<PAGE>
Northern
Institutional
Funds
FIXED INCOME AND
EQUITY PORTFOLIOS
PROSPECTUS
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Northern Institutional Funds
FIXED INCOME AND
EQUITY PORTFOLIOS
- - U.S. Government Securities Portfolio
- - Short-Intermediate Bond Portfolio
- - Intermediate Bond Portfolio
- - U.S. Treasury Index Portfolio
- - Bond Portfolio
- - International Bond Portfolio
- - Balanced Portfolio
- - Equity Index Portfolio
- - Diversified Growth Portfolio
- - Focused Growth Portfolio
- - Mid Cap Growth Portfolio
- - Small Company Index Portfolio
- - Small Company Growth Portfolio
- - International Equity Index Portfolio
- - International Growth Portfolio
Prospectus dated April 1, 2000
An investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. An investment in a Portfolio involves investment risks, including
possible loss of principal.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Table of Contents
OVERVIEW 4
RISK/RETURN SUMMARY
Information about the
objectives, principal
strategies and risk
characteristics
of each Portfolio
Fixed Income Portfolios
U.S. Government Securities Portfolio 5
Short-Intermediate Bond Portfolio 6
Intermediate Bond Portfolio 7
U.S. Treasury Index Portfolio 8
Bond Portfolio 9
International Bond Portfolio 10
Balanced Portfolio 12
Equity Portfolios
Equity Index Portfolio 14
Diversified Growth Portfolio 15
Focused Growth Portfolio 16
Mid Cap Growth Portfolio 17
Small Company Index Portfolio 18
Small Company Growth Portfolio 19
International Equity Index Portfolio 20
International Growth Portfolio 21
Principal Investment Risks 22
Portfolio Performance 25
U.S. Government Securities Portfolio 26
Short-Intermediate Bond Portfolio 27
Intermediate Bond Portfolio 28
U.S. Treasury Index Portfolio 29
Bond Portfolio 30
International Bond Portfolio 31
Balanced Portfolio 32
Equity Index Portfolio 33
Diversified Growth Portfolio 34
Focused Growth Portfolio 35
Small Company Index Portfolio 36
International Equity Index Portfolio 37
International Growth Portfolio 38
Portfolio Fees and Expenses 40
MANAGEMENT
OF THE
PORTFOLIOS
Details that apply to the
Portfolios as a group
Investment Advisers 51
Advisory Fees 52
Portfolio Management 53
Other Portfolio Management Information 55
Other Portfolio Services 55
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ABOUT YOUR
ACCOUNT
How to open, maintain
and close an account
Purchasing and Selling Shares 56
Purchasing Shares 56
Opening an Account 56
Selling Shares 57
Account Policies and Other Information 58
Purchase and Redemption Minimums 58
Calculating Share Price 58
Timing of Purchase Requests 58
Additional Transaction Fee 58
Tax Identification Number 59
In-Kind Purchases and Redemptions 59
Miscellaneous Purchase Information 59
Timing of Redemption and Exchange Requests 59
Miscellaneous Redemption Information 59
Exchange Privileges 60
Telephone Transactions 60
Making Changes to Your Account Information 60
Business Day 60
Early Closings 61
Authorized Intermediaries 61
Servicing Agents 61
Shareholder Communications 62
Dividends and Distributions 63
Tax Considerations 64
RISKS,
SECURITIES, TECHNIQUES AND
FINANCIAL
INFORMATION
Risks, Securities, Techniques and Financial Information 66
Additional Information on Investment Objectives,
Principal Investment Strategies and Related Risks 66
Additional Description of Securities and Common
Investment Techniques 71
Disclaimers 80
Financial Information 81
Financial Highlights 82
FOR MORE
INFORMATION
Annual/Semiannual Report 107
Statement of Additional Information 107
<PAGE>
Overview
Northern Institutional Funds (the "Trust") offers a selection of investment
portfolios to institutional investors, each with a distinct investment objective
and risk/reward profile.
The descriptions on the following pages may help you choose the portfolios that
best fit your investment needs. Keep in mind, however, that no portfolio can
guarantee it will meet its investment objective, and no portfolio should be
relied upon as a complete investment program.
This Prospectus describes the six fixed income, one balanced and eight equity
portfolios (the "Portfolios") currently offered by the Trust. Each Portfolio is
authorized to offer three classes of shares: Class A, Class C and Class D
Shares. The Trust also offers three classes of shares of its five money market
portfolios which are described in a separate prospectus.
In addition to the instruments described on the pages below, each Portfolio may
use various investment techniques in seeking its investment objective. You can
learn more about these techniques and their related risks by reading "Risks,
Securities, Techniques and Financial Information" beginning on page 66 and the
Statement of Additional Information. As used in this Prospectus the term "equity
securities" includes common stocks, preferred stocks, interests in real estate
investment trusts, convertible debt obligations, convertible preferred stocks,
equity interest in trusts, partnerships, joint ventures, limited liability
companies and similar enterprises, warrants and stock purchase rights.
4
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U.S. Government Securities Portfolio
INVESTMENT OBJECTIVE
The Portfolio seeks to maximize total return with minimal reasonable risk.
PRINCIPAL INVESTMENT STRATEGIES
AND
RISKS
Investment Strategies. The Portfolio will seek capital appreciation and current
income in its attempt to maximize total return. In doing so, the Portfolio will
invest, under normal market conditions, at least 65% of its total assets in a
broad range of securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities and repurchase agreements relating to such
securities. These may include:
- - U.S. Treasury bills, notes and bonds
- - Obligations of U.S. government agencies and instrumentalities
- - Mortgage-related securities issued by U.S. government agencies
- - Stripped securities evidencing ownership of future interest or principal
payments on obligations of the U.S. government, its agencies or
instrumentalities
- - Structured debt securities that are issued or guaranteed directly by the U.S.
government, its agencies or instrumentalities
In buying and selling securities for the Portfolio, the investment management
team uses a relative value approach. This approach involves an analysis of
general economic and market conditions. It also involves the use of models that
analyze and compare expected returns and assumed risks. Under the relative value
approach, the investment management team will emphasize particular securities
and types of securities (such as treasury, agency and mortgage-related
securities) that the team believes will provide a favorable total return in
light of these risks. In this regard, the management team will consider not only
the income the Portfolio will receive from its investments, but also the
likelihood that particular securities or types of securities will have a more
favorable or improving credit outlook. The investment management team may engage
in active trading, and will not consider portfolio turnover rate a limiting
factor in making decisions for the Portfolio.
The Portfolio's dollar-weighted average maturity will, under normal market
conditions, range between one and five years.
In seeking to achieve its investment objective, the Portfolio may make
significant investments in structured debt securities that are issued or
guaranteed directly by the U.S. government, its agencies or instrumentalities.
Like other types of U.S. government securities, the U.S. government, agency or
instrumentality that issues or guarantees a structured debt security is
obligated to make principal and interest payments on the security. Structured
debt securities, however, are considered to be derivative instruments because
the value of the principal of and/or interest on these securities is based on
changes in the value of specific currencies, interest rates, indices or other
financial indicators. For these reasons structured debt securities present
additional risk that the interest paid to the Portfolio on a structured debt
security will be less than expected, and that the principal amount invested will
not be returned to the Portfolio. As a result, investments in structured debt
securities may adversely affect the Portfolio's net asset value. The Portfolio
may also invest, to a lesser extent, in futures contracts, options and swaps for
both hedging and non-hedging purposes.
Risks. These primary investment risks apply to the Portfolio: interest
rate/maturity, prepayment (or call), debt extension, government securities,
structured debt securities and derivatives. See page 66 for these risks and
primary risks common to all Portfolios.
5
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Short-Intermediate Bond Portfolio
INVESTMENT OBJECTIVE
The Portfolio seeks to maximize total return consistent with reasonable risk.
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
Investment Strategies. The Portfolio will seek capital appreciation and current
income in its attempt to maximize total return. In doing so, the Portfolio will
invest, under normal market conditions, at least 65% of its total assets in a
broad range of bonds and other fixed income securities. These may include:
- - Obligations of the U.S. government, its agencies or instrumentalities and
repurchase agreements collateralized by such obligations
- - Obligations of state, local and foreign governments
- - Obligations of domestic and foreign banks and corporations
- - Zero coupon bonds, debentures, preferred stock and convertible securities
- - Mortgage and other asset-backed securities
- - Stripped securities evidencing ownership of future interest or principal
payments on debt obligations
Although the Portfolio primarily invests in investment grade domestic debt
obligations (i.e., obligations rated within the top four rating categories by a
Nationally Recognized Statistical Rating Organization), it may invest to a
limited extent in obligations of foreign issuers and in securities that are
rated below investment grade ("junk bonds").
In buying and selling securities for the Portfolio, the investment management
team uses a relative value approach. This approach involves an analysis of
general economic and market conditions. It also involves the use of models that
analyze and compare expected returns and assumed risks. Under the relative value
approach, the investment management team will emphasize particular securities
and types of securities (such as treasury, agency, mortgage-related and
corporate securities) that the team believes will provide a favorable return in
light of these risks. In this regard, the management team will consider not only
the income the Portfolio will receive from its investments, but also the
likelihood that particular securities or types of securities will have a more
favorable or improving credit outlook.
The Portfolio's dollar-weighted average maturity will, under normal market
conditions, range between two and five years.
In seeking to achieve its investment objective, the Portfolio may make
significant investments in structured debt securities. Structured debt
securities are considered to be derivative instruments because the value of the
principal of and/or interest on these securities is based on changes in the
value of specific currencies, interest rates, indices or other financial
indicators. For these reasons structured debt securities present additional risk
that the interest paid to the Portfolio on a structured debt security will be
less than expected, and that the principal amount invested will not be returned
to the Portfolio. As a result, investments in structured debt securities may
adversely affect the Portfolio's net asset value. The Portfolio may also invest,
to a lesser extent, in futures contracts, options and swaps for both hedging and
non-hedging purposes.
Risks. These primary investment risks apply to the Portfolio: interest
rate/maturity, credit (or default), prepayment (or call), debt extension,
currency, country, foreign regulatory, high-yield, structured debt securities
and derivatives risks. See page 66 for these risks and primary risks common to
all Portfolios.
6
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Intermediate Bond Portfolio
INVESTMENT OBJECTIVE
The Portfolio seeks to maximize total return consistent with reasonable risk.
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
Investment Strategies. The Portfolio will seek capital appreciation and current
income in its attempt to maximize total return. In doing so, the Portfolio will
invest, under normal market conditions, at least 65% of its total assets in a
broad range of bonds and other fixed income securities. These may include:
- - Obligations of the U.S. government, its agencies or instrumentalities and
repurchase agreements collateralized by such obligations
- - Obligations of state, local and foreign governments
- - Obligations of domestic and foreign banks and corporations
- - Zero coupon bonds, debentures, preferred stock and convertible securities
- - Mortgage and other asset-backed securities
- - Stripped securities evidencing ownership of future interest or principal
payments on debt obligations
Although the Portfolio primarily invests in investment grade domestic debt
obligations (i.e., obligations rated within the top four rating categories by a
Nationally Recognized Statistical Rating Organization), it may invest to a
limited extent in obligations of foreign issuers and in securities that are
rated below investment grade ("junk bonds").
In buying and selling securities for the Portfolio, the investment management
team uses a relative value approach. This approach involves an analysis of
general economic and market conditions. It also involves the use of models that
analyze and compare expected returns and assumed risks. Under the relative value
approach, the investment management team will emphasize particular securities
and types of securities (such as treasury, agency, mortgage-related and
corporate securities) that the team believes will provide a favorable return in
light of these risks. In this regard, the management team will consider not only
the income the Portfolio will receive from its investments, but also the
likelihood that particular securities or types of securities will have a more
favorable or improving credit outlook.
The Portfolio's dollar-weighted average maturity will, under normal market
conditions, range between three and ten years.
In seeking to achieve its investment objective, the Portfolio may make
significant investments in structured debt securities. Structured debt
securities are considered to be derivative instruments because the value of the
principal of and/or interest on these securities is based on changes in the
value of specific currencies, interest rates, indices or other financial
indicators. For these reasons structured debt securities present additional risk
that the interest paid to the Portfolio on a structured debt security will be
less than expected, and that the principal amount invested will not be returned
to the Portfolio. As a result, investments in structured debt securities may
adversely affect the Portfolio's net asset value. The Portfolio may also invest,
to a lesser extent, in futures contracts, options and swaps for both hedging and
non-hedging purposes.
Risks. These primary investment risks apply to the Portfolio: interest
rate/maturity, credit (or default), prepayment (or call), debt extension,
derivatives, structured debt securities, currency, country, foreign regulatory
high-yield and portfolio turnover risks. See page 66 for these risks and primary
risks common to all Portfolios.
7
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U.S. Treasury Index Portfolio
INVESTMENT
OBJECTIVE
The Portfolio seeks to provide investment results approximating the performance
of the Lehman Brothers Treasury Bond Index (the "Lehman Index").
The Lehman Index is an unmanaged index that includes a broad range of U.S.
Treasury obligations and is considered representative of U.S. Treasury bond
performance overall. As of November 30, 1999, the duration of Lehman Index was
5.37 years.
Lehman Brothers ("Lehman") does not endorse any of the securities in the Index.
It is not a sponsor of the U.S. Treasury Index Portfolio and is not affiliated
with the Portfolio in any way.
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
Investment Strategies. Under normal market conditions, the Portfolio will invest
substantially all (at least 80%) of its total assets in a representative sample
of the U.S. Treasury obligations included in the Lehman Index. The Portfolio
will buy and sell securities with the goal of achieving an overall duration and
total return similar to that of the Lehman Index.
The Portfolio is passively managed, which means it tries to duplicate the
investment composition and performance of the Lehman Index using computer
programs and statistical procedures. As a result, the investment management team
does not use traditional methods of fund investment management for the
Portfolio, such as selecting securities on the basis of economic, financial and
market analysis. Because the Portfolio will have fees and transaction expenses
(while the Index has none), returns are likely to be below those of the Index.
The Investment Adviser expects that, under normal market conditions, the
quarterly performance of the Portfolio, before expenses, will track the
performance of the Lehman Index within a .95 correlation coefficient.
In seeking to achieve its investment objective, the Portfolio may make
investments in structured debt securities, which are derivative instruments. The
value of the principal of and/or interest on structured debt securities is based
on changes in the value of specific currencies, interest rates, commodities,
indices or other financial indicators. The Portfolio may also invest, to a
lesser extent, in futures contracts, options and swaps for both hedging and
non-hedging purposes.
Risks. These primary investment risks apply to the Portfolio: tracking, interest
rate/maturity, prepayment (or call), debt extension, derivatives and government
securities risks. See page 66 for these risks and primary risks common to all
Portfolios.
8
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Bond Portfolio
INVESTMENT
OBJECTIVE
The Portfolio seeks to maximize total return consistent with reasonable risk.
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
Investment Strategies. The Portfolio will seek capital appreciation and current
income in its attempt to maximize total return. In doing so, the Portfolio will
invest, under normal market conditions, at least 65% of its total assets in a
broad range of bonds and other fixed income securities. These may include:
- - Obligations of the U.S. government, its agencies or instrumentalities and
repurchase agreements collateralized by such obligations
- - Obligations of state, local and foreign governments
- - Obligations of domestic and foreign banks and corporations
- - Zero coupon bonds, debentures, preferred stock and convertible securities
- - Mortgage and other asset-backed securities
- - Stripped securities evidencing ownership of future interest or principal
payments on debt obligations
Although the Portfolio invests primarily in investment grade domestic debt
obligations (i.e., obligations rated within the top four rating categories by a
Nationally Recognized Statistical Rating Organization), it may invest to a
limited extent in obligations of foreign issuers and in securities that are
rated below investment grade ("junk bonds").
In buying and selling securities for the Portfolio, the investment management
team uses a relative value approach. This approach involves an analysis of
general economic and market conditions. It also involves the use of models that
analyze and compare expected returns and assumed risks. Under the relative value
approach, the investment management team will emphasize particular securities
and types of securities (such as treasury, agency, mortgage-related and
corporate securities) that the team believes will provide a favorable return in
light of these risks. In this regard, the management team will consider not only
the income the Portfolio will receive from its investments, but also the
likelihood that particular securities or types of securities will have a more
favorable or improving credit outlook.
The Portfolio's dollar-weighted average maturity will, under normal market
conditions, range between five and fifteen years.
In seeking to achieve its investment objective, the Portfolio may make
significant investments in structured debt securities. Structured debt
securities are considered to be derivative instruments because the value of the
principal of and/or interest on these securities is based on changes in the
value of specific currencies, interest rates, indices or other financial
indicators. For these reasons structured debt securities present additional risk
that the interest paid to the Portfolio on a structured debt security will be
less than expected, and that the principal amount invested will not be returned
to the Portfolio. As a result, investments in structured debt securities may
adversely affect the Portfolio's net asset value. The Portfolio may also invest,
to a lesser extent, in futures contracts, options and swaps for both hedging and
non-hedging purposes.
Risks. These primary investment risks apply to the Portfolio: interest
rate/maturity, credit (or default), prepayment (or call), debt extension,
derivatives, structured debt securities, currency, country, foreign regulatory
and high-yield risks. See page 66 for these risks and primary risks common to
all Portfolios.
9
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International Bond Portfolio
INVESTMENT
OBJECTIVE
The Portfolio seeks to maximize total return consistent with reasonable risk.
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
Investment Strategies. The Portfolio will seek capital appreciation and current
income in its attempt to maximize total return. In doing so, the Portfolio will
invest, under normal market conditions, at least 65% of its total assets in a
broad range of bonds and other fixed income securities of foreign issuers. These
may include:
- - Obligations of foreign governments, their agencies and instrumentalities
- - Obligations of supranational organizations (such as the World Bank)
- - Obligations of foreign corporations and banks
- - Zero coupon bonds, debentures, preferred stock and convertible securities of
foreign issuers
- - Mortgage and other asset-backed securities of foreign issuers
The Portfolio will invest in the securities of issuers located in at least three
different foreign countries. Although the Portfolio primarily invests in mature
markets (such as Germany and Japan), it may to a lesser extent also make
investments in emerging markets (such as Argentina and China). Investments are
made based on the portfolio management team's outlook for the relative economic
growth, expected inflation and other economic and political prospects of each
country or region.
The Portfolio may also invest a portion of its assets in domestic obligations,
including obligations of the U.S. government, its agencies and instrumentalities
and repurchase agreements collateralized by such obligations. It may also invest
in the obligations of domestic banks and corporations, zero coupon bonds,
debentures and convertible debentures, and mortgage and other asset-backed
securities.
Although the Portfolio primarily invests in investment grade fixed income
securities (i.e., obligations rated within the top four rating categories by a
Nationally Recognized Statistical Rating Organization), it may invest to a
limited extent in securities that are rated below investment grade ("junk
bonds").
In buying and selling securities for the Portfolio, the investment management
team uses a relative value approach. This approach involves an analysis of
general economic and market conditions. It also involves the use of models that
analyze and compare expected returns and assumed risks. Under the relative value
approach, the investment management team will emphasize particular securities
and types of securities (such as foreign governmental, supranational and foreign
corporate obligations) that the team believes will provide a favorable return in
light of these risks. In this regard, the management team will consider not only
the income the Portfolio will receive from its investments, but also the
likelihood that particular securities or types of securities will have a more
favorable or improving credit outlook.
The Portfolio's dollar-weighted average maturity will, under normal market
conditions, range between three and eleven years.
In seeking to achieve its investment objective, the Portfolio may make
significant investments in structured debt securities. Structured debt
securities are considered to be derivative instruments because the value of the
principal
10
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PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
(CONTINUED)
of and/or interest on these securities is based on changes in the value of
specific currencies, interest rates, indices or other financial indicators. For
these reasons structured debt securities present additional risk that the
interest paid to the Portfolio on a structured debt security will be less than
expected, and that the principal amount invested will not be returned to the
Portfolio. As a result, investments in structured debt securities may adversely
affect the Portfolio's net asset value. The Portfolio may also invest, to a
lesser extent, in futures contracts, options, swaps and currency contracts for
both hedging and non-hedging purposes.
The Portfolio is "non-diversified" under the Investment Company Act of 1940 (the
"1940 Act"), and may invest more of its assets in fewer issuers than
"diversified" mutual funds.
Risks. These primary investment risks apply to the Portfolio: interest
rate/maturity, credit (or default), prepayment (or call), debt extension,
derivatives, structured debt securities, currency, country, foreign regulatory,
emerging markets, high-yield and non-diversification risks. See page 66 for
these risks and primary risks common to all Portfolios.
11
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Balanced Portfolio
INVESTMENT
OBJECTIVE
The Portfolio seeks to provide long-term capital appreciation and current
income.
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
Investment Strategies. In seeking long-term capital appreciation and current
income, the Portfolio will, under normal market conditions, invest up to 75% of
the value of its total assets in equity securities and at least 25% in fixed
income securities. Within these limitations, the actual mix of assets will vary
depending on the investment management team's analysis of market and economic
conditions, including expected earnings, growth in earnings, long-term interest
rates and risk premiums. When, for example, this analysis indicates that the
equity market is overvalued relative to the fixed income market, the investment
management team would allocate a greater percentage of the Portfolio's assets to
fixed income securities.
When investing in equity securities, the Portfolio generally invests in the
equity securities of a broad mix of companies. Such companies generally will
have market capitalizations in excess of $750 million. Although the Portfolio
primarily invests in the common stocks of U.S. companies, it may invest to a
limited extent in the stocks of foreign issuers. Using fundamental research and
quantitative analysis, the investment management team buys equity securities it
believes have favorable growth characteristics relative to their peers.
Similarly, the investment management team sells securities it believes no longer
have these characteristics. The team may also sell securities in order to
maintain the desired equity securities composition of the Portfolio. In
determining whether a company has favorable growth characteristics, the
investment management team analyzes factors such as:
- - Sales and earnings growth
- - Return on equity
- - Debt to equity ratio
- - Market share and competitive leadership of the company's products
In buying and selling securities for the fixed income portion of the Portfolio,
the investment management team uses a relative value approach. This approach
involves an analysis of general economic and market conditions. It also involves
the use of models that analyze and compare expected returns and assumed risks.
Under the relative value approach, the investment management team will emphasize
particular securities and types of securities (such as treasury, agency,
mortgage-related and corporate securities) that the team believes will provide a
favorable return in light of these risks. In this regard, the management team
will consider not only the income the Portfolio will receive from its
investments, but also the likelihood that particular securities or types of
securities will have a more favorable or improving credit outlook.
The Portfolio invests in a broad range of fixed income securities, including:
- - Obligations of the U.S. government, its agencies or instrumentalities and
repurchase agreements collateralized by such obligations
- - Obligations of state, local and foreign governments
- - Obligations of domestic and foreign banks and corporations
- - Zero coupon bonds, debentures, preferred stock and convertible securities
- - Mortgage and other asset-backed securities
- - Stripped securities evidencing ownership of future interest or principal
payments on debt obligations
Although the Portfolio primarily invests in domestic fixed income obligations
that are
12
<PAGE>
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
(CONTINUED)
investment grade (i.e., obligations rated within the top four rating categories
by a Nationally Recognized Statistical Rating Organization), it may invest to a
limited extent in fixed income obligations of foreign issuers and in securities
that are rated below investment grade ("junk bonds").
The dollar-weighted average maturity of the fixed income portion of the
Portfolio will, under normal market conditions, range between two and ten years.
In seeking to achieve its investment objective, the Portfolio may make
significant investments in structured debt securities. Structured debt
securities are considered to be derivative instruments because the value of the
principal of and/or interest on these securities is based on changes in the
value of specific currencies, interest rates, indices or other financial
indicators. For these reasons structured debt securities present additional risk
that the interest paid to the Portfolio on a structured debt security will be
less than expected, and that the principal amount invested will not be returned
to the Portfolio. As a result, investments in structured debt securities may
adversely affect the Portfolio's net asset value. The Portfolio may also invest,
to a lesser extent, in futures contracts, options and swaps for both hedging and
non-hedging purposes.
Risks. These primary investment risks apply to the Portfolio: interest
rate/maturity, credit (or default), prepayment (or call), debt extension,
derivatives, structured debt securities, currency, country, foreign regulatory,
high-yield and stock risks. See page 66 for these risks and primary risks common
to all Portfolios.
13
<PAGE>
Equity Index Portfolio
INVESTMENT
OBJECTIVE
The Portfolio seeks to provide investment results approximating the aggregate
price and dividend performance of the securities included in the Standard &
Poor's ("S&P") 500 Composite Stock Price Index ("S&P 500(R) Index").
The S&P 500(R) Index is an unmanaged index which includes 500 companies
operating across a broad spectrum of the U.S. economy, and its performance is
widely considered representative of the U.S. stock market as a whole.
The companies chosen for inclusion in the Index tend to be industry leaders
within the U.S. economy as determined by Standard & Poor's. However, companies
are not selected by S&P for inclusion because they are expected to have superior
stock price performance relative to the market in general or other stocks in
particular. As of November 30, 1999, the approximate market capitalization range
of companies included in the S&P 500(R) Index was between $395 million and
$464.7 billion.
S&P does not endorse any stock in the S&P 500(R) Index. It is not a sponsor of
the Equity Index Portfolio and is not affiliated with the Portfolio in any way.
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
Investment Strategies. Under normal market conditions, the Portfolio will invest
substantially all (at least 80%) of its total assets in the equity securities of
the companies that make up the S&P 500(R) Index, in weightings that approximate
the relative composition of the securities contained in the Index.
The Portfolio is passively managed, which means it tries to duplicate the
investment composition and performance of the S&P 500(R) Index using computer
programs and statistical procedures. As a result, the investment management team
does not use traditional methods of fund investment management for this
Portfolio, such as selecting securities on the basis of economic, financial and
market analysis. Rather, the investment management team will buy and sell
securities in response to changes in the Index. Because the Portfolio will have
fees and transaction expenses (while the Index has none), returns are likely to
be below those of the Index.
Under normal market conditions, it is expected that the quarterly performance of
the Portfolio, before expenses, will track the performance of the S&P 500(R)
Index within a .95 correlation coefficient.
Risks. These primary investment risks apply to the Portfolio: stock and tracking
risk. See page 66 for these risks and primary risks common to all Portfolios.
14
<PAGE>
Diversified Growth Portfolio
INVESTMENT
OBJECTIVE
The Portfolio seeks to provide long-term capital appreciation with income a
secondary consideration.
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
Investment Strategies. In seeking long-term capital appreciation, the Portfolio
will, under normal market conditions, invest at least 65% of its total assets in
the equity securities of a broad mix of companies. Such companies generally will
have market capitalizations in excess of $750 million. Although the Portfolio
primarily invests in the common stocks of U.S. companies, it may invest to a
limited extent in the stocks of foreign issuers.
Using fundamental research and quantitative analysis, the investment management
team buys securities it believes have favorable growth characteristics relative
to their peers. Similarly, the investment management team sells securities it
believes no longer have these characteristics. The team may also sell securities
in order to maintain the desired portfolio securities composition of the
Portfolio, which may change in response to market conditions. In determining
whether a company has favorable growth characteristics, the investment
management team analyzes factors such as:
- - Sales and earnings growth
- - Return on equity
- - Debt to equity ratio
- - Market share and competitive leadership of the company's products
Risks. These primary investment risks apply to the Portfolio: stock, currency,
country and foreign regulatory risks. See page 66 for these risks and primary
risks common to all Portfolios.
15
<PAGE>
Focused Growth Portfolio
INVESTMENT
OBJECTIVE
The Portfolio seeks to provide long-term capital appreciation. Any income
received is incidental to this objective.
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
Investment Strategies. In seeking long-term capital appreciation, the Portfolio
will, under normal market conditions, invest at least 65% of its total assets in
the equity securities of a somewhat smaller number of companies (generally less
than 100) that are selected by the investment mangement team for their growth
potential. Such companies generally will have market capitalizations in excess
of $750 million. Although the Portfolio primarily invests in the common stocks
of U.S. companies, it may invest to a limited extent in the securities of
foreign issuers.
Using fundamental research and quantitative analysis, the investment management
team buys securities it believes have favorable growth characteristics relative
to their peers. Similarly, the investment management team sells securities it
believes no longer have these characteristics. The team may also sell securities
in order to maintain the desired portfolio securities composition of the
Portfolio. In determining whether a company has favorable growth
characteristics, the investment management team analyzes factors such as:
- - Sales and earnings growth
- - Return on equity
- - Debt to equity ratio
- - Market share and competitive leadership of the company's products
The Portfolio may, from time to time, emphasize particular companies or market
segments, such as technology, in attempting to achieve its investment objective.
Many of the companies in which the Portfolio invests retain their earnings to
finance current and future growth. These companies generally pay little or no
dividends.
Risks. These primary investment risks apply to the Portfolio: stock, technology
stock, currency, country, foreign regulatory and portfolio turnover risks. See
page 66 for these risks and primary risks common to all Portfolios.
16
<PAGE>
Mid Cap Growth Portfolio
INVESTMENT
OBJECTIVE
The Portfolio seeks to provide long-term capital appreciation. Any income
received is incidental to this objective.
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
Investment Strategies. In seeking long-term capital appreciation, the Portfolio
will invest, under normal market conditions, at least 65% of its total assets in
the equity securities of companies with market capitalizations, at the time of
purchase, that are within the range of the Standard & Poor's ("S&P") MidCap 400
Stock Index ("S&P MidCap 400(R) Index").
Using fundamental research and quantitative analysis, the investment management
team buys securities of mid-sized companies that it believes have favorable
characteristics such as above average sales, earnings growth and competitive
returns on equity relative to their peers. Similarly, the investment management
team sells securities it believes no longer have these or other favorable
characteristics. The team may also sell securities in order to maintain the
desired portfolio securities composition of the Portfolio. In doing so, the
investment management team considers factors such as a company's:
- - Financial condition (such as debt to equity ratio)
- - Market share and competitive leadership of the company's products
- - Earnings growth relative to relevant competitors
- - Market valuation in comparison to securities of other companies and the
stock's own historical norms
As of November 30, 1999, the approximate market capitalization range of the
companies included in the S&P MidCap 400(R) Index was between $195.0 million and
$23.4 billion. However, the Portfolio is not limited to the stocks included in
the S&P MidCap 400(R) Index and may invest in other stocks that meet the
Investment Adviser's criteria discussed above.
S&P does not endorse any stock in the Index. It is not a sponsor of the Mid Cap
Growth Portfolio and is not affiliated with the Portfolio in any way.
Although the Portfolio primarily invests in the stocks of U.S. companies, it may
invest to a limited extent in the securities of foreign issuers.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Risks. These primary investment risks apply to the Portfolio: stock, mid cap
stock, currency, country, foreign regulatory and portfolio turnover risks. See
page 66 for these risks and primary risks common to all Portfolios.
17
<PAGE>
Small Company Index Portfolio
INVESTMENT
OBJECTIVE
The Portfolio seeks to provide investment results approximating the aggregate
price and dividend performance of the securities included in the Russell 2000
Index.
The Russell 2000 Index is a market value-weighted index which includes stocks of
the smallest 2,000 companies in the Russell 3000 Index. The Russell 3000 Index
includes stocks of the 3,000 largest companies based in the United States. The
Russell 2000 Index is widely considered representative of smaller company stock
performance as a whole. The companies in the Russell 2000 Index are selected
according to their total market capitalization. However, companies are not
selected by Frank Russell & Company ("Russell") for inclusion in the Index
because they are expected to have superior stock price performance relative to
the stock market in general or other stocks in particular. As of November 30,
1999, the approximate market capitalization range of the companies included in
the Russell 2000 Index was between $2.7 million and $6.0 billion.
Russell does not endorse any stock in the Russell 2000 Index. It is not a
sponsor of the Small Company Index Portfolio and is not affiliated with the
Portfolio in any way.
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
Investment Strategies. Under normal market conditions, the Portfolio will invest
substantially all (at least 80%) of its total assets in the equity securities
included in the Russell 2000 Index, in weightings that approximate the relative
composition of securities contained in the Index.
The Portfolio is passively managed, which means it tries to duplicate the
investment composition and performance of the Russell 2000 Index by using
sophisticated computer programs and statistical procedures. As a result, the
investment management team does not use traditional methods of fund investment
management for the Portfolio, such as selecting securities on the basis of
economic, financial and market analysis. Rather, the investment management team
will buy and sell securities in response to changes in the Index. Because the
Portfolio will have fees and transaction expenses (while the Index has none),
returns are likely to be below those of the Index.
Under normal market conditions, it is expected that the quarterly performance of
the Portfolio, before expenses, will track the performance of the Russell 2000
Index within a .95 correlation coefficient.
Risks. These primary investment risks apply to the Portfolio: stock, tracking,
small company stock and portfolio turnover risks. See page 66 for these risks
and primary risks common to all Portfolios.
18
<PAGE>
Small Company Growth Portfolio
INVESTMENT
OBJECTIVE
The Portfolio seeks to provide long-term capital appreciation. Any income
received is incidental to this objective.
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
Investment Strategies. In seeking long-term capital appreciation, the Portfolio
will invest, under normal market conditions, at least 65% of its total assets in
the equity securities of companies with market capitalizations that are, at the
time of purchase, within the range of the Russell 2000 Index.
Using fundamental research and quantitative analysis, the investment management
team buys securities of small companies that it believes have favorable
characteristics such as above average sales and earnings growth and competitive
returns on equity relative to their peers. Similarly, the investment management
team sells securities it believes no longer have these or other favorable
characteristics. The team may also sell securities in order to maintain the
desired portfolio securities composition of the Portfolio. In doing so, the
investment management team considers factors such as a company's:
- - Financial condition (such as debt to equity ratio)
- - Market share and competitive leadership of the company's products
- - Earnings growth relative to relevant competitors
- - Market valuation in comparison to securities of other small cap companies and
the stock's own historical norms
As of November 30, 1999, the approximate market capitalization range of the
companies included in the Russell 2000 Index was between $2.7 million and $6.0
billion. The Portfolio, however, is not limited to the stocks in the Russell
2000 Index, and may invest in other stocks that meet the Investment Adviser's
criteria discussed above.
Russell does not endorse any stock in the Index. It is not a sponsor of the
Small Company Growth Portfolio and is not affiliated with the Portfolio in any
way.
Although the Portfolio primarily invests in the stocks of U.S. companies, it may
invest to a limited extent in the securities of foreign issuers.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Risks. These primary investment risks apply to the Portfolio: stock, small
company stock, currency, country, foreign regulatory and portfolio turnover
risks. See page 66 for these risks and primary risks common to all Portfolios.
19
<PAGE>
International Equity Index Portfolio
INVESTMENT
OBJECTIVE
The Portfolio seeks to provide investment results approximating the aggregate
price and dividend performance of the securities in the Morgan Stanley Capital
International Europe, Australia and Far East Index ("EAFE(R) Index").
The EAFE(R) Index is a broad-based market capitalization weighted index that
includes more than 1,000 securities in twenty foreign countries. It is widely
considered representative of foreign stock market performance overall.
Morgan Stanley Capital International ("MSCI") does not endorse any of the
securities in the EAFE(R) Index. It is not a sponsor of the International Equity
Index Portfolio and is not affiliated with the Portfolio in any way.
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
Investment Strategies. Under normal market conditions, the Portfolio will invest
substantially all (at least 80%) of its total assets in the equity securities
included in the EAFE(R) Index, in weightings that approximate the relative
composition of the securities contained in the Index.
The Portfolio is passively managed, which means it tries to duplicate the
investment composition and performance of the EAFE(R) Index by using
sophisticated computer programs and statistical procedures. As a result, the
investment management team does not use traditional methods of fund investment
management for the Portfolio, such as selecting securities on the basis of
economic, financial and market analysis. Rather, the investment management team
will buy and sell securities in response to changes in the EAFE(R) Index.
Because the Portfolio will have fees and transaction expenses (while the EAFE(R)
Index has none), returns are likely to be below those of the EAFE(R) Index.
Because the proportion of assets allocated to each country will approximate the
relative country weights in the EAFE(R) Index, more than 25% of the Portfolio's
assets may be invested in a single country (such as the United Kingdom and
Japan). This may make the Portfolio's performance more dependent upon the
performance of a single country than if the Portfolio allocated its assets among
issuers in a larger number of countries.
Under normal market conditions, it is expected that the quarterly performance of
the Portfolio, before expenses, will track the performance of the EAFE(R) Index
within a .95 correlation coefficient.
Risks. These primary investment risks apply to the Portfolio: stock, tracking,
currency, country and foreign regulatory risks. See page 66 for these risks and
primary risks common to all Portfolios.
20
<PAGE>
International Growth Portfolio
INVESTMENT
OBJECTIVE
The Portfolio seeks to provide long-term capital appreciation. Any income
received is incidental to this objective.
PRINCIPAL INVESTMENT
STRATEGIES
AND
RISKS
Investment Strategies. In seeking long-term capital appreciation, the Portfolio
will, under normal market conditions, invest at least 65% of its total assets in
the equity securities of a broad mix of foreign companies. Such companies
generally will have market capitalizations in excess of $750 million.
Using fundamental research and quantitative analysis, the investment management
team buys securities of foreign companies that it believes to have favorable
growth characteristics relative to their peers. Similarly, the investment
management team sells securities it believes no longer have these
characteristics. The team may also sell securities in order to maintain the
desired portfolio securities composition of the Portfolio. In determining
whether a company has favorable growth characteristics, the investment
management team analyzes factors such as:
- - Sales and earnings growth
- - Return on equity
- - Debt to equity ratio
- - Market share and competitive leadership of the company's products
The Portfolio will invest in the equity stocks of issuers located in at least
three different foreign countries. Although the Portfolio primarily invests in
mature markets (such as Germany and Japan), it may to a lesser extent also make
investments in emerging markets (such as Argentina and China). In determining
whether to invest in a particular country or region, the investment management
team looks at a number of factors, including a country's (or region's):
- - Prospects for economic growth
- - Expected level of inflation
- - Government policies influencing business conditions
- - Outlook for currency relationships
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the
Portfolio.
Risks. These primary investment risks apply to the Portfolio: stock, currency,
country, foreign regulatory, emerging markets and portfolio turnover risks. See
page 66 for these risks and primary risks common to all Portfolios.
21
<PAGE>
Principal Investment Risks
All investments carry some degree of risk which will affect the value of a
Portfolio's investments, its investment performance and the price of its shares.
As a result, loss of money is a risk of investing in each Portfolio.
An investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
The following summarizes the principal risks that apply to the Portfolios and
may result in a loss of your investment.
RISKS THAT
APPLY TO ALL
PORTFOLIOS
Market risk is the risk that the value of the securities in which a Portfolio
invests may go up or down in response to the prospects of individual companies
and/or general economic conditions. Price changes may be temporary or last for
extended periods.
Management risk is the risk that a strategy used by the investment management
team may fail to produce the intended results.
Liquidity risk is the risk that a Portfolio will not be able to pay redemption
proceeds within the time periods described in this Prospectus because of unusual
market conditions, an unusually high volume of redemption requests or other
reasons.
RISKS THAT APPLY
PRIMARILY TO
THE FIXED INCOME
AND BALANCED PORTFOLIOS
Interest rate/maturity risk is the risk that increases in prevailing interest
rates will cause fixed income securities held by a Portfolio to decline in
value. The magnitude of this decline will often be greater for longer-term fixed
income securities than shorter-term securities.
Credit (or default) risk is the risk that an issuer of fixed income securities
held by a Portfolio may default on its obligation to pay interest and repay
principal. Generally, the lower the credit rating of a security, the greater the
risk that the issuer of the security will default on its obligation. Investment
grade bonds are generally believed to have relatively low degrees of credit
risk.
Prepayment (or call) risk is the risk that an issuer will exercise its right to
pay principal on an obligation held by a Portfolio (such as a mortgage-backed
security) earlier than expected. This may happen during a period of declining
interest rates. Under these circumstances, a Portfolio may be unable to recoup
all of its initial investment and will suffer from having to reinvest in lower
yielding securities. The loss of higher yielding securities and the reinvestment
at lower interest rates can reduce the Portfolio's income, total return and
share price.
22
<PAGE>
Debt extension risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by a Portfolio (such as a mortgage-backed
security) later than expected. This may happen during a period of rising
interest rates. Under these circumstances, the value of the obligation will
decrease and the Portfolio will suffer from the inability to invest in higher
yielding securities.
Derivatives risk is the risk that loss may result from a Portfolio's investments
in options, futures, swaps, structured debt securities and other derivative
instruments, which may be leveraged. Investments in derivative instruments may
result in losses exceeding the amounts invested.
Structured debt securities risk is the risk that loss may result from a
Portfolio's investments in structured debt securities, which are derivative
instruments and may be leveraged. The value of structured debt securities may be
adversely affected by changes in the interest rate payable on a security while
held by a Portfolio. In some cases it is possible that a Portfolio may suffer a
total loss on its investment in a structured debt security.
RISK THAT APPLIES
PRIMARILY TO THE
U.S. GOVERNMENT SECURITIES AND
U.S. TREASURY INDEX PORTFOLIOS
Government securities risk is the risk that the U.S. government will not provide
financial support to U.S. government agencies, instrumentalities or sponsored
enterprises if it is not obligated to do so by law.
RISK THAT APPLIES
TO THE U.S. TREASURY
INDEX, EQUITY INDEX,
SMALL COMPANY
INDEX AND
INTERNATIONAL EQUITY
INDEX PORTFOLIOS
Tracking risk is the risk that a Portfolio's performance may vary substantially
from the performance of the benchmark index it tracks as a result of share
purchases and redemptions, transaction costs, expenses and other factors.
RISK THAT APPLIES
PRIMARILY TO THE
EQUITY AND
BALANCED PORTFOLIOS
Stock risk is the risk that stock prices have historically risen and fallen in
periodic cycles. As of the date of this Prospectus, U.S. stock markets and
certain foreign stock markets were trading at or close to record high levels.
There is no guarantee that such levels will continue.
RISK THAT APPLIES
PRIMARILY TO THE
SMALL COMPANY
INDEX AND SMALL
COMPANY GROWTH
PORTFOLIOS
Small company stock risk is the risk that stocks of smaller companies may be
subject to more abrupt or erratic market movements than stocks of larger, more
established companies. Small companies may have limited product lines or
financial resources, or may be dependent upon a small or inexperienced
management group. In addition, small cap stocks typically are traded in lower
volume, and their issuers typically are subject to greater degrees of changes in
their earnings and prospects.
23
<PAGE>
RISK THAT APPLIES
PRIMARILY TO THE
FOCUSED GROWTH
PORTFOLIO
Technology stock risk is the risk that stocks of technology companies may be
subject to greater price volatility than stocks of companies in other sectors.
Technology companies may produce or use products or services that prove
commercially unsuccessful, become obsolete or may be adversely impacted by
government regulation. Technology securities may experience significant price
movements caused by disproportionate investor optimism or pessimism.
RISK THAT APPLIES
PRIMARILY TO THE MID
CAP GROWTH
PORTFOLIO
Mid cap stock risk is the risk that stocks of mid-sized companies may be subject
to more abrupt or erratic market movements than stocks of larger, more
established companies. Mid-sized companies may have limited product lines or
financial resources, and may be dependent upon a particular niche of the market.
RISK THAT APPLIES
PRIMARILY TO THE
INTERNATIONAL
BOND PORTFOLIOS
Non-diversification risk is the risk that a non-diversified portfolio may be
more susceptible to adverse financial, economic or other developments affecting
any single issuer, and more susceptible to greater losses because of these
developments.
OTHER RISKS
High-yield risk may impact the value of non-investment grade securities held by
a Portfolio. Generally, these securities, sometimes known as "junk bonds," are
subject to greater credit risk, price volatility and risk of loss than
investment grade securities. In addition, there may be less of a market for
them, which could make it harder to sell them at an acceptable price. These and
related risks mean that a Portfolio may not achieve the expected income from
non-investment grade securities and that its share price may be adversely
affected by declines in the value of these securities.
Currency risk is the potential for price fluctuations in the dollar value of
foreign securities because of changing currency exchange rates.
Country risk is the potential for price fluctuations in foreign securities
because of political, financial and economic events in foreign countries.
Investment of more than 25% of a Portfolio's total assets in securities of
issuers located in one country will subject the Portfolio to increased country
risk with respect to the particular country.
Foreign regulatory risk is the risk that a foreign security could lose value
because of less stringent foreign securities regulations and accounting and
disclosure standards.
Emerging markets risk is the risk that the securities markets of emerging
countries are less liquid, are especially subject to greater price volatility,
have smaller market capitalizations, have less government regulation and are not
subject to as extensive and frequent accounting, financial and other reporting
requirements as the securities markets of more developed countries.
Portfolio turnover risk is the risk that high portfolio turnover is likely to
result in increased Portfolio expenses which may result in lower investment
returns. High portfolio turnover is also likely to result in higher short-term
capital gains taxable to shareholders. For the last fiscal year, the annual
portfolio turnover rates of the Intermediate Bond, Focused Growth, Small Company
Index and International Growth Portfolios exceeded 100%. It is expected that the
annual portfolio turnover rates of the Small Company Growth and Mid Cap Growth
Portfolios may also exceed 100%.
More information about the Portfolio's investment strategies and techniques is
provided in "Risks, Securities, Techniques and Financial Information" beginning
on page 66.
24
<PAGE>
Portfolio Performance
Each Portfolio is authorized to offer three classes of shares -- Class A, Class
C and Class D. The bar charts and tables below provide an indication of the
risks of investing in a Portfolio by showing: (a) changes in the performance of
a Portfolio's Class A Shares from year to year, and (b) how the average annual
returns of a Portfolio's outstanding classes of shares compare to those of a
broad-based securities market index.
The bar charts and tables assume reinvestment of dividends and distributions. A
Portfolio's past performance is not necessarily an indication of how the
Portfolio will perform in the future. Performance reflects expense limitations
(as set forth in the Footnotes to the Portfolio Fees and Expenses table on page
46) that were in effect during the periods presented. If expense limitations
were not in place, a Portfolio's performance would have been reduced. Because
the operating expenses of each Portfolio's Class A Shares are lower than the
expenses of its Class C and Class D Shares, the performance of the Class A
Shares is higher than the performance of these other share classes.
The bar chart and performance table have been omitted for the Small Company
Growth and Mid Cap Growth Portfolios because these Portfolios have been in
operation for less than one calendar year.
25
<PAGE>
U.S. Government Securities Portfolio
[Calendar Year Total Return (Class A) Chart appears here]
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1999):
Best Quarter Return
Q1 '95 +3.51%
Worst Quarter Return
Q1 '94 -1.13%
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
1 Year 5 Year Inception
- ----------------------------------------------------------------------
Class A (Inception 4/5/93) 2.09% 6.31% 5.05%
Merrill Lynch 1-5 Government Index* 2.10% 6.77% 5.31%
- ----------------------------------------------------------------------
Class C (Inception 12/29/95)** -- -- --
Merrill Lynch 1-5 Government Index* 2.10% 6.77% 5.32%
- ----------------------------------------------------------------------
Class D (Inception 9/15/94) 1.70% 5.89% 5.41%
Merrill Lynch 1-5 Government Index* 2.10% 6.77% 6.50%
- ----------------------------------------------------------------------
* The Index figures do not reflect any fees or expenses.
** From February 10, 1999 to the date of this Prospectus, no Class C shares of
the U.S. Government Securities Portfolio were held by shareholders. Class C
shares of the U.S. Government Securities Portfolio will have substantially
similar annual returns when compared with Class A shares of the U.S. Government
Securities Portfolio because shares of both Class A and Class C are invested in
the same portfolio of securities. The annual returns of Class A and Class C
shares will differ only to the extent that the classes do not have the same
expenses. Annual returns reflected since inception will also differ as the
classes do not have the same inception date.
26
<PAGE>
Short-Intermediate Bond Portfolio
[Calendar Year Total Return (Class A) chart appears here]
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1999):
Best Quarter Return
Q2 '95 +3.96%
Worst Quarter Return
Q1 '94 -0.65%
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
1 Year 5 Year Inception
- ------------------------------------------------------------------------------
Class A (Inception 1/11/93) 1.41% 6.43% 5.64%
Merrill Lynch 1-5 Corporate/Government Bond Index* 2.19% 6.86% 5.81%
- ------------------------------------------------------------------------------
Class D (Inception 9/14/94) 1.03% 6.01% 5.68%
Merrill Lynch 1-5 Corporate/Government Bond Index* 2.19% 6.86% 6.29%
- ------------------------------------------------------------------------------
*The Index figures do not reflect any fees or expenses.
27
<PAGE>
Intermediate Bond Portfolio
[Calendar Year Total Return (Class A) chart appears here]
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1999):
Best Quarter Return
Q3 '98 +2.94%
Worst Quarter Return
Q2 '99 -0.64%
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
1 Year 5 Year Inception
- ----------------------------------------------------------------------
Class A (Inception 8/1/97) -0.37% N/A 3.55%
Lehman Brothers Intermediate
Government/Corporate Bond Index* 0.39% N/A 4.77%
- ----------------------------------------------------------------------
Class D (Inception 10/5/98) -0.76% N/A 0.93%
Lehman Brothers Intermediate
Government/Corporate Bond Index* 0.39% N/A 0.54%
- ----------------------------------------------------------------------
*The Index figures do not reflect any fees or expenses.
28
<PAGE>
U.S. Treasury Index Portfolio
[Calendar Year Total Return (Class A) appears here]
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1999):
Best Quarter Return
Q2 '95 +6.23%
Worst Quarter Return
Q1 '94 -2.94%
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
1 Year 5 Year Inception
- ------------------------------------------------------------------------
Class A (Inception 1/11/93) -2.93% 7.16% 6.05%
Lehman Brothers Treasury Bond Index* -2.53% 7.38% 5.98%
- ------------------------------------------------------------------------
Class C (Inception 10/7/98) -2.89% N/A -3.69%
Lehman Brothers Treasury Bond Index* -2.53% N/A -2.29%
- ------------------------------------------------------------------------
Class D (Inception 11/16/94) -2.99% 6.75% 6.78%
Lehman Brothers Treasury Bond Index* -2.53% 7.38% 5.38%
- ------------------------------------------------------------------------
*The Index figures do not reflect any fees or expenses.
29
<PAGE>
Bond Portfolio
[Calendar Year Total Return (Class A) chart appears here]
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1999):
Best Quarter Return
Q2 '95 +7.65%
Worst Quarter Return
Q1 '94 -2.27%
30
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
1 Year 5 Year Inception
- ------------------------------------------------------------------------------
Class A (Inception 1/11/93) -2.39% 8.29% 6.90%
Lehman Brothers Government/Corporate Bond Index* -2.15% 7.61% 6.42%
Lehman Brothers Aggregate Bond Index** -0.82% 7.73% 6.42%
- ------------------------------------------------------------------------------
Class C (Inception 7/3/95) -2.68% 8.04% 5.92%
Lehman Brothers Government/Corporate Bond Index* -2.15% 7.61% 5.83%
Lehman Brothers Aggregate Bond Index** -0.82% 7.73% 6.04%
- ------------------------------------------------------------------------------
Class D (Inception 9/14/94) -2.83% 7.85% 7.36%
Lehman Brothers Government/Corporate Bond Index* -2.15% 7.61% 6.89%
Lehman Brothers Aggregate Bond Index** -0.82% 7.73% 7.01%
- ------------------------------------------------------------------------------
* The Index figures do not reflect any fees or expenses.
** The Lehman Brothers Aggregate Bond Index, an unmanaged index of prices of
U.S. dollar-denominated investment grade fixed income securities with remaining
maturities of one year and longer, is replacing the Lehman Brothers
Government/Corporate Bond Index as the Northern Institutional Bond Portfolio's
performance benchmark. The Lehman Brothers Aggregate Bond Index is a broader
measure of the U.S. dollar-denominated investment grade fixed income market and
includes government and corporate securities, agency mortgage pass-through
securities, commercial mortgage-backed securities, and asset-backed securities.
It is therefore expected to be a better benchmark comparison of the Portfolio's
performance. The Index figures do not reflect any fees or expenses.
30
<PAGE>
International Bond Portfolio
[Calendar Year Total Return (Class A) chart appears here]
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1999):
Best Quarter Return
Q1 '95 +10.88%
Worst Quarter Return
Q1 '97 -5.91%
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
1 Year 5 Year Inception
- ------------------------------------------------------------------------------
Class A (Inception 3/28/94) -7.98% 5.80% 5.68%
J.P. Morgan Non-U.S. Global Government Bond Index* -6.17% 6.37% 6.18%
- ------------------------------------------------------------------------------
Class D (Inception 11/20/95)** -- -- --
J.P. Morgan Non-U.S. Global Government Bond Index* -6.17% 6.37% 3.20%
- ------------------------------------------------------------------------------
* The Index figures do not reflect any fees or expenses.
** From August 22, 1999 to the date of this Prospectus, no Class D shares of the
International Bond Portfolio were held by shareholders. Class D shares of the
International Bond Portfolio will have substantially similar annual returns when
compared with Class A shares of the International Bond Portfolio because shares
of both Class A and Class D are invested in the same portfolio of securities.
The annual returns of Class A and Class D shares will differ only to the extent
that the classes do not have the same expenses. Annual returns reflected since
inception will also differ as the classes do not have the same inception date.
31
<PAGE>
Balanced Portfolio
[Calendar Year Total Return (Class A) chart appears here]
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1999):
Best Quarter Return
Q4 '98 +13.43%
Worst Quarter Return
Q3 '98 -4.71%
Average Annual Total Return
(for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
1 Year 5 Year Inception
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (Inception 7/1/93) 12.76% 17.34% 12.88%
Lehman Bros. Intermediate Government/Corporate Bond Index* 00.39% 07.10% 05.49%
S&P 500(R) Index* 21.03% 28.54% 22.46%
- ----------------------------------------------------------------------------------------
Class C (Inception 12/29/95) 12.68% N/A 16.29%
Lehman Bros. Intermediate Government/Corporate Bond Index* 00.39% N/A 5.13%
S&P 500(R) Index* 21.03% N/A 26.39%
- ----------------------------------------------------------------------------------------
Class D (Inception 2/20/96) 12.33% N/A 16.14%
Lehman Bros. Intermediate Government/Corporate Bond Index* 00.39% N/A 5.44%
S&P 500(R) Index* 21.03% N/A 26.22%
- ----------------------------------------------------------------------------------------
</TABLE>
* The Index figures do not reflect any fees or expenses.
32
<PAGE>
Equity Index Portfolio
[Calendar Year Total Return (Class A) chart appears here]
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1999):
Best Quarter Return
Q4 '98 +21.22%
Worst Quarter Return
Q3 '98 -9.98%
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
1 Year 5 Year Inception
- -----------------------------------------------------------------------
Class A (Inception 1/11/93) 20.61% 28.15% 21.53%
S&P 500(R) Index* 21.03% 28.54% 21.52%
- -----------------------------------------------------------------------
Class C (Inception 9/28/95) 20.31% N/A 25.58%
S&P 500(R) Index* 21.03% N/A 26.39%
- -----------------------------------------------------------------------
Class D (Inception 9/14/94) 20.22% 27.73% 25.70%
S&P 500(R) Index* 21.03% 28.54% 25.97%
- -----------------------------------------------------------------------
* The Index figures do not reflect any fees or expenses.
33
<PAGE>
Diversified Growth Portfolio
[Calendar Year Total Return (Class A) chart appears here]
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1999):
Best Quarter Return
Q4 '98 +24.46%
Worst Quarter Return
Q3 '98 -9.75%
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
1 Year 5 Year Inception
- -----------------------------------------------------------------------
Class A (Inception 1/11/93) 22.82% 26.06% 18.17%
S&P 500(R) Index* 21.03% 28.54% 21.52%
- -----------------------------------------------------------------------
Class D (Inception 9/14/94) 22.16% 22.57% 22.90%
S&P 500(R) Index* 21.03% 28.54% 25.97%
- -----------------------------------------------------------------------
* The Index figures do not reflect any fees or expenses.
34
<PAGE>
Focused Growth Portfolio
[Calendar Year Total Return (Class A) chart appears here]
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1999):
Best Quarter Return
Q4 '98 +27.60%
Worst Quarter Return
Q3 '98 -11.04%
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
1 Year 5 Year Inception
- ----------------------------------------------------------------------
Class A (Inception 7/1/93) 34.78% 28.29% 21.21%
S&P 500(R) Index* 21.03% 28.54% 22.46%
- ----------------------------------------------------------------------
Class C (Inception 6/14/96) 34.47% N/A 29.72%
S&P 500(R) Index* 21.03% N/A 26.60%
- ----------------------------------------------------------------------
Class D (Inception 12/8/94) 34.27% 27.80% 28.68%
S&P 500(R) Index* 21.03% 28.54% 28.41%
- ----------------------------------------------------------------------
* The Index figures do not reflect any fees or expenses.
35
<PAGE>
Small Company Index Portfolio
[Calendar Year Total Return (Class A)* chart appears here]
* The returns in the bar chart do not reflect the special transaction fee which
is charged on the purchase of shares and is explained on pages 58 and 59. If
the bar chart did reflect such fee, returns would be less than those shown.
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1999):
Best Quarter Return
Q4 '99 +18.24%
Worst Quarter Return
Q3 '98 -20.10%
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
1 Year 5 Year Inception
- ----------------------------------------------------------------------
Class A (Inception 1/11/93) 20.21% 16.11% 13.60%
Russell 2000 Index** 21.26% 16.69% 14.15%
- ----------------------------------------------------------------------
Class D (Inception 12/8/94) 19.41% 15.69% 16.80%
Russell 2000 Index** 21.26% 16.69% 17.02%
- ----------------------------------------------------------------------
** The Index figures do not reflect any fees or expenses.
36
<PAGE>
International Equity Index Portfolio
[Calendar Year Total Return (Class A)* chart appears here]
* The return in the bar chart does not reflect the special transaction fee which
is charged on the purchase of shares and is explained on pages 58 and 59. If
the bar chart did reflect such fee, the return would be less than that shown.
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1999):
Best Quarter Return
Q4 '98 +19.84%
Worst Quarter Return
Q3 '98 -14.07%
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
1 Year 5 Year Inception
- -------------------------------------------------------------------------
Class A (Inception 4/1/97) 26.06% N/A 18.49%
MSCI EAFE Index** 26.96% N/A 17.97%
- -------------------------------------------------------------------------
Class D (Inception 10/5/98) 25.14% N/A 44.21%
MSCI EAFE Index** 26.96% N/A 40.67%
- -------------------------------------------------------------------------
** The Index figures do not reflect any fees or expenses.
37
<PAGE>
International Growth Portfolio
[Calendar Year Total Return (Class A) chart appears here]
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1999):
Best Quarter Return
Q4 '98 +19.00%
Worst Quarter Return
Q3 '98 -13.75%
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
1 Year 5 Year Inception
- ------------------------------------------------------------------------
Class A (Inception 3/28/94) 35.35% 14.11% 12.28%
MSCI EAFE(R) Index* 26.96% 12.83% 8.86%
- ------------------------------------------------------------------------
Class D (Inception 11/16/94)** -- -- --
MSCI EAFE(R) Index* 26.96% 12.83% 12.83%
- ------------------------------------------------------------------------
* The Index figures do not reflect any fees or expenses.
** From August 22, 1999 to the date of this Prospectus, no Class D shares of the
International Growth Portfolio were held by shareholders. Class D shares of the
International Growth Portfolio will have substantially similar annual returns
when compared with Class A shares of the International Growth Portfolio because
shares of both Class A and Class D are invested in the same portfolio of
securities. The annual returns of Class A and Class D shares will differ only to
the extent that the classes do not have the same expenses. Annual returns
reflected since inception will also differ as the classes do not have the same
inception date.
38
<PAGE>
Broad-Based Securities Market Indices Descriptions
The Merrill Lynch 1-5 Government Index is an unmanaged index of prices of U.S.
Treasury notes with maturities of one to five years.
The Lehman Brothers Intermediate Government/ Corporate Bond Index is an
unmanaged index of prices of U.S. government and corporate bonds with remaining
maturities of one to ten years.
The Lehman Brothers Aggregate Bond Index is an unmanaged index of prices of U.S.
dollar-denominated investment grade fixed income securities with remaining
maturities of one year and longer.
The Lehman Brothers Treasury Bond Index is an unmanaged index of prices of U.S.
Treasury bonds with maturities of one to thirty years.
The J.P. Morgan Non-U.S. Global Government Bond Index is an unmanaged index of
prices of non-U.S. government bonds with maturities of one to thirty years.
The S&P 500(R) Index is the Standard & Poor's Composite Index of 500 stocks, a
widely recognized, unmanaged index of common stock prices.
The Russell 2000 Index is an unmanaged index which tracks the performance of the
2,000 smallest of the 3,000 largest U.S. companies, based on market
capitalization.
The MSCI EAFE(R) Index is the Morgan Stanley Capital International Europe,
Australia and Far East Index, an unmanaged index which tracks the performance of
selected equity securities in Europe, Australia, Asia and the Far East.
The S&P MidCap 400(R) Index is an unmanaged index generally representative of
the U.S. market for medium cap stocks.
The Merrill Lynch 1-5 Corporate/Government Bond Index is an unmanaged index of
prices of U.S. government and corporate bonds with maturities of one to five
years.
The Lehman Brothers Government/Corporate Bond Index is an unmanaged index of
prices of U.S. government and corporate bonds with not less than one year to
maturity.
39
<PAGE>
Portfolio Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Class A, C or D Shares of the Portfolios. Each class of shares represents pro
rata interests in a Portfolio except that different shareholder servicing and
transfer agency fees are payable due to the varying levels of administrative
support and transfer agency services provided to each class. Please note that
the following information does not reflect any charges which may be imposed by
The Northern Trust Company ("Northern"), its affiliates, correspondent banks and
other institutions on their customers. (For more information, please see
"Account Policies and Other Information" on page 58.)
