<CAPTION>
INVESTMENT INCOME
DIVIDENDS CAPITAL
------------------ GAINS
DECLARED PAID DISTRIBUTION
------------------ ------------
<S> <C> <C> <C>
Monthly Monthly Annually
</TABLE>
Dividends and distributions will reduce the Portfolio's net asset value by the
amount of the dividend or distribution. All dividends and distributions are
automatically reinvested (without any sales charge) in additional units of the
Portfolio at the net asset value per unit determined on the payment date.
However, a holder may elect, upon written notification to the Transfer Agent,
to have dividends or capital gain distributions (or both) paid in cash or
reinvested in the same class of units of another investment portfolio of the
Trust at their net asset
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value per unit (plus any additional transaction fee payable in connection with
the purchase of units in certain portfolios of the Trust) determined on the
payment date (provided the holder maintains an account in such portfolio).
Unitholders of record must make such election, or any revocation thereof, in
writing to the Transfer Agent. The election will become effective with respect
to dividends paid two days after its receipt by the Transfer Agent.
Because of the different servicing fees and transfer agency fees payable with
respect to the Class A, B, C and D units in the Portfolio, the amount of the
Portfolio's net investment income available for distribution to the holders of
such units will be effectively reduced by the amount of such fees. See
"Unitholder Service Plan" and "Investment Adviser, Transfer Agent and
Custodian" under the heading "Trust Information" in this Prospectus.
TAXES
The Portfolio intends to qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"). Such qualification
generally will relieve the Portfolio of liability for Federal income taxes to
the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a taxable
year requires, among other things, that the Portfolio distribute to its
unitholders an amount equal to at least 90% of its investment company taxable
income for such year. In general, the Portfolio's investment company taxable
income will be its taxable income, subject to certain adjustments and
excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year. The Portfolio
intends to distribute as dividends substantially all of its investment company
taxable income each year. Such dividends will be taxable as ordinary income to
the Portfolio's unitholders who are not currently exempt from Federal income
taxes whether they are received in cash or reinvested in additional units.
(Federal income taxes for distributions to an IRA or other qualified
retirement plan are deferred under the Code.) It is not expected that the
Portfolio's distributions will qualify for the dividends received deduction
for corporations.
Substantially all of the Portfolio's net realized long-term capital gains will
be distributed at least annually to its unitholders. The Portfolio generally
will have no tax liability with respect to such gains and the distributions
will be taxable to Portfolio unitholders who are not currently exempt from
Federal income taxes as long-term capital gains, regardless of how long the
unitholders have held the units and whether such gains are received in cash or
reinvested in additional units. Unitholders should note that, upon sale or
exchange of Portfolio units, if the unitholder has not held such units for
more than six months, any loss on the sale or exchange of those units will be
treated as long term capital loss to the extent of the capital gain dividends
received with respect to the units.
Dividends declared in October, November or December of any year payable to
unitholders of record on a specified date in such months will be deemed for
Federal tax purposes to have been paid by the Portfolio and received by the
unitholders on December 31 of such year if such dividends are paid during
January of the following year.
An investor considering buying units of the Portfolio on or just before the
record date of a dividend should be aware that the amount of the forthcoming
dividend payment, although in effect a return of capital, will be taxable.
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A taxable gain or loss may be realized by a unitholder upon the redemption,
transfer or exchange of units of the Portfolio depending upon the tax basis
and their price at the time of redemption, transfer or exchange.
Unitholders of record will be advised by the Trust at least annually as to the
Federal income tax consequences of distributions made to them each year.
The foregoing discussion summarizes some of the important Federal tax
considerations generally affecting the Portfolio and its unitholders and is
not intended as a substitute for careful tax planning. Accordingly, potential
investors in the Portfolio should consult their tax advisers with specific
reference to their own Federal, state and local tax situation.
NET ASSET VALUE
The net asset value per unit of the Portfolio for purposes of pricing purchase
and redemption orders is calculated by Northern as of 3:00 p.m., Chicago Time,
on each Business Day. Net asset value per unit of a particular class in the
Portfolio is calculated by dividing the value of all securities and other
assets belonging to the Portfolio that are allocated to such class, less the
liabilities charged to that class, by the number of the outstanding units of
that class.