As indicated below, the Small Company Index and International Equity Index
Portfolios charge an additional transaction fee on the purchase of shares. 40
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
Additional
Transaction Sales Charge
Sales Charge Fee (as a (Load)
(Load) percentage Imposed on
Imposed on of amount Deferred Sales Reinvested Redemption Exchange
Portfolio Purchases invested) Charge (Load) Distributions Fees Fees
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Securities
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
Short-Intermediate Bond
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
Intermediate Bond
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
U.S. Treasury Index
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
Bond
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
International Bond
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets)
Total Annual
Other Portfolio
Management Distribution Other Servicing Transfer Operating Operating
Fees(1) (12b-1) Fees Expenses Fees Agency Fees Expenses(2) Expenses(3)
<S> <C> <C> <C> <C> <C> <C>
0.60% None 0.17% None 0.01% 0.16% 0.77%
0.60% None 0.41% 0.15% 0.10% 0.16% 1.01%
0.60% None 0.56% 0.25% 0.15% 0.16% 1.16%
0.60% None 0.16% None 0.01% 0.15% 0.76%
0.60% None 0.40% 0.15% 0.10% 0.15% 1.00%
0.60% None 0.55% 0.25% 0.15% 0.15% 1.15%
0.60% None 0.20% None 0.01% 0.19% 0.80%
0.60% None 0.44% 0.15% 0.10% 0.19% 1.04%
0.60% None 0.59% 0.25% 0.15% 0.19% 1.19%
0.40% None 0.37% None 0.01% 0.36% 0.77%
0.40% None 0.61% 0.15% 0.10% 0.36% 1.01%
0.40% None 0.76% 0.25% 0.15% 0.36% 1.16%
0.60% None 0.14% None 0.01% 0.13% 0.74%
0.60% None 0.38% 0.15% 0.10% 0.13% 0.98%
0.60% None 0.53% 0.25% 0.15% 0.13% 1.13%
0.90% None 0.54% None 0.01% 0.53% 1.44%
0.90% None 0.78% 0.15% 0.10% 0.53% 1.68%
0.90% None 0.93% 0.25% 0.15% 0.53% 1.83%
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
Additional
Transaction Sales Charge
Sales Charge Fee (as a (Load)
(Load) percentage Imposed on
Imposed on of amount Deferred Sales Reinvested Redemption Exchange
Portfolio Purchases invested) Charge (Load) Distributions Fees Fees
<S> <C> <C> <C> <C> <C> <C>
Balanced
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
Equity Index
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
Diversified Growth
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
Focused Growth
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
Mid Cap Growth
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
Small Company Index
Class A None 0.50% None None None None
Class C None 0.50% None None None None
Class D None 0.50% None None None None
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets)
Total Annual
Other Portfolio
Management Distribution Other Servicing Transfer Operating Operating
Fees(1) (12b-1) Fees Expenses Fees Agency Fees Expenses(2) Expenses(3)
<S> <C> <C> <C> <C> <C> <C>
0.80% None 0.19% None 0.01% 0.18% 0.99%
0.80% None 0.43% 0.15% 0.10% 0.18% 1.23%
0.80% None 0.58% 0.25% 0.15% 0.18% 1.38%
0.30% None 0.14% None 0.01% 0.13% 0.44%
0.30% None 0.38% 0.15% 0.10% 0.13% 0.68%
0.30% None 0.53% 0.25% 0.15% 0.13% 0.83%
0.80% None 0.16% None 0.01% 0.15% 0.96%
0.80% None 0.40% 0.15% 0.10% 0.15% 1.20%
0.80% None 0.55% 0.25% 0.15% 0.15% 1.35%
1.10% None 0.16% None 0.01% 0.15% 1.26%
1.10% None 0.40% 0.15% 0.10% 0.15% 1.50%
1.10% None 0.55% 0.25% 0.15% 0.15% 1.65%
1.10% None 0.58% None 0.01% 0.57% 1.68%
1.10% None 0.82% 0.15% 0.10% 0.57% 1.92%
1.10% None 0.97% 0.25% 0.15% 0.57% 2.07%
0.40% None 0.41% None 0.01% 0.40% 0.81%
0.40% None 0.65% 0.15% 0.10% 0.40% 1.05%
0.40% None 0.80% 0.25% 0.15% 0.40% 1.20%
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
Additional
Transaction Sales Charge
Sales Charge Fee (as a (Load)
(Load) percentage Imposed on
Imposed on of amount Deferred Sales Reinvested Redemption Exchange
Portfolio Purchases invested) Charge (Load) Distributions Fees Fees
<S> <C> <C> <C> <C> <C> <C>
Small Company Growth
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
International Equity Index
Class A None 1.00% None None None None
Class C None 1.00% None None None None
Class D None 1.00% None None None None
International Growth
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets)
Total Annual
Other Portfolio
Management Distribution Other Servicing Transfer Operating Operating
Fees(1) (12b-1) Fees Expenses Fees Agency Fees Expenses(2) Expenses(3)
<S> <C> <C> <C> <C> <C> <C>
1.10% None 0.19% None 0.01% 0.18% 1.29%
1.10% None 0.43% 0.15% 0.10% 0.18% 1.53%
1.10% None 0.58% 0.25% 0.15% 0.18% 1.68%
0.50% None 0.41% None 0.01% 0.40% 0.91%
0.50% None 0.65% 0.15% 0.10% 0.40% 1.15%
0.50% None 0.80% 0.25% 0.15% 0.40% 1.30%
1.00% None 0.31% None 0.01% 0.30% 1.31%
1.00% None 0.55% 0.15% 0.10% 0.30% 1.55%
1.00% None 0.70% 0.25% 0.15% 0.30% 1.70%
</TABLE>
45
<PAGE>
Footnotes
1 For the fiscal year ended November 30, 1999, Northern and Northern Trust
Quantitative Advisors, Inc. (collectively, the "Investment Advisers")
voluntarily waived a portion of their management fees. As a result of the fee
waiver, actual management fees paid by the U.S. Government Securities,
Short-Intermediate Bond, Intermediate Bond, U.S. Treasury Index, Bond,
International Bond, Balanced, Equity Index, Diversified Growth, Focused
Growth, Small Company Index, International Equity Index and International
Growth Portfolios were 0.25%, 0.25%, 0.25%, 0.15%, 0.25%, 0.70%, 0.50%, 0.10%,
0.55%, 0.80%, 0.20%, 0.25% and 0.80%, respectively, of the Portfolios' average
daily net assets. As of the date of this Prospectus, Northern intends to waive
voluntarily a portion of its management fee for the Mid Cap Growth and Small
Company Growth Portfolios so that the actual management fees paid by each of
these Portfolios will be 0.80% for the current fiscal year. Fee waivers may be
terminated at any time at the option of the Investment Advisers.
2 "Other Operating Expenses" include administration or co-administration fees
and all other ordinary operating expenses of the Portfolios not listed above.
Northern and PFPC Inc., formerly First Data Investor Services Group, Inc.
("PFPC"), serve as the Portfolios' co-administrators, and are entitled to a
co-administration fee from the Portfolios at an annual rate of 0.15% of the
average daily net assets of each of the International Equity Index,
International Growth and International Bond Portfolios, and 0.10% of the
average daily net assets of each other Portfolio. Under the Co-Administration
Agreement with the Trust, which may be amended without shareholder approval,
the co-administrators have agreed to reimburse expenses (including fees
payable to Northern and PFPC as co-administrators, but excluding management
fees, transfer agency fees, servicing fees and extraordinary expenses) which
exceed on an annualized basis 0.25% of the International Equity Index,
International Growth and International Bond Portfolios' average daily net
assets, and 0.10% of each other Portfolio's average daily net assets. The Mid
Cap Growth and Small Company Growth Portfolios did not conduct investment
operations during the fiscal year ended November 30, 1999. As a result, "Other
Operating Expenses" for those Portfolios are based on estimated amounts the
Portfolios expect to pay during the current fiscal year.
3 Set forth below are the management fees, distribution (12b-1) fees, other
expenses and total annual operating expenses actually paid (for share classes
that were outstanding) or which would have been paid (for share classes that
were not outstanding) during the fiscal year ended November 30, 1999 as a
result of fee waivers and expense reimbursements.
46
<PAGE>
Management Distribution Other Total Annual
Portfolio Fees (12b-1) Fees Expenses Operating Expenses
U.S. Government
Securities
Class A 0.25% 0.00% 0.11% 0.36%
Class C 0.25% 0.00% 0.35% 0.60%
Class D 0.25% 0.00% 0.50% 0.75%
Short-Intermediate
Bond
Class A 0.25% 0.00% 0.11% 0.36%
Class C 0.25% 0.00% 0.35% 0.60%
Class D 0.25% 0.00% 0.50% 0.75%
Intermediate Bond
Class A 0.25% 0.00% 0.11% 0.36%
Class C 0.25% 0.00% 0.35% 0.60%
Class D 0.25% 0.00% 0.50% 0.75%
U.S. Treasury Index
Class A 0.15% 0.00% 0.11% 0.26%
Class C 0.15% 0.00% 0.35% 0.50%
Class D 0.15% 0.00% 0.50% 0.65%
Bond
Class A 0.25% 0.00% 0.11% 0.36%
Class C 0.25% 0.00% 0.35% 0.60%
Class D 0.25% 0.00% 0.50% 0.75%
International Bond
Class A 0.70% 0.00% 0.26% 0.96%
Class C 0.70% 0.00% 0.50% 1.20%
Class D 0.70% 0.00% 0.65% 1.35%
Balanced
Class A 0.50% 0.00% 0.11% 0.61%
Class C 0.50% 0.00% 0.35% 0.85%
Class D 0.50% 0.00% 0.50% 1.00%
Equity Index
Class A 0.10% 0.00% 0.11% 0.21%
Class C 0.10% 0.00% 0.35% 0.45%
Class D 0.10% 0.00% 0.50% 0.60%
Diversified Growth
Class A 0.55% 0.00% 0.12% 0.67%
Class C 0.55% 0.00% 0.36% 0.91%
Class D 0.55% 0.00% 0.51% 1.06%
47
<PAGE>
Management Distribution Other Total Annual
Portfolio Fees (12b-1) Fees Expenses Operating Expenses
Focused Growth
Class A 0.80% 0.00% 0.12% 0.92%
Class C 0.80% 0.00% 0.36% 1.16%
Class D 0.80% 0.00% 0.51% 1.31%
Small Company Index
Class A 0.20% 0.00% 0.14% 0.34%
Class C 0.20% 0.00% 0.38% 0.58%
Class D 0.20% 0.00% 0.53% 0.73%
International Equity Index
Class A 0.25% 0.00% 0.28% 0.53%
Class C 0.25% 0.00% 0.52% 0.77%
Class D 0.25% 0.00% 0.67% 0.92%
International Growth
Class A 0.80% 0.00% 0.26% 1.06%
Class C 0.80% 0.00% 0.50% 1.30%
Class D 0.80% 0.00% 0.65% 1.45%
Set forth below are the estimated actual management fees, distribution (12b-1)
fees, other expenses and total annual operating expenses for the Mid Cap Growth
and Small Company Growth Portfolios for the current fiscal year as a result of
fee waivers and expense reimbursements.
Management Distribution Other Total Annual
Portfolio Fees (12b-1) Fees Expenses Operating Expenses
Mid Cap Growth
Class A 0.80% 0.00% 0.12% 0.92%
Class C 0.80% 0.00% 0.36% 1.16%
Class D 0.80% 0.00% 0.51% 1.31%
Small Company Growth
Class A 0.80% 0.00% 0.11% 0.91%
Class C 0.80% 0.00% 0.35% 1.15%
Class D 0.80% 0.00% 0.50% 1.30%
Fee waivers (and voluntary expense reimbursements, if applicable) may be
terminated at any time at the option of the Investment Advisers. If this occurs,
the Portfolios' total annual operating expenses may increase without shareholder
approval.
48
<PAGE>
EXAMPLE
The following Example is intended to help you compare the cost of investing in a
Portfolio (without fee waivers and expense reimbursements) with the cost of
investing in other mutual funds.
The Example assumes that you invest $10,000 in a Portfolio for the time periods
indicated (with reinvestment of all dividends and distributions) and then redeem
all of your shares at the end of those periods. The Example also assumes that
your investment has a 5% return each year and that a Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio 1 Year 3 Years 5 Years 10 Years
U.S. Government Securities
Class A $79 $246 $428 $954
Class C $103 $322 $558 $1,236
Class D $118 $368 $638 $1,409
Short-Intermediate Bond
Class A $78 $243 $422 $942
Class C $102 $318 $552 $1,225
Class D $117 $365 $633 $1,398
Intermediate Bond
Class A $82 $255 $444 $990
Class C $106 $331 $574 $1,271
Class D $121 $378 $654 $1,443
U.S. Treasury Index
Class A $79 $246 $428 $954
Class C $103 $322 $558 $1,236
Class D $118 $368 $638 $1,409
Bond
Class A $76 $237 $411 $918
Class C $100 $312 $542 $1,201
Class D $115 $359 $622 $1,375
International Bond
Class A $147 $456 $787 $1,724
Class C $171 $530 $913 $1,987
Class D $186 $576 $990 $2,148
Balanced
Class A $101 $315 $547 $1,213
Class C $125 $390 $676 $1,489
Class D $140 $437 $755 $1,657
49
<PAGE>
Portfolio 1 Year 3 Years 5 Years 10 Years
Equity Index
Class A $45 $141 $246 $555
Class C $69 $218 $379 $847
Class D $85 $265 $460 $1,025
Diversified Growth
Class A $98 $306 $531 $1,178
Class C $122 $381 $660 $1,455
Class D $137 $428 $739 $1,624
Focused Growth
Class A $128 $400 $692 $1,523
Class C $153 $474 $818 $1,791
Class D $168 $520 $897 $1,955
Mid Cap Growth
Class A $171 $530 N/A N/A
Class C $195 $603 N/A N/A
Class D $210 $649 N/A N/A
Small Company Index
Class A $83 $259 $450 $1,002
Class C $107 $334 $579 $1,283
Class D $122 $381 $660 $1,455
Small Company Growth
Class A $131 $409 N/A N/A
Class C $156 $483 N/A N/A
Class D $171 $530 N/A N/A
International Equity Index
Class A $93 $290 $504 $1,120
Class C $117 $365 $633 $1,398
Class D $132 $412 $713 $1,568
International Growth
Class A $133 $415 $718 $1,579
Class C $158 $490 $845 $1,845
Class D $173 $536 $923 $2,009
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Investment Advisers
The Northern Trust Company ("Northern"), an Illinois state-chartered bank and
member of the Federal Reserve System, serves as investment adviser for all
Portfolios except the U.S. Treasury Index, Equity Index, Small Company Index and
International Equity Index Portfolios. Northern Trust Quantitative Advisors,
Inc. ("NTQA"), an Illinois state-chartered trust company, serves as investment
adviser for the U.S. Treasury Index, Equity Index, Small Company Index and
International Equity Index Portfolios.
Northern and NTQA are referred to as the "Investment Advisers." The Investment
Advisers are located at 50 S. LaSalle Street, Chicago, IL 60675 and are
wholly-owned subsidiaries of Northern Trust Corporation, a bank holding company.
As of December 31, 1999, Northern Trust Corporation and its subsidiaries had
approximately $28.7 billion in assets, $21.4 billion in deposits and employed
over 8,500 persons.
Northern has for more than 100 years managed the assets of individuals,
charitable organizations, foundations and large corporate investors. Northern
and its affiliates administered in various capacities (including as master
trustee, investment manager or custodian) approximately $1.5 trillion of assets
as of December 31, 1999, including approximately $299.1 billion of assets for
which Northern and its affiliates had investment management responsibility.
Under its Advisory Agreement with the Trust, each Investment Adviser, subject to
the general supervision of the Trust's Board of Trustees, is responsible for
making investment decisions for the Portfolios for which it serves as adviser
and for placing purchase and sale orders for portfolio securities.
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As compensation for its advisory services and its assumption of related
expenses, each Investment Adviser is entitled to an advisory fee, computed daily
and payable monthly, at annual rates set forth in the table below (expressed as
a percentage of each Portfolio's respective average daily net assets). The table
also reflects the advisory fees (after voluntary fee waivers) paid by the
Portfolios for the fiscal year ended November 30, 1999.
Advisory Fee Paid
Contractual for Fiscal Year
Portfolio Rate Ended 11/30/99
- -------------------------------------------------------------
U.S. Government Securities 0.60% 0.25%
Short-Intermediate Bond 0.60% 0.25%
Intermediate Bond 0.60% 0.25%
U.S. Treasury Index 0.40% 0.15%
Bond 0.60% 0.25%
International Bond 0.90% 0.70%
Balanced 0.80% 0.50%
Equity Index 0.30% 0.10%
Diversified Growth 0.80% 0.55%
Focused Growth 1.10% 0.80%
Mid Cap Growth 1.10% N/A
Small Company Index 0.40% 0.20%
Small Company Growth 1.10% N/A
International Equity Index 0.50% 0.25%
International Growth 1.00% 0.80%
The difference, if any, between the contractual advisory fees and the actual
advisory fees paid by the Portfolios reflects the fact that the Investment
Advisers did not charge the full amount of the advisory fees to which they would
have been entitled. The Investment Advisers may discontinue or modify their
voluntary limitations in the future at their discretion.
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Portfolio Management
The Investment Advisers employ a team approach to the investment management of
the Portfolios. Below is information regarding the management of the actively
managed Portfolios.
Mark J. Wirth, Senior Vice President of Northern, is the management team leader
for the Bond Portfolio and the Short-Intermediate Bond Portfolio and has had
such responsibility for these Portfolios since 1993. Mr. Wirth joined Northern
in 1986 and during the past five years has managed various fixed income
portfolios.
Guy Williams, Vice President of Northern, is the management team leader for the
International Bond Portfolio. Mr. Williams has had such responsibility for the
Fund since September 1999. Mr. Williams joined Northern in 1999. From 1992 to
1999, he was a global fixed income manager for Paribas Asset Management.
The management team leader for the International Growth Portfolio is Robert A.
LaFleur, Senior Vice President of Northern. Mr. LaFleur has had such
responsibility since 1994. Mr. LaFleur joined Northern in 1982 and during the
past five years has managed various international equity portfolios.
The management team leaders for the U.S. Government Securities Portfolio are
Mark J. Wirth and Peter T. Marchese, Second Vice President of Northern. Messrs.
Wirth and Marchese have had such responsibility since 1998 and 1999,
respectively. Mr. Marchese joined Northern in 1990 and during the past five
years has managed various money market and fixed income portfolios.
The management team leaders for the Intermediate Bond Portfolio are Mark J.
Wirth and Steven M. Schafer, Vice President of Northern. Mr. Wirth has had such
responsibility since 1998 and Mr. Schafer has had such responsibility since
1997. Mr. Schafer joined Northern in 1988 and during the past five years has
managed various fixed income portfolios and served as credit analyst following
both industrial and utility companies.
The management team leaders for the Diversified Growth Portfolio are Jon D.
Brorson, Senior Vice President of Northern, and John J. Zielinski, Vice
President of Northern. Mr. Brorson has had such responsibility since 1996 and
Mr. Zielinski has had such responsibility since 1999. Mr. Brorson joined
Northern in 1996. From 1990 to 1996, he was with Hartline Investment Corp.,
where his primary responsibilities included portfolio management, investment
research, sales and trading. Mr. Zielinski joined Northern in 1980 and during
the past five years has managed various equity portfolios.
The management team leaders for the Focused Growth Portfolio are Jon D. Brorson
and Ken Turek, Vice President of Northern. Mr. Brorson has had such
responsibility since 1996. Mr. Turek has had such responsibility since 1999. Mr.
Turek joined Northern in 1997 and has managed equity investment portfolios for
institutional clients. From 1994 to 1997, Mr. Turek was the chief equity officer
of National Investment Services.
The management team leaders for the Balanced Portfolio are Monty M. Memler, Vice
President of Northern and John J. Zielinski. Mr. Memler has had such
responsibility since 1993. Mr. Zielinski has had such responsibility since 1999.
Mr. Memler joined Northern in 1986 and during the past five years has managed
various fixed income portfolios.
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The management team leader for the Small Company Growth Portfolio is David H.
Burshtan, Vice President of Northern. Mr. Burshtan has had such responsibility
since the Portfolio commenced operations in December 1999. Mr. Burshtan joined
Northern in 1999. From 1995 to 1999, Mr. Burshtan was a Portfolio manager for
various small cap mutual funds with Scudder Kemper Investments, Inc. From 1993
to 1995, Mr. Burshtan held a variety of analyst and portfolio management
positions with Northern.
The management team leader for the Mid Cap Growth Portfolio is Ken Turek. Mr.
Turek has had such responsibility since the Portfolio commenced operations in
December 1999.
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Other Portfolio Management Information
On September 2, 1997, the shareholders of the International Growth Portfolio
approved a new investment advisory agreement which would allow this Portfolio to
implement a "manager of managers" structure with Northern and one of its
affiliates, and would allow the Portfolio's investment advisers to enter into
sub-advisory agreements with respect to the Portfolio with other firms in the
future without further shareholder approval. Although the Securities and
Exchange Commission (the "SEC") has granted an exemptive order permitting the
manager of managers structure for the Portfolio, the structure will not be
implemented without final authorization by the Board of Trustees. At present, it
is uncertain when, or if, this structure will become effective.
Other Portfolio Services
Northern also serves as transfer agent ("Transfer Agent") and custodian for each
Portfolio. As Transfer Agent, Northern performs various administrative servicing
functions, and any shareholder inquiries should be directed to it. The fees that
Northern receives for its services in these capacities are described on page 40
under "Portfolio Fees and Expenses" and in the Statement of Additional
Information. Northern and PFPC Inc. ("PFPC"), serve as co-administrators for the
Portfolios. The fees that Northern and PFPC receive for their co-administrative
services are described on page 40 under "Portfolio Fees and Expenses."
55
<PAGE>
Purchasing and Selling Shares
PURCHASING SHARES
Institutional investors, acting on their own behalf or on behalf of their
customers, clients, employees, participants and others ("Customers"), may
purchase shares of the Portfolios through their institutional accounts at
Northern or an affiliate. They may also purchase shares directly from the Trust.
There is no sales charge imposed on purchases of shares. Institutional investors
include:
- - Northern and its affiliates;
- - Defined contribution plans having at least $30 million in assets or annual
contributions of at least $5 million; and
- - Other institutions and organizations.
The Portfolios currently offer a choice of three classes of shares to meet the
special needs of institutional investors ("Institutions").
Class A Shares are designed for Institutions that can obtain information about
their shareholder accounts and do not require the additional services available
to other classes.
Class C Shares are designed for Institutions that require the Transfer Agent and
a Servicing Agent to provide certain account-related services incident to
Customers being the beneficial owners of shares.
Class D Shares are designed for Institutions that require the Transfer Agent and
a Servicing Agent to provide them and their Customers with certain
account-related services and other information.
Different shareholder servicing and transfer agency fees are payable by each
class of shares (see "Portfolio Fees and Expenses" on page 40). In addition, any
person entitled to receive compensation for selling or servicing shares of a
Portfolio may receive different compensation with respect to one particular
class of shares over another in the same Portfolio.
OPENING
AN ACCOUNT
You may purchase shares of the Portfolios through your institutional account at
Northern (or an affiliate) or you may open an account directly with the Trust
with a minimum initial investment of $5 million in one or more Portfolios. There
is no minimum for subsequent investments.
Through an Institutional Account. If you are opening an institutional account at
Northern, a Northern representative can assist you with all phases of your
investment. To purchase shares through your account, contact your Northern
representative for further information.
Directly from the Trust. An Institution may open a shareholder account and
purchase shares directly from the Trust as described in this Prospectus.
By Mail
Read this prospectus carefully.
Complete and sign the new account application.
Include a certified corporate resolution
(or other acceptable evidence of authority).
Enclose a check or Federal Reserve draft payable to the specific Portfolio. If
investing in more than one Portfolio, please include a separate check for each.
Mail your check, corporate resolution and completed application to:
Northern Institutional Funds,
c/o The Northern Trust Company
P.O. Box 75943
Chicago, Illinois 60675-5943
All checks must be payable in U.S. dollars and drawn on a bank located in the
United States. Cash and third party checks are not acceptable.
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By Telephone
Read this prospectus carefully.
Call the Transfer Agent at 1-800-637-1380.
To open a new account please provide:
- - The name of the Portfolio in which you'd like to invest
- - The number of shares or dollar amount to be invested
- - The method of payment
To add to an existing account, please provide:
- - The Institution's name
- - Your Account Number
By Wire or Automated Clearing House Transfer ("ACH Transfer")
To open a new account:
Call the Transfer Agent at 1-800-637-1380 for instructions.
For more information about the purchase of shares, call the Transfer Agent at
1-800- 637-1380.
To add to an existing account:
Have your bank 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 No.)
(Reference Shareholder's Name)
SELLING
SHARES
Through an Institutional Account.
Institutions may sell (redeem) shares through their institutional account by
contacting their Northern account representative.
Directly through the Trust. Institutions that purchase shares directly from the
Trust may redeem their shares through the Transfer Agent in one of the following
ways:
By Mail Send a written request to:
Northern Institutional Funds
c/o The Northern Trust Company
P.O. Box 75943
Chicago, Illinois 60675-5943
The letter of instruction must include:
- - The signature of a duly authorized person
- - Your account number
- - The name of the Portfolio
- - The number of shares or the dollar amount to be redeemed
By Telephone
- - Call the Transfer Agent at 1-800-637-1380 for instructions
- - During periods of unusual economic or market activity, telephone redemptions
may be difficult to implement. In such event, shareholders should follow the
procedures outlined above under "Selling Shares - By Mail."
By Wire
- - Call the Transfer Agent at 1-800-637-1380 for instructions.
- - You must have given prior authorization for expedited wire redemption.
- - The minimum amount that may be redeemed by this method is $10,000.
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Account Policies and Other Information
Purchase and Redemption Minimums. There is a minimum initial investment of $5
million in one or more Portfolios. There is no minimum for subsequent
investments. A $10,000 minimum applies for redemptions by wire. The Trust
reserves the right to waive purchase and redemption minimums and to determine
the manner in which a minimum is satisfied.
Calculating Share Price. The Trust issues shares and redeems shares at net asset
value ("NAV"). The NAV for each share class of a Portfolio is calculated by
dividing the value of the Portfolio's net assets attributed to that class by the
number of outstanding shares of that class. The NAV for each class is calculated
as of 3:00 p.m., Chicago time, each Business Day. The NAV used in determining
the price of your shares is the one calculated after your purchase, exchange or
redemption order is received and accepted as described below.
U.S. and foreign securities held by a Portfolio generally are valued at their
market prices. Shares of an investment company held by a Portfolio are valued at
their net asset value. Any securities, including restricted securities, for
which market prices are not readily available are valued at fair value as
determined by the Investment Advisers. Short-term obligations held by a
Portfolio are valued at their amortized cost which, according to the Investment
Advisers, approximates market value.
A Portfolio may hold foreign securities that trade on weekends or other days
when the Portfolio does not price its shares. Therefore, the value of such
securities may change on days when shareholders will not be able to purchase or
redeem shares.
Timing of Purchase Requests.
Requests accepted by the Transfer Agent or other authorized intermediary by 3:00
p.m., Chicago time, on any Business Day will be executed the same day, at that
day's closing share price (plus any additional transaction fee) provided that
either:
- - The Transfer Agent receives the purchase price in Federal or other immediately
available funds prior to 3:00 p.m., Chicago time, on the same Business Day;
- - The order is accepted by an authorized intermediary and payment in Federal or
other immediately available funds is made on the next Business Day according
to procedures authorized by the Trust; or
- - Payment in Federal or other immediately available funds is received on the
next Business Day in an institutional account maintained with Northern or an
affiliate.
Orders received by the Transfer Agent or other authorized intermediary on a
non-Business Day or after 3:00 p.m. on a Business Day will be executed on the
next Business Day, at that day's closing share price (plus any additional
transaction fee), provided that payment is made as noted above. If an
Institution pays for shares by check, Federal funds generally will become
available within two Business Days after a purchase order is received.
In certain circumstances, the Trust may advance the time by which purchase
orders must be received. See "Early Closings" on page 61.
Additional Transaction Fee. Purchases of, and exchanges for, shares of the Small
Company Index and International Equity Index Portfolios require the payment of
an additional transaction fee. This fee equals 0.50% and 1.00%, respectively, of
the dollar amount purchased. It does not apply to reinvested dividends or
capital gains distributions.
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This transaction fee is not a sales charge. It is paid to the Portfolios and is
used to protect existing shareholders by offsetting the transaction costs
associated with new purchases of securities by the Portfolios. Because these
transaction costs are not paid out of their other assets, the Small Company
Index Portfolio and the International Equity Index Portfolio are expected to
track their respective indices more closely.
Tax Identification Number. Federal regulations require you to provide to the
Transfer Agent a taxpayer identification number when you open an account.
Purchase orders without such a number or an indication that a number has been
applied for will not be accepted. If you have applied for a number, you must
provide it to the Transfer Agent within 60 days of the date of the order.
In-Kind Purchases and Redemptions. The Trust reserves the right to accept
payment for shares in the form of securities that are permissible investments
for a Portfolio. The Trust also reserves the right to pay redemptions by a
distribution "in-kind" of securities (instead of cash) from a Portfolio. See the
Statement of Additional Information for further information about the terms of
these purchases and redemptions.
Miscellaneous Purchase Information.
- - Institutions are responsible for transmitting purchase orders to the Transfer
Agent and delivering required funds on a timely basis.
- - Institutions are responsible for all losses and expenses of a Portfolio in the
event of any failure to make payment according to the procedures outlined in
this Prospectus. Northern may redeem shares from any account it maintains to
protect the Portfolios and Northern against loss. In addition, a $20 charge
will be imposed if a check does not clear.
- - The Trust reserves the right to reject any purchase order. The Trust also
reserves the right to change or discontinue any of its purchase procedures.
Timing of Redemption and Exchange Requests. Redemption and exchange requests
received in good order by the Transfer Agent or other authorized intermediary by
3:00 p.m., Chicago time, on a Business Day will be executed on the same day. The
redemption or exchange will be effected at that day's closing share price (plus
any additional transaction fee, in the case of an exchange). Redemption proceeds
will normally be sent or credited on the next Business Day.
Orders received in good order on a non-Business Day or after 3:00 p.m., Chicago
time, on a Business Day will be executed the next Business Day, at that day's
closing share price (plus any additional transaction fee, in the case of an
exchange). The proceeds will normally be sent or credited the second Business
Day. We consider requests to be in "good order" when all required documents are
properly completed, signed and received, including a certified corporate
resolution or other acceptable evidence of authority.
In certain circumstances, the Trust may advance the time by which redemption and
exchange orders must be received. See "Early Closings" on page 61.
Miscellaneous Redemption Information. All redemption proceeds will be sent by
check unless the Transfer Agent is directed otherwise. Redemption proceeds may
also be wired. A redemption request may not be processed if a shareholder has
failed to submit a completed and properly executed new account application,
including a corporate resolution or other acceptable evidence of authority.
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- - The Trust reserves the right to defer crediting, sending or wiring redemption
proceeds for up to 7 days after receiving the redemption order if, in its
judgment, an earlier payment could adversely affect a Portfolio.
- - If you are redeeming recently purchased shares, your redemption request may
not be honored until your check or electronic transaction has cleared. This
may delay your transaction for up to 15 days.
- - Institutions are responsible for transmitting redemption orders to the
Transfer Agent and crediting their Customers' accounts with redemption
proceeds on a timely basis.
- - Redemption requests by mail must be signed by a person authorized by
acceptable documentation on file with the Transfer Agent.
- - The Trust reserves the right to redeem shares held by any shareholder who
provides incorrect or incomplete account information or when such involuntary
redemptions are necessary to avoid adverse consequences to the Trust and its
shareholders.
- - The Trust may require any information reasonably necessary to ensure that a
redemption has been duly authorized. n The Trust reserves the right to change
or discontinue any of its redemption procedures.
Exchange Privileges. Institutions and their Customers (to the extent permitted
by their account agreements) may exchange shares of a Portfolio for the same
class of shares of another Portfolio. The registration of both accounts involved
must be identical. A $1,000 minimum investment applies. An exchange is a
redemption of shares of one Portfolio and the purchase of shares of another
Portfolio. It is considered a taxable event and may result in a gain or loss.
The Trust reserves the right to change or discontinue the exchange privilege at
any time upon 60 days written notice to shareholders and to reject any exchange
request. Exchanges are only available in states where an exchange can legally be
made. Before making an exchange you should read the prospectus for the shares
you are acquiring.
Telephone Transactions. For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, the Transfer Agent has adopted
procedures in an effort to establish reasonable safeguards against fraudulent
telephone transactions. If reasonable measures are taken to verify that
telephone instructions are genuine, the Trust and its service providers will not
be responsible for any loss resulting from fraudulent or unauthorized
instructions received over the telephone. In these circumstances, shareholders
will bear the risk of loss. During periods of unusual market activity, you may
have trouble placing a request by telephone. In this event, consider sending
your request in writing.
The proceeds of redemption orders received by telephone will be sent by check,
wire or transfer according to proper instructions. All checks will be made
payable to the shareholder of record and mailed only to the shareholder's
address of record.
The Trust reserves the right to refuse a telephone redemption.
Making Changes to Your Account Information. You may make changes to wiring
instructions, address of record, or other account information only in writing.
These instructions must be accompanied by a certified corporate resolution,
signature guarantee from an institution participating in the Stock Transfer
Agency Medallion Program ("STAMP"), or other acceptable evidence of authority.
In accordance with SEC regulations, the Trust and Transfer Agent may charge a
shareholder reasonable costs in locating a shareholder's current address.
Business Day. A "Business Day" is each Monday through Friday when the New York
Stock Exchange (the "Exchange") is open for business. A "Business Day" does not
include a holiday observed by the Exchange. In 2000 these days are: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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Early Closings. The Portfolios reserve the right to cease, or to advance the
time for, accepting purchase, redemption or exchange orders for same Business
Day credit when Northern or the Exchange closes early as a result of unusual
weather or other conditions. They also reserve this right when The Bond Market
Association recommends that securities markets close or close early.
Authorized Intermediaries. The Trust may authorize certain financial
intermediaries (including banks, trust companies, brokers and investment
advisers), which provide recordkeeping, reporting and processing services, to
accept purchase, redemption and exchange orders from their Customers on behalf
of the Trust. They may also designate other intermediaries to accept such
orders, if approved by the Trust. Authorized intermediaries are responsible for
transmitting orders and delivering funds on a timely basis. A Portfolio will be
deemed to have received an order when the order is accepted by the authorized
intermediary on a Business Day, and the order will be priced at the Portfolio's
per share NAV next determined.
Servicing Agents. Certain Institutions may perform (or arrange to have
performed) various administrative support services for Customers who are the
beneficial owners of Class C or D shares through agreements with the Trust
("Service Agents"). These agreements are permitted under the Trust's Shareholder
Servicing Plan. The level of support services required by an Institution and its
Customers generally will determine whether they purchase Class A, C or D shares.
Administrative support services may include:
- - processing purchase and redemption requests from investors;
- - placing net purchase and redemption orders with the 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 shares.
Servicing Agents will receive fees from the Portfolios for such services at an
annual rate of up to 0.15% and 0.25% of the average daily net asset value of
Class C and Class D shares, respectively. These fees will be borne exclusively
by the beneficial owners of Class C and D shares. Please note that Northern and
NTQA may also provide compensation to certain dealers and other financial
intermediaries who provide services to their Customers who invest in the Trust
or whose Customers purchase significant amounts of a Portfolio's shares. 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 earned by Northern and NTQA as
Investment Advisers (after adjustments). This additional compensation will be
paid by Northern, NTQA or their affiliates and will not represent an additional
expense to the Trust or its shareholders.
Customers purchasing shares through an Institution should read their account
agreements carefully. An Institution's requirements may differ from those listed
in this Prospectus. An Institution may also impose account charges, such as
asset allocation fees, account maintenance fees, and other charges that will
reduce the net return on an investment in a Portfolio. If a Customer has agreed
with a particular Institution to maintain a minimum balance with the Institution
and the balance falls below this minimum, the Customer may be required to redeem
all or a part of his investment in a Portfolio.
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 shares. 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.
State securities laws regarding the registration of dealers may differ from
Federal law. As a result, Institutions investing in the Portfolios on behalf of
their Customers may be required to register as dealers.
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Shareholder Communications.
Shareholders of record will be provided each year with a semiannual report
showing portfolio investments and other information as of May 31 and, after the
close of the Portfolio's fiscal year on November 30, with an annual report
containing audited financial statements. If you have consented to the delivery
of a single copy of the shareholder reports, prospectuses or (if and when
permitted by law) proxy or information statements to all shareholders who share
the same mailing address with your account, you may revoke your consent at any
time by contacting the Northern Institutional Funds Center by phone at (800)
637-1380 or by mail at the Northern Institutional Funds, P.O. Box 75943,
Chicago, IL 60675.
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Dividends and Distributions
Dividends and capital gain distributions of each Portfolio are automatically
reinvested in additional shares of the same Portfolio without any sales charge
or additional purchase price amount.
You may, however, elect to have dividends or capital gain distributions (or
both) paid in cash or reinvested in the same class of shares of another
Portfolio at their net asset value per share (plus an additional purchase price
amount equal to 0.50% and 1.00% of the amount invested in the case of the Small
Company Index Portfolio and International Equity Index Portfolio, respectively).
If you would like to receive dividends or distributions in cash or have them
reinvested in another Portfolio, you must notify the Transfer Agent in writing
at least two days before the dividend or distribution record date. Dividends and
distributions may only be reinvested in a Portfolio in which you maintain an
account.
The following table summarizes the general distribution policies for each of the
Portfolios:
Dividends, Capital Gains,
if any, if any,
Declared Declared
Portfolio and Paid and Paid
- ----------------------------------------------------------------
U.S. Government Securities Monthly Annually
Short-Intermediate Bond Monthly Annually
Intermediate Bond Monthly Annually
U.S. Treasury Index Monthly Annually
Bond Monthly Annually
International Bond Quarterly Annually
Balanced Quarterly Annually
Equity Index Quarterly Annually
Diversified Growth Annually Annually
Focused Growth Annually Annually
Mid Cap Growth Annually Annually
Small Company Index Annually Annually
Small Company Growth Annually Annually
International Equity Index Annually Annually
International Growth Annually Annually
A Portfolio with an annual dividend or distribution policy may, in some years,
make additional dividends or distributions to the extent necessary for the
Portfolio to avoid incurring unnecessary tax liabilities.
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Tax Considerations
Each Portfolio intends to qualify as a regulated investment company for Federal
tax purposes, and to distribute to shareholders substantially all of its net
investment income and net capital gain. The Portfolios' dividends and
distributions will be taxable to you for Federal, state and local income tax
purposes, unless you have a tax-advantaged account. Dividends and distributions
are taxable whether they are received in cash or reinvested in Portfolio shares.
In general, distributions attributable to interest, dividend, certain foreign
exchange gain and short-term capital gain income of the Portfolios are taxable
to you as ordinary income. Distributions attributable to any excess of net
long-term capital gains of a Portfolio over net short-term capital losses are
generally taxable to you as long-term capital gains. This is true no matter how
long you own your shares.
There are certain tax requirements that the Portfolios must follow in order to
avoid Federal taxation. In their efforts to adhere to these requirements, the
Portfolios may have to limit their investment activity in some types of
instruments.
A portion of dividends paid by the Balanced and Equity Portfolios may qualify
for the dividends-received deduction for corporations. It is not expected that
any dividends paid by the International Equity Index and Fixed Income Portfolios
will qualify for this deduction.
The sale of Portfolio shares is a taxable event on which a gain or loss may be
recognized. For tax purposes, an exchange is considered the same as a sale. The
amount of gain or loss is based on the difference between your tax basis in the
Portfolio shares and the amount you receive for them upon disposition.
Generally, you will recognize long-term capital gain or loss if you have held
your Portfolio shares for over twelve months at the time you sell or exchange
them. Shares held six months or less may also generate long-term capital loss to
the extent of any capital gains distributions received on the shares while they
were held by you.
TIMING
Dividends and distributions from each Portfolio will generally be taxable to you
in the tax year in which they are paid, with one exception. Dividends and
distributions declared by a Portfolio in October, November or December and paid
in January are taxed as though they were paid by December 31.
Every year, the Trust will send you information detailing the amount of ordinary
income and capital gains distributed to your account for the previous year.
Effect of foreign taxes. So long as more than 50% of the value of the total
assets of the International Bond, International Growth and International Equity
Index Portfolios consists of stock or securities (including debt securities) of
foreign corporations at the close of a taxable year, these Portfolios may elect,
for Federal income tax purposes, to treat certain foreign taxes paid by them,
including generally any withholding and other foreign income taxes, as paid by
their shareholders. Should the Portfolios make this election, the amount of such
foreign taxes paid by the Portfolios will be included in their shareholders'
income pro rata (in addition to taxable distributions actually received by
them), and such shareholders will be entitled either (a) to credit their
proportionate amounts of such taxes against their Federal income tax
liabilities, or (b) to deduct such proportionate amounts from their Federal
taxable income under certain circumstances.
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TAX EFFECT
OF "BUYING
A DIVIDEND"
A Portfolio's share price may, at any time, reflect undistributed capital gains
or income and unrealized appreciation. When these amounts are distributed, they
will be taxable to you. For this reason, you should be especially mindful that
if you buy shares on or just before the record date of a dividend or capital
gains distribution, you will pay the full price for the shares and then receive
back a portion of the money you have just invested in the form of a taxable
dividend or capital gain.
Shareholders who are nonresident aliens, foreign trusts or estates, or foreign
corporations or partnerships, may be subject to different United States Federal
income tax treatment. Your investment in the Portfolios could have additional
tax consequences. You should consult your tax professional for information
regarding all tax consequences applicable to your investments in the Portfolios.
More tax information is provided in the Statement of Additional Information.
This short summary is not intended as a substitute for careful tax planning.
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Risks, Securities, Techniques and
Financial Information
This section takes a closer look at some of the Portfolios' principal
investment strategies and related risks. It also explores the various investment
securities and techniques that the investment management team may use. The
Portfolios may invest in other securities and are subject to further
restrictions and risks which are described in the Statement of Additional
Information.
ADDITIONAL
INFORMATION
OF INVESTMENT
OBJECTIVES,
PRINCIPAL
INVESTMENT
STRATEGIES AND
RELATED RISKS
Investment Objectives. The investment objective of each of the following
Portfolios may be changed by the Trust's Board of Trustees without shareholder
approval: Intermediate Bond Portfolio, Mid Cap Growth Portfolio and Small
Company Growth Portfolio. Shareholders will, however, be notified of any
changes. Any such change may result in a Portfolio having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Portfolio. The investment
objectives of the other Portfolios may not be changed without shareholder
approval.
Derivatives. Each Portfolio may purchase certain "derivative" instruments. A
derivative is a financial instrument whose value is derived from - or based upon
- - the performance of underlying assets, interest or currency exchange rates, or
indices. Many types of instruments representing a wide range of potential risks
and rewards are derivatives, including futures contracts, options, interest rate
and currency swaps, equity swaps, structured securities, 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 leveraged "inverse floaters").
Investment strategy. A Portfolio will invest in derivatives only if the
potential risks and rewards are consistent with the Portfolio's objective,
strategies and overall risk profile. The Portfolios may use derivatives for
hedging purposes to offset a potential loss in one position by establishing an
interest in an opposite position. The Portfolios may also use derivatives for
speculative purposes to invest for potential income or capital gain.
Special risks. Engaging in derivative transactions involves special risks,
including (a) market risk that the Portfolio's derivatives position will lose
value; (b) credit risk that the counterparty to the transaction will default;
(c) leveraging risk that the value of the derivative instrument will decline
more than the value of the assets on which it is based; (d) illiquidity risk
that a Portfolio will be unable to sell its position because of lack of market
depth or disruption; (e) pricing risk that the value of a derivative instrument
will be difficult to determine; and (f) operations risk that loss will occur as
a result of inadequate systems or human error. Many types of derivatives have
been recently developed and have not been tested over complete market cycles.
For these reasons, a Portfolio may suffer a loss whether or not the analysis of
the investment management team is accurate.
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Structured Securities. The value of the principal of and/or interest on such
securities is determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The interest
rate or the principal amount payable upon maturity or redemption may be
increased or decreased depending upon changes in the applicable Reference.
Investment strategy. Each Portfolio may invest in structured securities to
the extent consistent with its investment objective.
Special risks. The terms of some structured securities may provide that in
certain circumstances no principal is due at maturity and, therefore, a
Portfolio could suffer a total loss of its investment. Structured
securities may be positively or negatively indexed, so that appreciation of
the Reference may produce an increase or decrease in the interest rate or
value of the security at maturity. In addition, changes in the interest
rates or the value of the security at maturity may be a multiple of changes
in the value of the Reference. Consequently, structured securities may
entail a greater degree of market risk than other types of securities.
Structured securities may also be more volatile, less liquid and more
difficult to accurately price than less complex securities due to their
derivative nature.
Foreign Investments. Foreign securities include direct investments in non-U.S.
dollar-denominated securities traded outside of the United States and
dollar-denominated securities of foreign issuers traded in the United States.
Foreign securities also include indirect investments such as American Depository
Receipts ("ADRs"), European Depository Receipts ("EDRs") and Global Depository
Receipts ("GDRs"). ADRs are U.S. dollar-denominated receipts representing shares
of foreign-based corporations. ADRs are issued by U.S. banks or trust companies,
and entitle the holder to all dividends and capital gains that are paid out on
the underlying foreign shares. EDRs and GDRs are receipts issued by non-U.S.
financial institutions that often trade on foreign exchanges. They represent
ownership in an underlying foreign or U.S. security and are generally
denominated in a foreign currency.
Investment strategy. The International Bond, International Equity Index and
International Growth Portfolios will invest a substantial portion of their
total assets in foreign securities. Each of the Short-Intermediate Bond,
Bond, Intermediate Bond, Balanced, Diversified Growth, Focused Growth,
Small Company Growth and Mid Cap Growth Portfolios may invest up to 25% of
their total assets in foreign securities, including ADRs, EDRs and GDRs.
These Portfolios may also invest in foreign time deposits and other
short-term instruments.
The International Growth and International Bond Portfolios may invest more than
25% of their total assets in the securities of issuers located in Japan, the
United Kingdom, France, Germany or Switzerland because the securities markets in
those countries are highly developed, liquid and subject to extensive
regulation. The International Equity Index Portfolio invests in countries
according to their weightings in the EAFE(R) Index.
Special risks. Foreign securities involve special risks and costs. Foreign
securities, and in particular foreign debt securities, are sensitive to
changes in interest rates. In addition, investment in the securities of
foreign governments involves the risk that foreign governments may default
on their obligations or may otherwise not respect the integrity of their
debt. 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
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events which could otherwise affect the value of a 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 results in an
increase in value of a foreign currency-denominated security in terms of
U.S. dollars. A decline in the value of the foreign currency relative to
the U.S. dollar generally results in a decrease in value of a foreign
currency-denominated security.
Investment in foreign securities may involve 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.
Additional risks are involved when 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. In
general, the securities markets of these countries are less liquid, are
subject to greater price volatility, have smaller market capitalizations
and have problems with securities registration and custody. In addition,
because the securities settlement procedures are less developed in these
countries, a Portfolio may be required to deliver securities before
receiving payment and may also be unable to complete transactions during
market disruptions. As a result of these and other risks, investments in
these countries generally present a greater risk of loss to the Portfolios.
While the Portfolios' investments may, if permitted, be denominated in
foreign currencies, the portfolio securities and other assets held by the
Portfolios are valued in U.S. dollars. Currency exchange rates may
fluctuate significantly over short periods of time causing a 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. To the extent that a
Portfolio is invested in foreign securities while also maintaining currency
positions, it may be exposed to greater combined risk. The Portfolios'
respective net currency positions may expose them to risks independent of
their securities positions.
The introduction of a single currency, the euro, on January 1, 1999 for
participating nations in the European Economic and Monetary Union presents
unique uncertainties, including the legal treatment of certain outstanding
financial contracts after January 1, 1999 that refer to existing currencies
rather than the euro; the establishment and maintenance of exchange rates for
currencies being converted into the euro; the fluctuation of the euro relative
to non-euro currencies during the transition period from January 1, 1999 to
December 31, 2001 and beyond; whether the interest rate, tax and labor regimes
of European countries participating in the euro will converge over time; and
whether the conversion of the currencies of other countries in the European
Union ("EU"), such as the United Kingdom and Denmark, into the euro
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and the admission of other non-EU countries such as Poland, Latvia and Lithuania
as members of the EU may have an impact on the euro. These or other factors,
including political and economic risks, could cause market disruptions, and
could adversely affect the value of securities held by the Portfolios. Because
of the number of countries using this single currency, a significant portion of
the assets of the International Equity Index, International Growth and
International Bond Portfolios may be denominated in the euro.
Investment Grade Securities. A security is considered investment grade if, at
the time of purchase, it is rated:
- - BBB or higher by Standard and Poor's Ratings Services ("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 IBCA Inc. ("Fitch").
A security will be considered investment grade if it receives one of the above
ratings, even if it receives a lower rating from other rating organizations.
Investment strategy. Each Portfolio may invest in fixed income and
convertible securities to the extent consistent with its investment
objective and policies. Except as stated in the section entitled
"Non-Investment Grade Securities," these securities will generally be rated
investment grade. The Portfolios may also invest in unrated securities if
the Investment Adviser believes they are comparable in quality.
Special risks. Although securities rated BBB by S&P, Duff or Fitch, or Baa
by Moody's are considered investment grade, they have certain speculative
characteristics. Therefore, they may be subject to a higher risk of default
than obligations with higher ratings. Subsequent to its purchase by a
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.
The Investment Adviser will consider such an event in determining whether
the Portfolio should continue to hold the security.
Non-Investment Grade Securities. Non-investment grade fixed income and
convertible securities (sometimes referred to as "junk bonds") are generally
rated BB or below by S&P, Duff or Fitch, or Ba by Moody's.
Investment strategy. All of the Portfolios, except the U.S. Government
Securities, Equity Index, Small Company Index and U.S. Treasury Index
Portfolios, may invest up to 15% of their total assets in non-investment
grade securities when the investment management team determines that such
securities are desirable in light of the Portfolios' investment objectives
and portfolio mix.
Special risks. Non-investment grade securities are subject to greater risk
than investment grade securities. The market value of these low-rated
securities tends to be more sensitive to individual corporate developments
and changes in interest rates and economic conditions than higher-rated
securities. In addition, they generally present a higher degree of credit
risk. Issuers of low-rated securities are often highly leveraged, so their
ability to repay their debt during an economic downturn or periods of
rising interest rates may be impaired. The risk of loss due to default by
these issuers is also greater because low-rated securities generally are
unsecured and are often subordinated to the rights of other creditors of
the issuers of such securities.
The secondary market for lower quality securities is concentrated in
relatively few market makers and is dominated by institutional investors.
Accordingly, the secondary market for such securities is not as liquid as,
and is more volatile than, the secondary market for higher quality secu-
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<PAGE>
rities. In addition, market trading volume for these securities is
generally lower and the secondary market for such securities could contract
under adverse market or economic conditions, independent of any specific
adverse changes in the condition of a particular issuer. These factors may
have an adverse effect on the market price and a Portfolio's ability to
dispose of particular portfolio investments. A less developed secondary
market may also make it more difficult for a Portfolio to obtain precise
valuations of the high yield securities in its portfolio.
Investments in lower quality securities, whether rated or unrated, will be
more dependent on the Investment Adviser's credit analysis than would be
the case with investments in higher quality securities.
Small Company Investments. Investments in small capitalization companies involve
greater risk and portfolio price volatility than investments in larger
capitalization stocks. Among the reasons for the greater price volatility of
these investments are the less certain growth prospects of smaller firms and the
lower degree of liquidity in the markets for such securities. Small
capitalization companies may be thinly traded and may have to be sold at a
discount from current market prices or in small lots over an extended period of
time. Because of the lack of sufficient market liquidity, a Portfolio may incur
losses because it will be required to effect sales at a disadvantageous time and
only then at a substantial drop in price. Small capitalization companies include
"unseasoned" issuers that do not have an established financial history; often
have limited product lines, markets or financial resources; may depend on or use
a few key personnel for management; and may be susceptible to losses and risks
of bankruptcy. Transaction costs for these investments are often higher than
those of larger capitalization companies. Investments in small capitalization
companies may be more difficult to price precisely than other types of
securities because of their characteristics and lower trading volumes.
Temporary Investments. Short-term obligations refer to U.S. government
securities, high-quality money market instruments (including commercial paper
and obligations of foreign and domestic banks such as certificates of deposit,
bank and deposit notes, bankers' acceptances and fixed time deposits) and
repurchase agreements with maturities of 13 months or less. Generally, these
obligations are purchased to provide stability and liquidity to a Portfolio.
Investment strategy. Each Portfolio may invest all or any portion of its
assets in short-term obligations pending investment, to meet anticipated
redemption requests or as a temporary defensive measure in response to
adverse market or economic conditions (except for the U.S. Treasury Index,
Equity Index, Small Company Index and International Equity Index Portfolios
which generally will not invest in these securities as part of a temporary
defensive strategy to protect against potential stock market declines).
Special risks. A Portfolio may not achieve its investment objective when
its assets are invested in short-term obligations.
Portfolio Turnover. The investment management team will not consider the
portfolio turnover rate a limiting factor in making investment decisions for a
Portfolio. A high rate of portfolio turnover (100% or more) may involve higher
brokerage commissions and other transaction costs, which could reduce a
Portfolio's return. It may also result in higher short-term capital gains that
are taxable to shareholders. See "Financial Information" for the Portfolios'
historical portfolio turnover rates. The Trust expects that the annual turnover
rate of the Mid Cap Growth and Small Company Growth Portfolios will generally
not exceed 125% and 200%, respectively.
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Maturity Risk. Each Fixed Income Portfolio will normally maintain the
dollar-weighted average maturity of its portfolio within a specified range.
However, the maturities of certain instruments, such as variable and floating
rate instruments, are subject to estimation. In addition, in calculating average
weighted maturities, the maturity of asset-backed securities will be based on
estimates of average life. As a result, the Portfolios cannot guarantee that
these estimates will, in fact, be accurate or that their average maturities will
remain within their specified limits.
Tracking Risk. The Equity Index, Small Company Index, International Equity Index
and U.S. Treasury Index Portfolios (the "Index Portfolios") seek to track the
performance of their respective benchmark indices.
Investment strategy. Under normal market conditions, the Investment Adviser
expects the quarterly performance of the Index Portfolios, before expenses,
will track the performance of their respective benchmarks within a .95
correlation coefficient.
Special risks. The Index Portfolios are subject to the risk of tracking
variance. Tracking variance may result from share purchases and
redemptions, transaction costs, expenses and other factors. These may
prevent a Portfolio from achieving its investment objective.
ADDITIONAL
DESCRIPTION
OF SECURITIES
AND COMMON
INVESTMENT
TECHNIQUES
Asset-Backed Securities. Asset-backed securities are sponsored by entities such
as government agencies, banks, financial companies and commercial or industrial
companies. They represent interests in pools of mortgages or other cash-flow
producing assets such as automobile loans, credit card receivables and other
financial assets. In effect, these securities "pass through" the monthly
payments that individual borrowers make on their mortgages or other assets net
of any fees paid to the issuers. Examples of these include guaranteed mortgage
pass-through certificates, collateralized mortgage obligations ("CMOs") and real
estate mortgage investment conduits ("REMICs").
Investment strategy. The Short-Intermediate Bond, Bond, Intermediate Bond,
International Bond and Balanced Portfolios may purchase various types of
asset-backed securities. The U.S. Government Securities Portfolio may only
purchase mortgage-backed securities that are issued by an agency of the
U.S. Government. The Portfolios will normally invest in asset-backed
securities rated investment grade (rated BBB or better by S&P, Duff or
Fitch, or Baa or better by Moody's) at the time of purchase. The Portfolios
may also invest in unrated mortgage-backed securities which Northern
believes are of comparable quality. The Portfolios will not purchase
non-mortgage asset-backed securities that are unrated by S&P, Duff, Fitch
or Moody's.
Special risks. In addition to credit and market risk, asset-backed
securities involve prepayment risk because the underlying assets (loans)
may be prepaid at any time. The value of these securities may also change
because of actual or perceived changes in the creditworthiness of the
originator, the servicing agent, the financial institution providing the
credit support, or the counterparty. 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. 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
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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. Automobile receivables
are subject to the risk that the trustee for the holders of the automobile
receivables may not have an effective security interest in all of the
obligations backing the receivables.
Borrowings and Reverse Repurchase Agreements. The Portfolios may borrow money
from banks and enter into reverse repurchase agreements with banks and other
financial institutions. Reverse repurchase agreements involve the sale of
securities held by a Portfolio subject to the Portfolio's agreement to
repurchase them at a mutually agreed upon date and price (including interest).
Investment strategy. Each Portfolio may borrow and enter into reverse
repurchase agreements in amounts not exceeding one-third of its total
assets (including the amount borrowed). Each Portfolio may also borrow up
to an additional 5% of its total assets for temporary purposes. The
Portfolios may enter into reverse repurchase agreements when the investment
management team expects that the interest income to be earned from the
investment of the transaction proceeds will be greater than the related
interest expense.
Special risks. Borrowings and reverse repurchase agreements involve
leveraging. If the securities held by the Portfolios decline in value while
these transactions are outstanding, the net asset value of the Portfolios'
outstanding shares will decline in value by proportionately more than the
decline in value of the securities. In addition, reverse repurchase
agreements involve the risks that the interest income earned by a Portfolio
(from the investment of the proceeds) will be less than the interest
expense of the transaction, that the market value of the securities sold by
a Portfolio will decline below the price the Portfolio is obligated to pay
to repurchase the securities, and that the securities may not be returned
to the Portfolio.
Convertible Securities. A convertible security is a bond or preferred stock that
may be converted (exchanged) into the common stock of the issuing company within
a specified time period for a specified number of shares. They offer the
Portfolios a way 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.
Investment strategy. The Short-Intermediate Bond, Bond, Intermediate Bond,
International Bond, Balanced, Diversified Growth, Focused Growth, Small
Company Growth, Mid Cap Growth, International Growth and International
Equity Index Portfolios may each acquire convertible securities. These
securities are subject to the same rating requirements as fixed income
securities held by a Portfolio.
Custodial Receipts for Treasury Securities. Custodial receipts are
participations in trusts that hold U.S. Treasury securities and are sold under
names such as TIGRs and CATS. Like other stripped obligations, they entitle the
holder to future interest or principal payments on the U.S. Treasury securities.
Investment strategy. To the extent consistent with their respective
investment objectives, the Portfolios may invest a portion of their assets
in custodial receipts. The U.S. Government Securities and U.S. Treasury
Index Portfolios will not invest more than 35% of the value of their total
assets in custodial receipts.
Special risks. Like other stripped obligations, custodial receipts may be
subject to greater price volatility than ordinary debt obligations because
of the way in which
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their principal and interest are returned to investors.
Equity Swaps. Equity swaps allow the parties to the swap agreement to exchange
components of return on one equity investment (e.g., a basket of equity
securities or an index) for a component of return on another non-equity or
equity investment, including an exchange of differential rates of return.
Investment strategy. The Balanced Portfolio and the Equity Portfolios may
invest in equity swaps. Equity swaps may be used to invest in a market
without owning or taking physical custody of securities in circumstances
where direct investment may be restricted for legal reasons or is otherwise
impractical. Equity swaps may also be used for other purposes, such as
hedging or seeking to increase total return.
Special risks. Equity swaps are derivative instruments and their values can
be very volatile. To the extent that the investment management team does
not accurately analyze and predict the potential relative fluctuation on
the components swapped with the other party, a Portfolio may suffer a loss.
The value of some components of an equity swap (such as the dividends on a
common stock) may also be sensitive to changes in interest rates.
Furthermore, during the period a swap is outstanding, a Portfolio may
suffer a loss if the counterparty defaults.
Exchange Rate-Related Securities. Exchange rate-related securities represent
certain foreign debt obligations whose principal values are linked to a foreign
currency but which are repaid in U.S. dollars.
Investment strategy. The Short-Intermediate Bond, Bond, Intermediate Bond,
International Bond and Balanced Portfolios may invest in exchange
rate-related securities.
Special risks. The principal payable on an exchange rate-related security
is subject to currency risk. In addition, the potential illiquidity and
high volatility of the foreign exchange market may make exchange
rate-related securities difficult to sell prior to maturity at an
appropriate price.
Forward Currency Exchange Contracts.
A forward currency exchange contract is an obligation to exchange one currency
for another on a future date at a specified exchange rate.
Investment strategy. The Short-Intermediate Bond, Bond, Intermediate Bond,
International Bond, Balanced, Diversified Growth, Focused Growth, Small
Company Growth, Mid Cap Growth, International Growth and International
Equity Index Portfolios may enter into forward currency exchange contracts
for hedging purposes and to help reduce the risks and volatility caused by
changes in foreign currency exchange rates. The International Bond and
International Growth Portfolios may also enter into these contracts for
speculative purposes (i.e., to increase total return) or for cross-hedging
purposes. Foreign currency exchange contracts will be used at the
discretion of the investment management team, and no Portfolio is required
to hedge its foreign currency positions.
Special risks. Forward foreign currency contracts are privately negotiated
transactions, and can have substantial price volatility. As a result, they
offer less protection against default by the other party than is available
for instruments traded on an exchange. When used for hedging purposes, they
tend to limit any potential gain that may be realized if the value of a
Portfolio's foreign holdings increases because of currency fluctuations.
When used for speculative purposes, forward currency exchange contracts may
result in losses that would not otherwise be incurred.
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Futures Contracts and Related Options. A futures contract is a type of
derivative instrument that obligates the holder to buy or sell an asset in the
future at an agreed upon price. For example, a futures contract may obligate a
Portfolio, at maturity, to take or make delivery of certain domestic or foreign
securities, the cash value of a securities index or a stated quantity of a
foreign currency. When a 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 a
Portfolio sells an option on a futures contract, it becomes obligated to
purchase or sell a futures contract if the option is exercised.
Investment strategy. Each Portfolio may invest in futures contracts and
options on futures contracts on domestic or foreign exchanges or boards of
trade. They may be used for hedging purposes, to increase total return or
to maintain liquidity to meet potential shareholder redemptions, invest
cash balances or dividends or minimize trading costs.
The value of a Portfolio's futures contracts may equal up to 100% of its
total assets. However, a Portfolio will not purchase or sell a futures
contract unless, after the transaction, the sum of the aggregate amount of
margin deposits on its existing futures positions and the amount of
premiums paid for related options used for non-hedging purposes is 5% or
less of its total assets.
Special risks. Futures contracts and options present the following risks:
imperfect correlation between the change in market value of a Portfolio's
securities and the price of futures contracts and options; the possible
inability to close a futures contract when desired; losses due to
unanticipated market movements which are potentially unlimited; and the
possible inability of the investment management team to correctly predict
the direction of securities prices, interest rates, currency exchange rates
and other economic factors. Foreign exchanges or boards of trade generally
do not offer the same protections as U.S. exchanges.
Illiquid or Restricted Securities. Illiquid securities include repurchase
agreements and time deposits with notice/termination dates of more than seven
days, certain variable amount master demand notes that cannot be called within
seven days, certain insurance funding agreements (see below), certain unlisted
over-the-counter options and other securities that are traded in the U.S. but
are subject to trading restrictions because they are not registered under the
Securities Act of 1933, as amended (the "1933 Act").
Investment strategy. Each Portfolio may invest up to 15% of its net assets
in securities that are illiquid. If otherwise consistent with their
investment objectives and policies, the Portfolios may purchase commercial
paper issued pursuant to Section 4(2) of the 1933 Act and domestically
traded securities that are not registered under the 1933 Act but can be
sold to "qualified institutional buyers" in accordance with Rule 144A under
the 1933 Act ("Rule 144A Securities"). These securities will not be
considered illiquid so long as the Investment Advisers determine, under
guidelines approved by the Trust's Board of Trustees, that an adequate
trading market exists.
Special risks. Because illiquid and restricted securities may be difficult
to sell at an acceptable price, they may be subject to greater volatility
and may result in a loss to a Portfolio. The practice of investing in Rule
144A Securities could increase the level of a Portfolio's illiquidity
during any period that qualified institutional buyers become uninterested
in purchasing these securities.
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Insurance Funding Agreements. An insurance funding agreement ("IFA") is an
agreement that requires a Portfolio to make cash contributions to a deposit fund
of an insurance company's general account. The insurance company then credits
interest to the Portfolio for a set time period.
Investment Strategy. The Short-Intermediate Bond, Bond, Intermediate Bond
and Balanced Portfolios may invest in IFAs issued by insurance companies
that meet quality and credit standards established by the Investment
Advisers.
Special risks. IFAs are not insured by a government agency -- they are
backed only by the insurance company that issues them. As a result, they
are subject to default risk. In addition, an active secondary market in
IFAs does not currently exist. This means that it may be difficult to sell
an IFA at an appropriate price.
Interest Rate Swaps, Floors and Caps and Currency Swaps. Interest rate and
currency swaps are contracts that obligate a Portfolio and another party to
exchange their rights to pay or receive interest or specified amounts of
currency, respectively. Interest rate floors entitle the purchasers to receive
interest payments if a specified index falls below a predetermined interest
rate. Interest rate caps entitle the purchasers to receive interest payments if
a specified index exceeds a predetermined interest rate.
Investment strategy. The Fixed Income Portfolios (except the U.S. Treasury
Index Portfolio) and the Balanced Portfolio may enter into interest rate
swaps and purchase interest rate floors or caps to protect against interest
rate fluctuations and fluctuations in the floating rate market. The
International Bond, International Growth and International Equity Index
Portfolios may enter into currency swaps to protect against currency
fluctuations.