U.S. and foreign investments held by the Portfolio are valued at the last
quoted sales price on the exchange on which such securities are primarily
traded, except that securities listed on an exchange in the United Kingdom are
valued at the average of the closing bid and ask prices. If any securities
listed on a U.S. securities exchange are not traded on a valuation date, they
will be valued at the last quoted bid price. If securities listed on a foreign
securities exchange are not traded on a valuation date, they will be valued at
the most recent quoted trade price. Securities which are traded in the U.S.
over-the-counter markets are valued at the last quoted bid price. Securities
which are traded in the foreign over-the-counter markets are valued at the
last sales price, except that such securities traded in the United Kingdom are
valued at the average of the closing bid and ask prices. Any securities,
including restricted securities, for which current quotations are not readily
available are valued at fair value as determined in good faith by Northern
under the supervision of the Board of Trustees. Short-term investments are
valued at amortized cost which Northern has determined, pursuant to Board
authorization, approximates market value. Securities may be valued on the
basis of prices provided by independent pricing services when such prices are
believed to reflect the fair market value of such securities.
PERFORMANCE INFORMATION
The performance of a class of units of the Portfolio may be compared to those
of other mutual funds with similar investment objectives and to bond and other
relevant indices or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. For example, the performance of a class of units may be compared to
data prepared by Lipper Analytical Services, Inc. or other independent mutual
fund reporting services. In addition, the performance of a class may be
compared to the Lehman Brothers Government/Corporate Bond Index (or its
components, including the Treasury Bond Index and the Agency Bond Index), the
Lehman Brothers Intermediate/Corporate Bond Index, the Consumer Price Index
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or other unmanaged bond indices, including, but not limited to, the Merrill
Lynch 1-5 Year Government Bond Index, the Merrill Lynch 1-5 Year
Corporate/Government Bond Index, the J.P. Morgan Non-U.S. Government Bond
Index. Performance data as reported in national financial publications such as
Money Magazine, Morningstar, Forbes, Barron's, The Wall Street Journal and The
New York Times, or in publications of a local or regional nature, may also be
used in comparing the performance of a class of units of the Portfolio.
The Portfolio will calculate its total return for each class of units on an
"average annual total return" basis for various periods from the date the
Portfolio commences investment operations and for other periods as permitted
under the rules of the SEC. Average annual total return reflects the average
annual percentage change in value of an investment in the class over the
measuring period. Total returns for each class of units may also be calculated
on an "aggregate total return" basis for various periods. Aggregate total
return reflects the total percentage change in value over the measuring
period. Both methods of calculating total return reflect changes in the price
of the units and assume that any dividends and capital gain distributions made
by the Portfolio with respect to a class during the period are reinvested in
the units of that class. When considering average total return figures for
periods longer than one year, it is important to note that the annual total
return of a class for any one year in the period might have been more or less
than the average for the entire period. The Portfolio may also advertise from
time to time the total return of one or more classes of units on a year-by-
year or other basis for various specified periods by means of quotations,
charts, graphs or schedules.
The yield of a class of units in the Portfolio is computed based on the net
income of such class during a 30-day (or one month) period (which period will
be identified in connection with the particular yield quotation). More
specifically, the Portfolio's yield for a class of units is computed by
dividing the per unit net income for the class during a 30-day (or one month)
period by the net asset value per unit on the last day of the period and
annualizing the result on a semi-annual basis.
Because of the different servicing fees and transfer agency fees payable with
respect to the Class A, B, C and D units in the Portfolio, the performance of
such units will be effectively reduced by the amount of such fees. For
example, because Class A units bear the lowest servicing and transfer agency
fees, the return of Class A units will be more than the return of other
classes of units of the Portfolio. See "Unitholder Servicing Plan" and
"Investment Adviser, Transfer Agent and Custodian" under the heading "Trust
Information" in this Prospectus.
The performance of each class of units of the Portfolio is based on historical
earnings, will fluctuate and is not intended to indicate future performance.
The investment return and principal value of an investment in a class will
fluctuate so that, when redeemed, units may be worth more or less than their
original cost. Performance data may not provide a basis for comparison with
bank deposits and other investments which provide a fixed yield for a stated
period of time. Total return data should also be considered in light of the
risks associated with the Portfolio's composition, quality, maturity,
operating expenses and market conditions. Any fees charged by Institutions
directly to their Customer accounts in connection with investments in the
Portfolio will not be included in calculations of performance data.