Special risks. If the other party to an interest rate swap defaults, a
Portfolio's risk of loss consists of the amount of interest payments that
the Portfolio is entitled to receive. In contrast, currency swaps usually
involve the delivery of the entire principal value of one currency in
exchange for the other currency. Therefore, the entire principal value of a
currency swap is subject to the risk that the other party will default on
its delivery obligations. Like other derivative securities, swaps, floors
and caps can be highly volatile. As a result, they may not always be
successful hedges and they could lower a Portfolio's total return.
Investment Companies. To the extent consistent with their respective investment
objectives and policies, the Portfolios may invest in securities issued by other
investment companies, including money market funds, index funds, "country funds"
(i.e., funds that invest primarily in issuers located in a specific foreign
country or region), World Equity Benchmark SharesSM issued by The Foreign Fund,
Inc. ("WEBS"), S&P's Depository Receipts ("SPDRs") and similar securities of
other issuers.
Investment strategy. Investments by a Portfolio in other investment
companies will be subject to the limitations of the 1940 Act. Although the
Portfolios do not expect to do so in the foreseeable future, each Portfolio
is authorized to invest substantially all of its assets in a single
open-end investment company or series thereof that has substantially the
same investment objective, policies and fundamental restrictions as the
Portfolio.
Special risks. As a shareholder of another investment company, a Portfolio
would be subject to the same risks as any other investor in that company.
In addition, it would bear a proportionate share of any fees and expenses
paid by that company.
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<PAGE>
These would be in addition to the advisory and other fees paid directly by
the Portfolio.
Mortgage Dollar Rolls. A mortgage dollar roll involves the sale by a Portfolio
of securities for delivery in the future (generally within 30 days). The
Portfolio simultaneously contracts with the same counterparty to repurchase
substantially similar (same type, coupon and maturity) but not identical
securities on a specified future date. During the roll period, the Portfolio
loses the right to receive principal and interest paid on the securities sold.
However, the Portfolio benefits to the extent of any difference between (a) the
price received for the securities sold and (b) the lower forward price for the
future purchase and/or fee income plus the interest earned on the cash proceeds
of the securities sold.
Investment strategy. Each Portfolio may enter into mortgage dollar rolls in
an effort to enhance investment performance. For financial reporting and
tax purposes, the Portfolios treat mortgage dollar rolls as two separate
transactions: one involving the purchase of a security and a separate
transaction involving a sale. The Portfolios do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing and
do not treat them as borrowings.
Special risks. Successful use of mortgage dollar rolls depends upon the
Investment Adviser's ability to predict correctly interest rates and
mortgage prepayments. If the Investment Adviser is incorrect in its
prediction, a Portfolio may experience a loss. Unless the benefits of a
mortgage dollar roll exceed the income, capital appreciation and gain or
loss due to mortgage prepayments that would have been realized on the
securities sold as part of the roll, the use of this technique will
diminish the Portfolio's performance.
Options. An option is a type of derivative instrument that gives the holder the
right (but not the obligation) to buy (a "call") or sell (a "put") an asset in
the future at an agreed upon price prior to the expiration date of the option.
Investment strategy. Each Portfolio may write (sell) covered call options,
buy put options, buy call options and write secured put options for hedging
(or cross-hedging) purposes or to earn additional income. Options may
relate to particular securities, foreign or domestic securities indices,
financial instruments or foreign currencies. A Portfolio will not purchase
put and call options in an amount that exceeds 5% of its net assets at the
time of purchase. The total value of a Portfolio's assets subject to
options written by the Portfolio will not be greater than 25% of its net
assets at the time the option is written. A Portfolio may "cover" a call
option by owning the security underlying the option or through other means.
Put options written by a Portfolio are "secured" if the Portfolio maintains
liquid assets in a segregated account in an amount at least equal to the
exercise price of the option up until the expiration date.
Special risks. Options trading is a highly specialized activity that
involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The value of options can
be highly volatile, and their use can result in loss if the investment
management team is incorrect in its expectation of price fluctuations. The
successful use of options for hedging purposes also depends in part on the
ability of the investment management team to predict future price
fluctuations and the degree of correlation between the options and
securities markets.
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<PAGE>
Each Portfolio will invest and trade in unlisted over-the-counter options
only with firms deemed creditworthy by the Investment Advisers. 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.
Preferred Stock. Preferred stocks are securities that represent an ownership
interest providing the holder with claims on the issuer's earnings and assets
before common stock owners but after bond owners.
Investment strategy. The Balanced and Equity Portfolios and, to the extent
consistent with their respective investment objectives and policies, the
Short-Intermediate Bond Portfolio, Intermediate Bond Portfolio, Bond
Portfolio and International Bond Portfolio, may invest in preferred stocks.
Special risks. Unlike most debt securities, the obligations of an issuer of
preferred stock, including dividend and other payment obligations, may not
typically be accelerated by the holders of such preferred stock on the
occurrence of an event of default or other non-compliance by the issuer of
the preferred stock.
Real Estate Investment Trusts (REITs). REITs are pooled investment vehicles that
invest primarily in either real estate or real estate related loans.
Investment strategy. The Small Company Index and Small Company Growth
Portfolios may invest in REITs.
Special risks. The value of a REIT is affected by changes in the value of
the properties owned by the REIT or securing mortgage loans held by the
REIT. REITs are dependent upon cash flow from their investments to repay
financing costs and the ability of a REIT's manager. REITs are also subject
to risks generally associated with investments in real estate. The
Portfolio will indirectly bear its proportionate share of any expenses,
including management fees, paid by a REIT in which it invests.
Repurchase Agreements. Repurchase agreements involve the purchase of securities
by a Portfolio subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price.
Investment strategy. Each Portfolio may enter into repurchase agreements
with financial institutions such as banks and broker-dealers that are
deemed to be creditworthy by the Investment Advisers. Although the
securities subject to a repurchase agreement may have maturities exceeding
one year, settlement of the agreement will never occur more than one year
after a Portfolio acquires the securities.
Special risks. In the event of a default, a Portfolio will suffer a loss to
the extent that the proceeds from the sale of the underlying securities and
other collateral are less than the repurchase price and the Portfolio's
costs associated with delay and enforcement of the repurchase agreement. In
addition, in the event of bankruptcy, a Portfolio could suffer additional
losses if a court determines that the Portfolio's interest in the
collateral is not enforceable.
Securities Lending. In order to generate additional income, the Portfolios may
lend securities on a short-term basis to banks, brokers-dealers, or other
qualified institutions. In exchange, the Portfolios will receive collateral
equal to at least 100% of the value of the securities loaned.
Investment strategy. Securities lending may represent no more than
one-third the value of a Portfolio's total assets (including the loan
collateral). Any cash collateral
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<PAGE>
received by a Portfolio in connection with these loans may be invested in
U.S. government securities and other liquid high-grade debt obligations.
Special risks. The main risk when lending portfolio securities is that the
borrower might become insolvent or refuse to honor its obligation to return
the securities. In this event, a Portfolio could experience delays in
recovering its securities and may incur a capital loss. In addition, a
Portfolio may incur a loss in reinvesting the cash collateral it receives.
Stripped Obligations. These securities are issued by the U.S. government (or
agency or instrumentality), foreign governments or banks and other issuers. They
entitle the holder to receive either interest payments or principal payments
that have been "stripped" from a debt obligation. These obligations include
stripped mortgage-backed securities, which are derivative multi-class mortgage
securities.
Investment strategy. The Fixed Income and Balanced Portfolios may purchase
stripped securities.
Special risks. Stripped securities are very sensitive to changes in
interest rates and to the rate of principal prepayments. A rapid or
unexpected increase in mortgage prepayments could severely depress the
price of certain stripped mortgage-backed securities and adversely affect a
Portfolio's total returns.
United States Government Obligations.
These include U.S. Treasury obligations, such as bills, notes and bonds, which
generally differ only in terms of their interest rates, maturities and time of
issuance. These also include obligations issued or guaranteed by the U.S.
government or its agencies and instrumentalities. 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.
Investment strategy. To the extent consistent with its investment
objective, each Portfolio may invest in a variety of U.S. Treasury
obligations. With the exception of the U.S. Treasury Index Portfolio, each
Portfolio also may invest in obligations issued or guaranteed by the U.S.
government or its agencies and instrumentalities.
Special risks. Not all U.S. government obligations carry the same
guarantees. Some, such as those of the Government National Mortgage
Association ("GNMA"), are supported by the full faith and credit of the
United States Treasury. Other obligations, such as those of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from
the United States Treasury; and others, such as those issued by 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 instrumentality. 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. In addition, the secondary market for
certain participations in loans made to foreign governments or their
agencies may be limited.
Variable and Floating Rate Instruments. Variable and floating rate instruments
have interest rates that are periodically adjusted either at set intervals or
that
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<PAGE>
float at a margin above a generally recognized index rate. These instruments
include variable amount master demand notes, long-term variable and floating
rate bonds (sometimes referred to as "Put Bonds") where the Fund obtains at the
time of purchase the right to put the bond back to the issuer or a third party
at par at a specified date and leveraged inverse floating rate instruments
("inverse floaters"). An inverse floater is leveraged to the extent that its
interest rate varies by an amount that exceeds the amount of the variation in
the index rate of interest. Some variable and floating rate instruments have
interest rates that are periodically adjusted as a result of changes in
inflation rates.
Investment strategy. Each Portfolio may invest in rated and unrated
variable and floating rate instruments to the extent consistent with its
investment objective. Unrated instruments may be purchased by a Portfolio
if they are determined by the Investment Advisers to be of comparable
quality to rated instruments eligible for purchase by the Portfolio.
Special risks. The market values of inverse floaters are subject to greater
volatility than other variable and floating rate instruments due to their
higher degree of leverage. Because there is no active secondary market for
certain variable and floating rate instruments, they may be more difficult
to sell if the issuer defaults on its payment obligations or during periods
when the Portfolios are not entitled to exercise their demand rights. As a
result, the Portfolios could suffer a loss with respect to these
instruments.
Warrants. A warrant represents the right to purchase a security at a
predetermined price for a specified period of time.
Investment strategy. The Balanced, Diversified Growth, Focused Growth,
International Growth, Small Company Growth, Mid Cap Growth, Small Company
Index and International Equity Index Portfolios may invest up to 5% of
their total assets at the time of purchase in warrants and similar rights.
A Portfolio may also purchase bonds that are issued in tandem with
warrants.
Special risks. Warrants are derivative instruments that present risks
similar to options.
When-Issued Securities, Delayed Delivery Transactions and Forward Commitments. A
purchase of "when-issued" securities refers to a transaction made conditionally
because the securities, although authorized, have not yet been issued. A delayed
delivery or forward commitment transaction involves a contract to purchase or
sell securities for a fixed price at a future date beyond the customary
settlement period.
Investment strategy. Each Portfolio may purchase or sell securities on a
when-issued, delayed-delivery or forward commitment basis. Although the
Portfolios would generally purchase securities in these transactions with
the intention of acquiring the securities, the Portfolios may dispose of
such securities prior to settlement if the investment management team deems
it appropriate to do so.
Special risks. Purchasing securities on a when-issued, delayed delivery or
forward commitment basis involves the risk that the value of the securities
may decrease by the time they are actually issued or delivered. Conversely,
selling securities in these transactions involves the risk that the value
of the securities may increase by the time they are actually issued or
delivered. These transactions also involve the risk that the seller may
fail to deliver the security or cash on the settlement date.
Zero Coupon, Pay-In-Kind and Capital Appreciation Bonds. These are securities
issued at a discount from their face value because interest payments are
typically postponed until maturity. Interest payments on
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<PAGE>
pay-in-kind securities are payable by the delivery of additional securities. The
amount of the discount rate varies depending on factors such as the time
remaining until maturity, prevailing interest rates, a security's liquidity and
the issuer's credit quality. These securities also may take the form of debt
securities that have been stripped of their interest payments.
Investment strategy. Each Portfolio may invest in zero coupon, pay-in-kind
and capital appreciation bonds to the extent consistent with its investment
objective.
Special risks. The market prices of zero coupon, pay-in-kind and capital
appreciation bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree
to changes in interest rates than interest-bearing securities having
similar maturities and credit quality. A Portfolio's investments in zero
coupon, pay-in-kind and capital appreciation bonds may require the
Portfolio to sell some of its portfolio securities to generate sufficient
cash to satisfy certain income distribution requirements.
DISCLAIMERS
The U.S. Treasury Index Portfolio is not sponsored, endorsed, sold or promoted
by Lehman, nor does Lehman guarantee the accuracy and/or completeness of the
Lehman Index or any data included therein. Lehman makes no warranty, express or
implied, as to the results to be obtained by the Portfolio, owners of the
Portfolio, or any person or any entity from the use of the Lehman Index or any
data included therein. Lehman makes no express or implied warranties and
expressly disclaims all such warranties of merchantability or fitness for a
particular purpose or use with respect to the Lehman Index or any data included
therein.
The Equity Index Portfolio is not sponsored, endorsed, sold or promoted by S&P,
nor does S&P guarantee the accuracy and/or completeness of the S&P 500(R) Index
or any data included therein. S&P makes no warranty, express or implied, as to
the results to be obtained by the Portfolio, owners of the Portfolio, or any
person or any entity from the use of the S&P 500(R) Index or any data included
therein. S&P makes no express or implied warranties and expressly disclaims all
such warranties of merchantability or fitness for a particular purpose for use
with respect to the S&P 500(R) Index or any data included therein.
The International Equity Index Portfolio is not sponsored, endorsed, sold or
promoted by MSCI, nor does MSCI guarantee the accuracy and/or completeness of
the EAFE(R) Index or any data included therein. MSCI makes no warranty, express
or implied, as to the results to be obtained by the Portfolio, owners of the
Portfolio, or any person or any entity from the use of the EAFE(R) Index or any
data included therein. MSCI makes no express or implied warranties and expressly
disclaims all such warranties of merchantability or fitness for a particular
purpose for use with respect to the EAFE(R) Index or any data included therein.
The Small Company Index Portfolio is not sponsored, endorsed, sold or promoted
by Russell, nor does Russell guarantee the accuracy and/or completeness of the
Russell 2000 Index or any data included therein. Russell makes no warranty,
express or implied, as to the results to be obtained by the Portfolio, owners of
the Portfolio, or any person or any entity from the use of the Russell 2000
Index or any data included therein. Russell makes no express or implied
warranties and expressly disclaims all such warranties of merchantability or
fitness for a particular purpose for use with respect to the Russell 2000 Index
or any data included therein.
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Financial Information
The financial highlights tables are intended to help you understand a
Portfolio's financial performance for the past five years (or, if shorter, the
period of the Portfolio's operations). Certain information reflects financial
results for a single Portfolio share. The total returns in the tables represent
the rate that an investor would have earned or lost on an investment in a
Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by Ernst & Young LLP, whose report is included in
the Portfolios' annual report along with the Portfolios' financial statements.
The annual report is available upon request and without charge.
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<PAGE>
Financial Information continued
Financial Highlights
For the Years Ended November 30,
U.S. Government Securities Portfolio
<TABLE>
<CAPTION>
Class A
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $20.27 $19.99 $20.07 $20.08 $19.05
Income (loss) from investment operations:
Net investment income 0.99 1.17 1.21 1.02 1.05
Net realized and unrealized gain (loss) (0.51) 0.26 (0.07) (0.01) 1.02
Total income (loss) from investment operations 0.48 1.43 1.14 1.01 2.07
Distributions to shareholders from:
Net investment income (0.98) (1.15) (1.22) (1.02) (1.04)
Net realized gain (0.29) - - - -
Return of capital - - - - -
Total distributions to shareholders (1.27) (1.15) (1.22) (1.02) (1.04)
Net increase (decrease) (0.79) 0.28 (0.08) (0.01) 1.03
Net asset value, end of year $19.48 $20.27 $19.99 $20.07 $20.08
Total return (a) 2.43% 7.36% 5.93% 5.15% 11.18%
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 0.77% 0.86% 0.85% 0.94% 1.09%
Expenses, net of waivers and reimbursements 0.36% 0.36% 0.36% 0.36% 0.36%
Net investment income, before waivers
and reimbursements 4.73% 5.51% 5.37% 4.64% 4.70%
Net investment income, net of waivers
and reimbursements 5.14% 6.01% 5.86% 5.22% 5.43%
Portfolio turnover rate 50.70% 115.55% 95.73% 119.75% 141.14%
Net assets at end of year (in thousands) $87,699 $48,317 $43,073 $92,351 $56,329
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete
redemption of the investment at the net asset value at the end of the
year. Total return is not annualized for periods less than one year.
(b) Annualized for periods less than a full year.
(c) For the period December 29, 1995 (Class C shares issue date) through
November 30, 1996.
(d) Class C shares were fully redeemed as of February 10, 1999.
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<TABLE>
<CAPTION>
Class C Class D
For the For the For the For the For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996(c) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$20.26 $19.98 $20.06 $20.13 $20.22 $19.94 $20.03 $20.04 $19.05
0.03 1.12 1.14 0.91 0.93 1.08 1.16 0.96 0.96
0.01 0.26 (0.04) (0.12) (0.53) 0.28 (0.10) (0.03) 1.00
0.04 1.38 1.10 0.79 0.40 1.36 1.06 0.93 1.96
(0.08) (1.10) (1.18) (0.86) (0.90) (1.08) (1.15) (0.94) (0.97)
(0.29) - - - (0.29) - - - -
- - - - - - - - -
(0.37) (1.10) (1.18) (0.86) (1.19) (1.08) (1.15) (0.94) (0.97)
(0.33) 0.28 (0.08) (0.07) (0.79) 0.28 (0.09) (0.01) 0.99
$19.93(d) $20.26 $19.98 $20.06 $19.43 $20.22 $19.94 $20.03 $20.04
- 7.10% 5.67% 4.05% 1.95% 6.96% 5.52% 4.77% 10.66%
- 1.10% 1.09% 1.18% 1.16% 1.25% 1.24% 1.33% 1.48%
- 0.60% 0.60% 0.60% 0.75% 0.75% 0.75% 0.75% 0.75%
- 5.27% 5.14% 4.39% 4.34% 5.05% 5.01% 4.25% 4.35%
- 5.77% 5.63% 4.97% 4.75% 5.55% 5.50% 4.83% 5.08%
- 115.55% 95.73% 119.75% 50.70% 115.55% 95.73% 119.75% 141.14%
$- $3,942 $3,118 $3,535 $810 $1,224 $312 $225 $67
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Financial Information continued
Financial Highlights
For the Years Ended November 30,
Short-Intermediate Bond Portfolio
<TABLE>
<CAPTION>
Class A
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 20.03 $ 20.36 $ 20.70 $ 20.73 $ 19.53
Income (loss) from investment operations:
Net investment income 1.79 1.84 1.46 1.14 1.02
Net realized and unrealized gain (loss) (1.36) (0.36) (0.29) (0.01) 1.19
Total income (loss) from investment operations 0.43 1.48 1.17 1.13 2.21
Distributions to shareholders from:
Net investment income (1.69) (1.78) (1.46) (1.16) (1.01)
Net realized gain (0.27) (0.03) (0.05) -- --
Return of capital - -- -- -- -- --
Total distributions to shareholders (1.96) (1.81) (1.51) (1.16) (1.01)
Net increase (decrease) (1.53) (0.33) (0.34) (0.03) 1.20
Net asset value, end of year $ 18.50 $ 20.03 $ 20.36 $ 20.70 $ 20.73
Total return (a) 2.25% 7.50% 5.95% 5.68% 11.58%
Ratio to average net assets of:
Expenses, before waivers and reimbursements 0.76% 0.76% 0.81% 0.88% 0.91%
Expenses, net of waivers and reimbursements 0.36% 0.36% 0.36% 0.36% 0.36%
Net investment income, before waivers and reimbursements 8.95% 9.21% 7.23% 5.31% 4.59%
Net investment income, net of waivers and reimbursements 9.35% 9.61% 7.68% 5.83% 5.14%
Portfolio turnover rate 88.29% 89.97% 48.49% 47.68% 54.68%
Net assets at end of year (in thousands) $ 184,382 $ 182,999 $ 201,457 $ 153,675 $ 158,678
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(b) Financial highlights for the year ended November 30, 1999 were calculated
using the average shares outstanding method.
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<PAGE>
<TABLE>
<CAPTION>
Class D
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
1999(b) 1998 1997 1996 1995
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 19.97 $ 20.31 $ 20.66 $ 20.71 $ 19.53
1.79 1.78 1.43 1.07 0.94
(1.43) (0.40) (0.34) (0.02) 1.18
0.36 1.38 1.09 1.05 2.12
(1.61) (1.69) (1.39) (1.10) (0.94)
(0.27) (0.03) (0.05) -- --
1.15% -- -- -- --
(1.88) (1.72) (1.44) (1.10) (0.94)
(1.52) (0.34) (0.35) (0.05) 1.18
$ 18.45 $ 19.97 $ 20.31 $ 20.66 $ 20.71
1.84% 7.08% 5.54% 5.22% 11.09%
1.15% 1.15% 1.20% 1.27% 1.30%
0.75% 0.75% 0.75% 0.75% 0.75%
8.56% 8.91% 7.03% 4.44% 4.30%
8.96% 9.31% 7.48% 4.96% 4.85%
88.29% 89.97% 48.49% 47.68% 54.68%
$ 121 $ 824 $ 891 $ 343 $ 13
- ------------------------------------------------------------
</TABLE>
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<PAGE>
Financial Information continued
Financial Highlights
For the Years Ended November 30,
Intermediate Bond Portfolio
<TABLE>
<CAPTION>
Class A Class D
---------------------------------- ----------------------
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997(a) 1999 1998(b)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 20.15 $ 19.89 $ 20.00 $ 20.13 $ 20.46
Income (loss) from investment operations:
Net investment income 1.10 1.19 0.38 1.06 0.18
Net realized and unrealized gain (loss) (1.05) 0.27 (0.15) (1.10) (0.32)
Total income (loss) from investment operations 0.05 1.46 0.23 (0.04) (0.14)
Distributions to shareholders from:
Net investment income (1.10) (1.20) (0.34) (1.02) (0.19)
Net realized gain (0.12) -- -- (0.12) --
Return of capital -- -- -- -- --
Total distributions to shareholders (1.22) (1.20) (0.34) (1.14) (0.19)
Net increase (decrease) (1.17) 0.26 (0.11) (1.18) (0.33)
Net asset value, end of year $ 18.98 $ 20.15 $ 19.89 $ 18.95 $ 20.13
Total return (c) 0.25% 7.55% 1.17% (0.21)% (0.70)%
Ratio to average net assets of (d):
Expenses, before waivers and reimbursements 0.80% 1.09% 2.28% 1.19% 1.48%
Expenses, net of waivers and reimbursements 0.36% 0.36% 0.36% 0.75% 0.75%
Net investment income, before waivers
and reimbursements 5.21% 5.46% 3.95% 4.82% 4.96%
Net investment income, net of waivers
and reimbursements 5.65% 6.19% 5.87% 5.26% 5.69%
Portfolio turnover rate 193.44% 93.40% 56.99% 193.44% 93.40%
Net assets at end of year (in thousands) $ 49,414 $ 30,439 $ 11,997 $ 26 $ 41
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period August 1, 1997 (commencement of operations) through November
30, 1997.
(b) For the period October 5, 1998 (Class D shares issue date) through
November 30, 1998.
(c) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(d) Annualized for periods less than a full year.
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Financial Information continued
Financial Highlights
For the Years Ended November 30,
U.S. Treasury Index Portfolio
<TABLE>
<CAPTION>
Class A
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 21.77 $ 20.81 $ 20.60 $ 20.78 $ 18.77
Income (loss) from investment operations:
Net investment income 1.09 1.23 1.26 1.19 1.11
Net realized and unrealized gain (loss) (1.54) 0.97 0.20 (0.18) 2.01
Total income (loss) from investment operations (0.45) 2.20 1.46 1.01 3.12
Distributions to shareholders from:
Net investment income (1.07) (1.24) (1.25) (1.19) (1.11)
Net realized gain -- -- -- -- --
Return of capital -- -- -- -- --
Total distributions to shareholders (1.07) (1.24) (1.25) (1.19) (1.11)
Net increase (decrease) (1.52) 0.96 0.21 (0.18) 2.01
Net asset value, end of year $ 20.25 $ 21.77 $ 20.81 $ 20.60 $ 20.78
Total return (a) (2.10)% 10.92% 7.44% 5.10% 16.95%
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 0.77% 0.77% 0.82% 1.04% 0.89%
Expenses, net of waivers and reimbursements 0.26% 0.26% 0.26% 0.26% 0.26%
Net investment income, before
waivers and reimbursements 4.73% 5.22% 5.80% 5.15% 4.46%
Net investment income, net of
waivers and reimbursements 5.24% 5.73% 6.36% 5.93% 5.09%
Portfolio turnover rate 84.77% 69.84% 72.61% 42.49% 80.36%
Net assets at end of year (in thousands) $ 22,033 $ 22,085 $ 33,839 $ 26,273 $ 17,674
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at net asset value at the end of the year. Total return is
not annualized for periods less than one year.
(b) Annualized for periods less than a full year.
(c) For the period October 7, 1998 (Class C shares issue date) through November
30, 1998.
(d) Financial highlights for the year ended November 30, 1999 were calculated
using the average shares outstanding method.
88
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
For the For the For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998(c) 1999(d) 1998 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 21.81 $ 22.28 $ 21.74 20.77 $ 20.57 $ 20.75 $ 18.77
0.96 0.21 1.05 1.13 1.20 1.17 1.00
(1.50) (0.52) (1.59) 1.00 0.18 (0.24) 2.03
(0.54) (0.31) (0.54) 2.13 1.38 0.93 3.03
(1.02) (0.16) (0.98) (1.16) (1.18) (1.11) (1.05)
-- -- -- -- -- -- --
-- -- -- -- -- -- --
(1.02) (0.16) (0.98) (1.16) (1.18) (1.11) (1.05)
(1.56) (0.47) (1.52) 0.97 0.20 (0.18) 1.98
$ 20.25 $ 21.81 $ 20.22 $ 21.74 $ 20.77 $ 20.57 $ 20.75
(2.49)% (1.39) 10.50% 7.03% 4.72% 16.43%
1.01% 1.01% 1.16% 1.16% 1.21% 1.43% 1.28%
0.50% 0.50% 0.65% 0.65% 0.65% 0.65% 0.65%
4.49% 4.71% 4.34% 4.84% 5.51% 4.79% 4.78%
5.00% 5.22% 4.85% 5.35% 6.07% 5.57% 5.41%
84.77% 69.84% 84.77% 69.84% 72.61% 42.49% 80.36%
$ 194 $ 17 $ 177 $ 1,721 $ 1,707 $ 848 $ 286
- --------------------------------------------------------------------------------------
</TABLE>
89
<PAGE>
Financial Information continued
Financial Highlights
For the Years Ended November 30,
Bond Portfolio
<TABLE>
<CAPTION>
Class A
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 21.61 $ 21.08 $ 20.77 $ 20.96 $ 18.29
Income (loss) from investment operations:
Net investment income 1.35 1.47 1.34 1.29 1.17
Net realized and unrealized gain (loss) (1.63) 0.62 0.29 (0.19) 2.66
Total income (loss) from investment operations (0.28) 2.09 1.63 1.10 3.83
Distributions to shareholders from:
Net investment income (1.34) (1.44) (1.32) (1.26) (1.14)
Net realized gain (0.68) (0.12) -- -- --
Return of capital -- -- -- (0.03) (0.02)
Total distributions to shareholders (2.02) (1.56) (1.32) (1.29) (1.16)
Net increase (decrease) (2.30) 0.53 0.31 (0.19) 2.67
Net asset value, end of year $ 19.31 $ 21.61 $ 21.08 $ 20.77 $ 20.96
Total return (a) (1.35)% 10.31% 8.17% 5.57% 21.55%
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 0.74% 0.75% 0.77% 0.84% 0.84%
Expenses, net of waivers and reimbursements 0.36% 0.36% 0.36% 0.36% 0.36%
Net investment income, before waivers
and reimbursements 6.57% 6.68% 6.25% 5.91% 5.46%
Net investment income, net of waivers
and reimbursements 6.95% 7.07% 6.66% 6.39% 5.94%
Portfolio turnover rate 72.61% 84.80% 76.30% 101.38% 74.19%
Net assets at end of year (in thousands) $879,161 $ 605,517 $ 460,514 $ 366,850 $ 286,301
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(b) Annualized for periods less than a full year.
(c) For the period July 3, 1955 (Class C shares issue date) through November 30,
1995.
90
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
For the For the For the For the For the For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996 1995(c) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 21.60 $ 21.07 $ 20.78 $ 20.96 $ 20.21 $ 21.58 $ 21.05 $ 20.76 $ 20.94 $ 18.29
1.32 1.42 1.29 1.25 0.47 1.31 1.38 1.24 1.22 1.08
(1.65) 0.62 0.28 (0.18) 0.74 (1.67) 0.63 0.30 (0.18) 2.66
(0.33) 2.04 1.57 1.07 1.21 (0.36) 2.01 1.54 1.04 3.74
(1.29) (1.39) (1.28) (1.22) (0.45) (1.26) (1.36) (1.25) (1.19) (1.09)
(0.68) (0.12) -- -- -- (0.68) (0.12) -- -- --
-- -- -- (0.03) (0.01) -- -- -- (0.03) --
(1.97) (1.51) (1.28) (1.25) (0.46) (1.94) (1.48) (1.25) (1.22) (1.09)
(2.30) 0.53 0.29 (0.18) 0.75 (2.30) 0.53 0.29 (0.18) 2.65
$ 19.30 $ 21.60 $ 21.07 $ 20.78 $ 20.96 $ 19.28 $ 21.58 $ 21.05 $ 20.76 $ 20.94
(1.59)% 10.04% 7.88% 5.33% 6.08% (1.74)% 9.89% 7.74% 5.17% 21.06%
0.98% 0.99% 1.01% 1.08% 1.08% 1.13% 1.14% 1.16% 1.23% 1.23%
0.60% 0.60% 0.60% 0.60% 0.60% 0.75% 0.75% 0.75% 0.75% 0.75%
6.33% 6.44% 5.98% 5.61% 5.11% 6.18% 6.31% 5.86% 5.51% 5.00%
6.71% 6.83% 6.39% 6.09% 5.59% 6.56% 6.70% 6.27% 5.99% 5.48%
72.61% 84.80% 76.30% 101.38% 74.19% 72.61% 84.80% 76.30% 101.38% 74.19%
$ 62,557 $ 61,450 $ 50,554 $ 7,342 $ 3,704 $ 1,497 $ 2,039 $ 601 $ 220 $ 120
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
91
<PAGE>
Financial Information continued
Financial Highlights
For the Years Ended November 30,
International Bond Portfolio
[CAPTION]
<TABLE>
Class A
For the For the For the For the
Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 21.35 $ 20.13 $ 22.16 $ 21.74
Income (loss) from investment operations:
Net investment income 0.96 0.98 1.02 1.54
Net realized and unrealized gain (loss) (2.07) 1.33 (1.70) 0.43
Total income (loss) from investment operations (1.11) 2.31 (0.68) 1.97
Distributions to shareholders from:
Net investment income (b) (1.24) (0.79) (1.01) (1.55)
Net realized gain (0.14) (0.30) (0.34) --
Return of capital -- -- -- --
Total distributions to shareholders (1.38) (1.09) (1.35) (1.55)
Net increase (decrease) (2.49) 1.22 (2.03) 0.42
Net asset value, end of year $ 18.86 $ 21.35 $ 20.13 $ 22.16
Total return (c) (5.76)% 11.85% (3.02)% 9.47
Ratio to average net assets of (d):
Expenses, before waivers and reimbursements 1.44% 1.52% 1.52% 1.58%
Expenses, net of waivers and reimbursements 0.96% 0.96% 0.96% 0.96%
Net investment income, before waivers
and reimbursements 4.41% 4.71% 5.05% 5.29%
Net investment income, net of waivers
and reimbursements 4.89% 5.27% 5.61% 5.91%
Portfolio turnover rate 17.85% 23.76% 29.29% 33.89%
Net assets at end of period (in thousands) $ 28,397 $ 28,568 $ 26,383 $ 34,183
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period November 20, 1995 (Class D shares issue date) through
November 30, 1995.
(b) Distributions to shareholders from net investment income include amounts
relating to foreign currency transactions which are treated as ordinary
income for Federal income tax purposes.
(c) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(d) Annualized for periods less than a full year.
(e) Class D shares were fully redeemed as of August 22, 1999. Financial
highlights for the year ended November 30, 1999 were calculated using the
average shares outstanding method.
92
<PAGE>
<TABLE>
<CAPTION>
Class D
For the For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
1995 1999 1998 1997 1996 1995(a)
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 19.93 $ 21.26 $ 20.06 $ 22.14 $ 21.74 $ 22.17
1.26 0.29 0.93 0.97 1.37 0.02
2.28 (1.25) 1.29 (1.72) 0.51 (0.08)
3.54 (0.96) 2.22 (0.75) 1.88 (0.06)
(1.73) (0.54) (0.72) (0.99) (1.48) (0.37)
-- -- (0.14) (0.30) (0.34) --
-- -- -- -- -- --
(1.73) (0.68) (1.02) (1.33) (1.48) (0.37)
1.81 (1.64) 1.20 (2.08) 0.40 (0.43)
$ 21.74 $ 19.62(e) $ 21.26 $ 20.06 $ 22.14 $ 21.74
18.20% 11.43% (3.38)% 9.04% (0.30)%
1.47% 1.91% 1.91% 1.97% 1.86%
0.96% 1.35% 1.35% 1.35% 1.35%
5.41% 4.34% 4.80% 5.05% 2.75%
5.92% 4.90% 5.36% 5.67% 3.26%
54.46% 23.76% 29.29% 33.89% 54.46%
$ 32,673 $ 132 $ 91 $ 52 $ 9
- -------------------------------------------------------------------------
</TABLE>
93
<PAGE>
Financial Information continued
Financial Highlights
For the Years Ended November 30,
Balanced Portfolio
<TABLE>
<CAPTION>
Class A
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 14.95 $ 13.59 $ 12.24 $ 11.05 $ 9.50
Income (loss) from investment operations:
Net investment income 0.40 0.38 0.38 0.34 0.34
Net realized and unrealized gain (loss) 1.55 1.81 1.66 1.19 1.55
Total income (loss) from investment operations 1.95 2.19 2.04 1.53 1.89
Distributions to shareholders from:
Net investment income (0.47) (0.32) (0.38) (0.34) (0.34)
In excess of net investment income (0.01) -- -- -- --
Net realized gain (1.30) (0.51) (0.31) -- --
Total distributions to shareholders (1.78) (0.83) (0.69) (0.34) (0.34)
Net increase 0.17 1.36 1.35 1.19 1.55
Net asset value, end of year $ 15.12 $ 14.95 $ 13.59 $ 12.24 $ 11.05
Total return (a) 14.11% 16.90% 17.29% 14.07% 20.22%
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 0.99% 1.04% 1.11% 1.20% 1.28%
Expenses, net of waivers and reimbursements 0.61% 0.61% 0.61% 0.61% 0.61%
Net investment income, before waivers
and reimbursements 2.31% 2.40% 2.49% 2.44% 2.69%
Net investment income, net of waivers
and reimbursements 2.69% 2.83% 2.99% 3.03% 3.36%
Portfolio turnover rate 77.19% 67.16% 59.06% 104.76% 93.39%
Net assets at end of year (in thousands) $ 76,884 $ 61,969 $ 51,475 $ 45,157 $ 38,897
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(b) Annualized for periods less than a full year.
(c) Financial Highlights for the year ended November 30, 1999 were calculated
using the average shares outstanding method.
(d) For the period December 29, 1995 (Class C shares issue date) through
November 30, 1996.
(e) For the period February 20, 1996 (Class D shares issue date) through
November 30, 1996.
94
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
For the For the For the For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
1999 (c) 1998 1997 1996(d) 1999 1998 1997 1996(e)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 14.91 $ 13.56 $ 12.24 $ 11.12 $ 14.88 $ 13.54 $ 12.23 $ 11.34
0.34 0.37 0.36 0.29 0.36 0.40 0.34 0.22
1.60 1.78 1.64 1.12 1.53 1.72 1.64 0.96
1.94 2.15 2.00 1.41 1.89 2.12 1.98 1.18
(0.42) (0.29) (0.37) (0.29) (0.41) (0.27) (0.36) (0.29)
-- -- -- -- -- -- -- --
(1.30) (0.51) (0.31) -- (1.30) (0.51) (0.31) --
(1.72) (0.80) (0.68) (0.29) (1.71) (0.78) (0.67) (0.29)
0.22 1.35 1.32 1.12 0.18 1.34 1.31 0.89
$ 15.13 $ 14.91 $ 13.56 $ 12.24 $ 15.06 $ 14.88 $ 13.54 $ 12.23
14.03% 16.61% 17.00% 12.72% 13.73% 16.45% 16.82% 10.55%
1.23% 1.28% 1.35% 1.44% 1.38% 1.43% 1.50% 1.59%
0.85% 0.85% 0.85% 0.85% 1.00% 1.00% 1.00% 1.00%
2.07% 2.15% 2.25% 2.21% 1.92% 2.01% 2.10% 2.19%
2.45% 2.58% 2.75% 2.80% 2.30% 2.44% 2.60% 2.78%
77.19% 67.16% 59.06% 104.76% 77.19% 67.16% 59.06% 104.76%
$ 805 $ 5,459 $ 4,587 $ 5,997 $ 405 $ 752 $ 322 $ 232
- -----------------------------------------------------------------------------------------------------
</TABLE>
95
<PAGE>
Financial Information continued
Financial Highlights
For the Years Ended November 30,
Equity Index Portfolio
<TABLE>
<CAPTION>
Class A
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 22.69 $ 20.09 $ 16.79 $ 13.86 $ 10.60
Income (loss) from investment operations:
Net investment income 0.28 0.28 0.30 0.31 0.30
Net realized and unrealized gain (loss) 4.13 4.02 4.13 3.36 3.47
Total income from investment operations 4.41 4.30 4.43 3.67 3.77
Distributions to shareholders from:
Net investment income (0.32) (0.26) (0.30) (0.31) (0.30)
In excess of net investment income (0.01) -- -- -- --
Net realized gain (1.43) (1.44) (0.83) (0.43) (0.21)
Total distributions to shareholders (1.76) (1.70) (1.13) (0.74) (0.51)
Net increase (decrease) 2.65 2.60 3.30 2.93 3.26
Net asset value, end of year $ 25.34 $ 22.69 $ 20.09 $ 16.79 $ 13.86
Total return (a) 20.53% 23.39% 27.93% 27.53% 36.60%
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 0.44% 0.46% 0.46% 0.50% 0.54%
Expenses, net of waivers and reimbursements 0.21% 0.21% 0.22% 0.22% 0.22%
Net investment income, before waivers
and reimbursements 0.96% 1.11% 1.42% 1.84% 2.22%
Net investment income, net of waivers
and reimbursements 1.19% 1.36% 1.66% 2.12% 2.54%
Portfolio turnover rate 12.81% 15.26% 18.96% 18.02% 15.27%
Net assets at end of year (in thousands) $ 1,368,157 $ 1,175,112 $ 844,065 $ 675,804 $ 479,763
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(b) Annualized for periods less than a full year.
(c) For the period September 28, 1995 (Class C Shares issue date) through
November 30, 1995.
96
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
For the For the For the For the For the For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996 1995(c) 1999 1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 22.64 $ 20.05 $ 16.79 $ 13.86 $ 13.43 $ 22.58 $ 20.00 $ 16.77 $ 13.83 $ 10.60
0.22 0.24 0.26 0.28 0.05 0.16 0.21 0.26 0.27 0.25
4.12 4.01 4.11 3.35 0.45 4.15 4.00 4.07 3.36 3.47
4.34 4.25 4.37 3.63 0.50 4.31 4.21 4.33 3.63 3.72
(0.21) (0.22) (0.28) (0.27) (0.07) (0.14) (0.19) (0.27) (0.26) (0.28)
(0.06) -- -- -- -- (0.07) -- -- -- --
(1.43) (1.44) (0.83) (0.43) -- (1.43) (1.44) (0.83) (0.43) (0.21)
(1.70) (1.66) (1.11) (0.70) (0.07) (1.64) (1.63) (1.10) (0.69) (0.49)
2.64 2.59 3.26 2.93 0.43 2.67 2.58 3.23 2.94 3.23
$ 25.28 $ 22.64 $ 20.05 $ 16.79 $ 13.86 $ 25.25 $ 22.58 $ 20.00 $ 16.77 $ 13.83
20.23% 23.09% 27.64% 27.24% 3.94% 20.15% 22.90% 27.45% 27.20% 36.20%
0.68% 0.68% 0.70% 0.70% 0.74% 0.83% 0.83% 0.85% 0.89% 0.93%
0.45% 0.45% 0.45% 0.46% 0.46% 0.60% 0.60% 0.61% 0.61% 0.61%
0.72% 0.87% 1.18% 1.61% 1.97% 0.57% 0.72% 1.03% 1.50% 1.75%
0.95% 1.12% 1.42% 1.89% 2.29% 0.80% 0.97% 1.27% 1.78% 2.07%
12.81% 15.26% 18.96% 18.02% 15.27% 12.81% 15.26% 18.96% 18.02% 15.27%
$ 113,588 $ 111,991 $ 82,982 $ 53,929 $ 18,390 $ 16,397 $ 31,703 $ 30,650 $ 8,005 $ 810
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
97
<PAGE>
Financial Information continued
Financial Highlights
For the Years Ended November 30,
Diversified Growth Portfolio
[CAPTION]
<TABLE>
Class A
For the For the For the
Year Ended Year Ended Year Ended
1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year $ 17.76 $ 16.20 $ 14.36
Income (loss) from investment operations:
Net investment income 0.07 0.07 0.11
Net realized and unrealized gain 3.95 3.46 3.33
Total income (loss) from investment operations 4.02 3.53 3.44
Distributions to shareholders from:
Net investment income (0.07) (0.11) (0.14)
In excess of net investment income -- -- --
Net realized gain (1.92) (1.86) (1.46)
Total distributions to shareholders (1.99) (1.97) (1.60)
Net increase 2.03 1.56 1.84
Net asset value, end of year $ 19.79 $ 17.76 $ 16.20
Total return (a) 24.66% 25.22% 27.06%
Ratio to average net assets of:
Expenses, before waivers and reimbursements 0.96% 0.96% 1.03%
Expenses, net of waivers and reimbursements 0.67%(b) 0.66 0.67%
Net investment income, before waivers
and reimbursements 0.04% 0.15% 0.40%
Net investment income, net of waivers
and reimbursements 0.33% 0.45% 0.76%
Portfolio turnover rate 67.47% 37.74% 45.53%
Net assets at end of year (in thousands) $ 189,077 $ 177,947 $ 158,383
- ----------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(b) Expense ratio, net of waivers and reimbursements, for the year ended
November 30, 1999 would have been 0.66% and 1.05% for Class A and D,
respectively, absent the effect of interest expense incurred by the Fund's
temporary borrowing against a line of credit.
(c) Financial highlights for the year ended November 30, 1999 were calculated
using the average shares outstanding method.
98
<PAGE>
<TABLE>
<CAPTION>
Class D
For the For the For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
1996 1995 1999(c) 1998 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 12.20 $ 9.88 $ 17.53 $ 16.03 $ 14.26 $ 12.16 $ 9.88
0.14 0.15 -- 0.03 0.09 0.11 0.11
2.33 2.26 3.89 3.40 3.27 2.29 2.25
2.47 2.41 3.89 3.43 3.36 2.40 2.36
(0.15) (0.09) -- (0.07) (0.13) (0.14) (0.08)
-- -- (0.01) -- -- -- --
(0.16) -- (1.92) (1.86) (1.46) (0.16) --
(0.31) (0.09) (1.93) (1.93) (1.59) (0.30) (0.08)
2.16 2.32 1.96 1.50 1.77 2.10 2.28
$ 14.36 $ 12.20 $ 19.49 $ 17.53 $ 16.03 $ 14.26 $ 12.16
20.83% 24.55% 24.09% 24.73% 26.60% 20.39% 24.19%
1.10% 1.12% 1.35% 1.35% 1.42% 1.49% 1.51%
0.66% 0.69% 1.06%(b) 1.05 1.06% 1.05% 1.08%
0.54% 0.73% (0.35)% (0.24)% 0.01% 0.15% 0.30%
0.98% 1.16% (0.06)% 0.06% 0.37% 0.59% 0.73%
59.99% 81.65% 67.47% 37.74% 45.53% 59.99% 81.65%
$ 142,055 $ 146,731 $ 476 $ 1,122 $ 696 $ 433 $ 221
- -----------------------------------------------------------------------------------
</TABLE>
99
<PAGE>
Financial Information continued
Financial Highlights
For the Years Ended November 30,
Focused Growth Portfolio
<TABLE>
<CAPTION>
Class A
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 16.39 $ 16.20 $ 14.48 $ 12.53 $ 9.79
Income (loss) from investment operations:
Net investment income (loss) -- (0.01) 0.05 0.02 0.05
Net realized and unrealized gain 5.28 3.10 3.37 2.17 2.71
Total income (loss) from investment operations 5.28 3.09 3.42 2.19 2.76
Distributions to shareholders from:
Net investment income -- (0.05) (0.02) (0.05) (0.02)
Net realized gain (1.26) (2.85) (1.68) (0.19) --
Total distributions to shareholders (1.26) (2.90) (1.70) (0.24) (0.02)
Net increase 4.02 0.19 1.72 1.95 2.74
Net asset value, end of year $ 20.41 $ 16.39 $ 16.20 $ 14.48 $ 12.53
Total return (a) 34.23% 24.03% 27.05% 17.82% 28.38%
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 1.26% 1.29% 1.34% 1.43% 1.47%
Expenses, net of waivers and reimbursements 0.92% 0.92% 0.92% 0.91% 0.91%
Net investment loss, before waivers
and reimbursements (0.60)% (0.41)% (0.12)% (0.40) (0.84)%
Net investment income (loss), net of waivers
and reimbursements (0.26)% (0.04)% 0.30% 0.12% 0.46%
Portfolio turnover rate 110.80% 79.11 108.29% 116.78% 85.93%
Net assets at end of year (in thousands) $ 180,557 $ 123,380 $ 115,802 $ 106,250 $ 86,099
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(b) Annualized for periods less than a full year.
(c) For the period June 14, 1996 (Class C shares issue date) through November
30, 1996.
(d) For the period December 8, 1994 (Class D shares issue date) through November
30, 1995.
100
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
For the For the For the For the For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996(c) 1999 1998 1997 1996 1995(d)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 16.34 $ 16.16 $ 14.47 $ 13.46 $ 16.14 $ 16.01 $ 14.37 $ 12.48 $ 9.55
(0.03) (0.05) 0.01 (0.01) (0.02) (0.05) 0.03 (0.03) 0.02
5.25 3.09 3.37 1.02 5.14 3.04 3.30 2.15 2.93
5.22 3.04 3.38 1.01 5.12 2.99 3.33 2.12 2.95
-- (0.01) (0.01) -- -- (0.01) (0.01) (0.04) (0.02)
(1.26) (2.85) (1.68) (1.26) (2.85) (1.68) (0.19) --
(1.26) (2.86) (1.69) -- (1.26) (2.86) (1.69) (0.23) (0.02)
3.96 0.18 1.69 1.01 3.86 0.13 1.64 1.89 2.93
$ 20.30 $ 16.34 $ 16.16 $ 14.47 $ 20.00 $ 16.14 $ 16.01 $ 14.37 $ 12.48
33.95% 23.73% 26.75% 7.51% 33.74% 23.60% 26.52% 17.42% 30.97%
1.50% 1.53% 1.58% 1.67% 1.65% 1.68% 1.73% 1.82% 1.86%
1.16% 1.16% 1.16% 1.15% 1.31% 1.31% 1.31% 1.30% 1.30%
(0.66)% (0.36)% (0.64)% (0.99)% (0.81)% (0.51)% (0.67)%
(0.50)% (0.29)% 0.06% (0.12)% (0.65)% (0.44)% (0.09)% (0.28)% (0.11)%
110.80% 79.11 108.29% 116.78% 110.80% 79.11% 108.29% 116.78% 85.93%
$ 11,183 $ 8,719 $ 8,325 $ 6,993 $ 514 $ 1,779 $ 1,206 $ 656 $ 489
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
101
<PAGE>
Financial Information continued
Financial Highlights
For the Years Ended November 30,
Small Company Index Portfolio
<TABLE>
<CAPTION>
Class A
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 13.02 $ 15.05 $ 13.97 $ 12.98 $ 10.86
Income (loss) from investment operations:
Net investment income 0.12 0.13 0.15 0.19 0.16
Net realized and unrealized gain (loss) 1.61 (1.13) 2.69 1.75 2.67
Total income (loss) from investment operations 1.73 (1.00) 2.84 1.94 2.83
Distributions to shareholders from:
Net investment income (0.10) (0.14) (0.17) (0.14) (0.15)
Net realized gain (1.51) (0.89) (1.59) (0.81) (0.56)
Total distributions to shareholders (1.61) (1.03) (1.76) (0.95) (0.71)
Net increase (decrease) 0.12 (2.03) 1.08 0.99 2.12
Net asset value, end of year $ 13.14 $ 13.02 $ 15.05 $ 13.97 $ 12.98
Total return (a) 14.97% (7.02)% 23.06 15.96% 27.76%
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 0.81% 0.74% 0.68% 0.79% 0.81%
Expenses, net of waivers and reimbursements 0.34%(c) 0.31% 0.32% 0.32% 0.32%
Net investment income, before waivers
and reimbursements 0.80% 0.76% 0.86% 0.89% 0.82%
Net investment income, net of waivers
and reimbursements 1.27% 1.19% 1.22% 1.36% 1.31%
Portfolio turnover rate 101.01% 59.21% 42.66% 46.26% 38.46%
Net assets at end of year (in thousands) $200,404 $ 139,100 $ 147,887 $ 112,856 $ 94,899
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(b) Annualized for periods less than a full year.
(c) Expense ratio, net of waivers and reimbursement, for the year ended November
30, 1999 would have been 0.31% and 0.70% for Class A and Class D,
respectively, absent the effect of any interest expense incurred by the
Fund's temporary borrowing against a line of credit.
(d) For the period January 8, 1998 (Class C shares issue date) through November
30, 1998.
(e) Class C shares were fully redeemed as of June 30, 1999. Financial highlights
for the period then ended were calculated using the average shares
outstanding method.
(f) For the period December 8, 1994 (Class D shares issue date) through November
30, 1995.
102
<PAGE>
<TABLE>
<CAPTION>
Class C Class C
For the For the For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998(d) 1999 1998 1997 1996 1995(f)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 12.98 $ 13.89 $ 12.94 $ 15.01 $ 13.96 $ 12.95 $ 10.51
0.09 0.03 0.10 0.11 0.17 0.13 0.18
1.61 (0.94) 1.52 (1.19) 2.62 1.83 2.96
1.70 (0.91) 1.62 (1.08) 2.79 1.96 3.14
(0.03) -- (0.04) (0.10) (0.15) (0.14) (0.14)
(1.51) -- (1.51) (0.89) (1.59) (0.81) (0.56)
(1.54) -- (1.55) (0.99) (1.74) (0.95) (0.70)
0.16 (0.91) 0.07 (2.07) 1.05 1.01 2.44
$ 13.14(e) $ 12.98 $ 13.01 $ 12.94 $ 15.01 $ 13.96 $ 12.95
-- (6.54)% 14.13% (7.58)% 22.68% 16.20% 31.62%
-- 0.98% 1.20% 1.13% 1.07% 1.18% 1.20%
-- 0.55% 0.73%(c) 0.70% 0.71% 0.71% 0.71%
-- 0.55% 0.41% 0.37% 0.40% 0.55% 0.41%
-- 0.98% 0.88% 0.80% 0.76% 1.02% 0.90%
-- 59.21% 101.01% 59.21% 42.66% 46.26% 38.46%
$ -- $ 870 $ 446 $ 855 $ 690 $ 269 $ 44
- ----------------------------------------------------------------------------------
</TABLE>
103
<PAGE>
Financial Information continued
Financial Highlights
For the Years Ended November 30,
International Growth Portfolio
[CAPTION]
<TABLE>
Class A
For the For the For the
Year Ended Year Ended Year Ended
1999 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year $ 11.78 $ 10.52 $ 10.63
Income (loss) from investment operations:
Net investment income 0.33 0.09 0.11
Net realized and unrealized gain (loss) 2.94 1.90 0.31
Total income (loss) from investment operations 3.27 1.99 0.42
Distributions to shareholders from:
Net investment income (0.22) (0.16) (0.08)
Net realized gain (0.76) (0.57) (0.45)
Total distributions to shareholders (0.98) (0.73) (0.53)
Net increase (decrease) 2.29 1.26 (0.11)
Net asset value, end of year $ 14.07 $ 11.78 $ 10.52
Total return (a) 30.07% 20.44% 4.21%
Ratio to average net assets of:
Expenses, before waivers and reimbursements 1.31% 1.31% 1.37%
Expenses, net of waivers and reimbursements 1.06% 1.06% 1.06%
Net investment income, before waivers
and reimbursements 0.67% 0.64% 0.66%
Net investment income, net of waivers
and reimbursements 0.92% 0.89% 0.97%
Portfolio turnover rate 168.10% 160.13% 154.62%
Net assets at end of year (in thousands) $ 147,689 $ 111,594 $ 106,774
- -------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(b) Class D shares were fully redeemed as of August 22, 1999. Financial
highlights for the period ended were calculated using the average shares
outstanding method.
104
<PAGE>
<TABLE>
<CAPTION>
Class D
For the For the For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
1996 1995 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 9.88 $ 10.21 $ 11.60 $ 10.39 $ 10.54 $ 9.83 $ 10.21
0.10 0.12 (0.01) 0.09 0.09 0.01 0.19
0.87 (0.36) 2.59 1.83 0.29 0.92 (0.48)
0.97 (0.24) 2.58 1.92 0.38 0.93 (0.29)
(0.22) (0.05) (0.14) (0.14) (0.08) (0.22) (0.05)
-- (0.04) (0.76) (0.57) (0.45) -- (0.04)
(0.22) (0.09) (0.90) (0.71) (0.53) (0.22) (0.09)
0.75 (0.33) 1.68 1.21 (0.15) 0.71 (0.38)
$ 10.63 $ 9.88 $ 13.28(b) $ 11.60 $ 10.39 $ 10.54 $ 9.83
9.96% (2.32)% -- 19.91% 3.79% 9.59% (2.78)%
1.43% 1.38% -- 1.70% 1.76% 1.82% 1.77%
1.06% 1.06% -- 1.45% 1.45% 1.45% 1.45%
0.36% 0.90% -- 0.34% 0.27% 0.07% 1.69%
0.73% 1.22% -- 0.59% 0.58% 0.44% 2.01%
202.47% 215.31% -- 160.13% 154.62% 202.47% 215.31%
$ 138,182 $ 148,704 -- $ 203 $ 234 $ 94 $ 20
- -------------------------------------------------------------------------------------
</TABLE>
105
<PAGE>
Financial Information continued
Financial Highlights
For the Years Ended November 30,
International Equity Index Portfolio
<TABLE>
<CAPTION>
Class A Class D
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997(a) 1999 1998(b)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 11.98 $ 10.55 $ 10.00 $ 11.97 $ 9.88
Income from investment operations:
Net investment income 0.23 0.14 0.10 0.12 --
Net realized and unrealized gain 2.07 1.46 0.45 2.08 2.09
Total income from investment operations 2.30 1.60 0.55 2.20 2.09
Distributions to shareholders from:
Net investment income (loss) (0.23) (0.17) -- (0.11) --
In excess of net investment income (0.01) -- -- (0.12) --
Net realized gain (0.54) -- -- (0.54) --
Total distributions to shareholders (0.78) (0.17) -- (0.77) --
Net increase 1.52 1.43 0.55 1.43 2.09
Net asset value, end of year $ 13.50 $ 11.98 $ 10.55 $ 13.40 $ 11.97
Total return (c) 20.32% 15.50% 5.45% 19.48% 21.15%
Ratio to average net assets of (d):
Expenses, before waivers and reimbursements 0.91% 1.00% 1.08% 1.30% 1.39%
Expenses, net of waivers and reimbursements 0.53% 0.55% 0.51% 0.92% 0.94%
Net investment income (loss), before waivers
and reimbursements 0.83% 0.91% 1.18% 0.44% (0.56)%
Net investment income (loss), net of waivers
and reimbursements 1.21% 1.36% 1.75% 0.82% (0.11)%
Portfolio turnover rate 45.97% 41.53% 8.16% 45.97% 41.53%
Net assets at end of year (in thousands) $ 56,479 $ 44,940 $ 34,244 $ 14 $ 12
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period April 1, 1997 (commencement of operations) through November
30, 1997.
(b) For the period October 5, 1998 (Class D Shares issue date) through November
30, 1998.
(c) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year and does not reflect
the 1.00% additional transaction fee which would reduce total return.
(d) Annualized for periods less than a full year.
106
<PAGE>
For More Information
ANNUAL/
SEMIANNUAL
REPORT
Additional information about the Portfolios' investments is available in the
Portfolios' annual and semiannual reports to shareholders. In the Portfolios'
annual reports, you will find a discussion of the market conditions and
investment strategies that significantly affected the Portfolios' performance
during their last fiscal year.
STATEMENT OF
ADDITIONAL
INFORMATION
Additional information about the Portfolios and their policies is also available
in the Portfolios' Statement of Additional Information ("SAI"). The SAI is
incorporated by reference into this Prospectus (is legally considered part of
this Prospectus).
The Portfolios' annual and semiannual reports, and the SAI, are available free
upon request by calling (800) 637-1380.
To obtain other information and for shareholder inquiries:
By telephone - Call (800) 637-1380
By mail - Northern Institutional Funds
P.O. Box 75943
Chicago, IL 60675-5943
On the Internet - Text-only versions of the Portfolios' documents are available
on line and may be downloaded from the SEC's website at http://www.sec.gov.
You may review and obtain copies of Trust documents by visiting the SEC's Public
Reference Room in Washington, D.C. You may also obtain copies of Trust documents
by sending your request and a duplicating fee to the SEC's Public Reference
Section, Washington, D.C. 20549-0102 or by electronic request at
[email protected]. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at 1-202-942-8090.
Northern Institutional Funds
811-3605
107
<PAGE>
This page intentionally left blank.
<PAGE>
INVESTMENT ADVISERS
The Northern Trust Company
Northern Trust Quantitative Advisors, Inc.
50 South LaSalle Street
Chicago, Illinois 60675
TRANSFER AGENT
AND CUSTODIAN
The Northern Trust Company
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
NORTHERN INSTITUTIONAL FUNDS
U.S. GOVERNMENT SECURITIES PORTFOLIO
SHORT-INTERMEDIATE BOND PORTFOLIO
INTERMEDIATE BOND PORTFOLIO
U.S. TREASURY INDEX PORTFOLIO
BOND PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
This Statement of Additional Information dated April 1, 2000 (the
"Additional Statement") is not a prospectus. Copies of the prospectus dated
April 1, 2000 for the U.S. Government Securities, Short-Intermediate Bond,
Intermediate Bond, U.S. Treasury Index, Bond, and International Bond Portfolios
(the "Portfolios") of Northern Institutional Funds (the "Prospectus") may be
obtained without charge by calling 1-800-637-1380 (toll-free). Capitalized terms
not otherwise defined have the same meaning as in the Prospectus.
The audited financial statements and related report of Ernst & Young LLP,
independent auditors, contained in the annual report to the Portfolios'
shareholders for the fiscal year ended November 30, 1999 are incorporated herein
by reference in the section entitled "Financial Statements." No other parts of
the annual report are incorporated herein by reference. Copies of the annual
report may be obtained upon request and without charge by calling 1-800-637-1380
(toll-free).
1
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL INVESTMENT INFORMATION........................................ 3
Classification and History........................................... 3
Investment Objectives, Strategies and Risks.......................... 3
Investment Restrictions.............................................. 15
ADDITIONAL TRUST INFORMATION............................................. 17
Trustees and Officers................................................ 17
Investment Advisers, Transfer Agent and Custodian.................... 22
Portfolio Transactions............................................... 25
Portfolio Valuation.................................................. 26
Co-Administrators and Distributor.................................... 26
Shareholder Servicing Plan........................................... 29
Counsel and Auditors................................................. 31
In-Kind Purchases and Redemptions.................................... 31
PERFORMANCE INFORMATION.................................................. 31
TAXES.................................................................... 38
Federal - General Information........................................ 38
Foreign Investors.................................................... 39
DESCRIPTION OF SHARES.................................................... 39
OTHER INFORMATION........................................................ 43
FINANCIAL STATEMENTS..................................................... 44
APPENDIX A............................................................... A-1
APPENDIX B............................................................... B-1
</TABLE>
No person has been authorized to give any information or to make any
representations not contained in this Additional Statement or in the Prospectus
in connection with the offering made by the 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. The 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.
An investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. An investment in a Portfolio involves investment risks, including
possible loss of principal.
2
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
Classification and History
Northern Institutional Funds (the "Trust") is an open-end, management
investment company. Each Portfolio (other than the International Bond Portfolio)
is classified as diversified under the Investment Company Act of 1940, as
amended (the "1940 Act"). The International Bond Portfolio is classified as non-
diversified under the 1940 Act.
Each Portfolio is a series of the Trust, which was formed as a Delaware
business trust on July 1, 1997 under an Agreement and Declaration of Trust (the
"Trust Agreement"). The Trust is the result of a reorganization of a
Massachusetts business trust formerly known as The Benchmark Funds on March 31,
1998. The Trust's name was changed from The Benchmark Funds to the Northern
Institutional Funds on July 15, 1998. The Trust also offers five money market,
one balanced, and nine equity portfolios, which are not described in this
document.
Investment Objectives, Strategies and Risks
The following supplements the investment objectives, strategies and risks
of the Portfolios as set forth in the Prospectus. The investment objective of
the Intermediate Bond Portfolio may be changed without shareholder approval. The
investment objective of each other Portfolio may not be changed without the vote
of the majority of the Portfolio's outstanding shares. Except as expressly noted
below, however, each Portfolio's investment policies may be changed without
shareholder approval.
U.S. Government Obligations. Examples of the types of U.S. Government
----------------------------
obligations that may be acquired by the Portfolios include U.S. Treasury Bills,
Treasury Notes and Treasury Bonds and the obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Federal National Mortgage Association
("FNMA"), Government National Mortgage Association ("GNMA"), General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal Intermediate Credit Banks and the Maritime
Administration.
Securities guaranteed as to principal and interest by the U.S. Government,
its agencies or instrumentalities are also 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 any agency or instrumentality
thereof, and (b) participations in loans made to foreign governments or their
agencies that are so guaranteed.
To the extent consistent with their respective investment objectives, the
Portfolios may invest in a variety of US. Treasury obligations and obligations
issued by or guaranteed by the U.S. Government or its agencies and
instrumentalities. Not all U.S. Government obligations carry the same credit
support. 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. In addition, the secondary market for certain
participations in loans made to foreign governments or their agencies may be
limited.
Supranational Bank Obligations. Each Portfolio (other than the U.S.
-------------------------------
Treasury Index Portfolio) may invest in obligations of supranational banks.
Supranational banks are international banking institutions designed or supported
by national governments to promote economic reconstruction, development or trade
between nations (e.g., the World Bank). Obligations of supranational banks may
be supported by appropriated but unpaid commitments of their member countries
and there is no assurance that these commitments will be undertaken or met in
the future.
Stripped Securities. Each Portfolio may purchase stripped securities. The
--------------------
Treasury Department has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and principal payments on Treasury securities through the
Federal Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Each Portfolio may purchase
securities registered in the STRIPS program. Under the STRIPS program, a
Portfolio will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the
3
<PAGE>
underlying U.S. Treasury securities.
In addition, each Portfolio (other than the U.S. Treasury Index Portfolio)
may acquire U.S. Government obligations and their unmatured interest coupons
that have been separated ("stripped") by their holder, typically a custodian
bank or investment brokerage firm. Having separated the interest coupons from
the underlying principal of the U.S. Government obligations, the holder will
resell the stripped securities in custodial receipt programs with a number of
different names, including "Treasury Income Growth Receipts" ("TIGRs") and
"Certificate of Accrual on Treasury Securities" ("CATS"). The stripped coupons
are sold separately from the underlying principal, which is usually sold at a
deep discount because the buyer receives only the right to receive a future
fixed payment on the security and does not receive any rights to periodic
interest (cash) payments. The underlying U.S. Treasury bonds and notes
themselves are held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities (i.e., unregistered securities which are ostensibly
owned by the bearer or holder), in trust on behalf of the owners. Counsel to the
underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government obligations for Federal tax purposes. The Trust is
not aware of any binding legislative, judicial or administrative authority on
this issue.
To the extent consistent with its investment objectives, each Portfolio may
purchase stripped mortgage-backed securities ("SMBS"). SMBS are usually
structured with two or more classes that receive different proportions of the
interest and principal distributions from a pool of mortgage-backed obligations.
A common type of SMBS will have one class receiving all of the interest, while
the other class receives all of the principal. However, in some instances, one
class will receive some of the interest and most of the principal while the
other class will receive most of the interest and the remainder of the
principal. If the underlying obligations experience greater than anticipated
prepayments of principal, the Portfolio may fail to fully recoup its initial
investment in these securities. The market value of the class consisting
entirely of principal payments generally is extremely volatile in response to
changes in interest rates. The yields on a class of SMBS that receives all or
most of the interest are generally higher than prevailing market yields on other
mortgage-backed obligations because their cash flow patterns are also volatile
and there is a risk that the initial investment will not be fully recouped. SMBS
issued by the U.S. Government (or a U.S. Government agency or instrumentality)
may be considered liquid under guidelines established by the Trust's Board of
Trustees if they can be disposed of promptly in the ordinary course of business
at a value reasonably close to that used in the calculation of the net asset
value per share.
Asset-Backed Securities. The U.S. Government Securities Portfolio may
------------------------
purchase asset-backed securities that are secured or backed by mortgages and
issued by an agency of the U.S. Government, and the Short-Intermediate Bond,
Bond, Intermediate Bond and International Bond Portfolios may purchase asset-
backed securities, which are securities backed by mortgages, installment
contracts, credit card receivables or other assets. Asset-backed securities
represent interests in "pools" of assets in which payments of both interest and
principal on the securities are made monthly, thus in effect "passing through"
monthly payments made by the individual borrowers on the assets that underlie
the securities, net of any fees paid to the issuer or guarantor of the
securities. The average life of asset-backed securities varies with the
maturities of the underlying instruments, and the average life of a mortgage-
backed instrument, in particular, is likely to be substantially less than the
original maturity of the mortgage pools underlying the securities as a result of
mortgage prepayments. For this and other reasons, an asset-backed security's
stated maturity may be shortened, and the security's total return may be
difficult to predict precisely.
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 U.S. Government Securities, Short-Intermediate
Bond, Bond, Intermediate Bond and International Bond Portfolios, 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.
Asset-backed securities acquired by a Portfolio may include collateralized
mortgage obligations ("CMOs") issued by private companies. CMOs provide the
holder with a specified interest in the cash flow of a pool of underlying
mortgages
4
<PAGE>
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
Portfolios will not purchase "residual" CMO interests, which normally exhibit
greater price volatility.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
by the Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by the Federal National Mortgage
Association ("FNMA") include FNMA Guaranteed Mortgage Pass-Through Certificates
(also known as "Fannie Maes") which are solely the obligations of the FNMA and
are not backed by or entitled to the full faith and credit of the United States,
but are supported by the right of the issuer to borrow from the U.S. Treasury.
FNMA is a government-sponsored organization owned entirely by private
stockholders. Fannie Maes are guaranteed as to timely payment of the principal
and interest by FNMA. Mortgage-related securities issued by the Federal Home
Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation
Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a corporate
instrumentality of the United States, created pursuant to an Act of Congress,
which is owned entirely by Federal Home Loan Banks. Freddie Macs are not
guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
the FHLMC does not guarantee timely payment of principal, the FHLMC may remit
the amount due on account of its guarantee of ultimate payment of principal at
any time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.
Non-mortgage asset-backed securities involve certain risks that are 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
have given 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 payments on these securities.
Foreign Securities. Each Portfolio other than the U.S. Government
-------------------
Securities and U.S. Treasury Index Portfolios may invest in bonds and other
fixed income securities of foreign issuers. Investment in foreign securities
involves special risks. These include market risk, interest rate risk and the
risks of investing in securities of foreign issuers and of companies whose
securities are principally traded outside the United States and in investments
denominated in foreign currencies. The holdings of the Portfolios will be
sensitive to changes in interest rates and the interest rate environment. In
addition, the performance of investments in securities denominated in a foreign
currency will depend 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 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.
There are other risks and costs involved in investing in foreign securities
which are in addition to the usual risks inherent in domestic investments.
Investment in foreign securities involves higher costs than investment in U.S.
securities,
5
<PAGE>
including higher transaction and custody costs as well as the imposition of
additional taxes by foreign governments. Foreign investments 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 the adoption of other governmental restrictions might adversely
affect an investment in foreign securities. Additionally, foreign banks and
foreign branches of domestic banks are subject to less stringent reserve
requirements, and to different accounting, auditing and recordkeeping
requirements.
Although a Portfolio may invest in securities denominated in foreign
currencies, its portfolio securities and other assets are valued in U.S.
dollars. Currency exchange rates may fluctuate significantly over short periods
of time causing, together with other factors, a 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. To the extent that a Portfolio's total assets, adjusted to reflect a
Portfolio's net position after giving effect to currency transactions, are
denominated in the currencies or foreign countries, a Portfolio will be more
susceptible to the risk of adverse economic and political developments within
those countries. A Portfolio is also subject to the possible imposition of
exchange control regulations or freezes on the convertibility of currency.
Dividends and interest payable on a Portfolio's foreign portfolio
securities may be subject to foreign withholding taxes. To the extent such taxes
are not offset by credits or deductions allowed to investors under U.S. federal
income tax law, they may reduce the net return to the shareholders. See "Taxes."
To the extent consistent with its investment objective, a Portfolio may
also invest in obligations of the International Bank for Reconstruction and
Development (also known as the World Bank) which are supported by subscribed,
but unpaid, commitments of its member countries. There is no assurance that
these commitments will be undertaken or complied with in the future.
Investors should understand that the expense ratio of the International
Bond Portfolio can be expected to be higher than those of Portfolios investing
primarily in domestic securities. The costs attributable to investing abroad are
usually higher for several reasons, such as the higher cost of investment
research, higher cost of custody of foreign securities, higher commissions paid
on comparable transactions on foreign markets and additional costs arising from
delays in settlements of transactions involving foreign securities. Countries in
which the Short-Intermediate Bond, Bond, Intermediate Bond and International
Bond Portfolios may invest include, but are not limited to: Argentina,
Australia, Austria, Belgium, Brazil, Canada, Chile, Colombia, Denmark, Finland,
France, Germany, Greece, Hong Kong, Hungary, Indonesia, Ireland, Israel, Italy,
Japan, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Peru,
the Philippines, Poland, Portugal, Singapore, South Africa, South Korea, Spain,
Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom and Venezuela.
The end of the Cold War, the reunification of Germany, the accession of new
Western European members to the European Economic and Monetary Union and the
aspirations of Eastern European states to join and other political and social
events in Europe have caused considerable economic, social and political
dislocation. In addition, events in the Japanese economy, as well as political
and social developments there have affected Japanese securities and currency
markets, and the relationship of the Japanese yen with other currencies and with
the U.S. dollar. Future political, economic and social developments in Japan and
in the Asia/Pacific regional context can be expected to produce continuing
effects on securities and currency markets.
Foreign Currency Transactions. In order to protect against a possible loss
------------------------------
on investments resulting from a decline or appreciation in the value of a
particular foreign currency against the U.S. dollar or another foreign currency
or for other reasons, the Short-Intermediate Bond, Bond, Intermediate Bond and
International Bond Portfolios are authorized to enter into forward foreign
currency exchange contracts. These contracts involve an obligation to purchase
or sell a specified currency at a future date at a price set at the time of the
contract. Forward currency contracts do not eliminate fluctuations in the values
of portfolio securities but rather allow a Portfolio to establish a rate of
exchange for a future point in time.
When entering into a contract for the purchase or sale of a security, a
Portfolio may enter into a forward foreign currency exchange contract for the
amount of the purchase or sale price to protect against variations, between the
date the security is purchased or sold and the date on which payment is made or
received, in the value of the foreign currency
6
<PAGE>
relative to the U.S. dollar or other foreign currency.
When the investment management team anticipates that a particular foreign
currency may decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, a Portfolio may enter into a forward
contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. Similarly, when the obligations held by a Portfolio
create a short position in a foreign currency, the Portfolio may enter into a
forward contract to buy, for a fixed amount, an amount of foreign currency
approximating the short position. A Portfolio's net long and short foreign
currency exposure will not exceed its total asset value. With respect to any
forward foreign currency contract, it will not generally be possible to match
precisely the amount covered by that contract and the value of the securities
involved due to the changes in the values of such securities resulting from
market movements between the date the forward contract is entered into and the
date it matures. In addition, while forward contracts may offer protection from
losses resulting from declines or appreciation in the value of a particular
foreign currency, they also limit potential gains which might result from
changes in the value of such currency. A Portfolio may also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
In addition, the International Bond Portfolio may purchase or sell forward
foreign currency exchange contracts to seek to increase total return or for
cross-hedging purposes. The Portfolio may engage in cross-hedging by using
forward contracts in one currency to hedge against fluctuations in the value of
securities denominated in a different currency if the investment management team
believes that there is a pattern of correlation between the two currencies.
Liquid assets equal to the amount of a Portfolio's assets that could be
required to consummate forward contracts will be segregated except to the extent
the contracts are otherwise "covered." The segregated assets will be valued at
market or fair value. If the market or fair value of such assets declines,
additional liquid assets will be segregated daily so that the value of the
segregated assets will equal the amount of such commitments by the Portfolio. A
forward contract to sell a foreign currency is "covered" if a Portfolio owns the
currency (or securities denominated in the currency) underlying the contract, or
holds a forward contract (or call option) permitting the Portfolio to buy the
same currency at a price that is (i) no higher than the Portfolio's price to
sell the currency or (ii) greater than the Portfolio's price to sell the
currency provided the Portfolio segregates liquid assets in the amount of the
difference. A forward contract to buy a foreign currency is "covered" if a
Portfolio holds a forward contract (or call option) permitting the Portfolio to
sell the same currency at a price that is (i) as high as or higher than the
Portfolio's price to buy the currency or (ii) lower than the Portfolio's price
to buy the currency provided the Portfolio segregates liquid assets in the
amount of the difference.
Interest Rate Swaps, Floors and Caps and Currency Swaps. The Portfolios
--------------------------------------------------------
(other than the U.S. Treasury Index Portfolio) may enter into interest rate
swaps or purchase interest rate floors or caps for hedging purposes and not for
speculation. Interest rate swaps involve the exchange by a Portfolio with
another party of their respective commitments to pay or receive interest, such
as an exchange of fixed rate payments for floating rate payments. A Portfolio
will typically use interest rate swaps to preserve a return on a particular
investment or portion of its portfolio or to shorten the effective duration of
its portfolio investments. The purchase of an interest rate floor or cap
entitles the purchaser to receive payments of interest on a notional principal
amount from the seller, to the extent the specified index falls below (floor) or
exceeds (cap) a predetermined interest rate. The Portfolios will only enter into
interest rate swaps or interest rate floor or cap transactions on a net basis;
i.e., the two payment streams are netted out, with a Portfolio receiving or
paying, as the case may be, only the net amount of the two payments.
The International Bond Portfolio may enter into currency swaps, which
involve the exchange of the rights of the Portfolio and another party to make or
receive payments in specified currencies. Currency swaps usually involve the
delivery of the entire principal value of one designated currency in exchange
for the other designated currency.
Inasmuch as interest rate and currency swaps are entered into for good
faith hedging purposes, the Trust and The Northern Trust Company ("Northern")
believe that such transactions do not constitute senior securities as defined in
the 1940 Act and, accordingly, will not treat them as being subject to the
Portfolio's borrowing restrictions. The net amount of the excess, if any, of a
Portfolio's obligations over its entitlements with respect to interest rate or
currency swaps 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 segregated by the Portfolio.
7
<PAGE>
The Portfolios will not enter into an interest rate or currency swap or
interest rate floor or cap transaction unless the unsecured commercial paper,
senior debt or the claims-paying ability of the other party thereto is rated
either A or A-1 or better by Standard & Poor's Ratings Group, Inc. ("S&P"), Duff
& Phelps Credit Rating Co. ("D&P") or Fitch IBCA ("Fitch"), or A or P-1 or
better by Moody's Investors Service, Inc. ("Moody's"). If there is a default by
the other party to such transaction, the Portfolios will have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with markets for other similar instruments which
are traded in the interbank market.
Options. Each Portfolio may buy put options and buy call options and write
--------
covered call and secured put options. Such options may relate to particular
securities, financial instruments, foreign currencies, foreign or domestic
securities indices or the yield differential between two securities ("yield
curve options") and may or may not be listed on a domestic or foreign securities
exchange (an "Exchange") or issued by the Options Clearing Corporation. A call
option for a particular security or currency gives the purchaser of the option
the right to buy, and a writer the obligation 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.
Options trading is a highly specialized activity which entails greater than
ordinary investment risk. Options on particular securities may be more volatile
than the underlying instruments and, therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying instruments themselves.
The Portfolios will write call options only if they are "covered." In the
case of a call option on a security or currency, the option is "covered" if a
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 segregated) upon conversion or exchange of other securities
or instruments held by it. For a call option on an index, the option is covered
if a 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 a 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 Portfolio segregates liquid assets in the amount of the difference.
The Portfolios will write put options only if they are "secured" by segregated
liquid assets in an amount not less than the exercise price of the option at all
times during the option period.
With respect to yield curve options, a call (or put) option is covered if a
Portfolio holds another call (or put) option on the spread between the same two
securities and segregates liquid assets sufficient to cover the Portfolio's net
liability under the two options. Therefore, the Portfolio's liability for such a
covered option is generally limited to the difference between the amount of the
Portfolio's liability under the option written by the Portfolio less the value
of the option held by the Portfolio. Yield curve options may also be covered in
such other manner as may be in accordance with the requirements of the
counterparty with which the option is traded and applicable laws and
regulations.
A Portfolio's obligation to sell a security or currency subject to a
covered call option written by it, or to purchase a security or currency subject
to a secured put option written by it, may be terminated prior to the expiration
date of the option by the Portfolio's execution of a closing purchase
transaction, which is effected by purchasing on an exchange an option of the
same series (i.e., same underlying security or currency, exercise price and
expiration date) as the option previously written. Such a purchase does not
result in the ownership of an option. A closing purchase transaction will
ordinarily be effected to realize a profit on an outstanding option, to prevent
an underlying security or currency from being called, to permit the sale of the
underlying security or currency or to permit the writing of a new option
containing different terms on such underlying security. The cost of such a
liquidation purchase plus transaction costs may be greater than the premium
received upon the original option, in which event the Portfolio will have
incurred a loss in the transaction. There is no assurance that a liquid
secondary market will exist for any particular option. An option writer, unable
to effect a closing
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<PAGE>
purchase transaction, will not be able to sell the underlying security or
currency (in the case of a covered call option) or liquidate the segregated
assets (in the case of a secured put option) until the option expires or the
optioned security or currency is delivered upon exercise with the result that
the writer in such circumstances will be subject to the risk of market decline
or appreciation in the security or currency during such period.
When a Portfolio purchases an option, the premium paid by it is recorded as
an asset of the Portfolio. When the Portfolio writes an option, an amount equal
to the net premium (the premium less the commission) received by the Portfolio
is included in the liability section of the Portfolio's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the current bid price. If an option
purchased by the Portfolio expires unexercised, the Portfolio realizes a loss
equal to the premium paid. If the Portfolio enters into a closing sale
transaction on an option purchased by it, the Portfolio will realize a gain if
the premium received by the Portfolio on the closing transaction is more than
the premium paid to purchase the option, or a loss if it is less. If an option
written by the Portfolio expires on the stipulated expiration date or if the
Portfolio enters into a closing purchase transaction, it will realize a gain (or
loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. If an option written by the Portfolio is exercised, the
proceeds of the sale will be increased by the net premium originally received
and the Portfolio will realize a gain or loss.
There are several risks associated with transactions in certain options.
For example, there are significant differences between the securities, currency
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In addition,
a liquid secondary market for particular options, whether traded over-the-
counter or on a national securities exchange (an "Exchange"), may be absent for
reasons which include the following: there may be insufficient trading interest
in certain options; restrictions may be imposed by an Exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an Exchange; the facilities of
an Exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading value; or one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that Exchange would
continue to be exercisable in accordance with their terms.
Futures Contracts and Related Options. Each Portfolio may invest in
--------------------------------------
futures contracts and interest rate futures contracts and may purchase and sell
call and put options on futures contracts for hedging purposes, for speculative
purposes (to seek to increase total return), or for liquidity management
purposes. When used as a hedge, a 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. A
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, a Portfolio may purchase
a futures contract as a hedge in anticipation of purchases of securities. In
addition, a Portfolio may utilize futures contracts in anticipation of changes
in the composition of its portfolio holdings. For a detailed description of
futures contracts and related options, see Appendix B to this Additional
Statement.
Securities Lending. Collateral for loans of portfolio securities made by a
-------------------
Portfolio may consist of cash, cash equivalents, securities issued or guaranteed
by the U.S. Government or its agencies or irrevocable bank letters of credit (or
any combination thereof). The borrower of securities will be required to
maintain the market value of the collateral at not less than the market value of
the loaned securities, and such value will be monitored on a daily basis. When a
Portfolio lends its securities, it continues to receive dividends and interest
on the securities loaned and may simultaneously earn interest on the investment
of the cash collateral. Although voting rights, or rights to consent, attendant
to securities on loan pass to the borrower, such loans will be called so that
the securities may be voted by a Portfolio if a material event affecting the
investment is to occur.
Forward Commitments, When-Issued Securities and Delayed Delivery
----------------------------------------------------------------
Transactions. Each Portfolio may purchase securities on a when-issued basis or
- -------------
purchase or sell securities on a forward commitment (sometimes called delayed
delivery) basis. These transactions involve a commitment by the Portfolio to
purchase or sell securities at a future date. The price of the underlying
securities (usually expressed in terms of yield) and the date when the
securities will be delivered and
9
<PAGE>
paid for (the settlement date) are fixed at the time the transaction is
negotiated. When-issued purchases and forward commitment transactions are
normally negotiated directly with the other party.
A Portfolio will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities. If
deemed advisable as a matter of investment strategy, however, a Portfolio may
dispose of or negotiate a commitment after entering into it. A Portfolio also
may sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. The Portfolio may realize a
capital gain or loss in connection with these transactions.
When a Portfolio purchases securities on a when-issued or forward
commitment basis, the Portfolio will segregate liquid assets having a value
(determined daily) at least equal to the amount of the Portfolio's purchase
commitments until three days prior to the settlement date, or otherwise cover
its position. These procedures are designed to ensure that the Portfolio will
maintain sufficient assets at all times to cover its obligations under when-
issued purchases, forward commitments and delayed-delivery transactions. For
purposes of determining a Portfolio's average dollar-weighted maturity, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date.
Commercial Paper, Bankers' Acceptances, Certificates of Deposit, Time
---------------------------------------------------------------------
Deposits and Bank Notes. Commercial paper represents short-term unsecured
- ------------------------
promissory notes issued in bearer form by banks or bank holding companies,
corporations and finance companies. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers' acceptances are
negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time
deposits may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties that vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party. Bank notes rank junior to deposit liabilities of banks and pari passu
----------
with other senior, unsecured obligations of the bank. Bank notes are classified
as "other borrowings" on a bank's balance sheet, while deposit notes and
certificates of deposit are classified as deposits. Bank notes are not insured
by the Federal Deposit Insurance Corporation or any other insurer. Deposit notes
are insured by the Federal Deposit Insurance Corporation only to the extent of
$100,000 per depositor per bank.
A Portfolio may invest a portion of its assets in the obligations of
foreign banks and foreign branches of domestic banks. Such obligations include
Eurodollar Certificates of Deposit ("ECDs") which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs") which are essentially the same as ETDs
except they are issued by Canadian offices of major Canadian banks; Schedule Bs,
which are obligations issued by Canadian branches of foreign or domestic banks;
Yankee Certificates of Deposit ("Yankee CDs") which are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the United States; and Yankee Bankers' Acceptances ("Yankee BAs") which are U.S.
dollar-denominated bankers' acceptances issued by a U.S. branch of a foreign
bank and held in the United States.
Commercial paper and other short-term obligations acquired by a 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 the Investment Advisers.
Insurance Funding Agreements. The Short-Intermediate Bond, Bond and
-----------------------------
Intermediate Bond Portfolios may invest in insurance funding agreements
("IFAs"). An IFA is normally a general obligation of the issuing insurance
company and not a separate account. The purchase price paid for an IFA becomes
part of the general assets of the insurance company, and the contract is paid
from the company's general assets. Generally, IFAs are not assignable or
transferable without the permission of the issuing insurance companies, and an
active secondary market in IFAs may not exist.
Zero Coupon, Pay-in-Kind and Capital Appreciation Bonds. To the extent
--------------------------------------------------------
consistent with their respective investment objectives, each Portfolio may
invest in zero coupon bonds, capital appreciation bonds and pay-in-kind ("PIK")
securities. Zero coupon and capital appreciation bonds are debt securities
issued or sold at a discount from their face value and which do not entitle the
holder to any periodic payment of interest prior to maturity or a specified
date. The original issue discount varies depending on the time remaining until
maturity or cash payment date, prevailing interest rates, the
10
<PAGE>
liquidity of the security and the perceived credit quality of the issuer. These
securities also may take the form of debt securities that have been stripped of
their unmatured interest coupons, the coupons themselves or receipts or
certificates representing interests in such stripped debt obligations or
coupons. The market prices of zero coupon bonds, capital appreciation bonds and
PIK securities generally are more volatile than the market prices of interest
bearing securities and are likely to respond to a greater degree to changes in
interest rates than interest bearing securities having similar maturities and
credit quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds, PIK securities are designed to give an issuer flexibility in
managing cash flow. PIK securities that are debt securities can either be senior
or subordinated debt and generally trade flat (i.e., without accrued interest).
The trading price of PIK debt securities generally reflects the market value of
the underlying debt plus an amount representing accrued interest since the last
interest payment.
Zero coupon bonds, capital appreciation bonds and PIK securities involve
the additional risk that, unlike securities that periodically pay interest to
maturity, a Portfolio will realize no cash until a specified future payment date
unless a portion of such securities is sold and, if the issuer of such
securities defaults, a Portfolio may obtain no return at all on its investment.
In addition, even though such securities do not provide for the payment of
current interest in cash, the Portfolios are nonetheless required to accrue
income on such investments for each taxable year and generally are required to
distribute such accrued amounts (net of deductible expenses, if any) to avoid
being subject to tax. Because no cash is generally received at the time of the
accrual, a Portfolio may be required to liquidate other portfolio securities to
obtain sufficient cash to satisfy Federal tax distribution requirements
applicable to the Portfolio.
Variable and Floating Rate Instruments. With respect to the variable and
---------------------------------------
floating rate instruments that may be acquired by the Portfolios, the investment
management team will consider the earning power, cash flows and other liquidity
ratios of the issuers and guarantors of such instruments and, if the instruments
are subject to demand features, will monitor their financial status and ability
to meet payment on demand. Where necessary to ensure that a variable or floating
rate instrument meets the Portfolios' quality requirements, the issuer's
obligation to pay the principal of the instrument will be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
Variable and floating rate instruments eligible for purchase by the
Portfolios include variable amount master demand notes, which permit the
indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate, and 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. The Portfolios may deem the maturity of variable and
floating rate instruments to be less than their stated maturities based on their
variable and floating rate features and/or their put features. Unrated variable
and floating rate instruments will be determined by Northern and Northern Trust
Quantitative Advisors, Inc. ("NTQA" and collectively with Northern, the
"Investment Advisers") to be of comparable quality at the time of purchase to
rated instruments which may be purchased by the Portfolios.
Variable and floating rate instruments including inverse floaters held by a
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. With respect to the investments of the Portfolios in
---------------------
the securities of other investment companies, such investments will be limited
so that, as determined after a purchase is made, either (a) not more than 3% of
the total outstanding stock of such investment company will be owned by a
Portfolio, the Trust as a whole and their affiliated persons (as defined in the
1940 Act); or (b)(i) not more than 5% of the value of the total assets of a
Portfolio will be invested in the securities of any one investment company, (ii)
not more than 10% of the value of its total assets will be invested in the
aggregate in securities of investment companies as a group, and (iii) not more
than 3% of the outstanding voting stock of any one investment company will be
owned by the Portfolio.
Certain investment companies whose securities are purchased by the
Portfolios may not be obligated to redeem
11
<PAGE>
such securities in an amount exceeding 1% of the investment company's total
outstanding securities during any period of less than 30 days. Therefore, such
securities that exceed this amount may be illiquid.
If required by the 1940 Act, each Portfolio expects to vote the shares of
other investment companies that are held by it in the same proportion as the
vote of all other holders of such securities.
A Portfolio may invest all or substantially all of its assets in a single
open-end investment company or series thereof with substantially the same
investment objective, policies and restrictions as the Portfolio. However, each
Portfolio currently intends to limit its investments in securities issued by
other investment companies to the extent described above. A Portfolio may adhere
to more restrictive limitations with respect to its investments in securities
issued by other investment companies if required by the SEC or deemed to be in
the best interests of the Trust.
Repurchase Agreements. Each Portfolio may agree to purchase portfolio
----------------------
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Repurchase agreements are considered loans under the 1940 Act.
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 subject to the agreement in an amount
exceeding the repurchase price (including accrued interest). Default by the
seller would, however, expose the Portfolio to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations.
Reverse Repurchase Agreements. Each Portfolio may borrow funds by selling
------------------------------
portfolio securities to financial institutions such as banks and broker/dealers
and agreeing to repurchase them at a mutually specified date and price ("reverse
repurchase agreements"). The Portfolios may 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. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Portfolio may decline below
the repurchase price. The Portfolios will pay interest on amounts obtained
pursuant to a reverse repurchase agreement. While reverse repurchase agreements
are outstanding, a Portfolio will segregate liquid assets in an amount at least
equal to the market value of the securities, plus accrued interest, subject to
the agreement. Reverse repurchase agreements are considered to be borrowings
under the 1940 Act.
Risks Related to Lower-Rated Securities. While any investment carries some
----------------------------------------
risk, certain risks associated with lower-rated securities are different than
those for investment-grade securities. The risk of loss through default is
greater because lower-rated securities are usually unsecured and are often
subordinate to an issuer's other obligations. Additionally, the issuers of these
securities frequently have high debt levels and are thus more sensitive to
difficult economic conditions, individual corporate developments and rising
interest rates. Consequently, the market price of these securities may be quite
volatile and may result in wider fluctuations of a Portfolio's net asset value
per share.
There remains some uncertainty about the performance level of the market
for lower-rated securities under adverse market and economic environments. An
economic downturn or increase in interest rates could have a negative impact on
both the market for lower-rated securities (resulting in a greater number of
bond defaults) and the value of lower-rated securities held in a portfolio of
investments.
The economy and interest rates can affect lower-rated securities
differently than other securities. For example, the prices of lower-rated
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher-rated investments. In
addition, during an economic downturn or period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.
If an issuer of a security defaults, a Portfolio may incur additional
expenses to seek recovery. In addition, periods of economic uncertainty would
likely result in increased volatility for the market prices of lower-rated
securities as well as a Portfolio's net asset value. In general, both the prices
and yields of lower-rated securities will fluctuate.
In certain circumstances it may be difficult to determine a security's fair
value due to a lack of reliable objective information. Such instances occur
where there is not an established secondary market for the security or the
security is lightly traded. As a result, a Portfolio's valuation of a security
and the price it is actually able to obtain when it sells the security could
differ.
12
<PAGE>
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower-rated
securities held by a Portfolio, especially in a thinly traded market. Illiquid
or restricted securities held by the Portfolio may involve special registration
responsibilities, liabilities and costs, and could involve other liquidity and
valuation difficulties.
The ratings of S&P, Moody's, Duff, Fitch and Thompson Bank Watch, Inc.
("TBW") evaluate the safety of a lower-rated security's principal and interest
payments, but do not address market value risk. Because the ratings of the
rating agencies may not always reflect current conditions and events, in
addition to using recognized rating agencies and other sources, the Investment
Advisers perform their own analysis of the issuers whose lower-rated securities
the Portfolios purchase. Because of this, a Portfolio's performance may depend
more on the Investment Adviser credit analysis than is the case of mutual funds
investing in higher-rated securities.
In selecting lower-rated securities, the Investment Advisers consider
factors such as those relating to the creditworthiness of issuers, the ratings
and performance of the securities, the protections afforded the securities and
the diversity of a Portfolio's investment portfolio. The Investment Advisers
monitor the issuers of lower-rated securities held by a Portfolio for their
ability to make required principal and interest payments, as well as in an
effort to control the liquidity of the Portfolio so that it can meet redemption
requests.
Yields and Ratings. The yields on certain obligations, including the
-------------------
instruments in which the Portfolios may invest, are dependent on a variety of
factors, including general market economic conditions, conditions in the
particular market for the obligation, financial condition of the issuer, size of
the offering, maturity of the obligation and ratings of the issue. The ratings
of S&P, Moody's, Duff, Fitch and TBW represent their respective opinions as to
the quality of the obligations they undertake to rate. Ratings, however, are
general and are not absolute standards of quality. Consequently, obligations
with the same rating, maturity and interest rate may have different market
prices. For a more complete discussion of ratings, see Appendix A to this
Additional Statement.
Subject to the limitations stated in the Prospectus, if a security held by
a Portfolio undergoes a rating revision, the Portfolio may continue to hold the
security if the Investment Advisers determine such retention is warranted.
Relative Value Approach. In buying and selling securities for the
------------------------
Portfolios, the investment management team uses a relative value approach. This
approach involves an analysis of economic and market information, including
economic growth rates, interest and inflation rates, deficit levels, the shape
of the yield curve, sector and quality spreads and risk premiums. It also
involves the use of proprietary valuation models to analyze and compare expected
returns and assumed risks. Under the relative value approach, the investment
management team will emphasize particular securities and particular types of
securities that the team believes will provide a favorable return in light of
these risks.
Tracking Variance. As discussed in the Prospectus, the U.S. Treasury Index
------------------
Portfolio is subject to the risk of tracking variance. Tracking variance may
result from share purchases and redemptions, transaction costs, expenses and
other factors. Share purchases and redemptions may necessitate the purchase and
sale of securities by the Portfolio and the resulting transaction costs which
may be substantial because of the number and the characteristics of the
securities held. In addition, transaction costs are incurred because sales of
securities received in connection with spin-offs and other corporate
reorganizations are made to conform the Portfolio's holdings with its investment
objective. Tracking variance may also occur due to factors such as the size of
the Portfolio, the maintenance of a cash reserve pending investment or to meet
expected redemptions, changes made in the Portfolio's designated Index or the
manner in which the Index is calculated or because the indexing and investment
approach of the Investment Adviser does not produce the intended goal of the
Portfolio. Tracking variance is monitored by the Investment Adviser at least
quarterly. In the event the performance of the Portfolio is not comparable to
the performance of its designated Index, the Board of Trustees will evaluate the
reasons for the deviation and the availability of corrective measures. If
substantial deviation in the Portfolio's performance were to continue for
extended periods, it is expected that the Board of Trustees would consider
recommending to shareholders possible changes to the Portfolio's investment
objective.
Calculation of Portfolio Turnover Rate. The portfolio turnover rate for
---------------------------------------
the Portfolios is calculated by dividing the lesser of purchases or sales of
portfolio investments for the reporting period by the monthly average value of
the portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Portfolio turnover may vary
greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements
13
<PAGE>
which enable the Portfolios to receive favorable tax treatment.
Mortgage Dollar Rolls. The Portfolios may enter into mortgage "dollar
----------------------
rolls" in which a Portfolio sells securities for delivery in the future
(generally within 30 days) and simultaneously contracts with the same
counterparty to repurchase similar (same type, coupon and maturity), but not
identical securities on a specified future date. During the roll period, a
Portfolio loses the right to receive principal and interest paid on the
securities sold. However, a Portfolio would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase (often referred to as the "drop") or fee
income plus the interest earned on the cash proceeds of the securities sold
until the settlement date of the forward purchase. Unless such benefits exceed
the income, capital appreciation and gain or loss due to mortgage prepayments
that would have been realized on the securities sold as part of the mortgage
dollar roll, the use of this technique will diminish the investment performance
of a Portfolio compared with what such performance would have been without the
use of mortgage dollar rolls. All cash proceeds will be invested in instruments
that are permissible investments for the applicable Portfolio. Each Portfolio
will hold and maintain in a segregated account until the settlement date cash or
liquid assets, as permitted by applicable law, in an amount equal to its forward
purchase price.
For financial reporting and tax purposes, the Portfolios treat mortgage
dollar rolls as two separate transactions; one involving the purchase of a
security and a separate transaction involving a sale. The Portfolios do not
currently intend to enter into mortgage dollar rolls that are accounted for as a
financing.
Mortgage dollar rolls involve certain risks including the following. If the
broker-dealer to whom a Portfolio sells the security becomes insolvent, a
Portfolio's right to purchase or repurchase the mortgage-related securities
subject to the mortgage dollar roll may be restricted and the instrument which a
Portfolio is required to repurchase may be worth less than an instrument which a
Portfolio originally held. Successful use of mortgage dollar rolls will depend
upon an Investment Adviser's ability to manage a Portfolio's interest rate and
mortgage prepayments exposure. For these reasons, there is no assurance that
mortgage dollar rolls can be successfully employed.
Investment Restrictions
Each Portfolio is subject to the fundamental investment restrictions enumerated
below which may be changed with respect to a particular Portfolio only by a vote
of the holders of a majority of such Portfolio's outstanding shares.
No Portfolio may:
(1) Make loans, except through (a) the purchase of debt obligations in
accordance with the Portfolio's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, (c) loans of securities, and (d) loans to affiliates of the
Portfolio to the extent permitted by law.
(2) Purchase or sell real estate, but this restriction shall not prevent a
Portfolio from investing directly or indirectly in portfolio instruments
secured by real estate or interests therein or acquiring securities of real
estate investment trusts or other issuers that deal in real estate.
(3) Invest in commodities or commodity contracts, except that each Portfolio
may invest in currency and financial instruments and contracts that are
commodities or commodity contracts.
(4) Invest in companies for the purpose of exercising control.
(5) Act as underwriter of securities, except as a Portfolio may be deemed to
be an underwriter under the Securities Act of 1933 in connection with the
purchase and sale of portfolio instruments in accordance with its investment
objective and portfolio management policies.
(6) Purchase securities (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) if such purchase would
cause more than 25% in the aggregate of the market value of the total assets
of a Portfolio to be invested in the securities of one or more issuers having
their principal business activities in the same industry.
For the purposes of this restriction, as to utility companies, the gas,
electric, water and telephone businesses are
14
<PAGE>
considered separate industries; personal credit finance companies and
business credit finance companies are deemed to be separate industries; and
wholly-owned finance companies are considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of their parents.
(7) Borrow money, except that to the extent permitted by applicable law (a)
a Portfolio may borrow from banks, other affiliated investment companies and
other persons, and may engage in reverse repurchase agreements and other
transactions which involve borrowings, in amounts up to 33 1/3% of its total
assets (including the amount borrowed) or such other percentage permitted by
law, (b) a Portfolio may borrow up to an additional 5% of its total assets
for temporary purposes, (c) a Portfolio may obtain such short-term credits as
may be necessary for the clearance of purchases and sales of portfolio
securities, and (d) a Portfolio may purchase securities on margin. If due to
market fluctuations or other reasons a Portfolio's borrowings exceed the
limitations stated above, the Trust will promptly reduce the borrowings of
such Portfolio in accordance with the 1940 Act. In addition, as a matter of
fundamental policy, a Portfolio will not issue senior securities to the
extent such issuance would violate applicable law.
(8) Notwithstanding any of the Trust's other fundamental investment
restrictions (including, without limitation, those restrictions relating to
issuer diversification, industry concentration and control), each Portfolio
may (a) purchase securities of other investment companies to the full extent
permitted under Section 12 of the 1940 Act (or any successor provision
thereto) or under any regulation or order of the Securities and Exchange
Commission; and (b) invest all or substantially all of its assets in a single
open-end investment company or series thereof with substantially the same
investment objective, policies and fundamental restrictions as the Portfolio.
(9) The Portfolio may not make any investment inconsistent with the
Portfolio's classification as a diversified investment company under the 1940
Act, provided that this restriction does not apply to the International Bond
Portfolio.
For the purposes of Restriction Nos. 1 and 7 above, the Portfolios expect
that they would be required to file an exemptive application with the SEC and
receive the SEC's approval of that application prior to entering into lending or
borrowing arrangements with affiliates. As of April 1, 2000, the Portfolios had
not filed such an exemptive application.
In applying Restriction No. 6 above, a security is considered to be issued by
the entity, or entities, whose assets and revenues back the security. A
guarantee of a security is not deemed to be a security issued by the guarantor
when the value of all securities issued and guaranteed by the guarantor, and
owned by the Portfolio, does not exceed 10% of the value of the Portfolio's
total assets.
Except to the extent otherwise provided in Investment Restriction No. 8 for
the purpose of such restriction, in determining industry classification the
Trust intends to use the industry classification titles in the Bloomberg
Industry Group Classifications (except that the International Bond Portfolio
will use the Morgan Stanley Capital International industry classification
titles).
As a non-fundamental investment restriction that can be changed without
shareholder approval, the International Bond Portfolio may not, at the end of
any tax quarter, hold more than 10% of the outstanding voting securities of any
one issuer, except that up to 50% of the total value of the assets of the
Portfolio may be invested in any securities without regard to this 10%
limitation so long as no more than 25% of the total value of its assets is
invested in the securities of any one issuer (except the U.S. Government, its
agencies and instrumentalities). In addition, as a non-fundamental investment
restriction, the International Bond Portfolio may not, at the end of any tax
quarter, hold more than 5% of the total value of its assets in the securities of
any one issuer (except U.S. Government securities), except that up to 50% of the
total value of the Portfolio's assets may be invested in any securities without
regard to this 5% limitation so long as no more than 25% of the total value of
its assets is invested in the securities of any one issuer (except the U.S.
Government, its agencies and instrumentalities).
Any restriction which involves a maximum percentage will not be considered
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition of securities or assets of, or borrowings by, a
Portfolio.
15
<PAGE>
ADDITIONAL TRUST INFORMATION
Trustees and Officers
The business and affairs of the Trust and each Portfolio are managed under the
direction of the Trust's Board of Trustees. Information pertaining to the
Trustees and officers of the Trust is set forth below.
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- --------------------------------------
<S> <C> <C> <C>
Richard G. Cline 65 Trustee Chairman, Hawthorne Investors, Inc. (a management
4200 Commerce Court advisory services and private investment company)
Suite 300 since January 1996; Chairman, Hussman
Lisle, IL 60532 International, Inc. (a refrigeration company)
since 1998, Chairman and CEO of NICOR Inc. (a
diversified public utility holding company) from
1986 to 1995, and President, 1992-1993; Chairman,
Federal Reserve Bank of Chicago from 1992 to
1995; and Deputy Chairman from 1995 to 1996.
Director: Whitman Corporation (a diversified
holding company); Kmart Corporation (a retailing
company); Ryerson Tull, Inc. (a metals
distribution company) and University of Illinois
Foundation. Trustee: Northern Funds.
Edward J. Condon, Jr. 60 Trustee Chairman of The Paradigm Group, Ltd. (a financial
Sears Tower, Suite 9650 advisor) since July 1993; Vice President and
233 S. Wacker Drive Treasurer of Sears, Roebuck and Co. (a retail
Chicago, IL 60606 corporation) from February 1989 to July 1993;
Member of Advisory Board of Real-Time USA, Inc.
(a software development company); Member of the
Board of Managers of The Liberty Hampshire
Company, LLC (a receivable securitization
company); Vice Chairman and Director of
Energenics L.L.C. (a waste to energy recycling
company). Director: University Eldercare, Inc.
(an Alzheimer's disease research and treatment
company); Financial Pacific Company (a small
business leasing company). Trustee: Dominican
University. Trustee: Northern Funds.
Mr. Wesley M. Dixon, Jr. 72 Trustee Director of Kinship Capital Corporation (a
400 Skokie Blvd., Suite 300 financial services company) since 1985 to 1996,
Northbrook, IL 60062 Vice Chairman and Director of G.D. Searle & Co.
(manufacture and sale of food products and
pharmaceuticals) from 1977 to 1985 and President
of G.D. Searle & Co. prior thereto. Trustee:
Northern Funds.
Mr. William J. Dolan, Jr. 67 Trustee Partner of Arthur Andersen & Co. S.C. (an
1534 Basswood Circle accounting firm) from 1966 to 1989. Financial
Glenview, IL 60025 Consultant, Ernst & Young (an accounting firm)
from 1992 to 1993 and 1997. Trustee: Northern
Funds.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
John W. English 67 Trustee Private Investor; Vice President and Chief
50-H New England Ave. Investment Officer of The Ford Foundation (a
P.O. Box 640 charitable trust) from 1981 to 1993. Trustee: The
Summit, NJ 07902-0640 China Fund, Inc., Select Sector SPDR Trust; WM
Funds; American Red Cross in Greater New York;
Mote Marine Laboratory (a non-profit marine
research facility); and United Board for
Christian Higher Education in Asia. Trustee:
Northern Funds.
Mr. Raymond E. George, Jr. * 69 Trustee Senior Vice President and Senior Fiduciary
703 Prospect Avenue Officer of The Northern Trust Company from 1990
Winnetka, Illinois 60093 to 1993. Trustee: Northern Funds.
Sandra Polk Guthman 56 Trustee President and CEO of Polk Bros. Foundation (an
420 N. Wabash Avenue Illinois not-for-profit corporation) from 1993 to
Suite 204 present; Director of Business Transformation from
Chicago, IL 60611 1992-1993, and Midwestern Director of Marketing
from 1988-1992, IBM (a technology company);
Director: MBIA Insurance Corporation of Illinois
(a municipal bond insurance company). Trustee:
Northern Funds.
Mr. Michael E. Murphy** 63 Trustee President of Sara Lee Foundation (philanthropic
Suite 2222 organization) since November 1997. Vice Chairman
20 South Clark Street and Chief Administrative Officer of Sara Lee
Chicago, IL 60603 Corporation (a consumer product company) from
November 1994 to October 1997; Vice Chairman and
Chief Financial and Administrative Officer of
Sara Lee Corporation from July 1993 to November
1994. Director: Payless Shoe Source, Inc., (a
retail shoe store business); True North
Communications, Inc. (a global advertising and
communications holding company); American General
Corporation (a diversified financial services
company); GATX Corporation (a railroad holding
company); Bassett Furniture Industries, Inc. (a
furniture manufacturer) Trustee: Northern Funds.
Mary Jacobs Skinner, Esq.*** 42 Trustee Partner in the law firm of Sidley & Austin.
One First National Plaza Trustee: Northern Funds.
Chicago, IL 06063
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
William H. Springer 71 Chairman and Trustee Vice Chairman of Ameritech (a telecommunications
701 Morningside Drive holding company) from February 1987 to August
Lake Forest, IL 60045 1992; Vice Chairman, Chief Financial and
Administrative Officer of Ameritech prior to 1987.
Director: Walgreen Co. (a retail drug store
business); Baker, Fentress & Co. (a closed-end,
non-diversified management investment company).
Trustee: Goldman Sachs Trust; Goldman Sachs
Variable Insurance Trust. Trustee: Northern Funds.
Richard P. Strubel 61 Trustee President and Chief Operating Officer, UNext.com
737 N. Michigan Avenue (a provider of educational services via the
Suite 1405 internet) since 1999; Managing Director of Tandem
Chicago, IL 60611 Partners, Inc. (a privately held management
services firm) from 1990 to 1999; President and
Chief Executive Officer, Microdot, Inc. (a
privately held manufacturing firm) from 1984 to
1994; Director: Gildan Activewear, Inc. (an
athletic clothing marketing and manufacturing
company); Children's Memorial Medical Center.
Trustee: University of Chicago; Goldman Sachs
Trust; Goldman Sachs Variable Insurance Trust.
Trustee: Northern Funds.
Stephen Timbers**** 55 Trustee President of Northern Trust Global Investments, a
50 South LaSalle Street division of Northern Trust Corporation and
Chicago, IL 60675 Executive Vice President, The Northern Trust
Company since 1998; President, Chief Executive
Officer and Director of Zurich Kemper Investments
(a financial services company) from 1996 to 1998;
President, Chief Operating Officer and Director
of Kemper Corporation (a financial services
company) from 1992 to 1996; President and
Director of Kemper Funds (a registered investment
company) from 1990 to 1998. Director: LTV
Corporation (a steel producer). Trustee: Northern
Funds.
Jylanne M. Dunne 40 President Senior Vice President for Distribution Services
4400 Computer Drive at PFPC Inc. ("PFPC") (formerly First Data
Westborough, MA 01581 Investor Services Group, Inc. ("FDISG")) (since
1988).
Archibald E. King 42 Vice President Senior Vice President and other positions at The
50 South LaSalle Street Northern Trust Company (since 1979).
Chicago, IL 60675
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Lloyd A. Wennlund 42 Vice President Senior Vice President and other positions at The
50 South LaSalle Street Northern Trust Company, President of Northern
Chicago, IL 60675 Trust Securities, Inc., and Managing Executive,
Mutual Funds for Northern Trust Global
Investments (since 1989).
Brian R. Curran 32 Vice President and Director of Fund Administration at PFPC (formerly
400 Computer Drive Treasurer FDISG) (since 1997); Director of Fund
estborough, MA 01581 Administration at State Street Bank & Trust
Company (February 1997 to October 1997); Senior
Auditor at Price Waterhouse L.L.P. (an accounting
firm) (February 1994 to February 1997).
Judith E. Clear 33 Assistant Treasurer Client Treasury Manager of Mutual Fund
4400 Computer Drive Administration at PFPC since (1997); Compliance
Westborough, MA 01581 Manager at Citizens Trust (1994 to 1996).
Suzanne E. Anderson 27 Assistant Treasurer Client Treasury Manager of Mutual Fund
4400 Computer Drive Administration at PFPC Inc. (since August 1998);
Westborough, MA 01581 Manager of Fund Administration at State Street
Bank & Trust Company (October 1996 to August
1998); Fund Administrator at State Street Bank &
Trust Company (October 1995 to October 1996);
Mutual Fund Accountant at The Boston Company
(prior thereto).
Jeffrey A. Dalke 49 Secretary Partner in the law firm of Drinker Biddle & Reath
One Logan Square LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Linda J. Hoard 52 Assistant Secretary Vice President at PFPC (formerly FDISG) (since
4400 Computer Drive 1998); Attorney Consultant for Fidelity
Westborough, MA 01581 Management & Research (a financial service
company); Investors Bank & Trust Company (a
financial service provider) and FDISG (September
1994 to June 1998).
Therese Hogan 37 Assistant Secretary Director of the State Regulation Department at
4400 Computer Drive PFPC (formerly FDISG) (since 1994).
Westborough, MA 01581
</TABLE>
* Mr. George is deemed to be an "interested" Trustee because he owns shares
of Northern Trust Corporation.
** Mr. Murphy is deemed to be an "interested" Trustee because he owns shares
of Northern Trust Corporation.
*** Ms. Skinner is deemed to be an "interested" Trustee because her law firm
provides legal services to Northern.
**** Mr. Timbers is deemed to be an "interested" Trustee because he is an
officer, director, employee and shareholder of Northern Trust Corporation
and/or Northern and NTQA.
Certain of the Trustees and officers and the organizations with which they
are associated have had in the past, and may have in the future, transactions
with the Investment Advisers, PFPC (formerly FDISG), Northern Funds
Distributors, LLC ("NFD") and their respective affiliates. The Trust has been
advised by such Trustees and officers that all such
19
<PAGE>
transactions have been and are expected to be in the ordinary course of business
and the terms of such transactions, including all loans and loan commitments by
such persons, have been and are expected to be substantially the same as the
prevailing terms for comparable transactions for other customers. As a result of
the responsibilities assumed by the Investment Advisers under the Advisory
Agreement with the Trust, by Northern under its Transfer Agency Agreement,
Custodian Agreement, Foreign Custody Agreement and Co-Administration Agreement
with the Trust, by PFPC under its Co-Administration Agreement with the Trust and
by PFPC under its Distribution Agreement with the Trust, the Trust itself
requires no employees.
Each officer holds comparable positions with certain other investment
companies of which NFD, PFPC or an affiliate thereof is the investment adviser,
administrator and/or distributor.
Each Trustee, except Mr. Timbers, earns a quarterly retainer of $6,750 and
the Chairman of the Board earns a quarterly retainer of $10,125. Each Trustee,
including the Chairman of the Board, earns an additional fee of $2,500 for each
meeting attended, plus reimbursement of expenses incurred as a Trustee.
In addition, the Trustees established an Audit Committee consisting of two
members, including a Chairman of the Committee. The Audit Committee members are
Messrs. Condon and Strubel (Chairman). Each member earns a fee of $2,500 for
each meeting attended and the Chairman earns a quarterly retainer of $1,500.
Each Trustee will hold office for an indefinite term until the earliest of
(i) the next meeting of shareholders if any, called for the purpose of
considering the election or re-election of such Trustee and until the election
and qualification of his or her successor, if any, elected at such meeting; (ii)
the date a Trustee resigns or retires, or a Trustee is removed by the Board of
Trustees or shareholders, in accordance with the Trust's Agreement and
Declaration of Trust; or (iii) effective December 31, 2001, in accordance with
the current resolutions of the Board of Trustees (which may be changed without
shareholder vote), on the last day of the fiscal year of the Trust in which he
or she attains the age of 72 years.
The Trust's officers do not receive fees from the Trust for services in
such capacities, although PFPC, of which certain of the Trust's officers are
also officers (except Mr. Dalke, Mr. King and Mr. Wennlund), receives fees from
the Trust for administrative services.
Drinker Biddle & Reath LLP, of which Mr. Dalke is a partner, receives fees
from the Trust for legal services.
Northern Trust Company, of which Mr. King and Mr. Wennlund are officers,
receives fees from the Trust as investment adviser, custodian, transfer agent
and co-administrator.
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended November
30, 1999:
<TABLE>
<CAPTION>
Total
U.S. Short- U.S.
Government Intermediate Treasury Compensation
Securities Bond Index Intermediate Intermediate from Fund
Portfolio Portfolio Portfolio Bond Portfolio Bond Portfolio Bond Portfolio Complex***
--------- --------- --------- -------------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Steven Timbers** $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
William H. Springer 530 1,060 530 3,710 530 530 53,000
Richard G. Cline 395 790 395 2,765 395 395 39,500
Edward J. Condon, Jr. 445 890 445 3,115 445 445 44,500
John W. English 395 790 395 2,765 395 395 39,500
Sandra Polk Guthman 395 790 395 2,765 395 395 39,500
Frederick T. Kelsey* 445 890 445 3,115 445 445 44,500
Richard P. Strubel 505 1,010 505 3,535 505 505 50,500
Wesley M. Dixon, Jr.** 0 0 0 0 0 0 22,500
William J. Dolan, Jr.** 0 0 0 0 0 0 22,500
Raymond E. George, Jr.** 0 0 0 0 0 0 21,250
Michael E. Murphy** 0 0 0 0 0 0 22,500
Mary Jacobs Skinner** 0 0 0 0 0 0 22,500
</TABLE>
* Frederick Kelsey retired from the Board of Trustees on November 30, 1999.
** Not a Trustee of the Northern Institutional Funds during the period ended
November 30, 1999.
*** Fund complex includes twenty-one investment portfolios of the Trust and
thirty-one portfolios of Northern Funds, a separately registered investment
company.
20
<PAGE>
The Trust, its investment adviser and principal underwriter have adopted
codes of ethics (the "Codes of Ethics") under rule 17j-1 of the 1940 Act. The
Codes of Ethics permit personnel, subject to the Codes of Ethics and their
provisions, to invest in securities, including securities that may be purchased
or held by the Trust.
Investment Advisers, Transfer Agent and Custodian
Northern, a wholly-owned subsidiary of Northern Trust Corporation, a bank
holding company, is one of the nation's leading providers of trust and
investment management services. Northern is one of the strongest banking
organizations in the United States. Northern believes it has built its
organization by serving clients with integrity, a commitment to quality, and
personal attention. Its stated mission with respect to all its financial
products and services is to achieve unrivaled client satisfaction. With respect
to such clients, the Trust is designed to assist (i) defined contribution plan
sponsors and their employees by offering a range of diverse investment options
to help comply with 404(c) regulation and may also provide educational material
to their employees, (ii) employers who provide post-retirement Employees'
Beneficiary Associations ("VEBA") and require investments that respond to the
impact of Federal regulations, (iii) insurance companies with the day-to-day
management of uninvested cash balances as well as with longer-term investment
needs, and (iv) charitable and not-for-profit organizations, such as endowments
and foundations, demanding investment management solutions that balance the
requirement for sufficient current income to meet operating expenses and the
need for capital appreciation to meet future investment objectives. NTQA, also a
wholly-owned subsidiary of Northern Trust Corporation, serves as investment
adviser principally to defined benefit and defined contribution plans and
manages over 60 equity and bond commingled and common trust funds. As of
February 29, 2000, the Investment Advisers and their affiliates had
approximately $299.1 billion in assets under management for clients including
public and private retirement funds, endowments, foundations, trusts,
corporations, other investment companies and individuals.
Under the Advisory Agreement with the Trust, the Investment Advisers,
subject to the general supervision of the Trust's Board of Trustees, are
responsible for making investment decisions for each Portfolio and placing
purchase and sale orders for portfolio transactions of the Portfolios. The
Advisory Agreement with the Trust provides that in selecting brokers or dealers
to place orders for transactions, the Investment Advisers shall attempt to
obtain best net price and execution or, with respect to the International Bond
and Intermediate Bond Portfolios, their best judgment to obtain the best overall
terms available. In assessing the best overall terms available for any
transaction, the Investment Advisers are to consider all factors they deem
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. In evaluating the best overall terms
available and in selecting the broker or dealer to execute a particular
transaction, the Investment Advisers may consider the brokerage and research
services provided to the Portfolios and/or other accounts over which the
Investment Advisers or an affiliate of Northern exercise investment discretion.
A broker or dealer providing brokerage and/or research services may receive a
higher commission than another broker or dealer would receive for the same
transaction. These brokerage and research services may include industry and
company analyses, portfolio services, quantitative data, market information
systems and economic and political consulting and analytical services.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment for brokerage commissions which are generally
fixed. Over-the-counter issues, including corporate debt and government
securities, are normally traded on a "net" basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. With respect to over-the-counter transactions, the Investment
Advisers will normally deal directly with dealers who make a market in the
instruments involved except in those circumstances where more favorable prices
and execution are available elsewhere. The cost of foreign and domestic
securities purchased from underwriters includes an underwriting commission or
concession, and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down.
The Portfolios may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Portfolios will engage in this practice, however, only when the Investment
Advisers believe such practice to be in the Portfolios' interests.
21
<PAGE>
On occasions when the Investment Advisers deem the purchase or sale of a
security to be in the best interests of a Portfolio as well as other fiduciary
or agency accounts managed by them (including any other Portfolio, investment
company or account for which an Investment Adviser acts as adviser), the
Advisory Agreement provides that the Investment Advisers, to the extent
permitted by applicable laws and regulations, may aggregate the securities to be
sold or purchased for such Portfolio with those to be sold or purchased for such
other accounts in order to obtain the best net price and execution. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Investment Advisers in
the manner they consider to be most equitable and consistent with their
fiduciary obligations to the Portfolio and other accounts involved. In some
instances, this procedure may adversely affect the size of the position
obtainable for a Portfolio or the amount of the securities that are able to be
sold for a Portfolio.
The Advisory Agreement provides that the Investment Advisers may render
similar services to others so long as their services under such Agreements are
not impaired thereby. The Advisory Agreement also provides that the Trust will
indemnify the Investment Advisers against certain liabilities (including
liabilities under the Federal securities laws relating to untrue statements or
omissions of material fact and actions that are in accordance with the terms of
the Agreements) or, in lieu thereof, contribute to resulting losses.
Under its Transfer Agency Agreement with the Trust, with respect to shares
held by Institutions, Northern has undertaken to perform some or all of the
following services: (i) establish and maintain an omnibus account in the name of
each Institution; (ii) process purchase orders and redemption requests from an
Institution, and furnish confirmations and disburse redemption proceeds; (iii)
act as the income disbursing agent of the Trust; (iv) answer inquiries from
Institutions; (v) provide periodic statements of account to each Institution;
(vi) process and record the issuance and redemption of shares in accordance with
instructions from the Trust or its administrator; (vii) if required by law,
prepare and forward to Institutions shareholder communications (such as proxy
statements and proxies, annual and semi-annual financial statements, and
dividend, distribution and tax notices); (viii) preserve records; and (ix)
furnish necessary office space, facilities and personnel. Under the Transfer
Agency Agreement, with respect to shares held by investors, Northern has also
undertaken to perform some or all of the following services: (i) establish and
maintain separate accounts in the name of the investors; (ii) process purchase
orders and redemption requests, and furnish confirmations in accordance with
applicable law; (iii) disburse redemption proceeds; (iv) process and record the
issuance and redemption of shares in accordance with instructions from the Trust
or its administrator; (v) act as income disbursing agent of the Trust in
accordance with the terms of the Prospectus and instructions from the Trust or
its administrator; (vi) provide periodic statements of account; (vii) answer
inquiries (including requests for prospectuses and statements of additional
information, and assistance in the completion of new account applications) from
investors and respond to all requests for information regarding the Trust (such
as current price, recent performance, and yield data) and questions relating to
accounts of investors (such as possible errors in statements, and transactions);
(viii) respond to and seek to resolve all complaints of investors with respect
to the Trust or their accounts; (ix) furnish proxy statements and proxies,
annual and semi-annual financial statements, and dividend, distribution and tax
notices to investors; (x) furnish the Trust with all pertinent Blue Sky
information; (xi) perform all required tax withholding; (xii) preserve records;
and (xiii) furnish necessary office space, facilities and personnel. Northern
may appoint one or more sub-transfer agents in the performance of its services.
As compensation for the services rendered by Northern under the Transfer
Agency Agreement and the assumption by Northern of related expenses, Northern is
entitled to a fee from the Trust, payable monthly, at an annual rate of .01%,
.10% and .15% of the average daily net asset value of the Class A, C and D
Shares, respectively, of the Portfolios.
Under its Custodian Agreement (and in the case of the International Bond
Portfolio, its Foreign Custody Agreement) with the Trust, Northern (i) holds
each Portfolio's cash and securities, (ii) maintains such cash and securities in
separate accounts in the name of the Portfolio, (iii) makes receipts and
disbursements of funds on behalf of the Portfolio, (iv) receives, delivers and
releases securities on behalf of the Portfolio, (v) collects and receives all
income, principal and other payments in respect of the Portfolio's investments
held by Northern under the Agreement, and (vi) maintains the accounting records
of the Trust. Northern may employ one or more subcustodians, provided that
Northern, subject to certain monitoring responsibilities, shall have no more
responsibility or liability to the Trust on account of any action or omission of
any subcustodian so employed than such subcustodian has to Northern and that the
responsibility or liability of the subcustodian to Northern shall conform to the
resolution of the Trustees of the Trust authorizing the appointment of the
particular subcustodian (or, in the case of foreign securities, to the terms of
any agreement entered into between Northern and such subcustodian to which such
resolution relates). In addition, the Trust's custodial arrangements provide,
with respect to foreign securities, that Northern shall not be: (i) responsible
for the solvency of any subcustodian appointed by it with reasonable care; (ii)
responsible for any act, omission, default or for the solvency of any eligible
foreign securities
22
<PAGE>
depository; and (iii) liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism or any loss where the subcustodian has otherwise
exercised reasonable care. Northern may also appoint agents to carry out such of
the provisions of the Custodian Agreement and the Foreign Custody Agreement as
Northern may from time to time direct, provided that the appointment of an agent
shall not relieve Northern of any of its responsibilities under either
Agreement. Northern has entered into agreements with financial institutions and
depositories located in foreign countries with respect to the custody of the
Portfolios' foreign securities.
As compensation for the services rendered to the Trust by Northern as
custodian to the U.S. Government Securities, Short-Intermediate Bond, U.S.
Treasury Index, Bond and Intermediate Bond Portfolios, and the assumption by
Northern of certain related expenses, Northern is entitled to payment from the
Trust as follows: (i) $18,000 annually for each Portfolio, plus (ii) 1/100th of
1% annually of each Portfolio's average daily net assets to the extent they
exceed $100 million, plus (iii) a fixed dollar fee for each trade in portfolio
securities, plus (iv) a fixed dollar fee for each time that Northern as
Custodian receives or transmits funds via wire, plus (v) reimbursement of
expenses incurred by Northern as custodian for telephone, postage, courier fees,
office supplies and duplicating. The fees referred to in clauses (iii) and (iv)
are subject to annual upward adjustments based on increases in the Consumer
Price Index for All Urban Consumers, provided that Northern may permanently or
temporarily waive all or any portion of any upward adjustment.
As compensation for the services rendered to the Trust under the Foreign
Custody Agreement with respect to the International Bond Portfolio, and the
assumption by Northern of certain related expenses, Northern is entitled to
payment from the Trust as follows: (i) $35,000 annually for the International
Bond Portfolio, plus (ii) 9/100th of 1% annually of the Portfolio's average
daily net assets, plus (iii) reimbursement for fees incurred by Northern as
foreign custodian for telephone, postage, courier fees, office supplies and
duplicating.
Northern's fees under the Custodian Agreement and Foreign Custody Agreement
are subject to reduction based on the Portfolios' daily uninvested cash balances
(if any).
Unless sooner terminated, the Advisory Agreement, the Custodian Agreement
(or, in the case of the International Bond Portfolio, the Foreign Custody
Agreement) and the Transfer Agency Agreement will continue in effect with
respect to a particular Portfolio until April 30, 2001 and thereafter for
successive 12-month periods, provided that the continuance is approved at least
annually (i) by the vote of a majority of the Trustees who are not parties to
the agreement or "interested persons" (as such term is defined in the 1940 Act)
of any party thereto, cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the Trustees or by the vote of a majority
of the outstanding shares of such Portfolio (as defined below under "Other
Information"). Each agreement is terminable at any time without penalty by the
Trust (by specified Trustee or shareholder action) on 60 days' written notice to
Northern or NTQA and by Northern or NTQA on 60 days' written notice to the
Trust.
Prior to April 1, 1998, Northern served as investment adviser to the U.S.