ORGANIZATION
The Trust was formed as a Massachusetts business trust on July 15, 1982 under
an Agreement and Declaration of Trust (the "Trust Agreement"). The Trust
Agreement permits the Board of Trustees to issue an unlimited
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number of units of beneficial interest of one or more separate series
representing interests in one or more investment portfolios. As of the date of
this Prospectus, the Trust offers seventeen separate series of units of
beneficial interest representing interests in seventeen investment portfolios,
one of which is described in this Prospectus; the other series of units are
described in separate prospectuses. It is anticipated that each investment
series of the Trust, including the Intermediate Bond Portfolio, will be
reorganized on March 31, 1998, or on such other date as the Trust may agree,
into newly established series of a Delaware business trust (the "Delaware
Trust"). The current Trustees of the Trust will also serve as Trustees of the
Delaware Trust and the investment objectives, restrictions and policies and
expenses of the series of the Delaware Trust will be identical to those of the
corresponding portfolios of the Trust. The initial unitholder of the
Intermediate Bond Portfolio has approved the reorganization of the Portfolio
into a series of the Delaware Trust. In the event that the unitholders of the
other series of the Trust do not approve reorganizations into the Delaware
Trust, the Intermediate Bond Portfolio may not be reorganized into the
Delaware Trust. The Trustees of the Trust are responsible for the overall
management and supervision of its affairs. The Declaration of Trust of both
the Trust and the Delaware Trust authorizes the Board of Trustees to classify
or reclassify any unissued units into additional series or subseries within a
series. Pursuant to such authority, the Board of Trustees has classified four
subseries (sometimes referred to as "Classes") of units in the Portfolio: the
Class A units, Class B units, Class C units and Class D units. Each unit of
the Portfolio is without par value, represents an equal proportionate interest
in the Portfolio with each other unit of its class in the Portfolio and is
entitled to such dividends and distributions earned on the Portfolio's assets
as are declared in the discretion of the Board of Trustees.
The Trust's unitholders are entitled to one vote for each full unit held and
proportionate fractional votes for fractional units held. Unitholders of the
Delaware Trust will be entitled at the discretion of the Board of Trustees, to
vote either on the basis of the number of units held or the aggregate net
asset value represented by such units. Each series entitled to vote on a
matter will vote thereon in the aggregate and not by series, except as
otherwise required by law or when the matter to be voted on affects only the
interests of unitholders of a particular series. The Additional Statement
gives examples of situations in which the law requires voting by series.
Voting rights are not cumulative and, accordingly, the persons holding more
than 50% of the aggregate voting power of the Trust may elect all of the
Trustees irrespective of the vote of the other unitholders. In addition,
holders of each of the Class A, B, C and D units representing interests in the
Portfolio have equal voting rights except that only units of a particular
class within the Portfolio will be entitled to vote on matters submitted to a
vote of unitholders (if any) relating to unitholder servicing expenses and
transfer agency fees that are payable by that class.
As of July 15, 1997, Northern possessed sole or shared voting or investment
power for its customer accounts with respect to more than 50% of the
outstanding units of the Trust.
The Trust does not presently intend to hold annual meetings of unitholders
except as required by the 1940 Act or other applicable law. Pursuant to the
Trust Agreement, the Trustees will promptly call a meeting of unitholders to
vote upon the removal of any Trustee when so requested in writing by the
record holders of 10% or more of the outstanding units. To the extent required
by law, the Trust will assist in unitholder communications in connection with
such a meeting.
The Trust Agreement provides that each unitholder, by virtue of becoming such,
will be held to have expressly assented and agreed to the terms of the Trust
Agreement and to have become a party thereto.
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MISCELLANEOUS
The address of the Trust is 4900 Sears Tower, Chicago, Illinois 60606 and the
telephone number is (800) 621-2550.
As used in this Prospectus, the term "Business Day" refers to each day when
Northern and the New York Stock Exchange are open, which is Monday through
Friday, except for holidays observed by Northern and/or the Exchange. For 1997
the holidays of Northern and/or the Exchange are: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Columbus Day, Veteran's Day, Thanksgiving and Christmas Day.
On those days when Northern or the Exchange closes early as a result of
unusual weather or other circumstances, the right is reserved to advance the
time on that day by which purchase and redemption requests must be received.
In addition, on any Business Day when the Public Securities Association (PSA)
recommends that the securities markets close early, the Portfolio reserves
the right to cease or to advance the deadline for accepting purchase and
redemption orders for same Business Day credit up to one hour before the PSA
recommended closing time. Purchase and redemption requests received after the
advanced closing time will be effected on the next Business Day.
---------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE TRUST'S STATEMENT
OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
TRUST OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY
THE TRUST OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
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