Treasury Index Portfolio on the same terms as those described above. For the
fiscal years or periods ended November 30 as indicated, the amount of advisory
fees incurred by each Portfolio (after fee waivers) was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. Government Securities Portfolio $ 199,929 $ 123,385 $ 214,637
Short-Intermediate Bond Portfolio 468,003 498,090 428,876
U.S. Treasury Index Portfolio 34,779 37,969 43,880
Bond Portfolio 2,051,219 1,454,684 1,086,221
Intermediate Bond Portfolio (1) 178,297 55,413 8,743
International Bond Portfolio 198,243 185,420 200,976
</TABLE>
(1) Commenced investment operations on July 31, 1997.
23
<PAGE>
For the fiscal years or periods ended November 30 as indicated, the
Investment Advisers waived advisory fees as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. Government Securities Portfolio $ 279,902 $ 172,740 $ 300,491
Short-Intermediate Bond Portfolio 655,206 697,327 600,427
U.S. Treasury Index Portfolio 57,965 63,282 73,133
Bond Portfolio 2,871,713 2,036,562 1,520,709
Intermediate Bond Portfolio (1) 249,615 77,578 12,240
International Bond Portfolio 56,641 52,977 57,422
</TABLE>
(1) Commenced investment operations on July 31, 1997.
For the fiscal years or periods ended November 30 as indicated, the amount
of transfer agency fees incurred by each Portfolio was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. Government Securities Portfolio $ 9,552 $ 9,110 $12,116
Short-Intermediate Bond Portfolio 19,199 21,373 17,908
U.S. Treasury Index Portfolio 3,342 5,260 4,802
Bond Portfolio 138,870 112,476 74,971
Intermediate Bond Portfolio (1) 7,181 2,226 347
International Bond Portfolio 2,865 2,837 2,957
</TABLE>
(1) Commenced investment operations on July 31, 1997.
For the fiscal years or periods ended November 30 as indicated, the amount
of custodian fees (and, in the case of the International Bond Portfolio, the
foreign custodian fees) incurred by each Portfolio was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. Government Securities Portfolio $18,609 $21,756 $21,569
Short-Intermediate Bond Portfolio 25,659 28,255 29,972
U.S. Treasury Index Portfolio 22,105 21,321 21,465
Bond Portfolio 85,855 76,339 48,245
Intermediate Bond Portfolio (1) 23,114 17,589 7,200
International Bond Portfolio 59,184 54,780 67,525
</TABLE>
(1) Commenced investment operations on July 31, 1997.
Under a Service Mark License Agreement (the "Agreement") with the Trust,
Northern Trust Corporation has agreed that the name "Northern Institutional
Funds" may be used in connection with the Trust's business on a royalty-free
basis. Northern Trust Corporation has reserved to itself the right to grant the
non-exclusive right to use the name "Northern Institutional Funds" to any other
person. The Agreement provides that at such time as the Agreement is no longer
in effect, the Trust will cease using the name "Northern Institutional Funds."
Portfolio Transactions
To the extent that a Portfolio effects brokerage transactions with NFD or
PFPC or any broker/dealer affiliated directly or indirectly with the Investment
Advisers, such transactions, including the frequency thereof, the receipt of any
commissions payable in connection therewith, and the selection of the affiliated
broker/dealer effecting such transactions, will be fair and reasonable to the
shareholders of the Portfolio.
For the fiscal years ended November 30, 1999, 1998 and 1997, all portfolio
transactions for the Portfolios were executed on a principal basis and,
therefore, no brokerage commissions were paid by the Portfolios. Purchases by
the Portfolios from underwriters of portfolio securities, however, normally
include a commission or concession paid by the
24
<PAGE>
issuer to the underwriter, and purchases from dealers include the spread between
the dealer's cost for a given security and the resale price of the security.
During the fiscal year ended November 30, 1999, the Bond Portfolio acquired
and sold securities of Lehman Brothers, Inc. and Morgan Stanley Dean Witter &
Co., each a regular broker/dealer. At November 30, 1999, the Bond Portfolio
owned the following amounts of securities of its regular broker/dealers, as
defined in Rule 10b-1 under the 1940 Act, or their parents: Lehman Brothers,
Inc., with an approximate aggregate market value of $11,316,000; and Morgan
Stanley Dean Witter & Co., with an approximate aggregate market value of
$33,060,000.
During the fiscal year ended November 30, 1999, the Intermediate Bond
Portfolio did not acquire or sell any securities of its regular broker/dealers
or their parents. At November 30, 1999, the Intermediate Bond Portfolio owned
the following amounts of securities of its regular broker/dealers, as defined in
Rule 10b-1 under the 1940 Act, or their parents: Morgan Stanley Dean Witter &
Co., with an approximate aggregate market value of $343,000.
During the fiscal year ended November 30, 1999, the International Bond
Portfolio acquired and sold securities of Banque Brussels Lambert, Deutsche
Bank, and Credit Suisse, each a regular broker/dealer. At November 30, 1999,
the International Bond Portfolio did not own securities of its regular
broker/dealers, as defined in Rule 10b-1 under the 1940 Act, or their parents.
During the fiscal year ended November 30, 1999, the Short-Intermediate Bond
Portfolio did acquired and sold securities of Lehman Brothers, Inc., a regular
broker/dealer. At November 30, 1999, the Short-Intermediate Bond Portfolio owned
the following amounts of securities of its regular broker/dealers, as defined in
Rule 10b-1 under the 1940 Act, or their parents: Lehman Brothers, Inc., with an
approximate aggregate market value of $5,318,000; and Prudential Securities,
with an approximate aggregate market value of $4,461,000.
During the fiscal year ended November 30, 1999, the U.S. Government
Securities Portfolio did not acquire, sell or own any securities of its regular
broker/dealers or their parents.
During the fiscal year ended November 30, 1999, the U.S. Treasury Index
Portfolio did not acquire, sell or own any securities of its regular
broker/dealers or their parents.
Portfolio Valuation
U.S. and foreign investments held by a 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. Shares of investment companies
held by the Portfolios will be valued at their respective net asset values. Any
securities, including restricted securities, for which current quotations are
not readily available are valued at fair value as determined in good faith by
the Investment Adviser under the supervision of the Board of Trustees. Short-
term investments are valued at amortized cost which the Investment Advisers have
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.
Co-Administrators and Distributor
Effective May 1, 1999, Northern and PFPC (formerly FDISG), 4400 Computer
Drive, Westborough, Massachusetts 01581, act as co-administrators for the
Portfolios under a Co-Administration Agreement with the Trust. Subject to the
general supervision of the Trust's Board of Trustees, Northern and PFPC (the
"Co-Administrators") provide supervision of all aspects of the Trust's non-
investment advisory operations and perform various corporate secretarial,
treasury and blue sky services, including but not limited to: (i) maintaining
office facilities and furnishing corporate officers for the Trust; (ii)
furnishing data processing services, clerical services, and executive and
administrative services and standard stationery and office supplies; (iii)
performing all functions ordinarily performed by the office of a corporate
treasurer, and furnishing the
25
<PAGE>
services and facilities ordinarily incident thereto, such as expense accrual
monitoring and payment of the Trust's bills, preparing monthly reconciliation of
the Trust's expense records, updating projections of annual expenses, preparing
materials for review by the Board of Trustees and compliance testing; (iv)
preparing and submitting reports to the Trust's shareholders and the SEC; (v)
preparing and printing financial statements; (vi) preparing monthly Portfolio
profile reports; (vii) preparing and filing the Trust's federal and state tax
returns (other than those required to be filed by the Trust's custodian and
transfer agent) and providing shareholder tax information to the Trust's
transfer agent; (viii) assisting in marketing strategy and product development;
(ix) performing oversight/management responsibilities, such as the supervision
and coordination of certain of the Trust's service providers; (x) effecting and
maintaining, as the case may be, the registration of shares of the Trust for
sale under the securities laws of various jurisdictions; (xi) assisting in
maintaining corporate records and good standing status of the Trust in its state
of organization; and (xii) monitoring the Trust's arrangements with respect to
services provided by Servicing Agents to their customers who are the beneficial
owners of shares, pursuant to servicing agreements between the Trust and such
Servicing Agents.
Subject to the limitations described below, as compensation for their
administrative services and the assumption of related expenses, the Co-
Administrators are entitled to a fee from each Portfolio, computed daily and
payable monthly, at an annual rate of .15% of the average daily net assets of
the International Bond Portfolio, and .10% of the average daily net assets of
each other Portfolio. The Co-Administrators will reimburse each Portfolio for
its expenses (including administration fees payable to the Co-Administrators,
but excluding advisory fees, transfer agency fees, servicing fees and
extraordinary expenses) which exceed on an annualized basis .25% of the
International Bond Portfolio's average daily net assets and .10% of each other
Portfolio's average daily net assets.
For the period May 1, 1999 through the fiscal year ended November 30, 1999,
the Co-Administrators received fees under the Co-Administration Agreement with
the Trust in the amount of:
U.S. Government Securities Portfolio $ 50,136
Short-Intermediate Bond Portfolio 112,931
U.S. Treasury Index Portfolio 13,232
Bond Portfolio 524,623
Intermediate Bond Portfolio 36,974
International Bond Portfolio 24,567
Additionally, for the period May 1, 1999 through the fiscal year ended
November 30, 1999, the Co-Administrators voluntarily reimbursed each Portfolio
for its expenses reducing administration fees in the following amounts for the
period May 1, 1999 through the fiscal year ended November 30, 1999:
U.S. Government Securities Portfolio $ 34,540
Short-Intermediate Bond Portfolio 49,829
U.S. Treasury Index Portfolio 37,242
Bond Portfolio 159,362
Intermediate Bond Portfolio 40,640
International Bond Portfolio 42,941
Prior to May 1, 1999, Goldman, Sachs & Co. ("Goldman Sachs"), 85 Broad
Street, New York, New York 10004, acted as the Trust's administrator pursuant to
an administration agreement similar to the Co-Administration Agreement currently
in effect with Northern and PFPC. For the fiscal years or periods ended November
30 as indicated, Goldman Sachs received fees under its administration agreement
with the Trust in the amount of:
<TABLE>
<CAPTION>
December 1, 1998
through
April 30, 1999 1998 1997
---------------- ---- ----
<S> <C> <C> <C>
U.S. Government Securities Portfolio $ 29,835 $ 49,354 $ 85,432
Short-Intermediate Bond Portfolio 74,269 199,235 171,514
U.S. Treasury Index Portfolio 9,954 25,313 29,247
Bond Portfolio 295,859 581,869 434,500
Intermediate Bond Portfolio (1) 34,344 22,165 3,470
International Bond Portfolio 17,914 39,733 36,801
</TABLE>
(1) Commenced investment operations on July 31, 1997.
26
<PAGE>
Prior to May 1, 1997, Goldman Sachs voluntarily agreed to waive a portion
of its administration fee for each Portfolio then in existence resulting in an
effective fee of .10% of the average daily net assets for each Portfolio. The
effect of these waivers by Goldman Sachs was to reduce administration fees by
the following amounts for the fiscal years or periods ended November 30 as
indicated:
<TABLE>
<CAPTION>
December 1, 1998
through
April 30, 1999 1998 1997
-------------- ---- ----
<S> <C> <C> <C>
U.S. Government Securities Portfolio $0 $ 0 $52,820
Short-Intermediate Bond Portfolio 0 0 72,454
U.S. Treasury Index Portfolio 0 0 17,382
Bond Portfolio 0 0 94,064
Intermediate Bond Portfolio (1) 0 0 N/A
International Bond Portfolio 0 0 18,779
</TABLE>
(1) Commenced investment operations on July 31, 1997.
In addition, pursuant to an undertaking that commenced August 1, 1992,
Goldman Sachs agreed that, if its administration fees (less expense
reimbursements paid by Goldman Sachs to the Trust and less certain marketing
expenses paid by Goldman Sachs) exceeded a specified amount ($1 million for the
Trust's first twelve investment portfolios plus $50,000 for each additional
portfolio) during a fiscal year, Goldman Sachs would waive a portion of its
administration fees during the following fiscal year. There were no waivers
pursuant to this agreement during the last three fiscal years.
Goldman Sachs had also agreed each year to reimburse each Portfolio for its
expenses (including fees payable to Goldman Sachs as administrator, but
excluding advisory fees, transfer agency fees, servicing fees and extraordinary
expenses) which exceeded on an annualized basis .25% of the International Bond
Portfolio's average daily net assets and .10% of each other Portfolio's average
daily net assets. Prior to May 1, 1997, this undertaking was voluntary with
respect to the Portfolios. As of May 1, 1997, this undertaking was contractual
with respect to all Portfolios. The effect of these reimbursements by Goldman
Sachs for the fiscal years or periods ended November 30 as indicated was to
reduce the expenses of each Portfolio by:
<TABLE>
<CAPTION>
December 1, 1998
through
April 30, 1999 1998 1997
-------------- ---- ----
<S> <C> <C> <C>
U.S. Government Securities Portfolio $ 24,893 $ 72,267 $ 70,879
Short-Intermediate Bond Portfolio 48,092 103,011 102,005
U.S. Treasury Index Portfolio 23,710 66,821 71,652
Bond Portfolio 121,707 222,213 165,969
Intermediate Bond Portfolio (1) 23,301 83,211 54,096
International Bond Portfolio 35,599 95,507 82,249
</TABLE>
(1) Commenced investment operations on July 31, 1997.
Unless sooner terminated, the Co-Administration Agreement among Northern,
PFPC and the Trust will continue in effect until April 30, 2001, and thereafter
for successive one-year terms with respect to each Portfolio, provided that the
Agreement is approved annually (1) by the Board of Trustees or (2) by the vote
of a majority of the outstanding shares of such Portfolio (as defined below
under "Other Information"), provided that in either event the continuance is
also approved by a majority of the Trustees who are not parties to the Agreement
and who are not interested persons (as defined in the 1940 Act) of any party
thereto, by vote cast in person at a meeting called for the purpose of voting on
such approval. The Co-Administration Agreement is terminable at any time after
April 30, 2001 without penalty by the Trust on at least 60 days written notice
to the Co-Administrators. Each Co-Administrator may terminate the Co-
Administration Agreement with respect to itself at any time after April 30, 2001
without penalty on at least 60 days written notice to the Trust and the other
Co-Administrator.
27
<PAGE>
The Trust may terminate the Co-Administration Agreement prior to April 30,
2001 in the event that the Trust or its shareholders incur damages in excess of
$100,000 as a result of the willful misfeasance, bad faith or negligence of the
Co-Administrators, or the reckless disregard of their duties under the
Agreement. The Trust may also terminate the Co-Administration Agreement prior to
April 30, 2001 in the event that the Co-Administrators fail to meet one of the
performance standards set forth in the Agreement.
The Trust has entered into a Distribution Agreement with NFD under which
NFD, as agent, sells shares of each Portfolio on a continuous basis. NFD pays
the cost of printing and distributing prospectuses to persons who are not
shareholders of the Trust (excluding preparation and typesetting expenses) and
of certain other distribution efforts. NFD is a wholly-owned subsidiary of
Provident Distributors, Inc. ("PDI"). PDI, based in West Conshohocken,
Pennsylvania, is an independently owned and operated broker-dealer. Between May
1, 1999 and November 30, 1999, First Data Distributors, Inc. ("FDDI") acted as
the Trust's distributor pursuant to a distribution agreement similar to the
Distribution Agreement currently in effect with NFD. No compensation is payable
by the Trust to NFD for such distribution services. Prior to May 1, 1999,
Goldman Sachs acted as the Trust's distributor pursuant to a distribution
agreement similar to the Distribution Agreement currently in effect with NFD.
The Co-Administration Agreement provides that the Co-Administrators may
render similar services to others so long as their services under such Agreement
are not impaired thereby. The Co-Administration Agreement also provides that the
Trust will indemnify each Co-Administrator against all claims except those
resulting from the willful misfeasance, bad faith or negligence of such Co-
Administrator, or the Co-Administrator's breach of confidentiality. The
Distribution Agreement provides that the Trust will indemnify NFD against
certain liabilities relating to untrue statements or omissions of material fact
except those resulting from the reliance on information furnished to the Trust
by NFD, or those resulting from the willful misfeasance, bad faith or negligence
of NFD, or NFD's breach of confidentiality.
Under a Service Mark License Agreement (the "License Agreement") with NFD,
Northern Trust Corporation agrees that the name "Northern Institutional Funds"
may be used in connection with Northern Institutional Funds' business on a
royalty-free basis. Northern Trust Corporation has reserved to itself the right
to grant the non-exclusive right to use the name ("Northern Institutional
Funds") to any other person. The License Agreement provides that at such time
as the License Agreement is no longer in effect NFD will cease using the name
"Northern Institutional Funds."
Shareholder Servicing Plan
As stated in the Portfolios' Prospectus, Servicing Agents may enter into
servicing agreements with the Trust under which they provide (or arrange to have
provided) support services to their Customers or other investors who
beneficially own such shares in consideration of the Portfolios' payment of not
more than .15% and .25% (on an annualized basis) of the average daily net asset
value of the Class C and D Shares, respectively, beneficially owned by such
Customers or investors.
28
<PAGE>
For the fiscal years or periods ended November 30 as indicated, the
aggregate amount of the Shareholder Service Fee incurred by each class of each
Portfolio then in existence was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. Government Securities Portfolio
Class C (1) $ 560 $ 5,132 $ 5,225
Class D 2,175 1,955 710
Short-Intermediate Bond Portfolio
Class D 852 2,584 1,349
U.S. Treasury Index Portfolio
Class C (2) 251 25 N/A
Class D 1,558 4,846 3,353
Bond Portfolio
Class C 90,790 86,693 51,720
Class D 4,179 4,050 887
Intermediate Bond Portfolio
Class D (3) 86 17 N/A
International Bond Portfolio
Class D 59 334 154
</TABLE>
(1) Class C Shares were issued on December 29, 1995.
(2) Class C Shares were issued on October 7, 1998.
(3) Class D Shares were issued on October 5, 1998.
Services provided by or arranged to be provided by Servicing Agents under
their servicing agreements may include: (i) establishing and maintaining
separate account records of Customers or other investors; (ii) providing
Customers or other investors with a service that invests their assets in shares
of certain classes pursuant to specific or pre-authorized instructions, and
assistance with new account applications; (iii) aggregating and processing
purchase and redemption requests for shares of certain classes from Customers or
other investors, and placing purchase and redemption orders with the Transfer
Agent; (iv) issuing confirmations to Customers or other investors in accordance
with applicable law; (v) arranging for the timely transmission of funds
representing the net purchase price or redemption proceeds; (vi) processing
dividend payments on behalf of Customers or other investors; (vii) providing
information periodically to Customers or other investors showing their positions
in shares; (viii) responding to Customer or other investor inquiries (including
requests for prospectuses), and complaints relating to the services performed by
the Servicing Agents; (ix) acting as liaison with respect to all inquiries and
complaints from Customers and other investors relating to errors committed by
the Trust or its agents, and other matters pertaining to the Trust; (x)
providing or arranging for another person to provide subaccounting with respect
to shares of certain classes beneficially owned by Customers or other investors;
(xi) if required by law, forwarding shareholder communications from the Trust
(such as proxy statements and proxies, shareholder reports, annual and semi-
annual financial statements and dividend, distribution and tax notices) to
Customers and other investors; (xii) providing such office space, facilities and
personnel as may be required to perform their services under the servicing
agreements; (xiv) maintaining appropriate management reporting and statistical
information; (xiii) paying expenses related to the preparation of educational
and other explanatory materials in connection with the development of investor
services; (xv) developing and monitoring investment programs; and (xvi)
providing such other similar services as the Trust may reasonably request to the
extent the Servicing Agents are permitted to do so under applicable statutes,
rules and regulations.
The Trust's agreements with Servicing Agents are governed by a Plan (called
the "Shareholder Servicing Plan") which has been adopted by the Board of
Trustees. Pursuant to the Shareholder Servicing Plan, the Board of Trustees
will review, at least quarterly, a written report of the amounts expended under
the Trust's agreements with Servicing Agents and the purposes for which the
expenditures were made. In addition, the arrangements with Servicing Agents must
be approved annually by a majority of the Board of Trustees, including a
majority of the Trustees who are not "interested persons" of the Trust, as
defined in the 1940 Act, and have no direct or indirect financial interest in
such arrangements.
The Board of Trustees has approved the arrangements with Servicing Agents
based on information provided by the Trust's service contractors that there is a
reasonable likelihood that the arrangements will benefit the Portfolios and
their shareholders by affording the Portfolios greater flexibility in connection
with the servicing of the accounts of the beneficial owners of their shares in
an efficient manner.
29
<PAGE>
Counsel and Auditors
Drinker Biddle & Reath LLP, with offices at One Logan Square, 18th and
Cherry Streets, Philadelphia, Pennsylvania 19103-6996, serve as counsel to the
Trust.
Ernst & Young LLP, independent auditors, 233 S. Wacker Drive, Chicago,
Illinois 60606, have been selected as auditors of the Trust. In addition to
audit services, Ernst & Young LLP reviews the Trust's Federal and state tax
returns, and provides consultation and assistance on accounting, internal
control and related matters.
In-Kind Purchases and Redemptions
Payment for shares of a Portfolio may, in the discretion of Northern, be
made in the form of securities that are permissible investments for the
Portfolio as described in the Prospectus. For further information about this
form of payment, contact Northern. In connection with an in-kind securities
payment, a Portfolio will require, among other things, that the securities be
valued on the day of purchase in accordance with the pricing methods used by the
Portfolio and that the Portfolio receive satisfactory assurances that it will
have good and marketable title to the securities received by it; that the
securities be in proper form for transfer to the Portfolio; and that adequate
information be provided concerning the basis and other tax matters relating to
the securities.
Although each Portfolio generally will redeem shares in cash, each
Portfolio reserves the right to pay redemptions by a distribution in kind of
securities (instead of cash) from such Portfolio. The securities distributed in
kind would be readily marketable and would be valued for this purpose using the
same method employed in calculating the Portfolio's net asset value per share.
If a shareholder receives redemption proceeds in kind, the shareholder should
expect to incur transaction costs upon the disposition of the securities
received in the redemption.
PERFORMANCE INFORMATION
The performance of a class of shares of a Portfolio may be compared to
those of other mutual funds with similar investment objectives and to bond,
stock 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 shares 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), the Lehman Mutual Fund Intermediate Tax
Exempt Index, S&P 500 Index, S&P/Barra Growth Index, the Russell 2000 Index, the
Europe and Australia Far East Equity Index ("EAFE Index") or other unmanaged
stock and 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 3-month LIBOR Index, the 91-day Treasury Bill Rate, the Composite
Index, the J.P. Morgan Non-U.S. Government Bond Index, and the Dow Jones
Industrial Average, a recognized unmanaged index of common stocks of 30 industry
companies listed on the New York Stock Exchange. 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 shares of a Portfolio.
The Portfolios calculate their total returns for each class of shares
separately on an "annual total return" basis for various 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 shares 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 shares
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 shares
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 Portfolios may also advertise from time to time the total
return of one or more classes of shares on a year-by-year or other basis for
various specified periods by means of quotations, charts, graphs or schedules.
Each Portfolio that advertises an "average annual total return" for a class
of shares computes such return by
30
<PAGE>
determining the average annual compounded rate of return during specified
periods that equates the initial amount invested to the ending redeemable value
of such investment according to the following formula:
P (1+T)/n/ = ERV
Where: T = average annual total return;
ERV = ending redeemable value at the end of the applicable period
(or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year (or
other) period;
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in terms of
years.
Each Portfolio that advertises an "aggregate total return" for a class of
shares computes such return by determining the aggregate compounded rates of
return during specified periods that likewise equate the initial amount invested
to the ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
T = [(ERV/P)] - 1
The calculations set forth below are made assuming that (1) all dividends
and capital gain distributions are reinvested on the reinvestment dates at the
price per share existing on the reinvestment date and (2) all recurring fees
charged to all shareholder accounts are included. The ending redeemable value
(variable "ERV" in the formula) is determined by assuming complete redemption of
the hypothetical investment after deduction of all nonrecurring charges at the
end of the measuring period.
The average annual total returns and aggregate total returns shown below
for the Short-Intermediate Bond, U.S. Treasury Index and Bond Portfolios
include, for periods prior to the commencement of the Portfolios' operations,
the performance of predecessor collective funds adjusted to reflect the higher
estimated fees and expenses applicable to such Portfolios' Class A Shares at the
time of their inception. Although all such predecessor collective funds were
managed by Northern for the periods stated in a manner and pursuant to
investment objectives that were equivalent in all material respects to the
management and investment objectives of the corresponding Portfolios, such
predecessor collective funds were not registered under the 1940 Act and were not
subject to certain investment restrictions imposed by the 1940 Act. If they had
been registered under the 1940 Act, performance might have been adversely
affected. The average annual total returns and aggregate total returns shown for
the Portfolios for their Class C and/or Class D Shares also include, for the
periods prior to the inception of such classes, the performance of the
Portfolios' Class A Shares. Because the fees and expenses of Class C and Class D
Shares are, respectively, 0.24% and 0.39% higher than those of Class A Shares,
actual performance for periods prior to the inception of Class C and Class D
Shares would have been lower if such higher fees and expenses had been taken
into account.
Following commencement of operations of the Portfolios, the Portfolios'
administrator (Goldman Sachs) or Co-administrators (Northern and PFPC)
reimbursed expenses to the Portfolios and voluntarily agreed to reduce a portion
of their administration fees for each Portfolio pursuant to the undertaking
described above under "Additional Trust Information - Co-Administrators and
Distributor" and "- Investment Advisers, Transfer Agent and Custodian," and
Northern waived a portion of its investment advisory fees with respect to the
Portfolios. The average annual total returns and aggregate total returns of each
Portfolio with respect to Class A, Class C and Class D Shares, as applicable,
are shown below with and without such fee waivers and expense reimbursements.
31
<PAGE>
<TABLE>
<CAPTION>
For Periods Ended November 30, 1999
Average Annual Total Returns (%) Aggregate Total Returns (%)
Since Since
1 Year 5 Year 10 year Inception 1 Year 5 Year 10 Year Inception
------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bond/1/
Class A
with fee waivers and (1.35%) 8.60% 8.57% --- (1.35%) 51.05% 127.53% ---
expense reimbursements
without fee waivers and (1.81%) 8.12% 8.02% --- (1.81%) 47.74% 116.26% ---
expense reimbursements
Class C
with fee waivers and (1.59%) 8.37% 8.45% --- (1.59%) 49.44% 125.10% ---
expense reimbursements
without fee waivers and (1.98%) 7.90% 7.91% --- (1.98%) 46.26% 114.09% ---
expense reimbursements
Class D
with fee waivers and (1.74%) 8.17% 8.35% --- (1.74%) 48.10% 122.93% ---
expense reimbursements
without fee waivers and (2.14%) 7.71% 7.81% --- (2.14%) 44.94% 112.03% ---
expense reimbursements
Intermediate Bond/2/
Class A
with fee waivers and 0.25% --- --- 3.79% 0.25% --- --- 9.07%
expense reimbursements
without fee waivers and (0.17%) --- --- 3.05% (0.17%) --- --- (7.10%)
expense reimbursements
Class D
with fee waivers and (0.21%) --- --- 3.52% (0.21%) --- --- 8.41%
expense reimbursements
without fee waivers and (0.64%) --- --- 2.82% (0.64%) --- --- 6.45%
expense reimbursements
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
For Periods Ended November 30, 1999
Average Annual Total Returns (%) Aggregate Total Returns (%)
Since Since
1 Year 5 Year 10 year Inception 1 Year 5 Year 10 Year Inception
-------- ------- -------- --------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-Intermediate Bond/3/
Class A
with fee waivers and 2.25% 6.55% 6.91% --- 2.25% 37.31% 94.99% ---
expense reimbursements
without fee waivers and 1.84% 6.90% 6.75% --- 1.84% 39.57% 92.10% ---
expense reimbursements
Class D
with fee waivers and 1.84% 6.11% 6.69% --- 1.84% 34.54% 91.01% ---
expense reimbursements
without fee waivers and 1.44% 5.62% 6.10% --- 1.44% 31.42% 80.73% ---
expense reimbursements
U.S. Treasury Index/4/
Class A
with fee waivers and (2.10%) 7.48% 7.37% --- (2.10%) 43.42% 103.68% ---
expense reimbursements
without fee waivers and (2.59%) 6.84% 6.71% --- (2.59%) 39.24% 91.44% ---
expense reimbursements
Class C
with fee waivers and (1.85%) 7.39% 7.33% --- (1.85%) 42.83% 102.84% ---
expense reimbursements
without fee waivers and (2.34%) 6.90% 6.74% --- (2.34%) 39.63% 91.98% ---
expense reimbursements
Class D
with fee waivers and
expense reimbursements (1.86%) 7.01% 7.15% --- (1.86%) 40.35% 99.43% ---
without fee waivers and (2.31%) 6.57% 6.57% --- (2.31%) 37.49% 89.03% ---
expense reimbursements
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
For Periods Ended November 30, 1999
Average Annual Total Returns(%) Aggregate Total Returns(%)
Since Since
1 Year 5 Year 10 Year Inception 1 Year 5 Year 10 Year Inception
----------- ---------- --------- ---------- -------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Securities/5/
Class A
with fee waivers and 2.46% 6.38% --- 5.13% 2.46% 36.21% --- 39.51%
expense reimbursements
without fee waivers and 2.03% 5.80% --- 4.50% 2.03% 32.54% --- 34.06%
expense reimbursements
Class C/6/
with fee waivers and
expense reimbursements See Footnote 7 See Footnote 7
without fee waivers and
expense reimbursements See Footnote 7 See Footnote 7
Class D
with fee waivers and 2.06% 5.95% --- 4.79% 2.06% 33.51% --- 36.58%
expense reimbursements
without fee waivers and 1.62% 5.37% --- 4.17% 1.62% 29.92% --- 31.23%
expense reimbursements
International Bond
Class A
with fee waivers and (5.76%) 5.75% --- 5.78% (5.76%) 32.23% --- 37.59%
expense reimbursements
without fee waivers and (6.24%) 5.16% --- 5.19% (6.24%) 28.61% --- 33.31%
expense reimbursements
Class D/7/
with fee waivers and
expense reimbursements See Footnote 8 See Footnote 8
without fee waivers and
expense reimbursements See Footnote 8 See Footnote 8
</TABLE>
1. For Class A, C and D Shares, performance information prior to January 11,
1993 (commencement of Portfolio) is that of a predecessor collective fund.
For Class C and D Shares, performance information from January 11, 1993 to
July 3, 1995 (commencement of Class C Shares) and September 14, 1994
(commencement of Class D Shares), respectively, is that of Class A Shares.
Because the fees and expenses of Class C and Class D Shares are .24% and
.39%, respectively, higher than those of Class A Shares, actual performance
would have been lower had such fees and expenses been taken into account.
The predecessor collective fund has been managed in a manner and pursuant
to investment objectives equivalent in all material respects to the
management and investment objective of the Portfolio for the periods shown.
The performance information of the predecessor collective fund is adjusted
to reflect the higher fees and expenses applicable to Class A Shares at the
time of their inception.
2. For Class D Shares, performance information from August 1, 1997 to October
5, 1998 (commencement of Class D Shares) is that of Class A Shares. Class A
Shares commenced operations on August 1, 1997. Because the fees and
expenses of Class D Shares are .39% higher than those of Class A Shares,
actual performance would have been lower had such higher fees and expenses
been taken into account.
3. For Class A and D Shares, performance information prior to January 11, 1993
(commencement of Portfolio) is that of a predecessor collective fund. For
Class D Shares, performance information from January 11, 1993 to September
14, 1994 (commencement of Class D Shares) is that of Class A Shares.
Because the fees and expenses of Class D Shares are .39% higher than those
of Class A Shares, actual performance would have been lower had such higher
fees and expenses been taken into account. The predecessor collective fund
has been managed in a manner and pursuant to investment objectives
equivalent in all material respects to the management and investment
objective of the Portfolio for the periods shown. The performance
information of the predecessor collective fund is adjusted to reflect the
higher fees and expenses applicable to Class A Shares at the time of their
inception.
34
<PAGE>
4. For Class A, C and D Shares, performance information prior to January 11,
1993 (commencement of Portfolio) is that of a predecessor collective fund.
For Class C and D Shares, performance information from January 11, 1993 to
October 7, 1998 (commencement of Class C Shares) and November 16, 1994
(commencement of Class D Shares), respectively, is that of Class A Shares.
Because the fees and expenses of Class C and Class D Shares are .24% and
.39%, respectively, higher than those of Class A Shares, actual performance
would have been lower had such higher fees and expenses been taken into
account. Performance information of the predecessor collective fund is shown
from January 1, 1987, the date from which the predecessor fund has been
managed in a manner and pursuant to investment objectives equivalent in all
material respects to the management and investment objective of the
Portfolio. The performance information of the predecessor collective fund is
adjusted to reflect the higher fees and expenses applicable to Class A
Shares at the time of their inception.
5. For Class D Shares, performance information prior to September 15, 1994
(commencement of Class D Shares) is that of Class A Shares. Class A Shares
commenced operations April 5, 1993. Because fees and expenses of Class D
Shares are .39%, higher than those of Class A Shares, actual performance
would have been lower had such higher fees and expenses been taken into
account.
6. From February 10, 1999 to the date of the Prospectus, no Class C shares of
the U.S. Government Securities Portfolio were held by shareholders. Class C
shares of the U.S. Government Securities Portfolio will have substantially
similar annual returns when compared with Class A shares of the U.S.
Government Securities Portfolio because shares of both Class A and Class C
are invested in the same portfolio of securities. The annual returns of
Class A and Class C shares will differ only to the extent that the share
classes do not have the same expenses. Annual returns reflected since
inception will also differ as the classes do not have the same inception
date.
7. From August 22, 1999 to the date of the Prospectus, no Class D shares of the
International Bond Portfolio were held by shareholders. Class D shares of
the International Bond Portfolio will have substantially similar annual
returns when compared with Class A shares of the International Bond
Portfolio because shares of both Class A and Class D are invested in the
same portfolio of securities. The annual returns of Class A and Class D
shares will differ only to the extent that the share classes do not have the
same expenses. Annual returns reflected since inception will also differ as
the classes do not have the same inception date.
The yield of a class of shares in the Portfolios 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, a Portfolio's yield for a class of shares is computed by dividing
the per share net income for the class during a 30-day (or one month) period by
the net asset value per share on the last day of the period and annualizing the
result on a semi-annual basis.
The Portfolios' 30-day (or one month) standard yield is calculated for each
class of the Portfolios in accordance with the method prescribed by the SEC for
mutual funds:
Yield = 2[{(a-b/cd) + 1}/6/ - 1]
Where: a = dividends and interest earned by a Portfolio during the
period;
b = expenses accrued for the period (net of reimbursements);
c = average daily number of shares outstanding during the
period entitled to receive dividends; and
d = net asset value per share on the last day of the period.
35
<PAGE>
For the 30-day period ended November 30, 1999, the annualized yields for the
outstanding Class A, Class C and Class D Shares of the Portfolios were as
follows:
30-Day Yield
------------
U.S. Government Securities Portfolio
Class A 5.75%
Class D 5.36%
Short-Intermediate Bond Portfolio
Class A 6.08%
Class D 5.69%
U.S. Treasury Index Portfolio
Class A 6.06%
Class C 5.83%
Class D 5.68%
Bond Portfolio
Class A 6.73%
Class C 6.49%
Class D 6.33%
Intermediate Bond Portfolio
Class A 6.39%
Class D 5.99%
International Bond Portfolio
Class A 3.43%
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations. See "Investment Advisers, Transfer Agent and
Custodian" and "Co-Administrators and Distributor" under "Additional Trust
Information." In the absence of such fee reductions and expense limitations, the
annualized 30-day yields of each Portfolio with respect to Class A, Class C and
Class D Shares would have been as follows:
30-Day Yield
------------
U.S. Government Securities Portfolio
Class A 5.34%
Class D 4.95%
Short-Intermediate Bond Portfolio
Class A 5.68%
Class D 5.29%
U.S. Treasury Index Portfolio
Class A 5.55%
Class C 5.32%
Class D 5.17%
Bond Portfolio
Class A 6.35%
Class C 6.11%
Class D 5.95%
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30-Day Yield
------------
Intermediate Bond Portfolio
Class A 5.95%
Class D 5.55%
International Bond Portfolio
Class A 2.95%
Because of the different servicing fees and transfer agency fees payable
with respect to Class A, C and D Shares in a Portfolio, performance quotations
for shares of Class C and D of the Portfolio will be lower than the quotations
for Class A Shares of the Portfolio, which will not bear any fees for
shareholder support services and will bear minimal transfer agency fees.
The performance of each class of shares of the Portfolios 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, shares may be worth more or less
than their original cost. Performance information 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 a 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 a
Portfolio will not be included in the Portfolios' calculations of performance
information.
TAXES
The following summarizes certain additional tax considerations generally
affecting the Portfolios and their shareholders that are not described in the
Portfolios' Prospectus. No attempt is made to present a detailed explanation of
the tax treatment of the Portfolios or their shareholders, and the discussion
here and in the applicable Prospectus is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers with
specific reference to their own tax situations.
The discussions of tax consequences in the Prospectus and this Additional
Statement are based on the Internal Revenue Code of 1986, as amended (the
"Code"), and the laws and regulations issued thereunder as in effect on the date
of this Additional Statement. Future legislative or administrative changes or
court decisions may significantly change the conclusions expressed herein, and
any such changes or decisions may have a retroactive effect with respect to the
transactions contemplated herein.
Federal - General Information
Each Portfolio intends to qualify as a regulated investment company under
Part I of Subchapter M of Subtitle A, Chapter 1, of Code. As a regulated
investment company, each Portfolio is generally exempt from federal income tax
on its net investment income and realized capital gains which it distributes to
shareholders, provided that it distributes an amount equal to at least the sum
of 90% of its tax-exempt income and 90% of its investment company taxable income
(net investment income and the excess of net short-term capital gain over net
long-term capital loss), if any, for the year (the "Distribution Requirement")
and satisfies certain other requirements of the Code that are described below.
In addition to satisfaction of the Distribution Requirement, each Portfolio
must derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities, loans and
gains from the sale or other disposition of stock or securities, loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from income derived with respect to its business of investing in such stock,
securities, or currencies (the "Income Requirement").
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of each Portfolio's assets must
generally consist of cash and cash items, U.S. Government Securities, securities
of other regulated investment companies, and securities of other issuers (as to
which as Portfolio has not invested more than 5% of
37
<PAGE>
the value of its total assets in securities of such issuer and as to which a
Portfolio does not hold more that 10% of the outstanding voting securities of
such issuer), and no more than 25% of the value of each Portfolio's total assets
may be invested in the securities of any one issuer (other than U.S. Government
Securities and securities of other regulated investment companies), or in two or
more issuers which such Portfolio controls and which are engaged in the same or
similar trades or businesses.
None of the Portfolios expects to pay dividends that qualify for the
dividends-received deduction for corporations.
If for any taxable year any Portfolio were not to qualify as a regulated
investment company, all of its taxable income would be subject to tax at regular
corporate rates without any deduction for distributions to shareholders. In such
event, all distributions would be taxable as ordinary income to the extent of
the Portfolio's current and accumulated earnings and profits, and would be
eligible for the dividends-received deduction in the case of corporate
shareholders.
The Code imposes a non-deductible 4% excise tax on regulated investment
companies that fail currently to distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Portfolio intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
Although each Portfolio expects to qualify as a RIC and to be relieved of
all or substantially all Federal taxes, depending upon the extent of its
activities in states and localities in which its offices are maintained, in
which its agents or independent contractors are located or in which it is
otherwise deemed to be conducting business, each Portfolio may be subject to the
tax laws of such states or localities.
The Trust will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends or 31% of gross sale proceeds
paid to any shareholder (i) who has provided either an incorrect tax
identification number or no number at all, (ii) who is subject to backup
withholding by the Internal Revenue Service for prior failure to report the
receipt of taxable interest or dividend income properly, or (iii) who has failed
to certify to the Trust, when required to do so, that he is not subject to
backup withholding or that he is an "exempt recipient."
Foreign Investors
Foreign shareholders generally will be subject to U.S. withholding tax at a
rate of 30% (or a lower treaty rate, if applicable) on distributions by a
Portfolio of net investment income, other ordinary income, and the excess, if
any, of net short-term capital gain over net long-term capital loss for the
year, regardless of the extent, if any, to which the income or gain is derived
from non-U.S. investments of the Portfolio. For this purpose, foreign
shareholders include individuals other than U.S. citizens, residents and
certain nonresident aliens, and foreign corporations, partnerships, trusts and
estates. A foreign shareholder generally will not be subject to U.S. income or
withholding tax in respect of proceeds from or gain on the redemption of shares
or in respect of capital gain dividends (i.e., dividends attributable to long-
term capital gains of a Portfolio), provided such shareholder submits a
statement, signed under penalties of perjury, attesting to such shareholder's
exempt status. Different tax consequences apply to a foreign shareholder engaged
in a U.S. trade or business or present in the U.S. for 183 days or more in a
year. Foreign shareholders should consult their tax advisers regarding the U.S.
and foreign tax consequences of investing in a Portfolio.
DESCRIPTION OF SHARES
The Trust Agreement permits the Trust's Board of Trustees to issue an
unlimited number of full and fractional shares of beneficial interest of one or
more separate series representing interests in one or more investment
portfolios. The Trustees may hereafter create series in addition to the Trust's
twenty-one existing series, which represent interests in the Trust's twenty-one
respective portfolios, six of which are discussed in this Additional Statement.
The Trust Agreement also permits the Board of Trustees to classify or reclassify
any unissued shares into classes within a series. Pursuant to such authority,
the Trustees have authorized the issuance of an unlimited number of shares of
beneficial interest in three separate classes of shares in each of the Trust's
non-money market portfolios: Class A, C and D Shares.
Under the terms of the Trust Agreement, each share of each Portfolio is
without par value, represents an equal proportionate interest in the particular
Portfolio with each other share of its class in the same Portfolio and is
entitled to such dividends and distributions out of the income belonging to the
Portfolio as are declared by the Trustees. Upon any
38
<PAGE>
liquidation of a Portfolio, shareholders of each class of a Portfolio are
entitled to share pro rata in the net assets belonging to that class available
for distribution. Shares do not have any preemptive or conversion rights. The
right of redemption is described under "About Your Account -- Selling Shares" in
the Prospectus. In addition, pursuant to the terms of the 1940 Act, the right of
a shareholder to redeem shares and the date of payment by a Portfolio may be
suspended for more than seven days (i) for any period during which the New York
Stock Exchange is closed, other than the customary weekends or holidays, or
trading in the markets the Portfolio normally utilizes is closed or is
restricted as determined by the SEC, (ii) during any emergency, as determined by
the SEC, as a result of which it is not reasonably practicable for the Portfolio
to dispose of instruments owned by it or fairly to determine the value of its
net assets, or (iii) for such other period as the SEC may by order permit for
the protection of the shareholders of the Portfolio. The Trust may also suspend
or postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions. In addition, shares of each Portfolio are
redeemable at the unilateral option of the Trust if the Trustees determine in
their sole discretion that failure to so redeem may have material adverse
consequences to the shareholders of the Portfolio. Shares when issued as
described in the Prospectus are validly issued, fully paid and nonassessable,
except as stated below. In the interests of economy and convenience,
certificates representing shares of the Portfolios are not issued.
The proceeds received by each Portfolio for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Portfolio. The underlying assets
of each Portfolio will be segregated on the books of account, and will be
charged with the liabilities in respect to that Portfolio and with a share of
the general liabilities of the Trust. Expenses with respect to the Portfolios
are normally allocated in proportion to the net asset value of the respective
Portfolios except where allocations of direct expenses can otherwise be fairly
made.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each investment portfolio affected by such matter. Rule 18f-2 further provides
that an investment portfolio shall be deemed to be affected by a matter unless
the interests of each investment portfolio in the matter are substantially
identical or the matter does not affect any interest of the investment
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to an investment portfolio only if approved by a majority of the
outstanding shares of such investment portfolio. However, the Rule also provides
that the ratification of the appointment of independent accountants, the
approval of principal underwriting contracts and the election of Trustees are
exempt from the separate voting requirements stated above. In addition,
shareholders of each of the classes in a particular investment portfolio have
equal voting rights except that only shares of a particular class of an
investment portfolio will be entitled to vote on matters submitted to a vote of
shareholders (if any) relating to shareholder servicing expenses and transfer
agency fees that are payable by that class.
The Trust is not required to hold annual meetings of shareholders and does
not intend to hold such meetings. In the event that a meeting of shareholders is
held, each share of the Trust will be entitled, as determined by the Trustees
without the vote or consent of shareholders, either to one vote for each share
or to one vote for each dollar of net asset value represented by such shares on
all matters presented to shareholders, including the election of Trustees (this
method of voting being referred to as "dollar-based voting"). However, to the
extent required by the 1940 Act or otherwise determined by the Trustees, series
and classes of the Trust will vote separately from each other. Shareholders of
the Trust do not have cumulative voting rights in the election of Trustees and,
accordingly, the holders of more than 50% of the aggregate voting power of the
Trust may elect all of the Trustees, irrespective of the vote of the other
shareholders. Meetings of shareholders of the Trust, or any series or class
thereof, may be called by the Trustees, certain officers or upon the written
request of holders of 10% or more of the shares entitled to vote at such
meeting. To the extent required by law, the Trust will assist in shareholder
communications in connection with a meeting called by shareholders. The
shareholders of the Trust will have voting rights only with respect to the
limited number of matters specified in the Trust Agreement and such other
matters as the Trustees may determine or may be required by law.
The Trust Agreement authorizes the Trustees, without shareholder approval
(except as stated in the next paragraph), to cause the Trust, or any series
thereof, to merge or consolidate with any corporation, association, trust or
other organization or sell or exchange all or substantially all of the property
belonging to the Trust, or any series thereof. In addition, the Trustees,
without shareholder approval, may adopt a "master-feeder" structure by investing
substantially all of the assets of a series of the Trust in the securities of
another open-end investment company or pooled portfolio.
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<PAGE>
The Trust Agreement also authorizes the Trustees, in connection with the
merger, consolidation, termination or other reorganization of the Trust or any
series or class, to classify the shareholders of any class into one or more
separate groups and to provide for the different treatment of shares held by the
different groups, provided that such merger, consolidation, termination or other
reorganization is approved by a majority of the outstanding voting securities
(as defined in the 1940 Act) of each group of shareholders that are so
classified.
The Trust Agreement permits the Trustees to amend the Trust Agreement
without a shareholder vote. However, shareholders of the Trust have the right to
vote on any amendment (i) that would adversely affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Trust Agreement; or (iv) that the
Trustees determine to submit to shareholders.
The Trust Agreement permits the termination of the Trust or of any series
or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors and
events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any series or class to maintain its
assets at an appropriate size; (ii) changes in laws or regulations governing the
Trust, or any series or class thereof, or affecting assets of the type in which
it invests; or (iii) economic developments or trends having a significant
adverse impact on their business or operations.
Under the Delaware Business Trust Act (the "Delaware Act"), shareholders
are not personally liable for obligations of the Trust. The Delaware Act
entitles shareholders of the Trust to the same limitation of liability as is
available to shareholders of private for-profit corporations. However, no
similar statutory or other authority limiting business trust shareholder
liability exists in many other states. As a result, to the extent that the Trust
or a shareholder is subject to the jurisdiction of courts in such other states,
those courts may not apply Delaware law and may subject the shareholders to
liability. To offset this risk, the Trust Agreement (i) contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
requires that notice of such disclaimer be given in each agreement, obligation
and instrument entered into or executed by the Trust or its Trustees and (ii)
provides for indemnification out of the property of the applicable series of the
Trust of any shareholder held personally liable for the obligations of the Trust
solely by reason of being or having been a shareholder and not because of the
shareholder's acts or omissions or for some other reason. Thus, the risk of a
shareholder incurring financial loss beyond his or her investment because of
shareholder liability is limited to circumstances in which all of the following
factors are present: (i) a court refuses to apply Delaware law; (ii) the
liability arises under tort law or, if not, no contractual limitation of
liability is in effect; and (iii) the applicable series of the Trust is unable
to meet its obligations.
The Trust Agreement provides that the Trustees will not be liable to any
person other than the Trust or a shareholder and that a Trustee will not be
liable for any act as a Trustee. However, nothing in the Trust Agreement
protects a Trustee against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
The Trust Agreement provides for indemnification of Trustees, officers and
agents of the Trust unless the recipient is liable by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such person's office.
The Trust Agreement provides that each shareholder, 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.
In addition to the requirements of Delaware law, the Trust Agreement
provides that a shareholder of the Trust may bring a derivative action on behalf
of the Trust only if the following conditions are met: (i) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the Trust, or 10% of the outstanding shares of
the series or class to which such action relates, must join in the request for
the Trustees to commence such action; and (ii) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of such claim. The Trust Agreement also provides that no
person, other than the Trustees, who is not a shareholder of a particular series
or class shall be entitled to bring any derivative action, suit or other
proceeding on behalf of or with respect to such series or class. The Trustees
will be entitled to retain counsel or other advisers in considering the merits
of the request and may require an undertaking by the shareholders making such
request to reimburse the Trust for the expense of any such advisers in the event
that the Trustees determine not to bring such action.
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<PAGE>
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). To the extent
provided by the Trustees in the appointment of Series Trustees, Series Trustees
(i) may, but are not required to, serve as Trustees of the Trust or any other
series or class of the Trust; (ii) may have, to the exclusion of any other
Trustee of the Trust, all the powers and authorities of Trustees under the Trust
Agreement with respect to such series or class; and/or (iii) may have no power
or authority with respect to any other series or class. The Trustees are not
currently considering the appointment of Series Trustees for the Trust.
As of February 29, 2000, substantially all of the Portfolios' outstanding
shares were held of record by Northern for the benefit of its customers and the
customers of its affiliates and correspondent banks that have invested in the
Portfolios. As of the same date, Northern possessed sole or shared voting
and/or investment power for its customer accounts with respect to less than 10%
of the Trust's outstanding shares. As of the same date, the Trust's Trustees
and officers as a group owned beneficially less than 1% of the outstanding
shares of each class of each Portfolio. Northern has advised the Trust that the
following persons (whose mailing address is: c/o The Northern Trust Company, 50
South LaSalle, Chicago, IL 60675) beneficially owned five percent or more of the
outstanding shares of the Portfolios' classes as of February 29, 2000:
<TABLE>
<CAPTION>
Number Percentage
of Shares of Shares
------------ -----------
<S> <C> <C>
BOND PORTFOLIO
Class A
Lannan Foundation 2,665,481.75 5.3%
Northern Trust Co. Pension Plan 2,628,042.33 5.3%
PWC Group Investment Savings Plan 3,188,817.76 6.4%
Class C
Phycor, Inc. 2,411,113.39 81.9%
Tuthill Corp. Supplement Investment 181,286.95 6.2%
Retirement Plan
Kitch Drutchas Wagner Kenney PC 218,389.11 7.4%
Class D
Bank of Illinois Trust Company 68,385.05 92.1%
First National Bank of La Grange 5,876.73 7.9%
INTERMEDIATE BOND PORTFOLIO
Class A
Illinois Masonic Medical Center - Board Designated Fund 226,527.36 8.7%
Illinois Masonic Medical Center - Restricted Investment Fund 355,426.73 13.6%
Illinois Masonic Medical Center - Warren Barr Pavillion 148,018.42 5.7%
HEB Savings & Retirement Trust 186,094.74 7.1%
Marshfield ERP 841,385.61 32.2%
Cavalcade Pension Trust 156,756.52 6.0%
Class D
Peoples National Bank & Trust 1,369.10 100%
INTERNATIONAL BOND PORTFOLIO
Class A
Northern Trust Pension Plan 947,008.94 57.1%
Doe Run Resources Corp. Retirement Plan 249,055.58 15.0%
SHORT-INTERMEDIATE BOND PORTFOLIO
Class A
Emerson Electric Co. Savings Plans Trust 821,852.49 8.2%
Northern Illinois Medical Center 530,043.31 5.3%
Class D
BankIllinois Trust Co. 5,349.91 78.9%
Dacotah Co. 1,431.21 21.1%
</TABLE>
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<TABLE>
<CAPTION>
Number Percentage
of Shares of Shares
------------ -----------
<S> <C> <C>
U.S. TREASURY INDEX PORTFOLIO
Class A
Belvediere National Bank & Trust 78,006.14 5.8%
Herget National Bank of Pekin 90,994.85 6.8%
Hubbell Defined Contribution Trust 118,357.60 8.8%
Old Second National Bank 201,001.14 14.9%
The Accreditation Council for Graduate Medical Education 84,894.97 6.3%
Henkel Rabbi Trust 395,100.72 29.4%
Class C
Wilson Sporting Goods 401K Plan 6,924.88 100.0%
Class D
First National Bank of LaGrange 5,106.16 100.0%
U.S. GOVERNMENT SECURITIES PORTFOLIO
Class A
Electrical Insurance Trust 611,708.59 11.6%
Sheet Metal Workers' Health & Welfare Plan 675,477.84 12.8%
Schlumberger Ltd. Master Health Care Trust 323,327.11 6.1%
Illinois State Partners Welfare Fund 311,930.68 5.9%
Mafco 420,634.70 8.0%
CTA 1,428,327.64 27.0%
Lifeway Christian Resources Master Retirement Fund 521,335.75 9.9%
Class D
First Bankers Trust Co. 39,978.98 87.0%
Enjayco Company 4,215.51 9.2%
</TABLE>
OTHER INFORMATION
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
Securities Act of 1933 with respect to the securities offered by the Trust's
Prospectus. Certain portions of the Registration Statement have been omitted
from the Prospectus and this Additional Statement pursuant to the rules and
regulations of the SEC. The Registration Statement including the exhibits filed
therewith may be examined at the office of the SEC in Washington, D.C.
Each Portfolio is responsible for the payment of its expenses. Such
expenses include, without limitation, the fees and expenses payable to Northern,
NTQA and PFPC, brokerage fees and commissions, fees for the registration or
qualification of Portfolio shares 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 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
shareholders and regulatory authorities, compensation and expenses of its
Trustees, expenses for industry organizations such as the Investment Company
Institute, miscellaneous expenses and extraordinary expenses incurred by the
Trust.
The term "majority of the outstanding shares" of either the Trust or a
particular Portfolio means, with respect to the approval of an investment
advisory agreement or a change in a fundamental investment policy, the vote of
the lesser of (i) 67% or more of the shares of the Trust or such Portfolio
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Trust or such Portfolio are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Trust or such Portfolio.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement of
which the Prospectus and this Additional Statement form a part, each such
statement being qualified in all respects by such reference.
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<PAGE>
FINANCIAL STATEMENTS
The audited financial statements and related report of Ernst & Young LLP,
independent auditors, contained in the annual report to the Portfolios'
shareholders for the fiscal year ended November 30, 1999 (the "Annual Report")
are hereby incorporated herein by reference and attached hereto. No other parts
of the Annual Report, including without limitation, "Management's Discussion of
Portfolio Performance," are incorporated by reference herein. Copies of the
Annual Report may be obtained upon request and without charge by calling 1-800-
637-1380 (toll-free).
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APPENDIX A
Description of Bond Ratings
The following summarizes the highest six ratings used by Standard & Poor's
Ratings Group, Inc., a division of McGraw Hill ("S&P") for corporate and
municipal debt:
AAA: Debt rated AAA has the highest rating assigned by S&P. The obligor's
capacity to meet its financial commitment on the obligation is extremely
strong.
AA: Debt rated AA differs from the highest rated obligations only in a small
degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: Debt rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories. However, the obligor's capacity to meet its financial commitment
on the obligation is still strong.
BBB: Debt rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB and B: Debt rated BB and B is regarded as having significant speculative
characteristics. Debt rated BB is less vulnerable to non-payment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
the obligor's inadequate capacity to meet its financial commitment on the
obligation. Debt rated B is more vulnerable to non-payment than debt rated
BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and C
the highest. While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB - An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B - An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.
D - An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
A-1
<PAGE>
PLUS (+) OR MINUS (-) - The ratings from AA through CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r - This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
To provide more detailed indications of credit quality, the ratings AA and lower
may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
S&P may attach the rating r to highlight risks to principal or volatility of
expected returns which are not addressed in the credit rating.
The following summarizes the highest six ratings used by Moody's Investors
Service, Inc. ("Moody's") for corporate and municipal long-term debt:
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risk appear somewhat larger than in
Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds that are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba and B: Bonds that possess one of these ratings provide questionable
protection of interest and principal. Ba indicates some speculative
elements. B indicates a general lack of characteristics of desirable
investment.
The foregoing ratings for corporate and municipal long-term debt are sometimes
presented in parenthesis preceded with a "con", indicating the bonds are rated
conditionally. Such parenthetical rating denotes the probable credit stature
upon completion of some act or the fulfillment of some condition.
The following summarizes the highest six ratings used by Duff & Phelps Credit
Rating Co. ("D&P") for corporate and municipal long-term debt:
AAA: Debt rated AAA is of the highest credit quality. The risk factors are
considered to be negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA: Debt rated AA is of high credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
A: Debt rated A has protection factors which are average but adequate.
However risk factors are more variable and greater in periods of economic
stress.
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BBB: Debt rated BBB has below-average protection factors but such protection
factors are still considered sufficient for prudent investment. Considerable
variability in risk is present during economic cycles.
BB and B: Debt rated BB or B is considered to be below investment grade. Debt
rated BB is deemed likely to meet obligations when due. Debt rated B
possesses the risk that obligations will not be met when due.
To provide more detailed indications of credit quality, the ratings AA and lower
may be modified by the addition of a plus (+) or minus (-) sign to show relative
standing within these major categories.
The following summarizes the highest six ratings used by Fitch IBCA, Inc.
("Fitch") for corporate and municipal bonds:
AAA: Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of investment risk and
are assigned only in case of exceptionally strong capacity for timely payment
of financial commitments. This capacity is highly unlikely to be affected by
reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality.
These ratings denote a very low expectation of credit risk and indicate very
strong capacity for timely payment of financial commitments. This capacity is
not significantly vulnerable to foreseeable events.
A: Bonds considered to be investment grade and of high credit quality. These
ratings denote a low expectation of credit risk and indicate strong capacity
for timely payment of financial commitments. This capacity may, nevertheless,
be more vulnerable to changes in circumstances or in economic conditions than
is the case for higher ratings.
BBB: Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
BB: Bonds considered to be speculative. These ratings indicate that there is
a possibility of credit risk developing, particularly as the result of
adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
B: Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
To provide more detailed indications of credit quality, the Fitch ratings "AA"
and lower may be modified by the addition of a plus (+) or minus (-) sign to
show relative standing within these major rating categories.
Description of Municipal Note Ratings
The following summarizes the two highest ratings by S&P for short-term municipal
notes:
SP-1: Strong capacity to pay principal and interest. Those issues determined
to possess very strong characteristics are given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
The following summarizes the two highest ratings used by Moody's for short-term
municipal notes and variable rate demand obligations:
MIG-1/VMIG-1: Obligations bearing these designations are of the best quality,
enjoying strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.
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MIG-2/VMIG-2: Obligations bearing these designations are of high quality with
margins of protection ample although not as large as in the preceding group.
The two highest rating categories of D&P for short-term debt are D-1 and D-2.
D&P employs three designations, D-1+, D-1 and D-1-, within the highest rating
category. D-1+ indicates the highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations. D-1 indicates very high certainty of timely
payment. Liquidity factors are excellent and supported by good fundamental
protection factors. Risk factors are minor. D-1- indicates high certainty of
timely payment. Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small. D-2 indicates good certainty of
timely payment. Liquidity factors and company fundamentals are sound. Although
ongoing funding needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
D&P uses the fixed-income ratings described above under "Description of Bond
Ratings" for tax-exempt notes and other short-term obligations. Fitch uses the
short-term ratings described below under "Description of Commercial Paper
Ratings" for municipal notes.
Description of Commercial Paper Ratings
Commercial paper rated A-1 by S&P indicates that the obligor's capacity to meet
its financial commitment is strong. Those issues for which the obligor's
capacity to meet its financial commitment on the obligation is extremely strong
are denoted in A-1+. The obligor's capacity to meet its financial commitment on
commercial paper rated A-2 is satisfactory but these obligations are somewhat
more susceptible to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers or supporting institutions rated Prime-1 are considered to have a
superior capacity for repayment of short-term debt obligations. Prime-1
repayment ability will often be evidenced by the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers or supporting institutions rated Prime-2 are considered to have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
The following summarizes the highest ratings used by Fitch for short-term
obligations:
F1 securities possess exceptionally strong credit quality. Issues assigned
this rating are regarded as having the strongest capacity for timely payment
of financial commitments and may have an added + to denote any exceptionally
strong credit feature.
F2 securities possess good credit quality. Issues assigned this rating have a
satisfactory capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of the higher ratings.
D&P uses the short-term ratings described above under "Description of Note
Ratings" for commercial paper.
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APPENDIX B
As stated in their Prospectus, the Portfolios may enter into futures
transactions and options thereon. Such transactions are described more fully in
this Appendix.
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are established in
---------------------------------------
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within three business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Portfolio could use interest rate
futures contracts as a defense, or hedge, against anticipated interest rate
changes. As described below, this could include the use of futures contract
sales to protect against expected increases in interest rates and the use of
futures contract purchases to offset the impact of interest rate declines.
A Portfolio presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by a Portfolio, through using futures contracts.
Interest rate futures contracts can also be used by a Portfolio for non-
hedging (speculative) purposes to increase total return.
Description of Interest Rate Futures Contracts. An interest rate
-----------------------------------------------
futures contract sale would create an obligation by a Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before a settlement date without the making or taking of delivery of securities.
Closing out a futures contract sale is effected by a Portfolio's entering into a
futures contract purchase for the same aggregate amount of the specific type of
financial instrument and the same delivery date. If the price of a sale exceeds
the price of the offsetting purchase, a Portfolio is immediately paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, a Portfolio pays the difference and realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by a Portfolio
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, a Portfolio realizes a gain, and if the purchase price exceeds
the offsetting sale price, a Portfolio realizes a loss.
Interest rate futures contracts are traded in an auction environment on the
floors of several exchanges--principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the -New York Futures Exchange. A Portfolio
would deal only in standardized contracts on recognized exchanges. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various financial
instruments including long-term United States Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities; three-month United States Treasury Bills; and ninety-day
commercial paper. A Portfolio may trade in any interest rate futures contracts
for which there exists a public market, including, without limitation, the
foregoing instruments.
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II. Index Futures Contracts
General. A bond index assigns relative values to the bonds included in the
index which fluctuates with changes in the market values of the bonds included.
A Portfolio may sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. A Portfolio may do so either to hedge the value of its portfolio
as a whole, or to protect against declines, occurring prior to sales of
securities, in the value of the securities to be sold. Conversely, a Portfolio
may purchase index futures contracts in anticipation of purchases of securities.
A long futures position may be terminated without a corresponding purchase of
securities.
In addition, a Portfolio may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
A Portfolio may also sell futures contracts in connection with this strategy, in
order to protect against the possibility that the value of the securities to be
sold as part of the restructuring of the portfolio will decline prior to the
time of sale.
Index futures contracts may also be used by a Portfolio for non-hedging
(speculative) purposes, to increase total return.
III. Futures Contracts on Foreign Currencies
A futures contract on foreign currency creates a binding obligation on one
party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of foreign currency, for an amount fixed in U.S.
dollars. Foreign currency futures may be used by a Portfolio for hedging
purposes in anticipation of fluctuations in exchange rates between the U.S.
dollars and other currencies arising from multinational transactions.
A Portfolio may also use futures contracts on foreign currencies for non-
hedging (speculative) purposes to increase total return.
IV. Margin Payments
Unlike purchases or sales of portfolio securities, no price is paid or
received by a Portfolio upon the purchase or sale of a futures contract.
Initially, the Portfolio will be required to deposit with the broker or in a
segregated account with the Custodian or a sub-custodian an amount of liquid
assets, known as initial margin, based on the value of the contract. The nature
of initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Portfolio upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when a particular Portfolio
has purchased a futures contract and the price of the contract has risen in
response to a rise in the underlying instruments, that position will have
increased in value and the Portfolio will be entitled to receive from the broker
a variation margin payment equal to that increase in value. Conversely, where
the Portfolio has purchased a futures contract and the price of the future
contract has declined in response to a decrease in the underlying instruments,
the position would be less valuable and the Portfolio would be required to make
a variation margin payment to the broker. At any time prior to expiration of the
futures contract, the Portfolio's adviser may elect to close the position by
taking an opposite position, subject to the availability of a secondary market,
which will operate to terminate the Portfolio's position in the futures
contract. A final determination of variation margin is then made, additional
cash is required to be paid by or released to the Portfolio, and the Portfolio
realizes a loss or gain.
V. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by the
Portfolios, even when futures are used for hedging (non-speculative) purposes.
In connection with the use of futures for hedging purposes, one risk arises
because of
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the imperfect correlation between movements in the price of the futures and
movements in the price of the instruments which are the subject of a hedge. The
price of the future may move more than or less than the price of the instruments
being hedged. If the price of the futures moves less than the price of the
instruments which are the subject of the hedge, the hedge will not be fully
effective but, if the price of the instruments being hedged has moved in an
unfavorable direction, the Portfolio would be in a better position than if it
had not hedged at all. If the price of the instruments being hedged has moved in
a favorable direction, this advantage will be partially offset by the loss on
the futures. If the price of the futures moves more than the price of the hedged
instruments, the Portfolio involved will experience either a loss or gain on the
futures which will not be completely offset by movements in the price of the
instruments which are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of instruments being hedged and movements
in the price of futures contracts, the Portfolio may buy or sell futures
contracts in a greater dollar amount than the dollar amount of instruments being
hedged if the volatility over a particular time period of the prices of such
instruments has been greater than the volatility over such time period of the
futures, or if otherwise deemed to be appropriate by the Investment Advisers.
Conversely, the Portfolios may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the instruments being
hedged is less than the volatility over such time period of the futures contract
being used, or if otherwise deemed to be appropriate by the Investment Advisers.
It is also possible that, where a Portfolio had sold futures to hedge its
portfolio against a decline in the market, the market may advance and the value
of instruments held in the Portfolio may decline. If this occurred, the
Portfolio would lose money on the futures and also experience a decline in value
in its portfolio securities.
When futures are purchased to hedge against a possible increase in the
price of securities before a Portfolio is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Portfolio then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Portfolio will realize a loss on the futures contract that is not offset by
a reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the instruments
being hedged, the price of futures may not correlate perfectly with movement in
the cash market due to certain market distortions. First, rather than meeting
additional margin deposit requirements, investors may close futures contracts
through off-setting transactions which could distort the normal relationship
between the cash and futures markets. Second, with respect to financial futures
contracts, the liquidity of the futures market depends on participants entering
into off-setting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced thus producing distortions. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the Investment Advisers may still
not result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the
Portfolios intend to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist for
any particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Portfolios would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will generally not be sold
until the futures contract can be terminated. In such circumstances, an increase
in the price of the securities, if any, may partially or completely offset
losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities will in fact correlate with the price
movements in the futures contract and thus provide an offset on a futures
contract.
Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times
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<PAGE>
make it difficult or impossible to liquidate existing positions or to recover
excess variation margin payments.
Successful use of futures by the Portfolios is also subject to the
Investment Advisers' ability to predict correctly movements in the direction of
the market. For example, if a particular Portfolio has hedged against the
possibility of a decline in the market adversely affecting securities held by it
and securities prices increase instead, the Portfolio will lose part or all of
the benefit to the increased value of its securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of securities
may be, but will not necessarily be, at increased prices which reflect the
rising market. The Portfolios may have to sell securities at a time when they
may be disadvantageous to do so.
Futures purchased or sold by the International Bond Portfolio (and related
options) may be traded on foreign exchanges. Participation in foreign futures
and foreign options transactions involves the execution and clearing of trades
on or subject to the rules of a foreign board of trade. Neither the National
Futures Association nor any domestic exchange regulates activities of any
foreign boards of trade, including the execution, delivery and clearing of
transactions, or has the power to compel enforcement of the rules of a foreign
board of trade or any applicable foreign law. This is true even if the exchange
is formally linked to a domestic market so that a position taken on the market
may be liquidated by a transaction on another market. Moreover, such laws or
regulations will vary depending on the foreign country in which the foreign
futures or foreign options transaction occurs. For these reasons, customers who
trade foreign futures of foreign options contracts may not be afforded certain
of the protective measures provided by the
Commodity Exchange Act, the Commodity Futures Trading Commission's ("CFTC")
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the CFTC and
arbitration proceedings provided by the National Futures Association or any
domestic futures exchange. In particular, the investments of the International
Bond Portfolio in foreign futures or foreign options transactions may not be
provided the same protections in respect of transactions on United States
futures exchanges. In addition, the price of any foreign futures or foreign
options contract and, therefore the potential profit and loss thereon may be
affected by any variance in the foreign exchange rate between the time an order
is placed and the time it is liquidated, offset or exercised.
VI. Options on Futures Contracts
The Portfolios may purchase and write (sell) call and put options on the
futures contracts described above. A futures option gives the holder, in return
for the premium paid, the right to buy (call) from or sell (put) to the writer
of the option a futures contract at a specified price at any time during the
period of the option. Upon exercise, the writer of the option is obligated to
pay the difference between the cash value of the futures contract and the
exercise price. Like the buyer or seller of a futures contract, the holder, or
writer, of an option has the right to terminate its position prior to the
scheduled expiration of the option by selling, or purchasing an option of the
same series, at which time the person entering into the closing transaction will
realize a gain or loss. A Portfolio will be required to deposit initial margin
and variation margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial margin
deposits.
Investments in futures options involve some of the same considerations that
are involved in connection with investments in futures contracts (for example,
the existence of a liquid secondary market). See "Risks of Transactions in
Futures Contracts" above. In addition, the purchase or sale of an option also
entails the risk that changes in the value of the underlying futures contract
will not correspond to changes in the value of the option purchased. Depending
on the pricing of the option compared to either the futures contract upon which
it is based, or upon the price of any underlying instruments, an option may or
may not be less risky than ownership of the futures contract or such
instruments. In general, the market prices of options can be expected to be more
volatile than the market prices on the underlying futures contract. Compared to
the purchase or sale of futures contracts, however, the purchase of call or put
options on futures contracts may, unlike futures contracts where the risk of
loss is potentially unlimited, frequently involve less potential risk to the
Portfolio because the maximum amount at risk is the premium paid for the options
(plus transaction costs). The writing of an option on a futures contract
involves risks similar to those risks relating to the sale of futures contracts.
VII. Other Matters
Each Portfolio intends to comply with the regulations of the CFTC exempting
it from registration as a "commodity
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<PAGE>
pool operator." Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
B-5
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
NORTHERN INSTITUTIONAL FUNDS
BALANCED PORTFOLIO
EQUITY INDEX PORTFOLIO
DIVERSIFIED GROWTH PORTFOLIO
FOCUSED GROWTH PORTFOLIO
SMALL COMPANY INDEX PORTFOLIO
SMALL COMPANY GROWTH PORTFOLIO
MID CAP GROWTH PORTFOLIO
INTERNATIONAL EQUITY INDEX PORTFOLIO
INTERNATIONAL GROWTH PORTFOLIO
This Statement of Additional Information dated April 1, 2000 (the
"Additional Statement") is not a prospectus. Copies of the prospectus dated
April 1, 2000 for the Balanced, Equity Index, Diversified Growth, Focused
Growth, Small Company Index, Small Company Growth, Mid Cap Growth, International
Equity Index and International Growth Portfolios (the "Portfolios") of Northern
Institutional Funds (the "Prospectus") may be obtained without charge by calling
1-800-637-1380 (toll-free). Capitalized terms not otherwise defined have the
same meaning as in the Prospectus.
The audited financial statements and related report of Ernst & Young LLP,
independent auditors, contained in the Annual Report to the Portfolio's
shareholders for the fiscal year ended November 30, 1999 (except for Small
Company Growth and Mid Cap Portfolios, which did not commence operations during
the period) are incorporated herein by reference in the section "Financial
Statements." No other portions of the Fund's Annual Reports are incorporated by
reference.
1
<PAGE>
INDEX
Page
----
ADDITIONAL INVESTMENT INFORMATION................... 3
Classification and History......................... 3
Investment Objectives, Strategies and Risks........ 3
Investment Restrictions............................ 19
ADDITIONAL TRUST INFORMATION........................ 20
Trustees and Officers.............................. 20
Investment Advisers, Transfer Agent and Custodian.. 26
Portfolio Transactions............................. 30
Portfolio Valuation................................ 34
Co-Administrators and Distributor.................. 35
Shareholder Servicing Plan......................... 38
Counsel and Auditors............................... 39
In-Kind Purchases and Redemptions.................. 39
PERFORMANCE INFORMATION............................. 40
TAXES............................................... 48
Federal - General Information...................... 49
Taxation of Certain Financial Instruments.......... 50
Foreign Investors.................................. 50
DESCRIPTION OF SHARES............................... 50
OTHER INFORMATION................................... 55
FINANCIAL STATEMENTS................................ 56
APPENDIX A.......................................... A-1
APPENDIX B.......................................... B-1
No person has been authorized to give any information or to make any
representations not contained in this Additional Statement or in the Prospectus
in connection with the offering made by the 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. The 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.
An investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. An investment in a Portfolio involves investment risks, including
possible loss of principal.
2
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
Classification and History
Northern Institutional Funds (the "Trust") is an open-end, management
investment company. Each Portfolio is classified as diversified under the
Investment Company Act of 1940, as amended (the "1940 Act").
Each Portfolio is a series of the Trust, which was formed as a Delaware
business trust on July 1, 1997 under an Agreement and Declaration of Trust (the
"Trust Agreement"). The Trust is the result of a reorganization of a
Massachusetts business trust formerly known as The Benchmark Funds on March 31,
1998. The Trust's name was changed from The Benchmark Funds to Northern
Institutional Funds on July 15, 1998. The Trust also offers six fixed income and
five money market portfolios, which are not described in this document.
Investment Objectives, Strategies and Risks
The following supplements the investment objectives, strategies and risks
of the Portfolios as set forth in the Prospectus. The investment objectives of
the Mid Cap Growth and Small Company Growth Portfolios may be changed without
shareholder approval. The investment objective of each other Portfolio may not
be changed without the vote of the majority of the Portfolio's outstanding
shares. Except as expressly noted below, however, each Portfolio's investment
policies may be changed without shareholder approval.
Warrants. The Balanced, Diversified Growth, Focused Growth, Small Company
Index, Small Company Growth, Mid Cap Growth, International Equity Index and
International Growth Portfolios may purchase warrants and similar rights, which
are privileges issued by corporations enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. The prices of warrants do not necessarily
correlate with the prices of the underlying shares. The purchase of warrants
involves the risk that a Portfolio could lose the purchase value of a warrant if
the right to subscribe to additional shares is not exercised prior to the
warrant's expiration. Also, the purchase of warrants involves the risk that the
effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security. A
Portfolio will not invest more than 5% of its total assets, taken at market
value, in warrants. Warrants acquired by a Portfolio in shares or attached to
other securities are not subject to this restriction.
U.S. Government Obligations. Examples of the types of U.S. Government
obligations that may be acquired by the Portfolios include U.S. Treasury Bills,
Treasury Notes and Treasury Bonds and the obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Federal National Mortgage Association,
Government National Mortgage Association, General Services Administration,
Central Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal
Intermediate Credit Banks and the Maritime Administration.
Securities guaranteed as to principal and interest by the U.S. Government,
its agencies or instrumentalities are also deemed to include (i) securities for
which the payment of principal and interest is backed by an irrevocable letter
of credit issued by the U.S. Government or any agency or instrumentality
thereof, and (ii) participations in loans made to foreign government; or their
agencies that are so guaranteed.
To the extent consistent with their respective investment objectives, the
Portfolios may invest in a variety of U.S. Treasury obligations and obligations
issued by or guaranteed by the U.S. Government or its agencies and
instrumentalities. Not all U.S. Government obligations carry the same credit
support. 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. In addition, the secondary market for certain
participations in loans made to foreign governments or their agencies may be
limited.
American Depository Receipts ("ADRs"). The Portfolios may invest in ADRs.
ADRs are receipts typically issued by a United States bank or trust company
evidencing ownership of the underlying foreign securities and are denominated in
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U.S. dollars. Some institutions issuing ADRs may not be sponsored by the issuer.
A non-sponsored depository may not provide the same shareholder information
that a sponsored depository is required to provide under its contractual
arrangement with the issuer.
European Depository Receipts ("EDRs"). The Portfolios may also invest in
EDRs and GDRs. EDRs and GDRs are receipts issued by a non-U.S. financial
institution evidencing ownership of underlying foreign or U.S. securities and
are usually denominated in foreign currencies. EDRs and GDRs may not be
denominated in the same currency as the securities they represent. Generally,
EDRs and GDRs are designed for use in the foreign securities markets.
Foreign Securities. Investment in foreign securities involves special
risks. These include market risk, interest rate risk and the risks of investing
in securities of foreign issuers and of companies whose securities are
principally traded outside the United States and in investments denominated in
foreign currencies. Market risk involves the possibility that stock prices will
decline over short or even extended periods. The stock markets tend to be
cyclical, with periods of generally rising prices and periods of generally
declining prices. These cycles will affect the value of the Portfolio to the
extent that it invests in foreign stocks. The holdings of the Portfolios, to the
extent that they invest in fixed income securities, will be sensitive to changes
in interest rates and the interest rate environment. In addition, the
performance of investments in securities denominated in a foreign currency will
depend 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 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.
There are other risks and costs involved in investing in foreign securities
which are in addition to the usual risks inherent in domestic investments.
Investment in foreign securities 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 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 the adoption of other governmental
restrictions might adversely affect an investment in foreign securities.
Additionally, foreign banks and foreign branches of domestic banks are subject
to less stringent reserve requirements, and to different accounting, auditing
and recordkeeping requirements.
Unanticipated political, economic or social developments may affect the
value of a Portfolio's investments in emerging market countries and the
availability to a Portfolio of additional investments in these 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. The small size and inexperience of the securities markets in certain
of such countries and the limited volume of trading in securities in those
countries may make a Portfolio's investments in such countries illiquid and more
volatile than investments in Japan or most Western European countries, and a
Portfolio may be required to establish special custodial or other arrangements
before making certain investments in those countries. There may be little
financial or accounting information available with respect to issuers located in
certain of such countries, and it may be difficult as a result to assess the
value or prospects of an investment in such issuers.
Although a Portfolio may invest in securities denominated in foreign
currencies, its portfolio securities and other assets are valued in U.S.
dollars. Currency exchange rates may fluctuate significantly over short periods
of time causing, together with other factors, a 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. To the extent that a Portfolio's total assets, adjusted to reflect a
Portfolio's net position after giving effect to currency transactions, are
denominated in the currencies of foreign countries, a Portfolio will be more
susceptible to the risk of adverse economic and political developments within
those countries. A Portfolio is also subject to the possible imposition of
exchange control regulations or freezes on the convertibility of currency.
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Dividends and interest payable on a Portfolio's foreign portfolio
securities may be subject to foreign withholding taxes. To the extent such taxes
are not offset by credits or deductions allowed to investors under U.S. federal
income tax law, they may reduce the net return to the shareholders. See "Taxes."
To the extent consistent with its investment objective, a Portfolio may
also invest in obligations of the International Bank for Reconstruction and
Development (also known as the World Bank) which are supported by subscribed,
but unpaid, commitments of its member countries. There is no assurance that
these commitments will be undertaken or complied with in the future.
Investors should understand that the expense ratios of the International
Equity Index and International Growth Portfolios can be expected to be higher
than those funds investing primarily in domestic securities. The costs
attributable to investing abroad are usually higher for several reasons, such as
the higher cost of investment research, higher cost of custody of foreign
securities, higher commissions paid on comparable transactions on foreign
markets and additional costs arising from delays in settlements of transactions
involving foreign securities.
As noted in the Prospectus, the International Equity Index Portfolio
invests primarily in the equity securities included in the Europe and Australia
for East Equity Index ("EAFE Index"). As of November 30, 1999, fourteen European
countries (Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy,
the Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom)
constitute approximately 73% of the EAFE Index. Six Asian/Pacific countries
(Australia, Hong Kong, Japan, Malaysia, New Zealand and Singapore) account for
the remaining 27%.
Countries in which the other Portfolios may invest (to the extent permitted
by their investment policies) include, but are not limited to: Argentina,
Australia, Austria, Belgium, Brazil, Canada, Chile, Colombia, Czech Republic,
Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, Indonesia,
Ireland, Israel, Italy, Japan, Luxembourg, Malaysia, Mexico, the Netherlands,
New Zealand, Norway, Peru, the Philippines, Poland, Portugal, Singapore, South
Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the
United Kingdom and Venezuela.
The end of the Cold War, the reunification of Germany, the accession of new
Western European members to the European Economic and Monetary Union and the
aspirations of Eastern European states to join and other political and social
events in Europe have caused considerable economic, social and political
dislocation. In addition, events in the Japanese economy, as well as political
and social developments there have affected Japanese securities and currency
markets, and the relationship of the Japanese yen with other currencies and with
the U.S. dollar. Future political, economic and social developments in Japan and
in the Asia/Pacific regional context can be expected to produce continuing
effects on securities and currency markets.
Foreign Currency Transactions. In order to protect against a possible loss
on investments resulting from a decline or appreciation in the value of a
particular foreign currency against the U.S. dollar or another foreign currency
or for other reasons, the Balanced, Diversified Growth, Focused Growth, Small
Company Growth, Mid Cap Growth, International Equity Index and International
Growth Portfolios are authorized to enter into forward foreign currency exchange
contracts. These contracts involve an obligation to purchase or sell a specified
currency at a future date at a price set at the time of the contract. Forward
currency contracts do not eliminate fluctuations in the values of portfolio
securities but rather allow a Portfolio to establish a rate of exchange for a
future point in time.
When entering into a contract for the purchase or sale of a security, a
Portfolio may enter into a forward foreign currency exchange contract for the
amount of the purchase or sale price to protect against variations, between the
date the security is purchased or sold and the date on which payment is made or
received, in the value of the foreign currency relative to the U.S. dollar or
other foreign currency.
When the investment management team anticipates that a particular foreign
currency may decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, a Portfolio may enter into a forward
contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. Similarly, when the securities held by a Portfolio
create a short position in a foreign currency, the Portfolio may enter into a
forward contract to buy, for a fixed amount, an amount of foreign currency
approximating the short position. A Portfolio's net long and short foreign
currency exposure will not exceed its total asset
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value. With respect to any forward foreign currency contract, it will not
generally be possible to match precisely the amount covered by that contract and
the value of the securities involved due to the changes in the values of such
securities resulting from market movements between the date the forward contract
is entered into and the date it matures. In addition, while forward contracts
may offer protection from losses resulting from declines or appreciation in the
value of a particular foreign currency, they also limit potential gains which
might result from changes in the value of such currency. A Portfolio may also
incur costs in connection with forward foreign currency exchange contracts and
conversions of foreign currencies and U.S. dollars.
In addition, the International Growth Portfolio may purchase or sell
forward foreign currency exchange contracts to seek to increase total return or
for cross-hedging purposes. The Portfolio may engage in cross-hedging by using
forward contracts in one currency to hedge against fluctuations in the value of
securities denominated in a different currency if the investment management team
believes that there is a pattern of correlation between the two currencies.
Liquid assets equal to the amount of a Portfolio's assets that could be
required to consummate forward contracts will be segregated except to the extent
the contracts are otherwise "covered." The segregated assets will be valued at
market or fair value. If the market or fair value of such assets declines,
additional liquid assets will be segregated daily so that the value of the
segregated assets will equal the amount of such commitments by the Portfolio. A
forward contract to sell a foreign currency is "covered" if a Portfolio owns the
currency (or securities denominated in the currency) underlying the contract, or
holds a forward contract (or call option) permitting the Portfolio to buy the
same currency at a price that is (i) no higher than the Portfolio's price to
sell the currency or (ii) greater than the Portfolio's price to sell the
currency provided the Portfolio segregates liquid assets in the amount of the
difference. A forward contract to buy a foreign currency is "covered" if a
Portfolio holds a forward contract (or call option) permitting the Portfolio to
sell the same currency at a price that is (i) as high as or higher than the
Portfolio's price to buy the currency or (ii) lower than the Portfolio's price
to buy the currency provided the Portfolio segregates liquid assets in the
amount of the difference.
Options. Each Portfolio may buy put options and buy call options and write
covered call and secured put options. Such options may relate to particular
securities, foreign and domestic stock indices, financial instruments, foreign
currencies or the yield differential between the securities ("yield curve
options") and may or may not be listed on a domestic or foreign securities
exchange or issued by the Options Clearing Corporation. A call option for a
particular security or currency gives the purchaser of the option the right to
buy, and a writer the obligation 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.
Options trading is a highly specialized activity which entails greater than
ordinary investment risk. Options on particular securities may be more volatile
than the underlying instruments, and therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying instruments themselves.
The Portfolios will write call options only if they are "covered." In the
case of a call option on a security or currency, the option is "covered" if a
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 segregated) upon conversion or exchange of other securities
held by it. For a call option on an index, the option is covered if a 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 a 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 Portfolio
segregates liquid assets in the amount of the difference. The Portfolios will
write put options only if they are "secured" by segregated liquid assets in an
amount not less than the exercise price of the option at all times during the
option period.
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A Portfolio's obligation to sell a security subject to a covered call
option written by it, or to purchase a security or currency subject to a secured
put option written by it, may be terminated prior to the expiration date of the
option by the Portfolio's execution of a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e., same
underlying security or currency, exercise price and expiration date) as the
option previously written. Such a purchase does not result in the ownership of
an option. A closing purchase transaction will ordinarily be effected to realize
a profit on an outstanding option, to prevent an underlying security or currency
from being called, to permit the sale of the underlying security or currency or
to permit the writing of a new option containing different terms on such
underlying security. The cost of such a liquidation purchase plus transaction
costs may be greater than the premium received upon the original option, in
which event the Portfolio will have incurred a loss in the transaction. There is
no assurance that a liquid secondary market will exist for any particular
option. An option writer, unable to effect a closing purchase transaction, will
not be able to sell the underlying security or currency (in the case of a
covered call option) or liquidate the segregated assets (in the case of a
secured put option) until the option expires or the optioned security or
currency is delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline or appreciation in
the security or currency during such period.
When a Portfolio purchases an option, the premium paid by it is recorded as
an asset of the Portfolio. When the Portfolio writes an option, an amount equal
to the net premium (the premium less the commission) received by the Portfolio
is included in the liability section of the Portfolio's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the current bid price. If an option
purchased by the Portfolio expires unexercised, the Portfolio realizes a loss
equal to the premium paid. If the Portfolio enters into a closing sale
transaction on an option purchased by it, the Portfolio will realize a gain if
the premium received by the Portfolio on the closing transaction is more than
the premium paid to purchase the option, or a loss if it is less. If an option
written by the Portfolio expires on the stipulated expiration date or if the
Portfolio enters into a closing purchase transaction, it will realize a gain (or
loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. If an option written by the Portfolio is exercised, the
proceeds of the sale will be increased by the net premium originally received
and the Portfolio will realize a gain or loss.
There are several risks associated with transactions in certain options.
For example, there are significant differences between the securities, currency
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In addition,
a liquid secondary market for particular options, whether traded over-the-
counter or on a national securities exchange (an "Exchange"), may be absent for
reasons which include the following: there may be insufficient trading interest
in certain options; restrictions may be imposed by an Exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an Exchange; the facilities of
an Exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading value; or one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that Exchange would
continue to be exercisable in accordance with their terms.
Supranational Bank Obligations. The Balanced Portfolio may invest in
obligations of supranational banks. Supranational banks are international
banking institutions designed or supported by national governments to promote
economic reconstruction, development or trade between nations (e.g., the World
Bank). Obligations of supranational banks may be supported by appropriated but
unpaid commitments of their member countries and there is no assurance that
these commitments will be undertaken or met in the future.
Stripped Securities. The Balanced Portfolio may purchase stripped
securities. The Treasury Department has facilitated transfers of ownership of
zero coupon securities by accounting separately for the beneficial ownership of
particular interest coupon and principal payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
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"Separate Trading of Registered Interest and Principal of Securities." The
Portfolio may purchase securities registered in the STRIPS program. Under the
STRIPS program, the Portfolio will be able to have its beneficial ownership of
zero coupon securities recorded directly in the book-entry record-keeping system
in lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities.
In addition, the Balanced Portfolio may acquire U.S. Government obligations
and their unmatured interest coupons that have been separated ("stripped") by
their holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury
Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The underlying
U.S. Treasury bonds and notes themselves are held in book-entry form at the
Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are ostensibly owned by the bearer or holder), in trust on
behalf of the owners. Counsel to the underwriters of these certificates or other
evidences of ownership of U.S. Treasury securities have stated that, in their
opinion, purchasers of the stripped securities most likely will be deemed the
beneficial holders of the underlying U.S. Government obligations for Federal tax
purposes. The Trust is not aware of any binding legislative, judicial or
administrative authority on this issue.
The Prospectus discusses other types of stripped securities that may be
purchased by the Balanced Portfolio, including stripped mortgage-backed
securities ("SMBS"). SMBS are usually structured with two or more classes that
receive different proportions of the interest and principal distributions from a
pool of mortgage-backed obligations. A common type of SMBS will have one class
receiving all of the interest, while the other class receives all of the
principal. However, in some instances, one class will receive some of the
interest and most of the principal while the other class will receive most of
the interest and the remainder of the principal. If the underlying obligations
experience greater than anticipated prepayments of principal, the Portfolio may
fail to fully recoup its initial investment in these securities. The market
value of the class consisting entirely of principal payments generally is
extremely volatile in response to changes in interest rates. The yields on a
class of SMBS that receives all or most of the interest are generally higher
than prevailing market yields on other mortgage-backed obligations because their
cash flow patterns are also volatile and there is a risk that the initial
investment will not be fully recouped. SMBS issued by the U.S. Government (or a
U.S. Government agency or instrumentality) may be considered liquid under
guidelines established by the Trust's Board of Trustees if they can be disposed
of promptly in the ordinary course of business at a value reasonably close to
that used in the calculation of the net asset value per share.
Asset-Backed Securities. The Balanced Portfolio may purchase asset backed
securities, which are securities backed by mortgages, installment contracts,
credit card receivables or other assets. Asset-backed securities represent
interests in "pools" of assets in which payments of both interest and principal
on the securities are made monthly, thus in effect "passing through" monthly
payments made by the individual borrowers on the assets that underlie the
securities, net of any fees paid to the issuer or guarantor of the securities.
The average life of asset-backed securities varies with the maturities of the
underlying instruments, and the average life of a mortgage-backed instrument, in
particular, is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities as a result of mortgage prepayments.
For this and other reasons, an asset-backed security's stated maturity may be
shortened, and the security's total return may be difficult to predict
precisely.
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 fixed income portion of the Balanced 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
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experience substantial prepayments.
Asset-backed securities acquired by the Balanced Portfolio may include
collateralized mortgage obligations ("CMOs") issued by private companies. CMOs
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.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
by the Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by the Federal National Mortgage Association
("FNMA") include FNMA Guaranteed Mortgage Pass-Through Certificates (also known
as "Fannie Maes") which are solely the obligations of the FNMA and are not
backed by or entitled to the full faith and credit of the United States, but are
supported by the right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private stockholders. Fannie
Maes are guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage Corporation
("FHLMC") include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress, which is owned entirely by
Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or
by any Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by the FHLMC. The FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When the FHLMC does not guarantee
timely payment of principal, the FHLMC may remit the amount due on account of
its guarantee of ultimate payment of principal at any time after default on an
underlying mortgage, but in no event later than one year after it becomes
payable.
Non-mortgage asset-backed securities involve certain risks that are 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
have given 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 payments on these securities.
Interest Rate Swaps, Floors and Caps and Currency Swaps. The Balanced
Portfolio may enter into interest rate swaps or purchase interest rate floors or
caps for hedging purposes and not for speculation. Interest rate swaps involve
the exchange by the Portfolio with another party of their respective commitments
to pay or receive interest, such as an exchange of fixed rate payments for
floating rate payments. The Portfolio will typically use interest rate swaps to
preserve a return on a particular investment or portion of its portfolio or to
shorten the effective duration of its portfolio investments. The purchase of an
interest rate floor or cap entitles the purchaser to receive payments of
interest on a notional principal amount from the seller, to the extent the
specified index falls below (floor) or exceeds (cap) a predetermined interest
rate. The Portfolio will only enter into interest rate swaps or interest rate
floor or cap transactions on a net basis; i.e., the two payment streams are
netted out, with the Portfolio receiving or paying, as the case may be, only the
net amount of the two payments.
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The International Equity Index and International Growth Portfolios may
enter into currency swaps, which involve the exchange of the rights of a
Portfolio and another party to make or receive payments in specified currencies.
Currency swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency.
Inasmuch as interest rate and currency swaps are entered into for good
faith hedging purposes, the Trust, The Northern Trust Company ("Northern") and
Northern Trust Quantitative Advisors, Inc. ("NTQA" and, collectively with
Northern, the "Investment Advisers") believe that such transactions do not
constitute senior securities as defined in the 1940 Act and, accordingly, will
not treat them as being subject to the Portfolios' borrowing restrictions. The
net amount of the excess, if any, of a Portfolio's obligations over its
entitlements with respect to interest rate or currency swaps 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 segregated by the Portfolio.
The Balanced Portfolio will not enter into an interest rate swap, floor or
cap transaction, and the International Equity Index and International Growth
Portfolios will not enter into currency swap transactions unless the unsecured
commercial paper, senior debt or the claims-paying ability of the other party
thereto is rated either A or A-l or better by Standard & Poor's Ratings Group,
Inc. ("S&P"), Duff & Phelps Credit Rating Co. ("Duff") or Fitch IBCA ("Fitch"),
or A or P-1 or better by Moody's Investors Service, Inc. ("Moody's"). If there
is a default by the other party to such transaction, the Portfolios will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with markets for other similar instruments which
are traded in the interbank market.
Equity Swaps. Each Portfolio may enter into equity swap contracts to invest
in a market without owning or taking physical custody of securities in
circumstances in which direct investment is restricted for legal reasons or is
otherwise impracticable. Equity swaps may also be used for hedging purposes or
to seek to increase total return. The counterparty to an equity swap contract
will typically be a bank, investment banking firm or broker/dealer. Equity swap
contracts may be structured in different ways. For example, a counterparty may
agree to pay the Portfolio the amount, if any, by which the notional amount of
the equity swap contract would have increased in value had it been invested in
particular stocks (or an index of stocks), plus the dividends that would have
been received on those stocks. In these cases, the Portfolio may agree to pay to
the counterparty the amount, if any, by which that notional amount would have
decreased in value had it been invested in the stocks. Therefore, the return to
the Portfolio on any equity swap contract should be the gain or loss on the
notional amount plus dividends on the stocks less the interest paid by the
Portfolio on the notional amount. In other cases, the counterparty and the
Portfolio may each agree to pay the other the difference between the relative
investment performances that would have been achieved if the notional amount of
the equity swap contract had been invested in different stocks (or indices of
stocks).
A Portfolio will enter into equity swaps only on a net basis, which means
that the two payment streams are netted out, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. Payments
may be made at the conclusion of an equity swap contract or periodically during
its term. Equity swaps do not involve the delivery of securities or other
underlying assets. Accordingly, the risk of loss with respect to equity swaps is
limited to the net amount of payments that a Portfolio is contractually
obligated to make. If the other party to an equity swap defaults, a Portfolio's
risk of loss consists of the net amount of payments that such Portfolio is
contractually entitled to receive, if any. Inasmuch as these transactions are
entered into for hedging purposes or are offset by segregated cash or liquid
assets to cover the Portfolios' potential exposure, the Portfolios and the
Investment Advisers believe that such transactions do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to a Portfolio's borrowing restrictions.
The Portfolios will not enter into any swap transactions 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. If there is a default by the other party to such a
transaction, a Portfolio will have contractual remedies pursuant to the
agreements related to the transaction.
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The use of equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Investment Advisers are incorrect in
their forecasts of market values, the investment performance of a Portfolio
would be less favorable than it would have been if this investment technique
were not used.
Futures Contracts and Related Options. Each Portfolio may invest in futures
contracts and may purchase and sell call and put options on futures contracts
for hedging purposes, for speculative purposes (to seek to increase total
return), or for liquidity management purposes. When used as a hedge, a 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. A 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, a Portfolio may purchase a futures contract as a hedge in
anticipation of purchases of securities. In addition, a Portfolio may utilize
futures contracts in anticipation of changes in the composition of its portfolio
holdings. For a detailed description of futures contracts and related options,
see Appendix B to this Additional Statement.
Real Estate Investment Trusts. The Small Company Index and the Small
Company Growth Portfolios may invest in equity real estate investment trusts
("REITs") that constitute a part of the Russell 2000 Small Stock Index. REITs
pool investors' funds for investment primarily in commercial real estate
properties. Investments in REITs may subject a Portfolio to certain risks. REITs
may be affected by changes in the value of the underlying property owned by the
trust. REITs are dependent upon specialized management skill, may not be
diversified and are subject to the risks of financing projects. REITs are also
subject to heavy cash flow dependency, defaults by borrowers, self liquidation
and the possibility of failing to qualify for the beneficial tax treatment
available to REITs under the Internal Revenue Code of 1986, as amended, and to
maintain exemption from the 1940 Act. As a shareholder in a REIT, a Portfolio
would bear, along with other shareholders, its pro rata portion of the REIT's
operating expenses. These expenses would be in addition to the advisory and
other expenses a Portfolio bears directly in connection with its own operations.
Securities Lending. Collateral for loans of portfolio securities made by a
Portfolio may consist of cash, cash equivalents, securities issued or guaranteed
by the U.S. Government or its agencies or irrevocable bank letters of credit (or
any combination thereof). The borrower of securities will be required to
maintain the market value of the collateral at not less than the market value of
the loaned securities, and such value will be monitored on a daily basis. When a
Portfolio lends its securities, it continues to receive dividends and interest
on the securities loaned and may simultaneously earn interest on the investment
of the cash collateral. Although voting rights, or rights to consent, attendant
to securities on loan pass to the borrower, such loans will be called so that
the securities may be voted by a Portfolio if a material event affecting the
investment is to occur.
Forward Commitments, When-Issued Securities and Delayed Delivery
Transactions. When a Portfolio purchases securities on a when-issued, delayed
delivery or forward commitment basis, the Portfolio will segregate liquid assets
until three days prior to the settlement date having a value (determined daily)
at least equal to the amount of the Portfolio's purchase commitments, or will
otherwise cover its position. In the case of a forward commitment to sell
portfolio securities, the Portfolio will segregate the portfolio securities
themselves. These procedures are designed to ensure that the Portfolio will
maintain sufficient assets at all times to cover its obligations under
when-issued purchases, forward commitments and delayed delivery transactions.
Commercial Paper, Bankers' Acceptances, Certificates of Deposit, Time
Deposits and Bank Notes. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by banks or bank holding companies,
corporations and finance companies. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers' acceptances are
negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time
deposits may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties that vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party. Bank notes rank junior to deposit liabilities of banks and pari passu
with other senior, unsecured obligations of the bank. Bank notes are classified
as "other borrowings" on a bank's
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balance sheet, while deposit notes and certificates of deposit are classified as
deposits. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
Each Portfolio may invest a portion of its assets in the obligations of
foreign banks and foreign branches of domestic banks. Such obligations include
Eurodollar Certificates of Deposit ("ECDs") which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs") which are essentially the same as ETDs
except they are issued by Canadian offices of major Canadian banks; Schedule Bs,
which are obligations issued by Canadian branches of foreign or domestic banks;
Yankee Certificates of Deposit ("Yankee CDs") which are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the United States; and Yankee Bankers' Acceptances ("Yankee Bas") which are U.S.
dollar-denominated bankers' acceptances issued by a U.S. branch of a foreign
bank and held in the United States.
Convertible Securities. Convertible securities entitle the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock
until the convertible securities mature or are redeemed, converted or exchanged.
Prior to conversion, convertible securities have characteristics similar to
ordinary debt securities in that they normally provide a stable stream of income
with generally higher yields than those of common stock of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure and therefore generally entail less risk than the
corporation's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security.
In selecting convertible securities, the investment management team will
consider, among other factors: an evaluation of the creditworthiness of the
issuers of the securities; the interest or dividend income generated by the
securities; the potential for capital appreciation of the securities and the
underlying common stocks; the prices of the securities relative to other
comparable securities and to the underlying common stocks; whether the
securities are entitled to the benefits of sinking funds or other protective
conditions; diversification of Portfolio securities as to issuers; and whether
the securities are rated by a rating agency and, if so, the ratings assigned.
The value of convertible securities is a function of their investment value
(determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
Capital appreciation for the Portfolios may result from an improvement in
the credit standing of an issuer whose securities are held in the Portfolio or
from a general lowering of interest rates, or a combination of both. Conversely,
a reduction in the credit standing of an issuer whose securities are held by the
Portfolio or a general increase in interest rates may be expected to result in
capital depreciation to the Portfolio.
In general, investments in lower quality convertible securities are subject
to a significant risk of a change in the credit rating or financial condition of
the issuing entity. Investments in convertible securities of medium or lower
quality are also likely to be subject to greater market fluctuation and to
greater risk of loss of income and principal due to default than investments of
higher quality fixed-income securities. Such lower quality securities generally
tend to reflect short-term corporate and market developments to a greater extent
than higher quality securities, which react more to fluctuations in the general
level of interest rates. A Portfolio that invests in convertible securities will
generally reduce risk to the investor by diversification, credit analysis and
attention to current developments in trends of both the economy and financial
markets. However, while diversification reduces the effect on a Portfolio of any
single investment, it does not reduce the overall risk
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of investing in lower quality securities.
Risks Related to Small Company Securities. While the Investment Advisers
believe that smaller companies can provide greater growth potential than larger,
more mature firms, investing in the securities of such companies also involves
greater risk, portfolio price volatility and cost. Historically, small
capitalization stocks, which will be the Small Company Index and Small Company
Growth Portfolios' primary investments, and stocks of recently organized
companies, in which the Portfolios may also invest, have been more volatile in
price than the larger capitalization stocks included in the Standard & Poor's
500(R) Composite Stock Price Index (the "S&P 500 Index"). Among the reasons for
this greater price volatility are the lower degree of market liquidity (the
securities of companies with small stock market capitalizations may trade less
frequently and in limited volume) and the greater sensitivity of small companies
to changing economic conditions. For example, these companies are associated
with higher investment risk due to the greater business risks of small size and
limited product lines, markets, distribution channels and financial and
managerial resources.
The values of small company stocks will frequently fluctuate independently
of the values of larger company stocks. Small company stocks may decline in
price as large company stock prices rise, or rise in price as large company
stock prices decline. You should, therefore, expect that the net asset value of
the Small Company Index and Small Company Growth Portfolios' shares will be more
volatile than, and may fluctuate independently of, broad stock market indices
such as the S&P 500 Index.
The additional costs associated with the acquisition of small company
stocks include brokerage costs, market impact costs (that is, the increase in
market prices which may result when the Small Company Index Portfolio or Small
Company Growth Portfolio purchases thinly traded stock) and the effect of the
"bid-ask" spread in small company stocks. These costs will be borne by all
shareholders and may negatively impact investment performance.
Insurance Funding Agreements. The Balanced Portfolio may invest in
insurance funding agreements ("IFAs"). An IFA is normally a general obligation
of the issuing insurance company and not a separate account. The purchase price
paid for an IFA becomes part of the general assets of the insurance company, and
the contract is paid from the company's general assets. Generally, IFAs are not
assignable or transferable without the permission of the issuing insurance
companies, and an active secondary market in IFAs may not exist. IFAs therefore
will be subject to the Portfolio's limitation on illiquid investments when the
Portfolio may not demand payment of the principal amount within seven days and a
reliable trading market is absent.
Zero Coupon, Pay-in-Kind and Capital Appreciation Bonds. To the extent
consistent with their respective investment objectives, the Portfolios may
invest in zero coupon bonds, capital appreciation bonds and pay-in-kind ("PIK")
securities. Zero coupon and capital appreciation bonds are debt securities
issued or sold at a discount from their face value and which do not entitle the
holder to any periodic payment of interest prior to maturity or a specified
date. The original issue discount varies depending on the time remaining until
maturity or cash payment date, prevailing interest rates, the liquidity of the
security and the perceived credit quality of the issuer. These securities also
may take the form of debt securities that have been stripped of their unmatured
interest coupons, the coupons themselves or receipts or certificates
representing interests in such stripped debt obligations or coupons. The market
prices of zero coupon bonds, capital appreciation bonds and PIK securities
generally are more volatile than the market prices of interest bearing
securities and are likely to respond to a greater degree to changes in interest
rates than interest bearing securities having similar maturities and credit
quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds, PIK securities are designed to give an issuer flexibility in
managing cash flow. PIK securities that are debt securities can either be senior
or subordinated debt and generally trade flat (i.e., without accrued interest).
The trading price of PIK debt securities generally reflects the market value of
the underlying debt plus an amount representing accrued interest since the last
interest payment.
Zero coupon bonds, capital appreciation bonds and PIK securities involve
the additional risk that, unlike securities that periodically pay interest to
maturity, the Portfolio will realize no cash until a specified future payment
date unless a portion of such securities is sold and, if the issuer of such
securities defaults, the Portfolio may obtain no return at all on its
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investment. In addition, even though such securities do not provide for the
payment of current interest in cash, the Portfolio is nonetheless required to
accrue income on such investments for each taxable year and generally is
required to distribute such accrued amounts (net of deductible expenses, if any)
to avoid being subject to tax. Because no cash is generally received at the time
of the accrual, the Portfolio may be required to liquidate other portfolio
securities to obtain sufficient cash to satisfy Federal tax distribution
requirements applicable to the Portfolio.
Variable and Floating Rate Instruments. With respect to the variable and
floating rate instruments that may be acquired by the Portfolios, the investment
management team will consider the earning power, cash flows and other liquidity
ratios of the issuers and guarantors of such instruments and, if the instruments
are subject to demand features, will monitor their financial status and ability
to meet payment on demand. Where necessary to ensure that a variable or floating
rate instrument meets the Portfolios' quality requirements, the issuer's
obligation to pay the principal of the instrument will be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
Variable and floating rate instruments eligible for purchase by the
Portfolios include variable amount master demand notes, which permit the
indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate, and 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. The Portfolios may deem the maturity of variable and
floating rate instruments to be less than their stated maturities based on their
variable and floating rate features and/or their put features. Unrated variable
and floating rate instruments will be determined by the Investment Advisers to
be of comparable quality at the time of purchase to rated instruments which may
be purchased by the Portfolios.
Variable and floating rate instruments including inverse floaters held by a
Portfolio will be subject to the Portfolio's 15% limitation on illiquid
investments, absent a reliable trading market, when the Portfolio may not demand
payment of the principal amount within seven days.
Repurchase Agreements. Each Portfolio may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Repurchase agreements are considered to be loans under the 1940
Act. 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 subject to the agreement in an amount
exceeding the repurchase price (including accrued interest). Default by the
seller would, however, expose the Portfolio to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations.
Reverse Repurchase Agreements. Each Portfolio may borrow funds by selling
portfolio securities to financial institutions such as banks and broker/dealers
and agreeing to repurchase them at a mutually specified date and price ("reverse
repurchase agreements"). The Portfolios may use the proceeds of reverse
repurchase agreements to purchase other securities either maturing, or under an
agreement to resell, on a date simultaneous with or prior to the expiration of
the reverse repurchase agreement. Reverse repurchase agreements are considered
to be borrowings under the 1940 Act. Reverse repurchase agreements involve the
risk that the market value of the securities sold by the Portfolios may decline
below the repurchase price. The Portfolios will pay interest on amounts obtained
pursuant to a reverse repurchase agreement. While reverse repurchase agreements
are outstanding, the Portfolios will segregate liquid assets in an amount at
least equal to the market value of the securities, plus accrued interest,
subject to the agreement.
Investment Companies. With respect to the investments of the Portfolios in
the securities of other investment companies, such investments will be limited
so that, as determined after a purchase is made, either (a) not more than 3% of
the total outstanding stock of such investment company will be owned by a
Portfolio, the Trust as a whole and their affiliated persons (as defined in the
1940 Act); or (b) (i) not more than 5% of the value the total assets of a
Portfolio will be invested in the securities of any one investment company, (ii)
not more than 10% of the value of its total assets will be invested in the
aggregate in securities of investment companies as a group, and (iii) not more
than 3% of the outstanding voting stock of any one investment company will be
owned by the Portfolio.
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Certain investment companies whose securities are purchased by the
Portfolios may not be obligated to redeem such securities in an amount exceeding
1% of the investment company's total outstanding securities during any period of
less than 30 days. Therefore, such securities that exceed this amount may be
illiquid.
If required by the 1940 Act, each Portfolio expects to vote the shares of
other investment companies that are held by it in the same proportion as the
vote of all other holders of such securities.
A Portfolio may invest all or substantially all of its assets in a single
open-end investment company or series thereof with substantially the same
investment objective, policy and restrictions as the Portfolio. However, each
Portfolio currently intends to limit its investments in securities issued by
other investment companies to the extent described above. A Portfolio may adhere
to more restrictive limitations with respect to its investments in securities
issued by other investment companies if required by the SEC or deemed to be in
the best interests of the Trust.
As noted in the Prospectus, a Portfolio may invest in World Equity
Benchmark Shares ("WEBS"), Standard & Poor's Depository Receipts ("SPDRs") and
similar securities of other investment companies, subject to the restrictions
set forth above.
WEBS are shares of an investment company that invests substantially all of
its assets in securities included in the Morgan Stanley Capital International
Index ("MSCI") indices for specified countries. WEBS are listed on the American
Stock Exchange (the "AMEX"), and were initially offered to the public in 1996.
The market prices of WEBS are expected to fluctuate in accordance with both
changes in the net asset values of their underlying indices and supply and
demand of WEBS on the AMEX. To date WEBS have traded at relatively modest
discounts and premiums to their net asset values. However, WEBS have a limited
operating history, and information is lacking regarding the actual performance
and trading liquidity of WEBS for extended periods or over complete market
cycles. In addition, there is no assurance that the requirements of the AMEX
necessary to maintain the listing of WEBS will continue to be met or will remain
unchanged. In the event substantial market or other disruptions affecting WEBS
should occur in the future, the liquidity and value of a Portfolio's shares
could also be substantially and adversely affected, and a Portfolio's ability to
provide investment results approximating the performance of securities in the
EAFE Index could be impaired. If such disruptions were to occur, a Portfolio
could be required to reconsider the use of WEBS as part of its investment
strategy.
SPDRs are interests in a unit investment trust ("UIT") that may be obtained
from the UIT or purchased in the secondary market (SPDRs are listed on the
AMEX). The UIT will issue SPDRs in aggregations known as "Creation Units" in
exchange for a "Portfolio Deposit" consisting of (i) a portfolio of securities
substantially similar to the component securities ("Index Securities") of the
S&P 500 Index, (ii) a cash payment equal to a pro rata portion of the dividends
accrued on the UIT's portfolio securities since the last dividend payment by the
UIT, net of expenses and liabilities, and (iii) a cash payment or credit
("Balancing Amount") designed to equalize the net asset value of the S&P Index
and the net asset value of a Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT.
To redeem, a Portfolio must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, a Portfolio
will receive Index Securities and cash identical to the Portfolio Deposit
required of an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held by
the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by a Portfolio could result in losses on SPDRs. Trading
in SPDRs involves risks similar to those risks involved in the writing of
options on securities.
Risks Related to Lower-Rated Securities. While any investment carries some
risk, certain risks associated with lower-rated securities are different than
those for investment-grade securities. The risk of loss through default is
greater because lower-rated securities are usually unsecured and are often
subordinate to an issuer's other obligations. Additionally, the issuers of these
securities frequently have high debt levels and are thus more sensitive to
difficult economic conditions,
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individual corporate developments and rising interest rates. Consequently, the
market price of these securities may be quite volatile and may result in wider
fluctuations of a Portfolio's net asset value per share.
There remains some uncertainty about the performance level of the market
for lower-rated securities under adverse market and economic environments. An
economic downturn or increase in interest rates could have a negative impact on
both the market for lower-rated securities (resulting in a greater number of
bond defaults) and the value of lower-rated securities held in the portfolio of
investments.
The economy and interest rates can affect lower-rated securities
differently than other securities. For example, the prices of lower-rated
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher-rated investments. In
addition, during an economic downturn or period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.
If an issuer of a security defaults, a Portfolio may incur additional
expenses to seek recovery. In addition, periods of economic uncertainty would
likely result in increased volatility for the market prices of lower-rated
securities as well as a Portfolio's net asset value. In general, both the prices
and yields of lower-rated securities will fluctuate.
In certain circumstances it may be difficult to determine a security's fair
value due to a lack of reliable objective information. Such instances occur
where there is not an established secondary market for the security or the
security is lightly traded. As a result, a Portfolio's valuation of a security
and the price it is actually able to obtain when it sells the security could
differ.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower-rated
securities held by a Portfolio, especially in a thinly traded market. Illiquid
or restricted securities held by a Portfolio may involve special registration
responsibilities, liabilities and costs, and could involve other liquidity and
valuation difficulties.
The ratings of S&P, Moody's, Duff and Fitch evaluate the safety of a lower-
rated security's principal and interest payments, but do not address market
value risk. Because the ratings of the rating agencies may not always reflect
current conditions and events, in addition to using recognized rating agencies
and other sources, the Investment Advisers perform their own analysis of the
issuers whose lower-rated securities the Portfolios purchase. Because of this, a
Portfolio's performance may depend more on the Investment Adviser own credit
analysis than is the case of mutual funds investing in higher-rated securities.
In selecting lower-rated securities, the Investment Advisers consider
factors such as those relating to the creditworthiness of issuers, the ratings
and performance of the securities, the protections afforded the securities and
the diversity of a Portfolio's investment portfolio. The Investment Advisers
monitor the issuers of lower-rated securities held by a Portfolio for their
ability to make required principal and interest payments, as well as in an
effort to control the liquidity of the Portfolio so that it can meet redemption
requests.
Yields and Ratings. The yields on certain obligations, including the
instruments in which the Portfolios may invest, are dependent on a variety of
factors, including general market conditions, conditions in the particular
market for the obligation, financial condition of the issuer, size of the
offering, maturity of the obligation and ratings of the issue. The ratings of
S&P, Moody's, Duff, Fitch and Thomson Bank Watch ("TBW") represent their
respective opinions as to the quality of the obligations they undertake to rate.
Ratings, however, are general and are not absolute standards of quality.
Consequently, obligations with the same rating, maturity and interest rate may
have different market prices. For a more complete discussion of ratings, see
Appendix A to this Additional Statement.
Subject to the limitations stated in the Prospectus, if a security held by
a Portfolio undergoes a rating revision, the Portfolio may continue to hold the
security if the Investment Advisers determine such retention is warranted.
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Stock Indices. The S&P 500 Index is a market value-weighted index
consisting of 500 common stocks which are traded on the New York Stock Exchange,
AMEX and the Nasdaq National Market System and selected by Standard & Poor's
Corporation ("Standard & Poor's") through a detailed screening process starting
on a macro-economic level and working toward a micro-economic level dealing with
company-specific information such as market value, industry group
classification, capitalization and trading activity. Standard & Poor's primary
objective for the S&P 500 Index is to be the performance benchmark for the U.S.
equity markets. The companies chosen for inclusion in the S&P 500 Index tend to
be leaders in important industries within the U.S. economy. However, companies
are not selected by Standard & Poor's for inclusion because they are expected to
have superior stock price performance relative to the market in general or other
stocks in particular. Standard & Poor's makes no representation or warranty,
implied or express, to purchasers of Stock Index Fund shares or any member of
the public regarding the advisability of investing in the Equity Index Portfolio
or the ability of the S&P 500 Index to track general stock market performance.
As of November 30, 1999, the approximate market capitalization range of the
companies included in the S&P 500 Index was between $395 million and $464.69
billion.
The Standard & Poor's Midcap 400 Stock Index ("S&P MidCap 400 Index") is a
market-weighted index composed of 400 common stocks chosen by Standard & Poor's
for market size, liquidity and industry group representation. The purpose of the
S&P MidCap 400 Index is to represent the performance of the medium-
capitalization sector of the U.S. securities market. Medium capitalized stocks
which are included in the S&P 500 Index are excluded from the S&P MidCap 400
Index. Except for a limited number of Canadian securities, the S&P MidCap 400
does not include foreign securities. As of November 30, 1999, the approximate
market capitalization range of the companies included in the S&P MidCap 400
Index was between $195 million and $23.394 billion.
The Russell 2000 Index is a market value-weighted index composed of the
stocks of the smallest 2000 companies in the Russell 3000 Index, which is
composed of the stocks of 3000 large U.S. domiciled companies (based on market
capitalization) that represent approximately 98% of the investable U.S. equity
markets. Because of its emphasis on the smallest 2000 companies, the Russell
2000 Index represents approximately 8% of the total market capitalization of the
Russell 3000 Index. As of November 30, 1999, the average market capitalization
of the companies included in the Russell 2000 Index was approximately $570.0
million. The Russell 2000 Index is reconstituted annually to reflect changes in
market capitalization. The primary criteria used by Frank Russell & Company
("Russell") to determine the initial list of securities eligible for inclusion
in the Russell 3000 Index (and accordingly, the Russell 2000 Index) is total
market capitalization adjusted for large private holdings and cross-ownership.
However, companies are not selected by Russell for inclusion in the Russell 2000
Index because they are expected to have superior stock price performance
relative to the market in general or other stocks in particular. Russell makes
no representation or warranty, implied or express, to purchasers of Small Cap
Index or Small Cap Growth Fund shares or any member of the public regarding the
advisability of investing in the Fund or the ability of the Russell 2000 Index
to track general market performance of small capitalization stocks.
Relative Value Approach. In buying and selling securities for the fixed
income portion of the Balanced Portfolio, the investment management team uses a
relative value approach. This approach involves an analysis of economic and
market information, including economic growth rates, interest and inflation
rates, deficit levels, the shape of the yield curve, sector and quality spreads
and risk premiums. It also involves the use of proprietary valuation models to
analyze and compare expected returns and assumed risks. Under the relative value
approach, the investment management team will emphasize particular securities
and particular types of securities that the team believes will provide a
favorable return in light of these risks.
Tracking Variance. As discussed in the Prospectus, the Equity Index, Small
Company Index and International Equity Index Portfolios are subject to the risk
of tracking variance. Tracking variance may result from share purchases and
redemptions, transaction costs, expenses and other factors. Share purchases and
redemptions may necessitate the purchase and sale of securities by a Portfolio
and the resulting transaction costs which may be substantial because of the
number and the characteristics of the securities held. In addition, transaction
costs are incurred because sales of securities received in connection with spin-
offs and other corporate reorganizations are made to conform a Portfolio's
holdings with its investment objective. Tracking variance may also occur due to
factors such as the size of a Portfolio, the maintenance of a cash reserve
pending investment or to meet expected redemptions, changes made in the
Portfolio's designated Index or the manner in which the Index is calculated or
because the indexing and investment approach of the Investment Adviser does not
produce the intended goal of the Portfolio. Tracking variance is monitored by
the Investment Adviser at least quarterly.
17
<PAGE>
In the event the performance of a Portfolio is not comparable to the performance
of its designated Index, the Board of Trustees will evaluate the reasons for the
deviation and the availability of corrective measures. If substantial deviation
in a Portfolio's performance were to continue for extended periods, it is
expected that the Board of Trustees would consider recommending to shareholders
possible changes to the Portfolio's investment objective.
The Small Company Index and International Equity Index Portfolios require
the payment of an additional transaction fee on purchases of shares of the
Portfolios. The purpose of the fee is to indirectly allocate transaction costs
associated with new purchases to investors making those purchases, thus
protecting existing shareholders. These costs include: (i) brokerage costs; (ii)
market impact costs--i.e., the increase in market prices which may result when
the Portfolios purchase thinly traded stocks; (iii) sales charges relating to
the purchase of shares in certain unaffiliated investment companies; and, most
importantly (iv) the effect of the "bid-ask" spread in the over-the-counter
market. (Securities in the over-the-counter market are bought at the "ask" or
purchase price, but are valued in the Portfolios at the last quoted bid price).
The additional transaction fees represent the Investment Adviser's estimate of
the brokerage and other transaction costs which may be incurred by the Small
Company Index and International Equity Index Portfolios in acquiring stocks of
small capitalization or foreign companies. Without the additional transaction
fee, the Portfolios would generally be selling their shares at a price less than
the cost to the Portfolios of acquiring the portfolio securities necessary to
maintain their investment characteristics, thereby resulting in reduced
investment performance for all shareholders in the Portfolios. With the
additional transaction fee, the transaction costs of acquiring additional stocks
are not borne by all existing shareholders, but are defrayed by the transaction
fees paid by those investors making additional purchases of shares.
Calculation of Portfolio Turnover Rate. The portfolio turnover rate for the
Portfolios is calculated by dividing the lesser of purchases or sales of
portfolio investments for the reporting period by the monthly average value of
the portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Portfolio turnover may vary
greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements which
enable the Portfolios to receive favorable tax treatment.
Mortgage Dollar Rolls. The Portfolios may enter into mortgage "dollar
rolls" in which a Portfolio sells securities for delivery in the future
(generally within 30 days) and simultaneously contracts with the same
counterparty to repurchase similar (same type, coupon and maturity), but not
identical securities on a specified future date. During the roll period, a
Portfolio loses the right to receive principal and interest paid on the
securities sold. However, a Portfolio would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase (often referred to as the "drop") or fee
income plus the interest earned on the cash proceeds of the securities sold
until the settlement date of the forward purchase. Unless such benefits exceed
the income, capital appreciation and gain or loss due to mortgage prepayments
that would have been realized on the securities sold as part of the mortgage
dollar roll, the use of this technique will diminish the investment performance
of a Portfolio compared with what such performance would have been without the
use of mortgage dollar rolls. All cash proceeds will be invested in instruments
that are permissible investments for the applicable Portfolio. Each Portfolio
will hold and maintain in a segregated account until the settlement date cash or
liquid assets, as permitted by applicable law, in an amount equal to its forward
purchase price.
For financial reporting and tax purposes, the Portfolios treat mortgage
dollar rolls as two separate transactions; one involving the purchase of a
security and a separate transaction involving a sale. The Portfolios do not
currently intend to enter into mortgage dollar rolls that are accounted for as a
financing.
Mortgage dollar rolls involve certain risks including the following. If the
broker-dealer to whom a Portfolio sells the security becomes insolvent, a
Portfolio's right to purchase or repurchase the mortgage-related securities
subject to the mortgage dollar roll may be restricted and the instrument which a
Portfolio is required to repurchase may be worth less than an instrument which a
Portfolio originally held. Successful use of mortgage dollar rolls will depend
upon the Investment Adviser's ability to manage a Portfolio's interest rate and
mortgage prepayments exposure. For these reasons, there is no assurance that
mortgage dollar rolls can be successfully employed.
18
<PAGE>
Investment Restrictions
Each Portfolio is subject to the fundamental investment restrictions
enumerated below which may be changed with respect to a particular Portfolio
only by a vote of the holders of a majority of such Portfolio's outstanding
shares.
No Portfolio may:
(1) Make loans, except through (a) the purchase of debt obligations in
accordance with the Portfolio's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, (c) loans of securities, and (d) loans to affiliates of the
Portfolio to the extent permitted by law.
(2) Purchase or sell real estate, but this restriction shall not prevent a
Portfolio from investing directly or indirectly in portfolio instruments
secured by real estate or interests therein or acquiring securities of real
estate investment trusts or other issuers that deal in real estate.
(3) Invest in commodities or commodity contracts, except that each Portfolio
may invest in currency and financial instruments and contracts that are
commodities or commodity contracts.
(4) Invest in companies for the purpose of exercising control.
(5) Act as underwriter of securities, except as a Portfolio may be deemed to
be an underwriter under the Securities Act of 1933 in connection with the
purchase and sale of portfolio instruments in accordance with its investment
objective and portfolio management policies.
(6) Make any investment inconsistent with the Portfolio's classification as
a diversified investment company under the 1940 Act.
(7) Purchase securities (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities if such purchase would
cause more than 25% in the aggregate of the market value of the total assets
of a Portfolio to be invested in the securities of one or more issuers having
their principal business activities in the same industry. For the purposes of
this restriction, as to utility companies, the gas, electric, water and
telephone businesses are considered separate industries; personal credit
finance companies and business credit finance companies are deemed to be
separate industries; and wholly-owned finance companies are considered to be
in the industries of their parents if their activities are primarily related
to financing the activities of their parents.
(8) Borrow money, except that to the extent permitted by applicable law (a)
a Portfolio may borrow from banks, other affiliated investment companies and
other persons, and may engage in reverse repurchase agreements and other
transactions which involve borrowings, in amounts up to 33-1/3% of its total
assets (including the amount borrowed) or such other percentage permitted by
law, (b) a Portfolio may borrow up to an additional 5% of its total assets
for temporary purposes, (c) a Portfolio may obtain such short-term credits as
may be necessary for the clearance of purchases and sales of portfolio
securities, and (d) a Portfolio may purchase securities on margin. If due to
market fluctuations or other reasons a Portfolio's borrowings exceed the
limitations stated above, the Trust will promptly reduce the borrowings of
such Portfolio in accordance with the 1940 Act. In addition, as a matter of
fundamental policy, a Portfolio will not issue senior securities to the
extent such issuance would violate applicable law.
(9) Notwithstanding any of the Trust's other fundamental investment
restrictions (including, without limitation, those restrictions relating to
issuer diversification, industry concentration and control), each Portfolio
may (a) purchase securities of other investment companies to the full extent
permitted under Section 12 of the 1940 Act (or any successor provision
thereto) or under any regulation or order of the Securities and Exchange
Commission; and (b) may invest all or substantially all of its assets in a
single open-end investment company or series thereof with substantially the
same investment objective, policies and fundamental restrictions as the
Portfolio.
* * *
19
<PAGE>
For the purposes of Restriction Nos. 1 and 8 above, the Portfolios expect
that they would be required to file an exemptive application with the SEC and
receive the SEC's approval of that application prior to entering into lending or
borrowing arrangements with affiliates. As of April 1, 2000, the Portfolios had
not filed such an exemptive application.
In applying Restriction No. 7 above, a security is considered to be issued
by the entity, or entities, whose assets and revenues back the security. A
guarantee of a security is not deemed to be a security issued by the guarantor
when the value of all securities issued and guaranteed by the guarantor, and
owned by a Portfolio, does not exceed 10% of the value of the Portfolio's total
assets.
Except to the extent otherwise provided in Investment Restriction No. 7 for
the purpose of such restriction, in determining industry classification the
Trust intends to use the industry classification titles in the Bloomberg
Industry Group Classifications (except that the International Growth Portfolio
and the International Equity Index Portfolio will use the Morgan Stanley Capital
International industry classification titles).
Any restriction which involves a maximum percentage will not be considered
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition of securities or assets of, or borrowings by, a
Portfolio.
ADDITIONAL TRUST INFORMATION
Trustees and Officers
The business and affairs of the Trust and each Portfolio are managed under
the direction of the Trust's Board of Trustees. Information pertaining to the
Trustees and officers of the Trust is set forth below.
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ----------- -----------------------
<S> <C> <C> <C>
Richard G. Cline 65 Trustee Chairman, Hawthorne Investors, Inc. (a management
4200 Commerce Court advisory services and private investment company)
Suite 300 since January 1996; Chairman, Hussman
Lisle, IL 60532 International, Inc. (a refrigeration company)
since 1998, Chairman and CEO of NICOR Inc. (a
diversified public utility holding company) from
1986 to 1995, and President, 1992-1993; Chairman,
Federal Reserve Bank of Chicago from 1992 to
1995; and Deputy Chairman from 1995 to 1996.
Director: Whitman Corporation (a diversified
holding company); Kmart Corporation (a retailing
company); Ryerson Tull, Inc. (a metals
distribution company) and University of Illinois
Foundation. Trustee: Northern Funds.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Edward J. Condon, Jr. 60 Trustee Chairman of The Paradigm Group, Ltd. (a financial
Sears Tower, Suite 9650 advisor) since July 1993; Vice President and
233 S. Wacker Drive Treasurer of Sears, Roebuck and Co. (a retail
Chicago, IL 60606 corporation) from February 1989 to July 1993;
Member of Advisory Board of Real-Time USA, Inc.
(a software development company); Member of the
Board of Managers of The Liberty Hampshire
Company, LLC (a receivable securitization
company); Vice Chairman and Director of
Energenics L.L.C. (a waste to energy recycling
company). Director: University Eldercare, Inc.
(an Alzheimer's disease research and treatment
company); Financial Pacific Company (a small
business leasing company). Trustee: Dominican
University. Trustee: Northern Funds.
Mr. Wesley M. Dixon, Jr. 72 Trustee Director of Kinship Capital Corporation (a
400 Skokie Blvd., Suite 300 financial services company) since 1985 to 1996,
Northbrook, IL 60062 Vice Chairman and Director of G.D. Searle & Co.
(manufacture and sale of food products and
pharmaceuticals) from 1977 to 1985 and President
of G.D. Searle & Co. prior thereto. Trustee:
Northern Funds.
Mr. William J. Dolan, Jr. 67 Trustee Partner of Arthur Andersen & Co. S.C. (an
1534 Basswood Circle accounting firm) from 1966 to 1989. Financial
Glenview, IL 60025 Consultant, Ernst & Young (an accounting firm)
from 1992 to 1993 and 1997. Trustee: Northern
Funds.
John W. English 67 Trustee Private Investor; Vice President and Chief
50-H New England Ave. Investment Officer of The Ford Foundation (a
P.O. Box 640 charitable trust) from 1981 to 1993. Trustee: The
Summit, NJ 07902-0640 China Fund, Inc., Select Sector SPDR Trust; WM
Funds; American Red Cross in Greater New York;
Mote Marine Laboratory (a non-profit marine
research facility); and United Board for
Christian Higher Education in Asia. Trustee:
Northern Funds.
Mr. Raymond E. George, Jr. * 69 Trustee Senior Vice President and Senior Fiduciary
703 Prospect Avenue Officer of The Northern Trust Company from 1990
Winnetka, IL 60093 to 1993. Trustee: Northern Funds.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Sandra Polk Guthman 56 Trustee President and CEO of Polk Bros. Foundation (an
420 N. Wabash Avenue Illinois not-for-profit corporation) from 1993 to
Suite 204 present; Director of Business Transformation from
Chicago, IL 60611 1992-1993, and Midwestern Director of Marketing
from 1988-1992, IBM (a technology company);
Director: MBIA Insurance Corporation of Illinois
(a municipal bond insurance company). Trustee:
Northern Funds.
Mr. Michael E. Murphy** 63 Trustee President of Sara Lee Foundation (philanthropic
Suite 2222 organization) since November 1997. Vice Chairman
20 South Clark Street and Chief Administrative Officer of Sara Lee
Chicago, IL 60603 Corporation (a consumer product company) from
November 1994 to October 1997; Vice Chairman and
Chief Financial and Administrative Officer of
Sara Lee Corporation from July 1993 to November
1994. Director: Payless Shoe Source, Inc., (a
retail shoe store business); True North
Communications, Inc. (a global advertising and
communications holding company); American General
Corporation (a diversified financial services
company); GATX Corporation (a railroad holding
company); Bassett Furniture Industries, Inc. (a
furniture manufacturer) Trustee: Northern Funds.
Mary Jacobs Skinner, Esq.*** 42 Trustee Partner in the law firm of Sidley & Austin.
One First National Plaza Trustee: Northern Funds.
Chicago, IL 06063
William H. Springer 71 Chairman and Vice Chairman of Ameritech (a telecommunications
701 Morningside Drive Trustee holding company) from February 1987 to August
Lake Forest, IL 60045 1992; Vice Chairman, Chief Financial and
Administrative Officer of Ameritech prior to 1987.
Director: Walgreen Co. (a retail drug store
business); Baker, Fentress & Co. (a closed-end,
non-diversified management investment company).
Trustee: Goldman Sachs Trust; Goldman Sachs
Variable Insurance Trust. Trustee: Northern Funds.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Richard P. Strubel 61 Trustee President and Chief Operating Officer, UNext.com
737 N. Michigan Avenue (a provider of educational services via the
Suite 1405 internet) since 1999; Managing Director of Tandem
Chicago, IL 60611 Partners, Inc. (a privately held management
services firm) from 1990 to 1999; President and
Chief Executive Officer, Microdot, Inc. (a
privately held manufacturing firm) from 1984 to
1994; Director: Gildan Activewear, Inc. (an
athletic clothing marketing and manufacturing
company); Children's Memorial Medical Center.
Trustee: University of Chicago; Goldman Sachs
Trust; Goldman Sachs Variable Insurance Trust.
Trustee: Northern Funds.
Stephen Timbers**** 55 Trustee President of Northern Trust Global Investments, a
50 South LaSalle Street division of Northern Trust Corporation and
Chicago, IL 60675 Executive Vice President, The Northern Trust
Company since 1998; President, Chief Executive
Officer and Director of Zurich Kemper Investments
(a financial services company) from 1996 to 1998;
President, Chief Operating Officer and Director
of Kemper Corporation (a financial services
company) from 1992 to 1996; President and
Director of Kemper Funds (a registered investment
company) from 1990 to 1998. Director: LTV
Corporation (a steel producer). Trustee: Northern
Funds.
Jylanne M. Dunne 40 President Senior Vice President for Distribution Services
4400 Computer Drive at PFPC Inc. ("PFPC") (formerly First Data
Westborough, MA 01581 Investor Services Group, Inc. ("FDISG")) (since
1988).
Archibald E. King 42 Vice President Senior Vice President and other positions at The
50 South LaSalle Street Northern Trust Company (since 1979).
Chicago, IL 60675
Lloyd A. Wennlund 42 Vice President Senior Vice President and other positions at The
50 South LaSalle Street Northern Trust Company, President of Northern
Chicago, IL 60675 Trust Securities, Inc., and Managing Executive,
Mutual Funds for Northern Trust Global
Investments (since 1989).
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Brian R. Curran 32 Vice President and Director of Fund Administration at PFPC (formerly
4400 Computer Drive Treasurer FDISG) (since 1997); Director of Fund
Westborough, MA 01581 Administration at State Street Bank & Trust
Company (February 1997 to October 1997); Senior
Auditor at Price Waterhouse L.L.P. (an accounting
firm) (February 1994 to February 1997).
Judith E. Clear 33 Assistant Treasurer Client Treasury Manager of Mutual Fund
4400 Computer Drive Administration at PFPC since (1997); Compliance
Westborough, MA 01581 Manager at Citizens Trust (1994 to 1996).
Suzanne E. Anderson 27 Assistant Treasurer Client Treasury Manager of Mutual Fund
4400 Computer Drive Administration at PFPC Inc. (since August 1998);
Westborough, MA 01581 Manager of Fund Administration at State Street
Bank & Trust Company (October 1996 to August
1998); Fund Administrator at State Street Bank &
Trust Company (October 1995 to October 1996);
Mutual Fund Accountant at The Boston Company
(prior thereto).
Jeffrey A. Dalke 49 Secretary Partner in the law firm of Drinker Biddle & Reath
One Logan Square LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Linda J. Hoard 52 Assistant Secretary Vice President at PFPC (formerly FDISG) (since
4400 Computer Drive 1998); Attorney Consultant for Fidelity
Westborough, MA 01581 Management & Research (a financial service
company); Investors Bank & Trust Company (a
financial service provider) and FDISG (September
1994 to June 1998).
Therese Hogan 37 Assistant Secretary Director of the State Regulation Department at
4400 Computer Drive PFPC (formerly FDISG) (since 1994).
Westborough, MA 01581
</TABLE>
* Mr. George is deemed to be an "interested" Trustee because he owns shares
of Northern Trust Corporation.
** Mr. Murphy is deemed to be an "interested" Trustee because he owns shares
of Northern Trust Corporation.
*** Ms. Skinner is deemed to be an "interested" Trustee because her law firm
provides legal services to Northern.
**** Mr. Timbers is deemed to be an "interested" Trustee because he is an
officer, director, employee and shareholder of Northern Trust Corporation
and/or Northern and NTQA.
Certain of the Trustees and officers and the organizations with which they
are associated have had in the past, and may have in the future, transactions
with the Investment Advisers, PFPC (formerly FDISG), Northern Funds
Distributors, LLC ("NFD") and their respective affiliates. The Trust has been
advised by such Trustees and officers that all such transactions have been and
are expected to be in the ordinary course of business and the terms of such
transactions, including all loans and loan commitments by such persons, have
been and are expected to be substantially the same as the prevailing terms for
comparable transactions for other customers. As a result of the responsibilities
assumed by the Trust's
24
<PAGE>
service providers, the Trust itself requires no employees.
Each officer holds comparable positions with certain other investment
companies for which NFD, PFPC or an affiliate thereof is the investment adviser,
administrator and/or distributor.
Each Trustee, except Mr. Timbers, earns a quarterly retainer of $6,750 and
the Chairman of the Board earns a quarterly retainer of $10,125. Each Trustee,
including the Chairman of the Board, earns an additional fee of $2,500 for each
meeting attended, plus reimbursement of expenses incurred as a Trustee.
In addition, the Trustees have established an Audit Committee consisting of
two members, including a Chairman of the Committee. The Audit Committee members
are Messrs. Condon and Strubel (Chairman). Each member earns a fee of $2,500 for
each meeting attended and the Chairman earns a quarterly retainer of $1,500.
Each Trustee will hold office for an indefinite term until the earliest of
(i) the next meeting of shareholders if any, called for the purpose of
considering the election or re-election of such Trustee and until the election
and qualification of his or her successor, if any, elected at such meeting; (ii)
the date a Trustee resigns or retires, or a Trustee is removed by the Board of
Trustees or shareholders, in accordance with the Trust's Agreement and
Declaration of Trust, or (iii) effective December 31, 2001, in accordance with
the current resolutions of the Board of Trustees (which may be changed without
shareholder vote), on the last day of the fiscal year of the Trust in which he
or she attains the age of 72 years.
The Trust's officers do not receive fees from the Trust for services in
such capacities, although PFPC, of which certain of the Trusts Officers are also
officers (except Mr. Dalke, Mr. King and Mr. Wennlund), receives fees from the
Trust for co-administrative services.
Drinker Biddle & Realth LLP, of which Mr. Dalke is a partner, receives fees
from the Trust for legal services.
Northern Trust Company, of which Mr. King and Mr. Wennlund are officers,
receives fees from the Trust as investment adviser, custodian, transfer agent
and co-administrator.
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended November
30, 1999:
<TABLE>
<CAPTION>
Total
Small Small Compen-
Equity Diversified Focused Company Company Mid Cap International International sation
Balanced Index Growth Growth Index Growth Growth Equity Index Growth from Fund
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio+ Portfolio+ Portfolio Portfolio Complex
--------- --------- --------- --------- --------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Steven Timbers** $ 0 $ 0 $ 0 $ 0 $ 0 n/a n/a $ 0 $ 0 $ 0
William H. Springer 530 5,300 530 530 530 n/a n/a 530 530 53,000
Richard G. Cline 395 3,950 395 395 395 n/a n/a 395 395 39,500
Edward J. Condon, Jr. 445 4,450 450 450 450 n/a n/a 450 450 44,500
John W. English 395 3,950 395 395 395 n/a n/a 395 395 39,500
Sandra Polk Guthman 395 3,950 395 395 395 n/a n/a 395 395 39,500
Frederick T. Kelsey* 445 4,450 445 445 445 n/a n/a 445 445 44,500
Richard P. Strubel 505 5,050 505 505 505 n/a n/a 505 505 50,500
Wesley M. Dixon, Jr.** 0 0 0 0 0 n/a n/a 0 0 22,500
William J. Dolan, Jr.** 0 0 0 0 0 n/a n/a 0 0 22,500
Raymond E. George, Jr.** 0 0 0 0 0 n/a n/a 0 0 21,250
Michael E. Murphy** 0 0 0 0 0 n/a n/a 0 0 22,500
Mary Jacobs Skinner** 0 0 0 0 0 n/a n/a 0 0 22,500
</TABLE>
* Frederick Kelsey retired from the Board of Trustees on November 30,1999.
** Not a Trustee of the Northern Institutional Funds during the period ended
November 30, 1999.
*** Fund Complex includes twenty-one investment portfolios of the Trust and
thirty-one investment Portfolios of Northern Funds, a separately registered
investment company.
+ Small Company Growth and Mid Cap Portfolios did not commence operations
during the period.
The Trust, its investment adviser and principal underwriter have adopted
codes of ethics (the "Codes of Ethics") under rule 17j-1 of the 1940 Act. The
Codes of Ethics permit personnel, subject to the Codes of Ethics and their
provisions, to invest in securities, including securities that may be purchased
or held by the Trust.
25
<PAGE>
Investment Advisers, Transfer Agent and Custodian
Northern, a wholly-owned subsidiary of Northern Trust Corporation, a bank
holding company, is one of the nation's leading providers of trust and
investment management services. Northern is one of the strongest banking
organizations in the United States. Northern believes it has built its
organization by serving clients with integrity, a commitment to quality, and
personal attention. Its stated mission with respect to all its financial
products and services is to achieve unrivaled client satisfaction. With respect
to such clients, the Trust is designed to assist (i) defined contribution plan
sponsors and their employees by offering a range of diverse investment options
to help comply with 404(c) regulation and may also provide educational material
to their employees, (ii) employers who provide post-retirement Employees'
Beneficiary Associations ("VEBA") and require investments that respond to the
impact of federal regulations, (iii) insurance companies with the day-to-day
management of uninvested cash balances as well as with longer-term investment
needs, and (iv) charitable and not-for-profit organizations, such as endowments
and foundations, demanding investment management solutions that balance the
requirement for sufficient current income to meet operating expenses and the
need for capital appreciation to meet future investment objectives. NTQA, also a
wholly-owned subsidiary of Northern Trust Corporation, serves as investment
adviser principally to defined benefit and defined contribution plans and
manages over 60 equity and bond commingled and common trust funds. As of
December 31, 1999, the Investment Advisers and their affiliates had
approximately $299.1 billion in assets under management for clients including
public and private retirement funds, endowments, foundations, trusts,
corporations, other investment companies and individuals.
Under the Advisory Agreement with the Trust, the Investment Advisers make
decisions with respect to, and place orders for, all purchases and sales of
portfolio securities for each Portfolio. The Advisory Agreement with the Trust
provides that in selecting brokers or dealers to place orders for transactions
(i) on common and preferred stocks, the Investment Advisers shall use their best
judgment to obtain the best overall terms available, and (ii) on bonds and other
fixed income obligations, the Investment Advisers shall attempt to obtain best
net price and execution. In assessing the best overall terms available for any
transaction, the Investment Advisers are to consider all factors they deem
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. In evaluating the best overall terms
available and in selecting the broker or dealer to execute a particular
transaction, the Investment Advisers may consider the brokerage and research
services provided to the Portfolios and/or other accounts over which the
Investment Advisers or an affiliate of Northern exercise investment discretion.
A broker or dealer providing brokerage and/or research services may receive a
higher commission than another broker or dealer would receive for the same
transaction. These brokerage and research services may include industry and
company analyses, portfolio services, quantitative data, market information
systems and economic and political consulting and analytical services.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment for brokerage commissions which are generally
fixed. Over-the-counter issues, including corporate debt and government
securities, are normally traded on a "net" basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. With respect to over-the-counter transactions, the Investment
Advisers will normally deal directly with dealers who make a market in the
instruments involved except in those circumstances where more favorable prices
and execution are available elsewhere. The cost of foreign and domestic
securities purchased from underwriters includes an underwriting commission or
concession, and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down.
The Portfolios may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Portfolios will engage in this practice, however, only when the Investment
Advisers believe such practice to be in the Portfolios' interests.
On occasions when the Investment Advisers deem the purchase or sale of a
security to be in the best interests of a Portfolio as well as other fiduciary
or agency accounts managed by them (including any other Portfolio, investment
company or account for which an Investment Adviser acts as adviser), the
Advisory Agreement provides that the Investment Advisers, to the extent
permitted by applicable laws and regulations, may aggregate the securities to be
sold or purchased
26
<PAGE>
for such Portfolio with those to be sold or purchased for such other accounts in
order to obtain best overall terms available with respect to common and
preferred stock, and best net price and execution with respect to bonds and
other fixed income obligations. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the Investment Advisers in the manner they consider to be most equitable
and consistent with their fiduciary obligations to the Portfolio and other
accounts involved. In some instances, this procedure may adversely affect the
size of the position obtainable for a Portfolio or the amount of the securities
that are able to be sold for a Portfolio.
The Advisory Agreement provides that the Investment Advisers may render
similar services to others so long as their services under such Agreements are
not impaired thereby. The Advisory Agreement also provides that the Trust will
indemnify the Investment Advisers against certain liabilities (including
liabilities under the Federal securities laws relating to untrue statements or
omissions of material fact and actions that are in accordance with the terms of
the Agreements) or, in lieu thereof, contribute to resulting losses.
At a meeting held on September 2, 1997, shareholders of the International
Growth Portfolio approved a new advisory agreement with Northern and another
wholly-owned subsidiary of Northern Trust Corporation (The Northern Trust
Company of Connecticut, formerly, RCB Trust Company, which has principal offices
at 300 Atlantic Street, Stamford, Connecticut 06901) that would permit the
Portfolio to implement a "manager-of-managers" structure. The new advisory
agreement would be identical in all material respects to the current Advisory
Agreement for the International Growth Portfolio, except that the new agreement
would appoint both Northern and The Northern Trust Company of Connecticut as the
advisers of the Portfolio and would allow the advisers to (i) delegate their
duties to sub-advisers, (ii) implement a manager-of-managers structure and (iii)
enter into sub-advisory agreements in the future without further shareholder
approval. Fees payable to the sub-advisers would be payable by Northern and The
Northern Trust Company of Connecticut and not by the Portfolio, and the current
investment advisory fee rate payable by the Portfolio would not change. Although
the Securities and Exchange Commission (the "SEC") has granted an exemption
permitting the Portfolio to implement a manager-of-managers structure, the new
advisory agreement will not become effective until the Trust's Board of Trustees
acts to effectuate the structure with respect to the Portfolio. At present, it
is uncertain when, or if, the manager-of-managers structure will become
effective.
Under its Transfer Agency Agreement with the Trust, with respect to shares
held by Institutions, Northern has undertaken to perform some or all of the
following services: (i) establish and maintain an omnibus account in the name of
each Institution; (ii) process purchase orders and redemption requests from an
Institution, and furnish confirmations and disburse redemption proceeds; (iii)
act as the income disbursing agent of the Trust; (iv) answer inquiries from
Institutions; (v) provide periodic statements of account to each Institution;
(vi) process and record the issuance and redemption of shares in accordance with
instructions from the Trust or its administrator; (vii) if required by law,
prepare and forward to Institutions shareholder communications (such as proxy
statements and proxies, annual and semi-annual financial statements, and
dividend, distribution and tax notices); (viii) preserve all records; and (ix)
furnish necessary office space, facilities and personnel. Under the Transfer
Agency Agreement, with respect to shares held by investors, Northern has also
undertaken to perform some or all of the following services: (i) establish and
maintain separate accounts in the name of the investors; (ii) process purchase
orders and redemption requests, and furnish confirmations in accordance with
applicable law; (iii) disburse redemption proceeds; (iv) process and record the
issuance and redemption of shares in accordance with instructions from the Trust
or its administrator; (v) act as income disbursing agent of the Trust in
accordance with the terms of the Prospectus and instructions from the Trust or
its administrator; (vi) provide periodic statements of account; (vii) answer
inquiries (including requests for prospectuses and statements of additional
information, and assistance in the completion of new account applications) from
investors and respond to all requests for information regarding the Trust (such
as current price, recent performance, and yield data) and questions relating to
accounts of investors (such as possible errors in statements, and transactions);
(viii) respond to and seek to resolve all complaints of investors with respect
to the Trust or their accounts; (ix) furnish proxy statements and proxies,
annual and semi-annual financial statements, and dividend, distribution and tax
notices to investors; (x) furnish the Trust with all pertinent Blue Sky
information; (xi) perform all required tax withholding; (xii) preserve records;
and (xiii) furnish necessary office space, facilities and personnel. Northern
may appoint one or more sub-transfer agents in the performance of its services.
As compensation for the services rendered by Northern under the Transfer
Agency Agreement and the assumption by Northern of related expenses, Northern is
entitled to a fee from the Trust, payable monthly, at an annual rate of .01%,
.10% and .15% of the average daily net asset value of the Class A, C and D
Shares, respectively, of the Portfolios.
27
<PAGE>
Under its Custodian Agreement (and in the case of the International Growth
Portfolio and International Equity Index Portfolio, its Foreign Custody
Agreement) with the Trust, Northern (i) holds each Portfolio's cash and
securities, (ii) maintains such cash and securities in separate accounts in the
name of the Portfolio, (iii) makes receipts and disbursements of funds on behalf
of the Portfolio, (iv) receives, delivers and releases securities on behalf of
the Portfolio, (v) collects and receives all income, principal and other
payments in respect of the Portfolio's investments held by Northern under the
Agreement, and (vi) maintains the accounting records of the Trust. Northern may
employ one or more subcustodians, provided that Northern, subject to certain
monitoring responsibilities, shall have no more responsibility or liability to
the Trust on account of any action or omission of any subcustodian so employed
than such subcustodian has to Northern and that the responsibility or liability
of the subcustodian to Northern shall conform to the resolution of the Trustees
of the Trust authorizing the appointment of the particular subcustodian (or, in
the case of foreign securities, to the terms of any agreement entered into
between Northern and such subcustodian to which such resolution relates). In
addition, the Trust's custodial arrangements provide, with respect to foreign
securities, that Northern shall not be: (i) responsible for the solvency of any
subcustodian appointed by it with reasonable care; (ii) responsible for any act,
omission, default or for the solvency of any eligible foreign securities
depository; and (iii) liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism or any loss where the subcustodian has otherwise
exercised reasonable care. Northern may also appoint agents to carry out such of
the provisions of the Custodian Agreement and the Foreign Custody Agreement as
Northern may from time to time direct, provided that the appointment of an agent
shall not relieve Northern of any of its responsibilities under either
Agreement. Northern has entered into agreements with financial institutions and
depositories located in foreign countries with respect to the custody of the
Portfolios' foreign securities.
As compensation for the services rendered to the Trust by Northern as
custodian with respect to each Portfolio except the International Growth
Portfolio and International Equity Index Portfolio, and the assumption by
Northern of certain related expenses, Northern is entitled to payment from the
Trust as follows: (i) $18,000 annually for each Portfolio, plus (ii) 1/100th of
1% annually of each Portfolio's average daily net assets to the extent they
exceed $100 million, plus (iii) a fixed dollar fee for each trade in portfolio
securities, plus (iv) a fixed dollar fee for each time that Northern as
Custodian receives or transmits funds via wire, plus (v) reimbursement of
expenses incurred by Northern as custodian for telephone, postage, courier fees,
office supplies and duplicating. The fees referred to in clauses (iii) and (iv)
are subject to annual upward adjustments based on increases in the Consumer
Price Index for All Urban Consumers, provided that Northern may permanently or
temporarily waive all or any portion of any upward adjustment.
As compensation for the services rendered to the Trust under the Foreign
Custody Agreement with respect to the International Growth Portfolio and
International Equity Index Portfolio, and the assumption by Northern of certain
related expenses, Northern is entitled to payment from the Trust as follows: (i)
$35,000 annually for the International Growth Portfolio and International Equity
Index Portfolio, plus (ii) 9/100th of 1% annually of the Portfolios' average
daily net assets, plus (iii) reimbursement for fees incurred by Northern as
foreign custodian for telephone, postage, courier fees, office supplies and
duplicating.
Northern's fees under the Custodian Agreement and Foreign Custody Agreement
are subject to reduction based on the Portfolios' daily uninvested cash balances
(if any).
Unless sooner terminated, the Advisory Agreement, the Custodian Agreement
(or, in the case of the International Growth Portfolio and International Equity
Index Portfolio, the Foreign Custody Agreement) and the Transfer Agency
Agreement will continue in effect with respect to a particular Portfolio until
April 30,2001 and thereafter for successive 12-month periods, provided that the
continuance is approved at least annually (i) by the vote of a majority of the
Trustees who are not parties to the agreement or "interested persons" (as such
term is defined in the 1940 Act) of any party thereto, cast in person at a
meeting called for the purpose of voting on such approval, and (ii) by the
Trustees or by the vote of a majority of the outstanding shares of such
Portfolio (as defined below under "Other Information"). Each agreement is
terminable at any time without penalty by the Trust (by specified Trustee or
shareholder action) on 60 days' written notice to Northern or NTQA and by
Northern or NTQA on 60 days' written notice to the Trust.
Prior to April 1, 1998, Northern served as investment adviser to the Equity
Index, Small Company Index and International Equity Index Portfolios on the same
terms as those described above.
28
<PAGE>
For the fiscal years or periods ended November 30 as indicated, the amount
of advisory fees incurred by each Portfolio (after fee waivers) (except for Mid
Cap Growth and Small Company Growth, which did not commence operations during
the fiscal year ended November 30, 1999) was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Balanced Portfolio $ 368,178 $ 297,879 $270,536
Equity Index Portfolio 1,453,598 1,136,850 830,952
Diversified Growth Portfolio 1,050,355 905,091 795,346
Focused Growth Portfolio 1,315,624 1,045,682 934,052
Small Company Index Portfolio 397,251 248,736 242,421
International Growth Portfolio 985,305 869,641 993,121
International Equity Index Portfolio/1/ 126,053 117,326 44,662
/1/ Commenced investment operations on April 1, 1997.
</TABLE>
For the fiscal years or periods ended November 30 as indicated, the
Investment Advisers waived advisory fees as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Balanced Portfolio $ 220,907 $ 178,727 $ 162,322
Equity Index Portfolio 2,907,197 2,273,722 1,661,904
Diversified Growth Portfolio 477,434 411,405 361,521
Focused Growth Portfolio 493,359 392,131 350,269
Small Company Index Portfolio 397,250 248,733 242,421
International Growth Portfolio 246,326 217,410 248,280
International Equity Index Portfolio/1/ 126,053 117,319 44,662
/1/ Commenced investment operations on April 1, 1997.
</TABLE>
For the fiscal years or periods ended November 30 as indicated, the amount
of transfer agency fees incurred by each Portfolio was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balanced Portfolio $ 9,237 $ 11,754 $ 10,622
Equity Index Portfolio 274,756 249,731 172,360
Diversified Growth Portfolio 19,733 17,453 15,280
Focused Growth Portfolio 26,816 23,773 19,546
Small Company Index Portfolio 20,843 13,858 12,676
International Growth Portfolio 12,389 11,469 12,624
International Equity Index Portfolio/1/ 5,061 4,696 1,780
/1/ Commenced investment operations on April 1, 1997.
</TABLE>
29
<PAGE>
For the fiscal years or periods ended November 30 as indicated, the amount
of custodian fees (and, in the case of the International Growth Portfolio and
International Equity Index Portfolio, the foreign custodian fees) incurred by
each Portfolio was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balanced Portfolio $ 22,972 $ 22,993 $ 24,371
Equity Index Portfolio 200,973 268,057 142,960
Diversified Growth Portfolio 31,714 28,035 27,587
Focused Growth Portfolio 30,486 28,583 23,050
Small Company Index Portfolio 491,423 227,658 66,695
International Growth Portfolio 135,538 123,373 158,611
International Equity Index Portfolio/1/ 77,124 67,398 49,999
/1/ Commenced investment operations on April 1, 1997.
</TABLE>
Under a Service Mark License Agreement with the Trust, Northern Trust
Corporation has agreed that the name "Northern Institutional Funds" may be used
in connection with the Trust's business on a royalty-free basis. Northern Trust
Corporation has reserved to itself the right to grant the non-exclusive right to
use the name "Northern Institutional Funds" to any other person. The Agreement
provides that at such time as the Agreement is no longer in effect, the Trust
will cease using the name "Northern Institutional Funds."
Portfolio Transactions
To the extent that a Portfolio effects brokerage transactions with any
broker/dealer affiliated directly or indirectly with the Investment Advisers,
such transactions, including the frequency thereof, the receipt of any
commissions payable in connection therewith, and the selection of the affiliated
broker/dealer effecting such transactions, will be fair and reasonable to the
shareholders of the Portfolio.
During the fiscal year ended November 30, 1999, the Balanced Portfolio
acquired and sold securities of Bank of America, Goldman Sachs Group, Inc.,
Merrill Lynch & Co., Inc., Morgan Stanley Dean Witter & Co. Inc., and Lehman
Brothers, Inc., each a regular broker/dealer. At November 30, 1999, the Balanced
Portfolio owned the following amounts of securities of its regular
broker/dealers, as defined in Rule 10b-1 under the 1940 Act, or their parents:
Donaldson Lufkin & Jenrette Securities, Inc., with an approximate aggregate
market value of $131,000; Goldman Sachs Group, Inc., with an approximate
aggregate market value of $62,000; Merrill Lynch & Co., Inc., with an
approximate aggregate market value of $363,000; Morgan Stanley Dean Witter &
Co., with an approximate aggregate market value of $458,000; and Salomon Smith
Barney, Inc., with an approximate aggregate market value of $648,000.
During the fiscal year ended November 30, 1999, the Diversified Growth
Portfolio acquired and sold securities of Bank of America, Goldman Sachs Group,
Inc., Merrill Lynch & Co., Inc., Morgan Stanley Dean Witter & Co. Inc., each a
regular broker/dealer. At November 30, 1999, the Diversified Growth Portfolio
owned the following amounts of securities of its regular broker/dealers, as
defined in Rule 10b-1 under the 1940 Act, or their parents: Merrill Lynch & Co.,
Inc., with an approximate aggregate market value of $1,411,000; Goldman Sachs
Group, Inc., with an approximate aggregate market value of $287,000; and Morgan
Stanley Dean Witter & Co., with an approximate aggregate market value of
$2,256,000.
During the fiscal year ended November 30, 1999, the Equity Index Portfolio
acquired and sold securities of Bank of America, Bear Stearns & Co., Lehman
Brothers, Inc., Merrill Lynch & Co., Inc. and Morgan Stanley Dean Witter & Co.,
each a regular broker/dealer. At November 30, 1999, the Equity Index Portfolio
owned the following amounts of securities of its regular broker/dealers, as
defined in Rule 10b-1 under the 1940 Act, or their parents: Merrill Lynch & Co.,
Inc., with an approximate aggregate market value of $3,789,000.
During the fiscal year ended November 30, 1999, the Focused Growth
Portfolio acquired and sold securities of Goldman Sachs Group, Inc., Merrill
Lynch & Co., Inc., and Morgan Stanley Dean Witter & Co., each a regular
broker/dealer. At November 30, 1999, the Focused Growth Portfolio owned the
following amounts of securities of its
30
<PAGE>
regular broker/dealers, as defined in Rule 10b-1 under the 1940 Act, or their
parents: Morgan Stanley Dean Witter & Co., with an approximate aggregate market
value of $1,206,000.
During the fiscal year ended November 30, 1999, the International Equity
Index Portfolio did not acquire, sell or own any securities of its regular
broker/dealers or their parents.
During the fiscal year ended November 30, 1999, the International Growth
Portfolio acquired and sold securities of UBS Securities, a regular
broker/dealer. At November 30, 1999, the International Growth Portfolio owned
the following amounts of securities of its regular broker/dealers, as defined in
Rule 10b-1 under the 1940 Act, or their parents: UBS Securities, with an
approximate aggregate market value of $1,641,000.
During the fiscal year ended November 30, 1999, the Small Company Index
Portfolio acquired and sold securities of Investment Technology Group, a regular
broker/dealer. At November 30, 1999, the Small Company Index Portfolio did not
own any securities of its regular broker/dealers or their parents.
During the fiscal year ended November 30, 1999, the Mid Cap Growth and
Small Company Growth Portfolios had not yet commenced operations.
31
<PAGE>
For the fiscal years ended November 30 as indicated, each Portfolio paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Fiscal Brokerage Amount of Commissions
Year Total Commissions Transactions Paid
Ended Brokerage Paid to On Which to Brokers
November 30, Commissions Affiliated Commissions Providing
1999 Paid Brokers/1/ Paid Research/4/
- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balanced $ 60,846 $ 3,936 $ 49,709,379 $ 54,086
Portfolio (6.47%)/2/ (5.35%)/3/
Equity 162,116 0 362,402,193 130,118
Index
Portfolio
Focused 312,416 9,567 249,401,190 252,742
Growth (3.06%)/2/ (2.40%)/3/
Portfolio
Diversified 266,101 20,628 227,241,917 240,074
Growth (7.75%)/2/ (6.46%)/3/
Portfolio
Small Company 327,470 0 354,777,500 259,972
Index
Portfolio
International 334,816 8,997 259,424,703 144,240
Growth (2.69%)/2/ (3.12%)/3/
Portfolio
International 156,404 0 36,494,860 152,351
Equity Index
Portfolio
</TABLE>
- ---------------------------------
/1/ Goldman Sachs and Co., the Trust's distributor prior to May 1, 1999, was
the only affiliated broker utilized by the Trust during the fiscal year
ending November 30, 1999.
/2/ Percentage of Total Commissions Paid.
/3/ Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
/4/ The amounts of the transactions involving commissions paid to brokers
providing research were $43,134,455, $300,137,797, $195,324,563,
$197,120,921, $274,938,914, $128,020,612 and $33,641,730 for the Balanced,
Equity Index, Focused Growth, Diversified Growth, Small Company Index,
International Growth and International Equity Index Portfolios,
respectively.
32
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Fiscal Brokerage Amount of Commissions
Year Total Commissions Transactions Paid
Ended Brokerage Paid to On Which to Brokers
November 30, Commissions Affiliated Commissions Providing
1998 Paid Brokers/1/ Paid Research/4/
- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balanced
Portfolio $ 33,693 $ 2,794 $ 24,707,706 $ 25,032
(8.29%)/2/ (1.91%)/3/
Equity
Index 148,670 0 590,431,860 125,498
Portfolio
Focused
Growth 257,630 12,648 178,606,124 208,872
Portfolio (4.91%)/2/ (0.12%)/3/
Diversified
Growth 148,788 19,748 116,674,485 122,744
Portfolio (13.27%)/2/ (2.23%)/3/
Small Company
Index 98,346 0 139,815,827 97,942
Portfolio
International
Growth 933,041 23,687 325,994,274 581,629
Portfolio (2.54%)/2/ (3.32%)/3/
International
Equity Index 72,801 0 43,852,342 61,732
Portfolio
</TABLE>
- ----------------
/1/ Goldman, Sachs & Co., the Trust's distributor prior to May 1, 1999, was the
only affiliated broker utilized by the Trust during the fiscal year.
/2/ Percentage of total commissions paid.
/3/ Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
/4/ The amounts of the transactions involving commissions paid to brokers
providing research were $18,453,666, $537,682,036, $145,818,514,
$94,871,574, $139,042,814, $198,366,763 and $36,469,237 for the Balanced,
Equity Index, Focused Growth, Diversified Growth, Small Company Index,
International Growth and International Equity Index Portfolios,
respectively.
33
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Fiscal Brokerage Amount of Commissions
Year Total Commissions Transactions Paid
Ended Brokerage Paid to On Which to Brokers
November 30, Commissions Affiliated Commissions Providing
1997 Paid Brokers/1/ Paid Research
- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balanced
Portfolio $ 32,642 $ 0 $ 20,396,168 $ 25,974
Equity
Index
Portfolio 131,385 0 254,772,161 121,495
Focused
Growth
Portfolio 300,436 1,484 226,791,529 260,384
(0.49%)/2/ (0.59%)/3/
Diversified
Growth
Portfolio 202,193 0 132,628,487 186,656
Small Company
Index
Portfolio 73,241 0 93,889,780 73,173
International
Growth
Portfolio 1,163,242 0 374,185,022 644,392
International
Equity Index
Portfolio 56,347 0 26,892,453 56,347
</TABLE>
- ----------------
/1/ Goldman, Sachs & Co., the Trust's distributor prior to May 1, 1999, was the
only affiliated broker utilized by the Trust during the fiscal year.
/2/ Percentage of total commissions paid.
/3/ Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
Portfolio Valuation
U.S. and foreign investments held by a 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. Shares of investment companies
held by the Portfolios will be valued at their respective net asset values. Any
securities, including restricted securities, for which current quotations are
not readily available are valued at fair value as determined in good faith by
the Investment Adviser under the supervision of the Board of Trustees. Short-
term
34
<PAGE>
investments are valued at amortized cost which the Investment Advisers have
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.
Co-Administrators and Distributor
Effective May 1, 1999, Northern and PFPC (formerly FDISG), 4400 Computer
Drive, Westborough, Massachusetts 01581, act as co-administrators for the
Portfolios under a Co-Administration Agreement with the Trust. Subject to the
general supervision of the Trust's Board of Trustees, Northern and PFPC (the
"Co-Administrators") provide supervision of all aspects of the Trust's
non-investment advisory operations and perform various corporate secretarial,
treasury and blue sky services, including but not limited to: (i) maintaining
office facilities and furnishing corporate officers for the Trust; (ii)
furnishing data processing services, clerical services, and executive and
administrative services and standard stationery and office supplies; (iii)
performing all functions ordinarily performed by the office of a corporate
treasurer, and furnishing the services and facilities ordinarily incident
thereto, such as expense accrual monitoring and payment of the Trust's bills,
preparing monthly reconciliation of the Trust's expense records, updating
projections of annual expenses, preparing materials for review by the Board of
Trustees and compliance testing; (iv) preparing and submitting reports to the
Trust's shareholders and the SEC; (v) preparing and printing financial
statements; (vi) preparing monthly Portfolio profile reports; (vii) preparing
and filing the Trust's federal and state tax returns (other than those required
to be filed by the Trust's custodian and transfer agent) and providing
shareholder tax information to the Trust's transfer agent; (viii) assisting in
marketing strategy and product development; (ix) performing oversight/management
responsibilities, such as the supervision and coordination of certain of the
Trust's service providers; (x) effecting and maintaining, as the case may be,
the registration of shares of the Trust for sale under the securities laws of
various jurisdictions; (xi) assisting in maintaining corporate records and good
standing status of the Trust in its state of organization; and (xii) monitoring
the Trust's arrangements with respect to services provided by Servicing Agents
to their customers who are the beneficial owners of shares.
Subject to the limitations described below, as compensation for their
administrative services and the assumption of related expenses, the Co-
Administrators are entitled to a fee from each Portfolio, computed daily and
payable monthly, at an annual rate of .15% of the average daily net assets of
each of the International Equity Index and International Growth Portfolios, and
.10% of the average daily net assets of each other Portfolio. The Co-
Administrators will reimburse each Portfolio for its expenses (including
administration fees payable to the Co-Administrators, but excluding advisory
fees, transfer agency fees, servicing fees and extraordinary expenses) which
exceed on an annualized basis .25% of the International Equity Index and
International Growth Portfolios' respective average daily net assets and .10% of
each other Portfolio's average daily net assets.
For the period May 1, 1999 through the fiscal year ended November 30, 1999,
the Co-Administrators received fees under the Co-Administration Agreement with
the Trust (except for the Mid Cap Growth and Small Company Growth Portfolios,
which did not commence operations during the period) in the amount of:
May 1, 1999
through
November 30, 1999
-----------------
Balanced Portfolio $ 44,254
Equity Index Portfolio 862,791
Diversified Growth Portfolio 110,735
Focused Growth Portfolio 101,915
Small Company Index Portfolio 115,702
International Equity Index Portfolio 46,855
International Growth Portfolio 114,770
35
<PAGE>
Additionally, for the period May 1, 1999 through the fiscal year ended
November 30, 1999, the Co-Administrators voluntarily reimbursed each Portfolio
(except for the Mid Cap Growth and Small Company Growth Portfolios, which did
not commence operations during the period) for its expenses reducing the
administration fees in the following amounts:
May 1, 1999
through
November 30, 1999
-----------------
Balanced Portfolio $ 35,435
Equity Index Portfolio 255,730
Diversified Growth Portfolio 48,664
Focused Growth Portfolio 44,091
Small Company Index Portfolio 325,512
International Equity Index Portfolio 36,849
International Growth Portfolio 26,024
Prior to May 1, 1999, Goldman, Sachs & Co. ("Goldman Sachs"), 85 Broad
Street, New York, New York 10004, acted as the Trust's administrator pursuant to
an administration agreement similar to the Co-Administration Agreement currently
in effect with Northern and PFPC. For the fiscal years or periods ended November
30 as indicated, Goldman Sachs received fees under its administration agreement
with the Trust in the amount of:
<TABLE>
<CAPTION>
December 1, 1998
through
April 30, 1999 1998 1997
-------------- ---------- --------
<S> <C> <C> <C>
Balanced Portfolio $ 29,381 $ 59,575 $ 54,096
Equity Index Portfolio 590,794 1,136,850 830,785
Diversified Growth Portfolio 80,237 164,560 144,576
Focused Growth Portfolio 62,536 130,709 116,431
Small Company Index Portfolio 82,921 124,365 121,184
International Equity Index Portfolio/1/ 28,777 70,396 26,233
International Growth Portfolio 69,975 163,058 159,139
/1/ Commenced investment operations on April 1, 1997.
</TABLE>
Prior to May 1, 1997, Goldman Sachs voluntarily agreed to waive a portion
of its administration fee for each Portfolio resulting in an effective fee of
.10% of the average daily net assets for each Portfolio. The effect of these
waivers by Goldman Sachs was to reduce administration fees by the following
amounts for the fiscal years or periods ended November 30 as indicated:
<TABLE>
<CAPTION>
December 1, 1998
through
April 30, 1999 1998 1997
-------------- ----- -------
<S> <C> <C> <C>
Balanced Portfolio $0 $0 $32,260
Equity Index Portfolio 0 0 52,050
Diversified Growth Portfolio 0 0 68,234
Focused Growth Portfolio 0 0 63,979
Small Company Index Portfolio 0 0 65,061
International Equity Index Portfolio/1/ 0 0 1,460
International Growth Portfolio 0 0 68,541
/1/ Commenced investment operations on April 1, 1997.
</TABLE>
In addition, pursuant to an undertaking that commenced August 1, 1992,
Goldman Sachs agreed that, if its
36
<PAGE>
administration fees (less expense reimbursements paid by Goldman Sachs to the
Trust and less certain marketing expenses paid by Goldman Sachs) exceeded a
specified amount ($1 million for the Trust's first twelve investment portfolios
plus $50,000 for each additional portfolio) during a fiscal year, Goldman Sachs
would waive a portion of its administration fees during the following fiscal
year. There were no waivers pursuant to this agreement during the last three
fiscal years.
Goldman Sachs had also agreed each year to reimburse each Portfolio for its
expenses (including fees payable to Goldman Sachs as administrator, but
excluding advisory fees, transfer agency fees, servicing fees and extraordinary
expenses) which exceeded on an annualized basis .25% of the International Equity
Index and International Growth Portfolios' respective average daily net assets
and .10% of each other Portfolio's average daily net assets. Prior to May 1,
1997, this undertaking was voluntary with respect to the Portfolios. As of May
1, 1997, this undertaking was contractual with respect to all Portfolios. The
effect of these reimbursements by Goldman Sachs for the fiscal years or periods
ended November 30 as indicated was to reduce the expenses of each Portfolio by:
<TABLE>
<CAPTION>
December 1, 1998
through
April 30, 1999 1998 1997
---------------- ---- ----
<S> <C> <C> <C>
Balanced Portfolio $ 25,110 $ 78,916 $ 74,341
Equity Index Portfolio 194,185 504,482 304,060
Diversified Growth Portfolio 33,095 82,995 89,069
Focused Growth Portfolio 28,925 83,616 79,410
Small Company Index Portfolio 217,923 282,541 128,881
International Equity Index Portfolio/1/ 31,559 98,328 56,393
International Growth Portfolio 30,874 49,890 67,398
</TABLE>
__________________
/1/ Commenced investment operations on April 1, 1997.
Unless sooner terminated, the Co-Administration Agreement will continue in
effect until April 30, 2001, and thereafter for successive one-year terms with
respect to each Portfolio, provided that the Agreement is approved annually (i)
by the Board of Trustees or (ii) by the vote of a majority of the outstanding
shares of such Portfolio (as defined below under "Other Information"), provided
that in either event the continuance is also approved by a majority of the
Trustees who are not parties to the Agreement and who are not interested persons
(as defined in the 1940 Act) of any party thereto, by vote cast in person at a
meeting called for the purpose of voting on such approval. The Co-Administration
Agreement is terminable at any time after April 30, 2001 without penalty by the
Trust on at least 60 days written notice to the Co-Administrators. Each Co-
Administrator may terminate the Co-Administration Agreement with respect to
itself at any time after April 30, 2001 without penalty on at least 60 days
written notice to the Trust and the other Co-Administrator.
The Trust may terminate the Co-Administration Agreement prior to April 30,
2001 in the event that the Trust or its shareholders incur damages in excess of
$100,000 as a result of the willful misfeasance, bad faith or negligence of the
Co-Administrators, or the reckless disregard of their duties under the
Agreement. The Trust may also terminate the Co-Administration Agreement prior to
April 30, 2001 in the event that the Co-Administrators fail to meet one of the
performance standards set forth in the Agreement.
The Trust has entered into a Distribution Agreement under which Northern
Funds Distributors, LLC, ("NFD") as agent, sells shares of each Portfolio on a
continuous basis. NFD pays the cost of printing and distributing prospectuses to
persons who are not shareholders of the Trust (excluding preparation and
typesetting expenses) and of certain other distribution efforts. No compensation
is payable by the Trust to NFD for such distribution services. NFD is a wholly-
owned subsidiary of Provident Distributors, Inc. ("PDI"). PDI, based in West
Conshohocken, Pennsylvania, is an independently owned and operated broker-
dealer. Between May 1, 1999 and November 30, 1999, First Data Distributors, Inc.
("FDDI") acted as the Trust's distributor pursuant to a distribution agreement
similar to the Distribution Agreement currently in effect with NFD. Prior to May
1, 1999, Goldman Sachs acted as the Trust's distributor pursuant to a
distribution agreement similar to the Distribution Agreement currently in effect
with NFD.
37
<PAGE>
The Co-Administration Agreement provides that the Co-Administrators may
render similar services to others so long as their services under such Agreement
are not impaired thereby. The Co-Administration Agreement also provides that the
Trust will indemnify each Co-Administrator against all claims except those
resulting from the willful misfeasance, bad faith or negligence of such Co-
Administrator, or the Co-Administrator's breach of confidentiality. The
Distribution Agreement provides that the Trust will indemnify NFD against
certain liabilities relating to untrue statements or omissions of material fact
except those resulting from the reliance on information furnished to the Trust
by NFD, or those resulting from the willful misfeasance, bad faith or negligence
of NFD's, or NFD's breach of confidentiality.
Under a Service Mark License Agreement (the "License Agreement") with NFD,
Northern Trust Corporation agrees that the name "Northern Institutional Funds"
may be used in connection with Northern Institutional Funds' business on a
royalty-free basis. Northern Trust Corporation has reserved to itself the right
to grant the non-exclusive right to use the name ("Northern Institutional
Funds") to any other person. The License Agreement provides that at such time as
the License Agreement is no longer in effect NFD will cease using the name
"Northern Institutional Funds."
Shareholder Servicing Plan
As stated in the Portfolios' Prospectus, Servicing Agents may enter into
servicing agreements with the Trust under which they provide (or arrange to have
provided) support services to their Customers or other investors who
beneficially own such shares in consideration of the Portfolios' payment of not
more than .15% and .25% (on an annualized basis) of the average daily net asset
value of the Class C and D Shares, respectively, beneficially owned by such
Customers or investors.
For the fiscal years or periods ended November 30 as indicated, the aggregate
amount of the Shareholder Service Fee incurred by each class of each Portfolio
then in existence was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balanced Portfolio
Class C $ 1,895 $ 7,927 $ 8,026
Class D 1,301 1,860 710
Equity Index Portfolio
Class C 167,443 148,096 99,924
Class D 51,644 84,248 52,360
Diversified Growth Portfolio
Class D 1,129 2,669 1,466
Focused Growth Portfolio
Class C 15,098 13,754 11,222
Class D 2,340 4,375 2,037
Small Company Index Portfolio
Class C/1/ 284 338 N/A
Class D 1,427 2,173 993
International Growth Portfolio
Class D 128 825 379
International Equity Index Portfolio
Class D/2/ 32 5 N/A
</TABLE>
_____________________________
/1/ Class C Shares were issued on January 8, 1998.
/2/ Class D Shares were issued on October 5, 1998.
Services provided by or arranged to be provided by Servicing Agents under
their servicing agreements may include: (i) establishing and maintaining
separate account records of Customers or other investors; (ii) providing
Customers or other investors with a service that invests their assets in shares
of certain classes pursuant to specific or pre-authorized instructions, and
assistance with new account applications; (iii) aggregating and processing
purchase and redemption requests for shares of certain classes from Customers or
other investors, and placing purchase and redemption orders with the Transfer
Agent; (iv) issuing confirmations to Customers or other investors in accordance
with applicable law; (v)
38
<PAGE>
arranging for the timely transmission of funds representing the net purchase
price or redemption proceeds; (vi) processing dividend payments on behalf of
Customers or other investors; (vii) providing information periodically to
Customers or other investors showing their positions in shares; (viii)
responding to Customer or other investor inquiries (including requests for
prospectuses), and complaints relating to the services performed by the
Servicing Agents; (ix) acting as liaison with respect to all inquiries and
complaints from Customers and other investors relating to errors committed by
the Trust or its agents, and other matters pertaining to the Trust; (x)
providing or arranging for another person to provide subaccounting with respect
to shares of certain classes beneficially owned by Customers or other investors;
(xi) if required by law, forwarding shareholder communications from the Trust
(such as proxy statements and proxies, shareholder reports, annual and semi-
annual financial statements and dividend, distribution and tax notices) to
Customers and other investors; (xii) providing such office space, facilities and
personnel as may be required to perform their services under the servicing
agreements; (xiii) maintaining appropriate management reporting and statistical
information; (xiv) paying expenses related to the preparation of educational and
other explanatory materials in connection with the development of investor
services; (xv) developing and monitoring investment programs; and (xvi)
providing such other similar services as the Trust may reasonably request to the
extent the Servicing Agents are permitted to do so under applicable statutes,
rules and regulations.
The Trust's agreements with Servicing Agents are governed by a Plan (called
the "Shareholder Servicing Plan"), which has been adopted by the Board of
Trustees. Pursuant to the Shareholder Servicing Plan, the Board of Trustees will
review, at least quarterly, a written report of the amounts expended under the
Trust's agreements with Servicing Agents and the purposes for which the
expenditures were made. In addition, the arrangements with Servicing Agents must
be approved annually by a majority of the Board of Trustees, including a
majority of the Trustees who are not "interested persons" of the Trust, as
defined in the 1940 Act, and have no direct or indirect financial interest in
such arrangements.
The Board of Trustees has approved the arrangements with Servicing Agents
based on information provided by the Trust's service contractors that there is a
reasonable likelihood that the arrangements will benefit the Portfolios and
their shareholders by affording the Portfolios greater flexibility in connection
with the servicing of the accounts of the beneficial owners of their shares in
an efficient manner.
Counsel and Auditors
Drinker Biddle & Reath LLP, with offices at One Logan Square, 18th and
Cherry Streets, Philadelphia, Pennsylvania 19103-6996, serve as counsel to the
Trust.
Ernst & Young LLP, independent auditors, 233 S. Wacker Drive, Chicago,
Illinois 60606, have been selected as auditors of the Trust. In addition to
audit services, Ernst & Young LLP reviews the Trust's Federal and state tax
returns, and provides consultation and assistance on accounting, internal
control and related matters.
In-Kind Purchases and Redemptions
Payment for shares of a Portfolio may, in the discretion of Northern, be
made in the form of securities that are permissible investments for the
Portfolio as described in the Prospectus. For further information about this
form of payment, contact Northern. In connection with an in-kind securities
payment, a Portfolio will require, among other things, that the securities be
valued on the day of purchase in accordance with the pricing methods used by the
Portfolio and that the Portfolio receive satisfactory assurances that it will
have good and marketable title to the securities received by it; that the
securities be in proper form for transfer to the Portfolio; and that adequate
information be provided concerning the basis and other tax matters relating to
the securities.
The additional transaction fee described in the Prospectus with respect to
the Small Company Index Portfolio and the International Equity Index Portfolio
does not apply to in-kind purchases of shares that are structured to minimize
the related brokerage, market impact costs and other transaction costs to such
Portfolios as described in the Prospectus.
Although each Portfolio generally will redeem shares in cash, each
Portfolio reserves the right to pay redemptions by a distribution in kind of
securities (instead of cash) from such Portfolio. The securities distributed in
kind would be readily marketable and would be valued for this purpose using the
same method employed in calculating the Portfolio's net asset value per share.
If a shareholder receives redemption proceeds in kind, the shareholder should
expect to incur
39
<PAGE>
transaction costs upon the disposition of the securities received in the
redemption.
PERFORMANCE INFORMATION
The performance of a class of shares of a Portfolio may be compared to
those of other mutual funds with similar investment objectives and to bond,
stock 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 shares 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), S&P 500 Index, S&P/Barra Growth Index, the
Russell 2000 Index, the EAFE Index or other unmanaged stock and 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 3-month LIBOR
Index, the 91-day Treasury Bill Rate, the Composite Index, the J.P. Morgan Non-
U.S. Government Bond Index, and the Dow Jones Industrial Average, a recognized
unmanaged index of common stocks of 30 industry companies listed on the New York
Stock Exchange. 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 shares of a Portfolio.
The Portfolios calculate their total returns for each class of shares
separately on an "average annual total return" basis for various periods.
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 shares 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 shares 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 shares 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 Portfolios
may also advertise from time to time the total return of one or more classes of
shares on a year-by-year or other basis for various specified periods by means
of quotations, charts, graphs or schedules.
Each Portfolio that advertises an "average annual total return" for a class
of shares computes such return by determining the average annual compounded rate
of return during specified periods that equates the initial amount invested to
the ending redeemable value of such investment according to the following
formula:
P(1 + T)/n/ = ERV
Where: T = average annual total return;
ERV = ending redeemable value at the end of the applicable period (or
fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year (or other) period;
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in
terms of years.
Each Portfolio that advertises an "aggregate total return" for a class of
shares computes such return by determining the aggregate compounded rates of
return during specified periods that likewise equate the initial amount invested
to the ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
T = [(ERV/P)]-1
The Small Company Index and International Equity Index Portfolios may
advertise total return data without reflecting the .50% and 1.00% portfolio
transaction fee in accordance with the rules of the SEC. Quotations which do not
40
<PAGE>
reflect the fee will, of course, be higher than quotations which do.
The calculations set forth below are made assuming that (i) all dividends
and capital gain distributions are reinvested on the reinvestment dates at the
price per share existing on the reinvestment date, (ii) all recurring fees
charged to all shareholder accounts are included, and (iii) the portfolio
transaction fee is taken into account for purchases of shares of the Small
Company Index Portfolio and the International Equity Index Portfolio. The ending
redeemable value (variable "ERV" in the formula) is determined by assuming
complete redemption of the hypothetical investment after deduction of all
nonrecurring charges at the end of the measuring period. Total return
calculations excluding the transaction fee are also provided for the Small
Company Index Portfolio and the International Equity Index Portfolio.
The average annual total returns and aggregate total returns shown below
for the Diversified Growth, Equity Index, Small Company Index and International
Growth Portfolios include, for periods prior to the commencement of the
Portfolios' operations, the performance of predecessor collective funds adjusted
to reflect the higher estimated fees and expenses applicable to such Portfolios'
Class A Shares at the time of their inception. Although all such predecessor
collective funds were managed by Northern for the periods stated in a manner and
pursuant to investment objectives that were equivalent in all material respects
to the management and investment objectives of the corresponding Portfolios,
such predecessor collective funds were not registered under the 1940 Act and
were not subject to certain investment restrictions imposed by the 1940 Act. If
they had been registered under the 1940 Act, performance might have been
adversely affected. The average annual total returns and aggregate total returns
shown for the Portfolios for their Class C and/or Class D Shares also include,
for the periods prior to the inception of such classes, the performance of the
Portfolios' Class A Shares. Because the fees and expenses of Class C and Class D
Shares are, respectively, 0.24% and 0.39% higher than those of Class A Shares,
actual performance for periods prior to the inception of Class C and Class D
Shares would have been lower if such higher fees and expenses had been taken
into account.
Following commencement of operations of the Portfolios, the Portfolios'
prior administrator (Goldman Sachs) or co-administrators (Northern and PFPC)
reimbursed expenses to the Portfolios and voluntarily agreed to reduce a portion
of its administration fees for each Portfolio pursuant to the undertaking
described above under "Additional Trust Information -Co-Administrators and
Distributor" and "Investment Advisers, Transfer Agent and Custodian," and
Northern waived a portion of its investment advisory fees with respect to the
Portfolios. The average annual total returns and aggregate total returns of each
Portfolio with respect to Class A, Class C and Class D Shares, as applicable,
are shown below with and without such fee waivers and expense reimbursements.
41
<PAGE>
<TABLE>
<CAPTION>
For Periods Ended November 30, 1999
Average Annual Total Returns (%) Aggregate Total Returns (%)
Since Since
1 Year 5 Year 10 Year Inception 1 Year 5 Year 10 Year Inception
------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Diversified Growth/1/
Class A
with fee waivers and
expense reimbursements 24.66% 24.45% 15.29% --- 24.66% 198.52% 314.75% ---
without fee waivers and 24.31% 24.00% 14.82% --- 24.31% 193.13% 298.42% ---
expense reimbursements
Class D
with fee waivers and
expense reimbursements 24.09% 23.99% 15.06% --- 24.09% 193.05% 306.74% ---
without fee waivers and 23.73% 23.53% 14.60% --- 23.73% 187.66% 290.54% ---
expense reimbursements
Focused Growth/2/
Class A
with fee waivers and
expense reimbursements 34.23% 26.18% --- 19.48% 34.23% 219.89% --- 213.37%
without fee waivers and 33.76% 25.41% --- 23.30% 33.76% 210.24% --- 283.81%
expense reimbursements
Class C
with fee waivers and
expense reimbursements 33.95% 25.98% --- 19.33% 33.95% 217.33% --- 210.86%
without fee waivers and 33.51% 25.44% --- 18.73% 33.51% 210.58% --- 201.19%
expense reimbursements
Class D
with fee waivers and 33.74% 25.70% --- 19.13% 33.74% 213.82% --- 207.42%
expense reimbursements
without fee waivers and 33.30% 25.17% --- 18.51% 33.30% 207.21% --- 197.66%
expense reimbursements
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
For Periods Ended November 30, 1999
Average Annual Total Returns (%) Aggregate Total Returns (%)
Since Since
1 Year 5 Year 10 Year Inception 1 Year 5 Year 10 Year Inception
------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Index/3/
Class A
with fee waivers and 20.53% 27.08% 17.48% --- 20.53% 231.48% 400.69% ---
expense reimbursements
without fee waivers and 20.24% 26.75% 17.12% --- 20.24% 227.14% 385.61% ---
expense reimbursements
Class C
with fee waivers and 20.23% 26.84% 17.37% --- 20.23% 228.33% 395.94% ---
expense reimbursements
without fee waivers and 19.95% 26.31% 17.81% --- 19.95% 224.03% 380.98% ---
expense reimbursements
Class D
with fee waivers and 20.15% 26.66% 17.28% --- 20.15% 226.03% 392.44% ---
expense reimbursements
without fee waivers and 19.85% 26.33% 16.92% --- 19.85% 221.74% 377.59% ---
expense reimbursements
Small Company Index/4/
Class A
with fee waivers and 14.40% 14.16% 11.65% --- 14.40% 97.92% 200.92% ---
expense reimbursements
and portfolio transaction fee
with fee waivers and
expense reimbursements 14.97% 14.28% 11.70% --- 14.97% 94.88% 202.43% ---
but without portfolio
transaction fee
without fee waivers and
expense reimbursements 14.48% 13.78% 11.16% --- 14.48% 90.63% 188.06% ---
but with portfolio
transaction fee
without fee waivers and 13.48% 13.71% 11.13% --- 13.48% 84.68% 187.06% ---
expense reimbursements
and portfolio transaction fee
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
For Periods Ended November 30, 1999
Average Annual Total Returns (%) Aggregate Total Returns (%)
Since Since
1 Year 5 Year 10 Year Inception 1 Year 5 Year 10 Year Inception
------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Small Company Index
Class C
with fee waivers and
expense reimbursements and
portfolio transaction fee See footnote 8 See footnote 8
with fee waivers and expense
reimbursements but without
portfolio transaction fee See footnote 8 See footnote 8
without fee waivers and
expense reimbursements but
with portfolio transaction fee See footnote 8 See footnote 8
without fee waivers and
expense reimbursements and
portfolio transaction fee See footnote 8 See footnote 8
Class D
with fee waivers and
expense reimbursements and 13.51% 13.77% 11.45% --- 13.51% 90.61% 195.56% ---
portfolio transaction fee
with fee waivers and expense
reimbursements but without
portfolio transaction fee 14.13% 13.88% 11.51% --- 14.13% 91.49% 242.08% ---
without fee waivers and
expense reimbursements but 13.65% 13.78% 11.15% --- 13.65% 90.59% 187.86% ---
with portfolio transaction fee
without fee waivers and
expense reimbursements and
portfolio transaction fee 12.65% 13.09% 11.13% --- 12.65% 89.59% 186.86% ---
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
For Periods Ended November 30, 1999
Average Annual Total Returns (%) Aggregate Total Returns (%)
Since Since
1 Year 5 Year 10 Year Inception 1 Year 5 Year 10 Year Inception
------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
International Growth/5/
Class A
with fee waivers and 30.07% 11.90% --- 9.18% 30.07% 75.42% --- 128.74%
expense reimbursements
without fee waivers and 29.75% 11.57% --- 8.83% 29.75% 72.86% --- 122.01%
expense reimbursements
Class D
with fee waivers and
expense reimbursements See footnote 9 See footnote 9
without fee waivers and
expense reimbursements See footnote 9 See footnote 9
Balanced/6/
Class A
with fee waivers and 14.41% 16.51% --- 12.32% 14.11% 114.73% --- 110.79%
expense reimbursements
without fee waivers and 13.79% 15.93% --- 11.65% 13.79% 109.37% --- 102.95%
expense reimbursements
Class C
with fee waivers and 14.03% 16.25% --- 12.12% 14.03% 112.30% --- 108.46%
expense reimbursements
without fee waivers and 13.57% 15.71% --- 11.50% 13.57% 107.42% --- 101.22%
expense reimbursements
Class D
with fee waivers and 13.73% 16.18% --- 12.07% 13.73% 111.65% --- 107.76%
expense reimbursements
without fee waivers and 13.29% 15.58% --- 11.40% 13.29% 106.22% --- 100.06%
expense reimbursements
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
For Periods Ended November 30, 1999
Average Annual Total Returns (%) Aggregate Total Returns (%)
Since Since
1 Year 5 Year 10 Year Inception 1 Year 5 Year 10 Year Inception
------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
International Equity Index/7/
Class A
with fee waivers and 19.13% --- --- 14.99% 19.13% --- --- 45.13%
expense reimbursements
and portfolio transaction fee
with fee waivers and expense 20.32% --- --- 15.42% 20.32% --- --- 46.58%
reimbursements but without
portfolio transaction fee
without fee waivers and
expense reimbursements but with 19.83% --- --- 14.62% 19.83% --- --- 43.88%
portfolio transaction fee
without fee waivers and
expense reimbursements
and portfolio transaction fee 18.83% --- --- 14.32% 18.83% --- --- 40.88%
Class D
with fee waivers and
expense reimbursements 18.29% --- --- 14.65% 18.29% --- --- 43.99%
and portfolio transaction fee
with fee waivers and expense
reimbursements but without 19.48% --- --- 15.08% 19.48% --- --- 45.43%
portfolio transaction fee
without fee waivers and
expense reimbursements but with
portfolio transaction fee 19.00% --- --- 14.29% 19.00% --- --- 42.77%
without fee waivers and
expense reimbursements
and portfolio transaction fee 18.00% --- --- 13.99% 18.00% --- --- 41.77%
</TABLE>
46
<PAGE>
1. For Class A and D Shares, performance information prior to January 11, 1993
(commencement of Portfolio) is that of a predecessor collective fund. For
Class D Shares, performance information from January 11, 1993 to September
14, 1994 (commencement of Class D Shares) is that of Class A Shares. Because
the fees and expenses of Class D Shares are .39% higher than those of Class A
Shares, actual performance would have been lower had such higher fees and
expenses been taken into account. The predecessor collective fund has been
managed in a manner and pursuant to investment objectives equivalent in all
material respects to the management and investment objective of the Portfolio
for the periods shown. The performance information of the predecessor
collective fund is adjusted to reflect the higher fees and expenses
applicable to Class A Shares at the time of their inception.
2. For Class C and Class D Shares, performance from July 1, 1993 to June 14,
1996 (commencement of Class C Shares) and December 8, 1994 (commencement of
Class D Shares), respectively, is that of Class A Shares. Class A Shares
commenced operations on July 1, 1993. Because the fees and expenses of Class
C and Class D Shares are .24% and .39%, respectively, higher than those of
Class A Shares, actual performance would have been lower had such higher
expenses been taken into account.
3. For Class A, C and D Shares, performance information prior to January 11,
1993 (commencement of Portfolio) is that of a predecessor collective fund.
For Class C and D Shares, performance information from January 11, 1993 to
September 28, 1995 (commencement of Class C Shares) and September 14, 1994
(commencement of Class D Shares), respectively, is that of Class A Shares.
Because the fees and expenses of Class C and Class D Shares are .24% and
.39%, respectively, higher than those of Class A Shares, actual performance
would have been lower had such higher fees and expenses been taken into
account. The predecessor collective fund has been managed in a manner and
pursuant to investment objectives equivalent in all material respects to the
management and investment objective of the Portfolio for the periods shown.
The performance information of the predecessor collective fund is adjusted to
reflect the higher fees and expenses applicable to Class A Shares at the time
of their inception.
4. For Class A and D Shares, performance information prior to January 11, 1993
(commencement of Portfolio) is that of a predecessor collective fund. For
Class D Shares, performance information from January 11, 1993 to December 8,
1994 (commencement of Class D Shares), is that of Class A Shares. Because the
fees and expenses of Class D Shares are .39%, higher than those of Class A
Shares, actual performance would have been lower had such higher fees and
expenses been taken into account. Performance information of the predecessor
collective fund is shown from August 1, 1988 (the date such collective fund
was first managed in a manner and pursuant to investment objectives
equivalent in all material respects to the management and investment
objective of the Portfolio) and is adjusted to reflect the higher fees and
expenses applicable to Class A Shares at the time of their inception.
5. For Class A Shares, performance information prior to March 28, 1994
(commencement of Portfolio) is that of a predecessor collective fund.
Performance information of the predecessor collective fund is shown from July
1, 1990 (the date such fund was first managed in a manner and pursuant to
investment objectives equivalent in all material respects to the management
and investment objective of the Portfolio) and is adjusted to reflect the
higher fees and expenses applicable to Class A Shares at the time of their
inception.
6. For Class C and Class D Shares, performance from July 1, 1993 to December 29,
1995 (commencement of Class C Shares) and February 20, 1996 (commencement of
Class D Shares), respectively, is that of Class A Shares. Class A Shares
commenced operations on July 1, 1993. Because the fees and expenses of Class
C and Class D Shares are .24% and .39%, respectively, higher than those of
Class A Shares, actual performance would have been lower had such higher fees
and expenses been taken into account.
7. For Class D Shares, performance from April 1, 1997 to October 5, 1998
(commencement of Class D Shares) is that of Class A Shares. Class A Shares
commenced operations on April 1, 1997. Because the fees and expenses of Class
D Shares are .39% higher than those of Class A Shares, actual performance
would have been lower had such higher fees and expenses been taken into
account.
8. From July 27, 1999 to the date of the Prospectus, no Class C shares of the
Small Company Index Portfolio were held by shareholders. Class C shares of
the Small Company Index Portfolio will have substantially similar annual
returns when compared with Class A shares of the Small Company Index
Portfolio because shares of both Class A and Class C are invested in the same
portfolio of securities. The annual returns of Class A and Class C shares
will differ only to the
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<PAGE>
extent that the share classes do not have the same expenses. Annual returns
reflected since inception will also differ as the classes do not have the
same inception date.
9. From August 22, 1999 to the date of the Prospectus, no Class D shares of the
International Growth Portfolio were held by shareholders. Class C shares of
the International Growth Portfolio will have substantially similar annual
returns when compared with Class A shares of the International Growth
Portfolio because shares of both Class A and Class D are invested in the same
portfolio of securities. The annual returns of Class A and Class D shares
will differ only to the extent that the share classes do not have the same
expenses. Annual returns reflected since inception will also differ as the
classes do not have the same inception date.
The yield of a class of shares in the Balanced 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 shares is computed by
dividing the per share net income for the class during a 30-day (or one month)
period by the net asset value per share on the last day of the period and
annualizing the result on a semi-annual basis.
The Balanced Portfolio calculates its 30-day (or one month) standard yield
for a class of shares in accordance with the method prescribed by the SEC for
mutual funds:
Yield = 2[{(a-b/cd) + 1}/6/ - 1]
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = average daily number of shares outstanding during the period
entitled to receive dividends; and
d = net asset value per share on the last day of the period.
For the 30-day period ended November 30, 1999, the annualized yields for
the Class A, Class C and Class D Shares of the Balanced Portfolio were 2.78%,
2.54% and 2.41%, respectively. During such period, the Co-Administrators
reimbursed expenses to the Portfolio and voluntarily agreed to reduced a portion
of its administration fees under "Additional Trust Information - Co-
Administrators and Distributor," and Northern waived a portion of its investment
advisory fees with respect to the Portfolio. In the absence of such advisory and
administration fee reductions, the 30-day yield for Class A, Class C and Class D
Shares would have been 2.40%, 2.16% and 2.03%, respectively.
Because of the different servicing fees and transfer agency fees payable
with respect to Class A, C and D Shares in a Portfolio, performance quotations
for shares of Class C and D of the Portfolio will be lower than the quotations
for Class A Shares of the Portfolio, which will not bear any fees for
shareholder support services and will bear minimal transfer agency fees.
The performance of each class of shares of the Portfolios 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, shares may be worth more or less
than their original cost. Performance information 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 a 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 a
Portfolio will not be included in calculations of performance information.
TAXES
The following summarizes certain additional tax considerations generally
affecting the Portfolios and their shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Portfolios or their shareholders, and the discussions here and
in the Prospectus are not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisers with specific reference to
their own
48
<PAGE>
tax situations.
The discussions of tax consequences in the Prospectus and this Additional
Statement are based on the Internal Revenue Code of 1986, as amended (the
"Code") and the laws and regulations issued thereunder as in effect on the date
of this Additional Statement. Future legislative or administrative changes or
court decisions may significantly change the conclusions expressed herein, and
any such changes or decisions may have a retroactive effect with respect to the
transactions contemplated herein.
Federal - General Information
Each Portfolio intends to qualify as a regulated investment company under
Part I of Subchapter M of Subtitle A, Chapter 1, of the Code. As a regulated
investment company, each Portfolio is generally exempt from federal income tax
on its net investment income and realized capital gains which it distributes to
shareholders, provided that it distributes an amount equal to at least the sum
of 90% of its tax-exempt income and 90% of its investment company taxable income
(net investment income and the excess of net short-term capital gain over net
long-term capital loss), if any, for the year (the "Distribution Requirement")
and satisfies certain other requirements of the Code that are described below.
In addition to satisfaction of the Distribution Requirement, each Portfolio
must derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities, loans and
gains from the sale or other disposition of stock or securities or foreign
currencies, or from income derived with respect to its business of investing in
such stock, securities, or currencies (the "Income Requirement").
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of each Portfolio's assets must
generally consist of cash and cash items, U.S. Government securities, securities
of other regulated investment companies, and securities of other issuers (as to
which as Portfolio has not invested more than 5% of the value of its total
assets in securities of such issuer and as to which a Portfolio does not hold
more than 10% of the outstanding voting securities of such issuer), and no more
than 25% of the value of each Portfolio's total assets may be invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which such Portfolio controls and which are engaged in the same or similar
trades or businesses.
In the case of corporate shareholders, distributions of a Portfolio for any
taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" from domestic corporations
received by the Portfolio for the year. A dividend usually will be treated as a
"qualifying dividend" if it has been received from a domestic corporation. A
portion of the dividends paid by the Balanced, Equity Index, Diversified Growth,
Focused Growth, Small Company Growth, Mid Cap Growth, and potentially
International Growth Portfolios, may constitute "qualifying dividends." The
other Portfolios, however, are not expected to pay qualifying dividends.
If for any taxable year any Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders. In such
event, all distributions would be taxable as ordinary income to the extent of
such Portfolio's current and accumulated earnings and profits and would be
eligible for the dividends received deduction in the case of corporate
shareholders.
The Code imposes a non-deductible 4% excise tax on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Portfolio intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
Although each Portfolio expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, each
Portfolio may be subject to the tax laws of such states or localities.
The Trust will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of taxable interest or
dividend income properly, or (iii) who has failed to certify to the Trust, when
required to do so, that he or
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<PAGE>
she is not subject to backup withholding or that he or she is an "exempt
recipient."
Taxation of Certain Financial Instruments
The tax principles applicable to transactions in financial instruments and
futures contracts and options that may be engaged in by a Portfolio, and
investments in passive foreign investment companies ("PFICs"), are complex and,
in some cases, uncertain. Such transactions and investments may cause a
Portfolio to recognize taxable income prior to the receipt of cash, thereby
requiring the Portfolio to liquidate other positions, or to borrow money, so as
to make sufficient distributions to shareholders to avoid corporate-level tax.
Moreover, some or all of the taxable income recognized may be ordinary income or
short-term capital gain, so that the distributions may be taxable to
shareholders as ordinary income.
In addition, in the case of any shares of a PFIC in which a Portfolio
invests, the Portfolio may be liable for corporate-level tax on any ultimate
gain or distributions on the shares if the Portfolio fails to make an election
to recognize income annually during the period of its ownership of the shares.
Foreign Investors
Foreign shareholders generally will be subject to U.S. withholding tax at a
rate of 30% (or a lower treaty rate, if applicable) on distributions by a
Portfolio of net investment income, other ordinary income, and the excess, if
any, of net short-term capital gain over net long-term capital loss for the
year, regardless of the extent, if any, to which the income or gain is derived
from non-U.S. investments of the Portfolio. For this purpose, foreign
shareholders include individuals other than U.S. citizens, residents and certain
nonresident aliens, and foreign corporations, partnerships, trusts and estates.
A foreign shareholder generally will not be subject to U.S. income or
withholding tax in respect of proceeds from or gain on the redemption of shares
or in respect of capital gain dividends (i.e., dividends attributable to long-
term capital gains of a Portfolio), provided such shareholder submits a
statement, signed under penalties of perjury, attesting to such shareholder's
exempt status. Different tax consequences apply to a foreign shareholder engaged
in a U.S. trade or business or present in the U.S. for 183 days or more in a
year. Foreign shareholders should consult their tax advisers regarding the U.S.
and foreign tax consequences of investing in a Portfolio.
DESCRIPTION OF SHARES
The Trust Agreement permits the Trust's Board of Trustees to issue an
unlimited number of full and fractional shares of beneficial interest of one or
more separate series representing interests in one or more investment
portfolios. The Trustees may hereafter create series in addition to the Trust's
twenty-one existing series, which represent interests in the Trust's twenty-one
respective portfolios, ten of which are discussed in this Additional Statement.
The Trust Agreement also permits the Board of Trustees to classify or reclassify
any unissued shares into classes within a series. Pursuant to such authority,
the Trustees have authorized the issuance of an unlimited number of shares of
beneficial interest in three separate classes of shares in each of the Trust's
non-money market portfolios: Class A, C and D Shares.
Under the terms of the Trust Agreement, each share of each Portfolio is
without par value, represents an equal proportionate interest in the particular
Portfolio with each other share of its class in the same Portfolio and is
entitled to such dividends and distributions out of the income belonging to the
Portfolio as are declared by the Trustees. Upon any liquidation of a Portfolio,
shareholders of each class of a Portfolio are entitled to share pro rata in the
net assets belonging to that class available for distribution. Shares do not
have any preemptive or conversion rights. The right of redemption is described
under "About Your Account -- Selling Shares" in the Prospectus. In addition,
pursuant to the terms of the 1940 Act, the right of a shareholder to redeem
shares and the date of payment by a Portfolio may be suspended for more than
seven days (i) for any period during which the New York Stock Exchange is
closed, other than the customary weekends or holidays, or trading in the markets
the Portfolio normally utilizes is closed or is restricted as determined by the
SEC, (ii) during any emergency, as determined by the SEC, as a result of which
it is not reasonably practicable for the Portfolio to dispose of instruments
owned by it or fairly to determine the value of its net assets, or (iii) for
such other period as the SEC may by order permit for the protection of the
shareholders of the Portfolio. The Trust may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions. In addition, shares of each Portfolio are redeemable at
the unilateral option of the Trust if the Trustees determine in their sole
discretion that failure to so redeem may have material adverse consequences to
the shareholders of the Portfolio. Shares when issued as described in the
Prospectus are validly issued, fully paid and nonassessable, except as stated
below. In the interests of economy and convenience, certificates representing
shares of the Portfolios are not issued.
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The proceeds received by each Portfolio for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Portfolio. The underlying assets
of each Portfolio will be segregated on the books of account, and will be
charged with the liabilities in respect to that Portfolio and with a share of
the general liabilities of the Trust. Expenses with respect to the Portfolios
are normally allocated in proportion to the net asset value of the respective
Portfolios except where allocations of direct expenses can otherwise be fairly
made.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each investment portfolio affected by such matter. Rule 18f-2 further provides
that an investment portfolio shall be deemed to be affected by a matter unless
the interests of each investment portfolio in the matter are substantially
identical or the matter does not affect any interest of the investment
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to an investment portfolio only if approved by a majority of the
outstanding shares of such investment portfolio. However, the Rule also provides
that the ratification of the appointment of independent accountants, the
approval of principal underwriting contracts and the election of Trustees are
exempt from the separate voting requirements stated above. In addition,
shareholders of each of the classes in a particular investment portfolio have
equal voting rights except that only shares of a particular class of an
investment portfolio will be entitled to vote on matters submitted to a vote of
shareholders (if any) relating to shareholder servicing expenses and transfer
agency fees that are payable by that class.
The Trust is not required to hold annual meetings of shareholders and does
not intend to hold such meetings. In the event that a meeting of shareholders is
held, each share of the Trust will be entitled, as determined by the Trustees
without the vote or consent of shareholders, either to one vote for each share
or to one vote for each dollar of net asset value represented by such shares on
all matters presented to shareholders, including the election of Trustees (this
method of voting being referred to as "dollar-based voting"). However, to the
extent required by the 1940 Act or otherwise determined by the Trustees, series
and classes of the Trust will vote separately from each other. Shareholders of
the Trust do not have cumulative voting rights in the election of Trustees and,
accordingly, the holders of more than 50% of the aggregate voting power of the
Trust may elect all of the Trustees, irrespective of the vote of the other
shareholders. Meetings of shareholders of the Trust, or any series or class
thereof, may be called by the Trustees, certain officers or upon the written
request of holders of 10% or more of the shares entitled to vote at such
meeting. To the extent required by law, the Trust will assist in shareholder
communications in connection with a meeting called by shareholders. The
shareholders of the Trust will have voting rights only with respect to the
limited number of matters specified in the Trust Agreement and such other
matters as the Trustees may determine or may be required by law.
The Trust Agreement authorizes the Trustees, without shareholder approval
(except as stated in the next paragraph), to cause the Trust, or any series
thereof, to merge or consolidate with any corporation, association, trust or
other organization or sell or exchange all or substantially all of the property
belonging to the Trust, or any series thereof. In addition, the Trustees,
without shareholder approval, may adopt a "master-feeder" structure by investing
substantially all of the assets of a series of the Trust in the securities of
another open-end investment company or pooled portfolio.
The Trust Agreement also authorizes the Trustees, in connection with the
merger, consolidation, termination or other reorganization of the Trust or any
series or class, to classify the shareholders of any class into one or more
separate groups and to provide for the different treatment of shares held by the
different groups, provided that such merger, consolidation, termination or other
reorganization is approved by a majority of the outstanding voting securities
(as defined in the 1940 Act) of each group of shareholders that are so
classified.
The Trust Agreement permits the Trustees to amend the Trust Agreement
without a shareholder vote. However, shareholders of the Trust have the right to
vote on any amendment (i) that would adversely affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Trust Agreement; or (iv) that the
Trustees determine to submit to shareholders.
The Trust Agreement permits the termination of the Trust or of any series
or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors and
events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any series or class to maintain its
assets at an appropriate size; (ii) changes in laws or regulations
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governing the Trust, or any series or class thereof, or affecting assets of the
type in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
Under the Delaware Business Trust Act (the "Delaware Act"), shareholders
are not personally liable for obligations of the Trust. The Delaware Act
entitles shareholders of the Trust to the same limitation of liability as is
available to shareholders of private for-profit corporations. However, no
similar statutory or other authority limiting business trust shareholder
liability exists in many other states. As a result, to the extent that the Trust
or a shareholder is subject to the jurisdiction of courts in such other states,
those courts may not apply Delaware law and may subject the shareholders to
liability. To offset this risk, the Trust Agreement (i) contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
requires that notice of such disclaimer be given in each agreement, obligation
and instrument entered into or executed by the Trust or its Trustees and (ii)
provides for indemnification out of the property of the applicable series of the
Trust of any shareholder held personally liable for the obligations of the Trust
solely by reason of being or having been a shareholder and not because of the
shareholder's acts or omissions or for some other reason. Thus, the risk of a
shareholder incurring financial loss beyond his or her investment because of
shareholder liability is limited to circumstances in which all of the following
factors are present: (i) a court refuses to apply Delaware law; (ii) the
liability arises under tort law or, if not, no contractual limitation of
liability is in effect; and (iii) the applicable series of the Trust is unable
to meet its obligations.
The Trust Agreement provides that the Trustees will not be liable to any
person other than the Trust or a shareholder and that a Trustee will not be
liable for any act as a Trustee. However, nothing in the Trust Agreement
protects a Trustee against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
The Trust Agreement provides for indemnification of Trustees, officers and
agents of the Trust unless the recipient is liable by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such person's office.
The Trust Agreement provides that each shareholder, 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.
In addition to the requirements of Delaware law, the Trust Agreement
provides that a shareholder of the Trust may bring a derivative action on behalf
of the Trust only if the following conditions are met: (i) shareholders eligible
to bring such derivative action under Delaware law who hold at least 10% of the
outstanding shares of the Trust, or 10% of the outstanding shares of the series
or class to which such action relates, must join in the request for the Trustees
to commence such action; and (ii) the Trustees must be afforded a reasonable
amount of time to consider such shareholder request and to investigate the basis
of such claim. The Trust Agreement also provides that no person, other than the
Trustees, who is not a shareholder of a particular series or class shall be
entitled to bring any derivative action, suit or other proceeding on behalf of
or with respect to such series or class. The Trustees will be entitled to retain
counsel or other advisers in considering the merits of the request and may
require an undertaking by the shareholders making such request to reimburse the
Trust for the expense of any such advisers in the event that the Trustees
determine not to bring such action.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). To the extent
provided by the Trustees in the appointment of Series Trustees, Series Trustees
(i) may, but are not required to, serve as Trustees of the Trust or any other
series or class of the Trust; (ii) may have, to the exclusion of any other
Trustee of the Trust, all the powers and authorities of Trustees under the Trust
Agreement with respect to such series or class; and/or (iii) may have no power
or authority with respect to any other series or class. The Trustees are not
currently considering the appointment of Series Trustees for the Trust.
As of February 29, 2000, substantially all of the Portfolios' outstanding
shares were held of record by Northern for the benefit of its customers and the
customers of its affiliates and correspondent banks that have invested in the
Portfolios. As of the same date, Northern possessed sole or shared voting
and/or investment power for its customer accounts with respect to less than 10%
of the Trust's outstanding shares. As of the same date, the Trust's Trustees
and officers as a group owned beneficially less than 1% of the outstanding
shares of each class of each Portfolio. Northern has advised the Trust that the
following persons (whose mailing address is: c/o The Northern Trust Company, 50
South LaSalle, Chicago, IL 60675) beneficially owned five percent or more of the
outstanding shares of the Portfolios' classes as of February 29, 2000:
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<TABLE>
<CAPTION>
Number Percentage
of Shares of Shares
------------ -----------
<S> <C> <C>
BALANCED PORTFOLIO
Class A
The Northern Trust Thrift Plan 1,769,943.97 35.4%
Gregian Delight, Inc. Employee Profit 243,075.90 5.2%
Sharing & Savings Plan & Trust
Goodyear Tire & Rubber Co. 249,468.91 5.3%
Sealed Air Corp. 984,982.08 19.7%
Class C
Kitch Drutchas Wagner Kenney PC 61,847.36 100.0%
Class D
First National Bank of LaGrange 32,893.35 100.0%
DIVERSIFIED GROWTH PORTFOLIO
Class A
The Northern Trust Co. Pension Plan 3,012,666.79 33.8%
Pension Plan for the Home Office Employees 521,827.73 5.9%
A Finkl & Sons Employee Pension 469,907.92 5.3%
Seiko Corp. 665,519.78 7.5%
Class D
First National Bank of LaGrange 32,562.59 100.0%
EQUITY INDEX PORTFOLIO
Class A
The Northern Trust Thrift Plan 8,672,457.31 15.9%
Libbey-Owens-Ford Co. 3,230,929.80 5.9%
Army Air Force 2,986,047.44 5.5%
Meadows Foundation 4,800,825.02 8.8%
Class C
Wilson Sports Goods 401K Plan 1,159,621.26 23.6%
American Medical Association 401K Plan 1,579,429.08 32.2%
Clark Schwebel, Inc. 410,676.87 8.4%
U.S. Silica Co. 693,459.75 14.1%
Sierra Technologies, Inc. 330,928.70 6.7%
Children's Hospital San Diego 590,486.63 12.0%
Class D
Marquette Trust Co. 551,897.53 82.1%
Great Plains Trust Co. 81,131.36 12.1%
</TABLE>
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Number Percentage
of Shares of Shares
------------ -----------
FOCUSED GROWTH PORTFOLIO
Class A
The Northern Trust Thrift Plan 6,083,288.96 53.4%
Doe Run Resources Corp. 712,558.56 6.3%
Woodmen Home Office Employees 657,370.87 5.8%
Class C
Kitch Drutchas Wagner Kenney PC 648,737.52 100.0%
Class D
First National Bank of LaGrange 32,670.52 97.2%
MID CAP GROWTH PORTFOLIO
Class A
NISource-Bay Area VEBA 217,500.00 28.1%
Presbytery of Chicago 41,472.54 5.4%
Mercy Medical Center Foundation 66,302.97 8.6%
Merrill Merchants Bank 61,706.11 8.0%
E Nakamichi Foundation 118,938.81 15.4%
Iowa Measurement Research Foundation 108,931.81 14.1%
Class D
BankIllinois Trust Co. 30,014.25 76.6%
Great Plains Trust Co. 9,182.76 23.4%
SMALL COMPANY GROWTH PORTFOLIO
Class A
Iowa Measurement Research Foundation 96,068.25 13.4%
NISource-Bay Area VEBA 109,680.28 15.3%
Schulze & Burch Employee Pension Plan 48,169.56 6.7%
Brazos Electric 76,277.65 10.7%
Illinois Masonic 36,162.01 5.1%
NiSource - Bay State VEBA 109,680.28 24.8%
SMALL COMPANY INDEX PORTFOLIO
Class A
Saxon & Co. 1,503,407.81 7.7%
Lifepoint Hospitals, Inc. 1,139,354.70 5.9%
General Dynamics Small Cap Fund 1,819,553.03 9.4%
Pfizer 1,385,000.64 7.1%
PWC Group Investment Savings Plan 1,653,989.59 8.5%
MASCO 1,898,941.40 9.8%
Class D
BankIllinois Trust Co. 30,014.25 76.6%
Great Plains Trust Co. 9,182.76 23.4%
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<PAGE>
Number Percentage
of Shares of Shares
--------- ---------
INTERNATIONAL EQUITY INDEX PORTFOLIO
Class A
The Northern Trust Co. Pension Plan 1,491,296.58 27.7%
The Northern Trust Thrift Plan 1,271,719.59 23.6%
AutoLic ASP, Inc. 303,462.50 5.6%
NI-Gas Savings & Thrift Trust 941,227.19 17.5%
Lifepoint Hospitals, Inc. 549,540.13 10.2%
Class D
People's National Bank 1,137.92 100.0%
INTERNATIONAL GROWTH PORTFOLIO
Class A
The Northern Trust Co. Pension Plan 1,578,693.67 11.6%
White Cap, Inc. 890,541.92 6.5%
Tuthill Corp. Supplement Investment 780,135.83 5.7%
Retirement Plan
Indresco 769,865.34 5.7%
Doe Run Resources Corp. 874,281.62 6.4%
OTHER INFORMATION
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
Securities Act of 1933 with respect to the securities offered by the Trust's
Prospectus. Certain portions of the Registration Statement have been omitted
from the Prospectus and this Additional Statement pursuant to the rules and
regulations of the SEC. The Registration Statement including the exhibits filed
therewith may be examined at the office of the SEC in Washington, D.C.
Each Portfolio is responsible for the payment of its expenses. Such
expenses include, without limitation, the fees and expenses payable to Northern,
NTQA and PFPC, brokerage fees and commissions, fees for the registration or
qualification of Portfolio shares 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 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
shareholders and regulatory authorities, compensation and expenses of its
Trustees, expenses for industry organizations such as the Investment Company
Institute, miscellaneous expenses and extraordinary expenses incurred by the
Trust.
The term "majority of the outstanding shares" of either the Trust or a
particular Portfolio means, with respect to the approval of an investment
advisory agreement or a change in a fundamental investment policy, the vote of
the lesser of (i) 67% or more of the shares of the Trust or such Portfolio
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Trust or such Portfolio are present or represented by proxy, or (ii)
more than 50% of the outstanding shares of the Trust or such Portfolio.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement of
which the Prospectus and this Additional Statement form a part, each such
statement being qualified in all respects by such reference.
55
<PAGE>
FINANCIAL STATEMENTS
The audited financial statements and related report of Ernst & Young LLP,
independent auditors, contained in the annual report to the Portfolios'
shareholders for the fiscal year ended November 30, 1999 (the "Annual Report")
are hereby incorporated herein by reference and attached hereto. No other parts
of the Annual Report, including without limitation, "Management's Discussion of
Portfolio Performance," are incorporated by reference herein. Copies of the
Semi-Annual Report and the Annual Report may be obtained upon request and
without charge by calling 1-800-637-1380 (toll-free). No financial statements
are supplied for the Mid Cap Growth and Small Cap Growth Portfolios because they
did not commence operations during the period ended November 30, 1999.
56
<PAGE>
APPENDIX A
Commercial Paper Ratings
- ------------------------
A Standard & Poor's Ratings Group, Inc. ("S&P") commercial paper rating is a
current assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet
its financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are dependent
upon favorable business, financial, and economic conditions for the obligor
to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D" rating will be used
upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Moody's Investors Service, Inc. ("Moody's") commercial paper ratings are
opinions of the ability of issuers to repay punctually senior debt obligations
not having an original maturity in excess of one year, unless explicitly noted.
The following summarizes the rating categories used by Moody's for commercial
paper:
"Prime-1" - Issuers (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of
return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in
earnings coverage of fixed financial charges and high internal cash
generation; and well-established access to a range of financial markets and
assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable ability
for repayment of senior short-term debt obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability
in earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
A-1
<PAGE>
The three rating categories of Duff & Phelps Credit Rating Co. ("D&P") for
investment grade commercial paper and short-term debt are "D-1," "D-2" and
"D-3." D&P employs three designations, "D-1+," "D-1" and "D-1-," within the
highest rating category. The following summarizes the rating categories used by
D&P for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good.
Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection factors
qualify issues as to investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics. Liquidity is
not sufficient to insure against disruption in debt service. Operating
factors and market access may be subject to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA ("Fitch") short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong
credit feature.
"F2" - Securities possess good credit quality. This designation indicates a
satisfactory capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation indicates
that the capacity for timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non-
investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
"C" - Securities possess high default risk. This designation indicates that
default is a real possibility and that the capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and
economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch, Inc. ("TBW") short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
TBW:
"TBW-1" - This designation represents TBW's highest category and indicates
a very high likelihood that principal and interest will be paid on a timely
basis.
A-2
<PAGE>
"TBW-2" - This designation represents TBW's second-highest category and
indicates that while the degree of safety regarding timely repayment of
principal and interest is strong, the relative degree of safety is not as
high as for issues rated "TBW-1."
"TBW-3" - This designation represents TBW's lowest investment-grade
category and indicates that while the obligation is more susceptible to
adverse developments (both internal and external) than those with higher
ratings, the capacity to service principal and interest in a timely fashion
is considered adequate.
"TBW-4" - This designation represents TBW's lowest rating category and
indicates that the obligation is regarded as non-investment grade and
therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- -----------------------------------------------
The following summarizes the ratings used by S&P for corporate and municipal
debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to
meet its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB," but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial and economic conditions
for the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on
this obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a
A-3
<PAGE>
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
"r" - This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and municipal
long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards. Together
with the "Aaa" group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risk appear somewhat larger than
the "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they are
neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these ratings
provide questionable protection of interest and principal ("Ba" indicates
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (i) earnings of projects under construction, (ii) earnings of
projects unseasoned in operating experience, (iii) rentals which begin when
facilities are completed, or (iv) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from "Aa" through "Caa." The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the long-term debt ratings used by D&P for corporate
and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because
of economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable in periods of greater economic
stress.
A-4
<PAGE>
"BBB" - Debt possesses below-average protection factors but such protection
factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of these ratings
is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred
dividends. Debt rated "DD" is a defaulted debt obligation, and the rating
"DP" represents preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A," "BBB,"
"BB" and "B" ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch for corporate and municipal
bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of credit risk and are
assigned only in case of exceptionally strong capacity for timely payment
of financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity.
"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or
financial alternatives may be available to allow financial commitments to
be met. Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC," "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic developments. "CC"
ratings indicate that default of some kind appears probable, and "C"
ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not meeting
obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved
and "D" represents the lowest potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA ratings
from and including "AA" to "B" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major rating categories.
TBW assesses the likelihood of an untimely repayment of principal or interest
over the term to maturity of long term debt and preferred stock which are issued
by United States commercial banks, thrifts and non-bank banks; non-United States
banks; and broker-dealers. The following summarizes the rating categories used
by TBW for long-term debt ratings:
A-5
<PAGE>
"AAA" - This designation indicates that the ability to repay principal and
interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis, with limited incremental risk compared to
issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents the lowest investment-grade category
and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more vulnerable to adverse developments (both
internal and external) than obligations with higher ratings.
"BB," "B," "CCC" and "CC" - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded
as having speculative characteristics regarding the likelihood of timely
payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a plus
or minus sign designation which indicates where within the respective category
the issue is placed.
Municipal Note Ratings
- -----------------------
A S&P's rating reflects the liquidity concerns and market access risks unique to
notes due in three years or less. The following summarizes the ratings used by
S&P for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess very strong
characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest, with some vulnerability to adverse financial
and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG") and variable rate demand obligations
are designated Variable Moody's Investment Grade ("VMIG"). Such ratings
recognize the differences between short-term credit risk and long-term risk. The
following summarizes the ratings by Moody's for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins of
protection that are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt instruments in
this category lack of margins of protection.
A-6
<PAGE>
Fitch and D&P use the short-term ratings described under Commercial Paper
Ratings for municipal notes.
A-7
<PAGE>
APPENDIX B
As stated in the Prospectus, the Portfolios may enter into certain futures
transactions. Such transactions are described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established in both
the cash market and the futures market. In the cash market, bonds are purchased
and sold with payment for the full purchase price of the bond being made in
cash, generally within five business days after the trade. In the futures
market, only a contract is made to purchase or sell a bond in the future for a
set price on a certain date. Historically, the prices for bonds established in
the futures markets have tended to move generally in the aggregate in concert
with the cash market prices and have maintained fairly predictable
relationships. Accordingly, a Portfolio may use interest rate futures contracts
as a defense, or hedge, against anticipated interest rate changes. As described
below, this would include the use of futures contract sales to protect against
expected increases in interest rates and futures contract purchases to offset
the impact of interest rate declines.
A Portfolio presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by a Portfolio, by using futures contracts.
Interest rate future contracts can also be used by a Portfolio for
non-hedging (speculative) purposes to increase total return.
Description of Interest Rate Futures Contracts. An interest rate futures
contract sale would create an obligation by a Portfolio, as seller, to deliver
the specific type of financial instrument called for in the contract at a
specific future time for a specified price. A futures contract purchase would
create an obligation by a Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Portfolio's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Portfolio is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a gain,
and if the purchase price exceeds the offsetting sale price, the Portfolio
realizes a loss.
Interest rate futures contracts are traded in an auction environment on the
floors of several exchanges -- principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various financial
instruments including long-term U.S. Treasury Bonds and Notes; Government
National Mortgage Association (GNMA) modified pass-through mortgage backed
securities; three-month U.S. Treasury Bills; and ninety-day commercial paper.
The Portfolios may trade in any interest rate futures contracts for which there
exists a public market, including, without limitation, the foregoing
instruments.
B-1
<PAGE>
II. Index Futures Contracts
- ----------------------------
General. A stock or bond index assigns relative values to the stocks or
bonds included in the index, which fluctuates with changes in the market values
of the stocks or bonds included. Some stock index futures contracts are based on
broad market indexes, such as S&P's 500 Index or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the S&P's 100 Index or indexes based on an
industry or market indexes, such as S&P's 100 Index or indexes based on an
industry or market segment, such as oil and gas stocks. Futures contracts are
traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
To the extent consistent with its investment objective, a Portfolio may also
engage in transactions, from time to time, in foreign stock index futures such
as the ALL-ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100
(United Kingdom).
A Portfolio may sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. A Portfolio may do so either to hedge the value of its portfolio
as a whole, or to protect against declines, occurring prior to sales of
securities, in the value of the securities to be sold. Conversely, a Portfolio
will purchase index futures contracts in anticipation of purchases of
securities. A long futures position may be terminated without a corresponding
purchase of securities.
In addition, a Portfolio may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
A Portfolio may also sell futures contracts in connection with this strategy, in
order to protect against the possibility that the value of the securities to be
sold as part of the restructuring of the portfolio will decline prior to the
time of sale.
Index futures contracts may also be used by a Portfolio for non-hedging
(speculative) purposes to increase total return.
III. Futures Contracts on Foreign Currencies
- --------------------------------------------
A futures contract on foreign currency creates a binding obligation on one
party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of foreign currency, for an amount fixed in U.S.
dollars. Foreign currency futures may be used by a Portfolio to hedge against
exposure to fluctuations in exchange rates between the U.S. dollar and other
currencies arising from multinational transactions.
A Portfolio may also use futures contracts on foreign currencies for
non-hedging (speculative) purposes to increase total return.
IV. Margin Payments
- --------------------
Unlike purchases or sales of portfolio securities, no price is paid or
received by a Portfolio upon the purchase or sale of a futures contract.
Initially, a Portfolio will be required to deposit with the broker or in a
segregated account with a custodian or sub-custodian an amount of liquid assets,
known as initial margin, based on the value of the contract. The nature of
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Portfolio upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." For example, when a particular Portfolio
has purchased a futures contract and the price of the contract has risen in
response to a rise in the underlying instruments, that position will have
increased in value and the Portfolio will be entitled to receive from the broker
a variation margin payment equal to that increase in value. Conversely, where
the Portfolio has purchased a futures contract and the price of the future
contract has declined in response to a decrease in the underlying instruments,
the position would be less valuable and the Portfolio would be required to make
a variation margin payment to the broker. Prior to expiration of the futures
contract, Northern Trust or NTQA may elect to close the position by taking an
opposite position,
B-2
<PAGE>
subject to the availability of a secondary market, which will operate to
terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Portfolio, and the Portfolio realizes a loss or
gain.
V. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by a
Portfolio, even if the futures are used for hedging (non-speculative) purposes.
One risk arises because of the imperfect correlation between movements in the
price of the futures and movements in the price of the instruments which are the
subject of a hedge. The price of the future may move more than or less than the
price of the instruments being hedged. If the price of the futures moves less
than the price of the instruments which are the subject of the hedge, the hedge
will not be fully effective but, if the price of the instruments being hedged
has moved in an unfavorable direction, the Portfolio would be in a better
position than if it had not hedged at all. If the price of the instruments being
hedged has moved in a favorable direction, this advantage will be partially
offset by the loss on the futures. If the price of the futures moves more than
the price of the hedged instruments, the Portfolio involved will experience
either a loss or gain on the futures which will not be completely offset by
movements in the price of the instruments which are the subject of the hedge. To
compensate for the imperfect correlation of movements in the price of
instruments being hedged and movements in the price of futures contracts, a
Portfolio may buy or sell futures contracts in a greater dollar amount than the
dollar amount of instruments being hedged if the volatility over a particular
time period of the prices of such instruments has been greater than the
volatility over such time period of the futures, or if otherwise deemed to be
appropriate by the Investment Advisers. Conversely, a Portfolio may buy or sell
fewer futures contracts if the volatility over a particular time period of the
prices of the instruments being hedged is less than the volatility over such
time period of the futures contract being used, or if otherwise deemed to be
appropriate by the Investment Advisers. It is also possible that, where a
Portfolio has sold futures to hedge its portfolio against a decline in the
market, the market may advance and the value of instruments held in the
Portfolio may decline. If this occurred, the Portfolio would lose money on the
futures and also experience a decline in value in its portfolio securities.
When futures are purchased to hedge against a possible increase in the
price of securities or a currency before a Portfolio is able to invest its cash
(or cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Portfolio then concludes not to invest its cash at that
time because of concern as to possible further market decline or for other
reasons, the Portfolio will realize a loss on the futures contract that is not
offset by a reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the instruments
being hedged, the price of futures may not correlate perfectly with movement in
the cash market due to certain market distortions. First, rather than meeting
additional margin deposit requirements, investors may close futures contracts
through off-setting transactions which could distort the normal relationship
between the cash and futures markets. Second, with respect to financial futures
contracts, the liquidity of the futures market depends on participants entering
into off-setting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced thus producing distortions. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the Investment Adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the
Portfolios intend to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist for
any particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, a Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
B-3
<PAGE>
Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Successful use of futures by a Portfolio is also subject to the Investment
Advisers' ability to predict correctly movements in the direction of the market.
For example, if a particular Portfolio has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Portfolio will lose part or all of the benefit to
the increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may be, but will
not necessarily be, at increased prices which reflect the rising market. A
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
Futures purchased or sold by a Portfolio (and related options) may be
traded on foreign exchanges. Participation in foreign futures and foreign
options transactions involves the execution and clearing of trades on or subject
to the rules of a foreign board of trade. Neither the National Futures
Association nor any domestic exchange regulates activities of any foreign boards
of trade, including the execution, delivery and clearing of transactions, or has
the power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked to
a domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign options
transaction occurs. For these reasons, customers who trade foreign futures of
foreign options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the Commodity Futures Trading
Commission's ("CFTC") regulations and the rules of the National Futures
Association and any domestic exchange, including the right to use reparations
proceedings before the CFTC and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In particular, the
investments of a Portfolio in foreign futures or foreign options transactions
may not be provided the same protections in respect of transactions on United
States futures exchanges. In addition, the price of any foreign futures or
foreign options contract and, therefore the potential profit and loss thereon
may be affected by any variance in the foreign exchange rate between the time an
order is placed and the time it is liquidated, offset or exercised.
VI. Options on Futures Contracts
- ----------------------------------
A Portfolio may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Portfolio will be required to deposit initial margin and
variation margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial margin deposits.
As an example, in anticipation of a decline in interest rates, a Portfolio may
purchase call options on futures contracts as a substitute for the purchase of
futures contracts to hedge against a possible increase in the price of
securities which the Portfolio intends to purchase. Similarly, if the value of
the securities held by a Portfolio is expected to decline as a result of an
increase in interest rates, the Portfolio might purchase put options or sell
call options on futures contracts rather than sell futures contracts.
Investments in futures options involve some of the same considerations that
are involved in connection with investments in futures contracts (for example,
the existence of a liquid secondary market). See "Risks of Transactions in
Futures Contracts" above. In addition, the purchase or sale of an option also
entails the risk that changes in the value of the underlying futures contract
will not correspond to changes in the value of the option purchased. Depending
on the pricing of the option compared to either the futures contract upon which
it is based, or upon the price of the securities being hedged, an option may or
may not be less risky than ownership of the futures contract or such securities.
In general, the market
B-4
<PAGE>
prices of options can be expected to be more volatile than the market prices on
the underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to the Portfolio because the maximum
amount at risk is the premium paid for the options (plus transaction costs). The
writing of an option on a futures contract involves risks similar to those risks
relating to the sale of futures contracts.
VII. Other Matters
- -------------------
Each Portfolio intends to comply with the regulations of the CFTC exempting
it from registration as a "Commodity Pool Operator." Accounting for futures
contracts will be in accordance with generally accepted accounting principles.
B-5
<PAGE>
NORTHERN
--------
INSTITUTIONAL
FUNDS
Money Market Portfolios
Shares
APRIL 1, 2000
Prospectus
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Northern Institutional Funds
- --------------------------------------------------------------------------------
MONEY MARKET . Government Select Portfolio
PORTFOLIOS SHARES ----------------------------------------------------------
. Government Portfolio
----------------------------------------------------------
. Diversified Assets Portfolio
----------------------------------------------------------
. Tax-Exempt Portfolio
----------------------------------------------------------
. Municipal Portfolio
----------------------------------------------------------
Prospectus dated April 1, 2000
An investment in a Portfolio is not a deposit of any bank
and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Although each of the Portfolios seeks to preserve the
value of your investment at $1.00 per share, it is
possible to lose money by investing in the Portfolios.
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy
of this Prospectus. Any representation to the contrary is
a criminal offense.
<PAGE>
Contents
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------
OVERVIEW 4
- -----------------------------------------------------------------------------------------------------------
RISK/RETURN SUMMARY Portfolios
.......................................................................
Information about the Government Select Portfolio 5
objectives, principal .......................................................................
strategies and risk Government Portfolio 6
characteristics of .......................................................................
each Portfolio Diversified Assets Portfolio 7
.......................................................................
Tax-Exempt Portfolio 8
.......................................................................
Municipal Portfolio 9
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Principal Investment Risks 10
---------------------------------------------------------------------------
Portfolio Performance 12
.......................................................................
Government Select Portfolio 13
.......................................................................
Government Portfolio 14
.......................................................................
Diversified Assets Portfolio 15
.......................................................................
Tax-Exempt Portfolio 16
.......................................................................
Portfolio Fees and Expenses 17
- -----------------------------------------------------------------------------------------------------------
MANAGEMENT OF THE Investment Adviser 20
PORTFOLIOS ---------------------------------------------------------------------------
Advisory Fees 21
---------------------------------------------------------------------------
Details that apply Other Portfolio Services 21
to the Portfolios as
a group
- -----------------------------------------------------------------------------------------------------------
ABOUT YOUR ACCOUNT Purchasing and Selling Shares 22
.......................................................................
How to open, maintain Investors 22
and close an account ......................................................................
Share Classes 22
.......................................................................
Opening an Account 23
.......................................................................
Selling Shares 24
---------------------------------------------------------------------------
Account Policies and Other Information 25
.......................................................................
Automatic Investment Arrangements 25
.......................................................................
Purchase and Redemption Minimums 25
.......................................................................
</TABLE>
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Calculating Share Price 25
.......................................................................
Timing of Purchase Requests 25
.......................................................................
Tax Identification Number 26
.......................................................................
In-Kind Purchases and Redemptions 26
.......................................................................
Miscellaneous Purchase Information 26
.......................................................................
Timing of Redemption and Exchange Requests 26
.......................................................................
Miscellaneous Redemption Information 27
.......................................................................
Exchange Privileges 27
.......................................................................
Telephone Transactions 27
.......................................................................
Advance Notification of Large Transactions 27
.......................................................................
Making Changes to Your Account Information 28
.......................................................................
Business Day 28
.......................................................................
Early Closings 28
.......................................................................
Authorized Intermediaries 28
.......................................................................
Information About Institutions 28
.......................................................................
Shareholder Communications 28
---------------------------------------------------------------------------
Distributions and Taxes 29
.......................................................................
Distributions 29
.......................................................................
Taxes 29
.......................................................................
Other Tax Information 30
- -----------------------------------------------------------------------------------------------------------
RISKS, Risks, Securities and Techniques 31
SECURITIES AND .......................................................................
TECHNIQUES Shareholder Communication 32
- -----------------------------------------------------------------------------------------------------------
APPENDIX Portfolio Financial Highlights 39
.......................................................................
- -----------------------------------------------------------------------------------------------------------
FOR MORE INFORMATION Annual/Semiannual Reports 44
---------------------------------------------------------------------------
Statement of Additional Information 44
</TABLE>
<PAGE>
Overview
Northern Institutional Funds (the "Trust") offers five money market portfolios
(each a "Portfolio") to institutional investors. Each Portfolio is authorized to
offer three classes of shares: Shares, Service Shares and Premier Shares.
Service Shares and Premier Shares are described in a separate prospectus.
The descriptions on the following pages may help you choose the Portfolio that
best fits your investment needs. Keep in mind, however, that no Portfolio can
guarantee it will meet its investment objective and no Portfolio should be
relied upon as a complete investment program. The Trust's six fixed income, one
balanced and nine equity portfolios are described in a separate prospectus.
The Portfolios seek to maintain a stable net asset value of $1.00 per share.
Consistent with this policy, each of the Portfolios:
. Limits its dollar-weighted average portfolio maturity to 90 days or less;
. Buys securities with remaining maturities of 397 days or less (except for
certain variable and floating rate instruments and securities collateralizing
repurchase agreements); and
. Invests only in U.S. dollar-denominated securities that represent minimal
credit risks.
In addition, each Portfolio limits its investments to "Eligible Securities" as
defined by the Securities and Exchange Commission ("SEC"). Eligible Securities
include, generally, securities that either (a) have short-term debt ratings at
the time of purchase in the two highest rating categories or (b) are issued or
guaranteed by, or otherwise allow a Portfolio to demand payment from, an issuer
with those ratings. Securities that are unrated (including securities of issuers
that have long-term but not short-term ratings) may be deemed to be Eligible
Securities if they are determined to be of comparable quality by The Northern
Trust Company ("Northern") under the direction of the Board of Trustees.
Securities that are in the highest short-term rating category (and comparable
unrated securities) are called "First Tier Securities." Under normal
circumstances, the Government Select, Government and Diversified Assets
Portfolios intend to limit purchases of securities to First Tier Securities.
Securities in which the Portfolios may invest may not earn as high a level of
income as long-term or lower quality securities, which generally have greater
market risk and more fluctuation in market value.
In addition to the instruments described above and on the pages below, each
Portfolio may use various investment techniques in seeking its investment
objective. You can learn more about these techniques and related risks by
reading "Risks, Securities and Techniques" beginning on page 31 of this
Prospectus and the Statement of Additional Information.
4
<PAGE>
RISK/RETURN SUMMARY
Government Select Portfolio
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Portfolio seeks to maximize current income to the extent consistent with the
preservation of capital and maintenance of liquidity by investing exclusively in
high-quality money market instruments.
- -------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies
The Portfolio seeks its objective by investing exclusively in securities issued
or guaranteed as to principal and interest by the U.S. government, its agencies
or instrumentalities. Under normal market conditions, the Portfolio will seek to
acquire only those U.S. government securities the interest upon which is
generally exempt from state income taxation. These securities include
obligations issued by the U.S. Treasury and certain U.S. government agencies and
instrumentalities, such as the Federal Home Loan Bank and the Federal Farm
Credit Banks Funding Corp.
When appropriate securities which are exempt from state taxes are unavailable,
the Portfolio may also invest in non-exempt U.S. government securities and cash
equivalents including money market funds and time deposits with a maturity of
three months or less, and hold uninvested cash.
Risks
These primary investment risks apply to the Portfolio: stable NAV risk, interest
rate risk, prepayment (or call) risk, debt extension risk, Government securities
risk, guarantor (or credit enhancement) risk, management risk and liquidity
risk. These and other risks are summarized on page 10.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 31 of this
Prospectus.
5
<PAGE>
Government Portfolio
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Portfolio seeks to maximize current income to the extent consistent with the
preservation of capital and maintenance of liquidity by investing exclusively in
high-quality money market instruments.
- -------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies
The Portfolio seeks its objective by investing in marketable securities issued
or guaranteed as to principal and interest by the U.S. government, its agencies
or instrumentalities, and repurchase agreements backed by such securities. The
Portfolio may invest up to 35% of its total assets in custodial receipts (such
as TIGRs and CATS) representing interests in U.S. government securities.
Risks
These primary investment risks apply to the Portfolio: stable NAV risk, interest
rate risk, prepayment (or call) risk, debt extension risk, Government securities
risk, guarantor (or credit enhancement) risk, management risk and liquidity
risk. These and other risks are summarized on page 10.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 31 of this
Prospectus.
6
<PAGE>
RISK/RETURN SUMMARY
Diversified Assets Portfolio
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Portfolio seeks to maximize current income to the extent consistent with the
preservation of capital and maintenance of liquidity by investing exclusively in
high-quality money market instruments.
- ------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies
The Portfolio seeks its objective by investing in a broad range of government,
bank and commercial obligations that are available in the money markets,
including:
. U.S. dollar-denominated obligations of U.S. banks with total assets in excess
of $1 billion (including obligations of foreign branches of such banks);
. U.S. dollar-denominated obligations of foreign commercial banks where such
banks have total assets in excess of $5 billion;
. High-quality commercial paper and other obligations issued or guaranteed by
U.S. and foreign corporations and other issuers;
. Corporate bonds, notes, paper and other instruments that are of high quality;
. Asset-backed securities (such as credit card and automobile receivables);
. Securities issued or guaranteed as to principal and interest by the U.S.
government or by its agencies or instrumentalities and custodial receipts
with respect thereto;
. U.S. dollar-denominated securities issued or guaranteed by one or more
foreign governments or political subdivisions, agencies or instrumentalities;
. Repurchase agreements relating to the above instruments; and
. Municipal securities issued or guaranteed by state or local governmental
bodies.
Risks
These primary investment risks apply to the Portfolio: stable NAV risk, interest
rate risk, credit (or default) risk, guarantor (or credit enhancement) risk,
management risk, liquidity risk, prepayment (or call) risk, debt extension risk
and foreign securities risk. These and other risks are summarized on page 10.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 31 of this
Prospectus.
7
<PAGE>
Tax-Exempt Portfolio
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Portfolio seeks to provide its shareholders, to the extent consistent with
the preservation of capital and prescribed portfolio standards, with a high
level of income exempt from Federal income tax by investing primarily in
municipal instruments.
- ------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies
The Portfolio seeks to achieve its objective by investing primarily in high-
quality short-term instruments, the interest on which is exempt from Federal
income tax ("municipal instruments"). The high level of income sought by the
Portfolio is relative to yields currently available in the tax-exempt
marketplace. Municipal instruments may include:
. Fixed and variable rate notes and similar debt instruments;
. Asset-backed securities which are considered municipal instruments (such as
trust certificates backed by municipal bonds);
. Tax-exempt commercial paper;
. Rated and unrated municipal bonds, notes, paper or other instruments; and
. Municipal bonds and notes which are guaranteed as to principal and interest or
backed by the U.S. government or its agencies or instrumentalities.
Under normal market conditions, at least 80% of the Portfolio's net assets will
be invested in municipal instruments. Interest earned by the Portfolio on AMT
obligations ("private activity bonds") the interest on which may be treated as
an item of tax preference to shareholders under the Federal alternative minimum
tax, will not be deemed to have been derived from municipal instruments for the
purposes of determining whether the Portfolio meets this policy. For
shareholders subject to AMT, a limited portion of the Portfolio's dividends may
be subject to Federal tax.
During extraordinary circumstances, however, the Portfolio may take a temporary
defensive posture and hold uninvested cash or invest in AMT obligations and
taxable short-term securities without limitation. During temporary defensive
periods the Portfolio may not achieve its investment objective.
Taxable investments will consist exclusively of those instruments that may be
purchased by the Diversified Assets Portfolio including U.S. dollar-denominated
obligations of U.S. banks, foreign commercial banks and securities issued or
guaranteed by foreign governments; high quality commercial paper and other
obligations; high quality corporate bonds and notes; asset-backed securities;
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and custodial receipts with respect thereto; and repurchase
agreements relating to the above instruments.
Risks
These primary investment risks apply to the Portfolio: stable NAV risk, interest
rate risk, credit (or default) risk, guarantor (or credit enhancement) risk,
management risk, liquidity risk, prepayment (or call) risk, debt extension risk,
project/industrial development bond risk and tax risk. These and other risks are
summarized on page 10.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 31 of this
Prospectus.
8
<PAGE>
RISK/RETURN SUMMARY
Municipal Portfolio
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Portfolio seeks to provide, to the extent consistent with the preservation
of capital, a high level of income exempt from regular Federal income tax by
investing primarily in municipal instruments. This objective may be changed
without shareholder approval.
- -------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies
The Portfolio seeks to achieve its objective by investing primarily in high-
quality short-term municipal instruments. The high level of income sought by the
Portfolio is relative to yields currently available in the tax-exempt
marketplace. Municipal instruments may include:
. Fixed and variable rate notes and similar debt instruments;
. Asset-backed securities which are considered municipal instruments (such as
trust certificates backed by municipal bonds);
. Tax-exempt commercial paper;
. Rated and unrated municipal bonds, notes, paper or other instruments; and
. Municipal bonds and notes which are guaranteed as to principal and interest
or backed by the U.S. government or its agencies or instrumentalities.
Under normal circumstances, at least 80% of the Portfolio's net assets will be
invested in municipal instruments. Subject to this limitation, the Portfolio may
hold uninvested cash and invest in taxable instruments. During temporary
defensive periods, however, all or any portion of the Portfolio's assets may be
held uninvested or invested in taxable instruments. During temporary defensive
periods the Portfolio may not achieve its investment objective.
The Portfolio is not limited in the amount of its assets that may be invested in
AMT obligations ("private activity bonds") the interest on which may be treated
as an item of tax preference to shareholders under the Federal alternative
minimum tax. For shareholders subject to AMT, a significant portion of the
Portfolio's dividends may be subject to Federal tax. The Portfolio does not
currently intend to invest in AMT obligations. The Portfolio retains, however,
the ability to invest any or all of its assets in AMT obligations, and may do so
in the future.
Taxable investments will consist exclusively of those instruments that may be
purchased by the Diversified Assets Portfolio including U.S. dollar-denominated
obligations of U.S. banks, foreign commercial banks and securities issued or
guaranteed by foreign governments; high quality commercial paper and other
obligations; high quality corporate bonds and notes; asset-backed securities;
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and custodial receipts with respect thereto; and repurchase
agreements relating to the above instruments.
Risks
These primary investment risks apply to the Portfolio: stable NAV risk, interest
rate risk, credit (or default) risk, guarantor (or credit enhancement) risk,
management risk, liquidity risk, prepayment (or call) risk, debt extension risk,
project/industrial development bond risk and tax risk. These and other risks are
summarized on page 10.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page 31 of this
Prospectus.
9
<PAGE>
Principal Investment Risks
All investments carry some degree of risk which will affect the value of a
Portfolio's investments, investment performance, yield and the price of its
shares.
An investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although each of the Portfolios seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Portfolios.
The following summarizes the principal risks that may affect the Portfolios.
- ------------------------------------------------------------------------------
RISKS THAT APPLY TO ALL PORTFOLIOS
Stable NAV risk is the risk that a Portfolio will not be able to maintain a net
asset value per share of $1.00 at all times.
Interest rate risk is the risk that during periods of rising interest rates, a
Portfolio's yield (and the market value of its securities) will tend to be lower
than prevailing market rates; in periods of falling interest rates, a
Portfolio's yield (and the market value of its securities) will tend to be
higher.
Guarantor (or Credit enhancement) risk is the risk that changes in credit
quality of a U.S. or foreign bank, insurance company or other financial
institution could cause a Portfolio's investments in securities backed by
letters of credit or other credit enhancements issued by such bank or
institution to decline in value.
Management risk is the risk that a strategy used by the investment management
team may fail to produce the intended results.
Liquidity risk is the risk that a Portfolio will not be able to pay redemption
proceeds on the same Business Day that shares are redeemed, because of unusual
market conditions, an unusually high volume of redemption requests or other
reasons.
10
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------------------------------------------------
RISK THAT APPLIES PRIMARILY TO THE GOVERNMENT SELECT AND GOVERNMENT PORTFOLIOS
Government securities risk is the risk that the U.S. government will not provide
financial support to U.S. government agencies, instrumentalities or sponsored
enterprises if it is not obligated to do so by law.
- -------------------------------------------------------------------------------
RISKS THAT APPLY PRIMARILY TO THE DIVERSIFIED ASSETS, TAX-EXEMPT AND MUNICIPAL
PORTFOLIOS
Credit (or Default) risk is the risk that an issuer of fixed income securities
held by the Portfolio may default on its obligation to pay interest and repay
principal. Generally, the lower the credit rating of a security, the greater the
risk that the issuer of the security will default on its obligation. High-
quality securities are generally believed to have relatively low degrees of
credit risk.
Prepayment (or Call) risk is the risk that an issuer will exercise its right to
pay principal on an obligation held by a Portfolio (such as an asset-backed
security) earlier than expected. This may happen during a period of declining
interest rates. Under these circumstances, a Portfolio may be unable to recoup
all of its initial investment and will suffer from having to reinvest in lower
yielding securities. The loss of higher yielding securities and the reinvestment
at lower interest rates can reduce a Portfolio's income.
Debt extension risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by the Portfolio (such as an asset-backed
security) later than expected. This may happen during a period of rising
interest rates. Under these circumstances, the value of the obligation will
decrease and a Portfolio will suffer from the inability to invest in higher
yielding securities.
- -------------------------------------------------------------------------------
RISKS THAT APPLY TO THE TAX-EXEMPT AND MUNICIPAL PORTFOLIOS
Project/industrial development bond risk is the risk that a Portfolio may be
more sensitive to an adverse economic, business or political development if it
invests more than 25% of its assets in municipal instruments the interest upon
which is paid solely from revenues of similar projects, or in industrial
development bonds.
Tax risk is the risk that future legislative or administrative changes or court
decisions may materially affect the ability of the Portfolio to pay tax-exempt
dividends.
- -------------------------------------------------------------------------------
RISK THAT APPLIES TO THE DIVERSIFIED ASSETS PORTFOLIO
Foreign securities risk is the risk that a foreign security, even if it is a
U.S. dollar-denominated foreign security, could lose value as a result of
political, financial and economic events in foreign countries, less stringent
foreign securities regulations and accounting and disclosure standards, or other
factors.
More information about the risks of investing in the Portfolios is provided in
"Risks, Securities and Techniques" beginning on page 31. You should
carefully consider the risks discussed in these sections before investing in a
Portfolio.
11
<PAGE>
Portfolio Performance
The bar charts and tables that follow provide an indication of the risks of
investing in a Portfolio by showing changes in the performance of a
Portfolio's Shares from year to year. The bar charts and tables assume
reinvestment of dividends and distributions. A Portfolio's past performance
is not necessarily an indication of how the Portfolio will perform in the
future. Performance reflects certain expense limitations (as set forth in
the Footnotes to the "Portfolio Fees and Expenses" table on page 18 that
were in effect during the periods presented. If expense limitations were
not in place, a Portfolio's performance would have been reduced. The bar
charts and tables have been omitted for the Municipal Portfolio because the
Portfolio has been in operation for less than one calendar year.
12
<PAGE>
RISK/RETURN SUMMARY
GOVERNMENT SELECT PORTFOLIO
Calendar Year Total Return
5.95% 3.68% 3.04% 4.09% 5.82% 5.29% 5.44% 5.40% 4.99%
1991 1992 1993 1994 1995 1996 1997 1998 1999
Best and Worst
Quarterly Performance:
Best Quarter Return
Q4 `91
+1.70%
Q2 `93
+0.74%
Worst Quarter Return
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
Inception
1-Year 5-Year (11/7/90)
- --------------------------------------------------------------------------------
Government Select Portfolio 4.99% 5.38% 4.89%
- --------------------------------------------------------------------------------
The 7-day yield for Shares of the Portfolio as of December 31, 1999: 5.23%.
You may call 1-800-637-1380 to obtain the current 7-day yield.
13
<PAGE>
Portfolio Performance continued
GOVERNMENT PORTFOLIO
Calendar Year Total Return
8.13% 6.10% 3.84% 2.94% 3.93% 5.65% 5.17% 5.34% 5.30% 4.90%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Best and Worst
Quarterly Performance:
Best Quarter Return
Q3 `90
+3.31%
Q2 `93
+0.72%
Worst Quarter Return
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
Inception
1-Year 5-Year 10-Year (10/29/85)
- --------------------------------------------------------------------------------
Government Portfolio 4.90% 5.27% 5.49% 6.63%
- --------------------------------------------------------------------------------
The 7-day yield for Shares of the Portfolio as of December 31, 1999: 5.26%.
You may call 1-800-637-1380 to obtain the current 7-day yield.
14
<PAGE>
RISK/RETURN SUMMARY
DIVERSIFIED ASSETS PORTFOLIO
Calendar Year Total Return
8.27% 6.14% 3.71% 3.02% 4.05% 5.79% 5.28% 5.45% 5.40% 5.02%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Best and Worst
Quarterly Performance:
Best Quarter Return
Q3 `90
+3.32%
Q2 `93
+0.73%
Worst Quarter Return
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
Inception
1-Year 5-Year 10-Year (7/27/82)
- --------------------------------------------------------------------------------
Diversified Assets Portfolio 5.02% 5.39% 5.58% 5.99%
- --------------------------------------------------------------------------------
The 7-day yield for Shares of the Portfolio as of December 31, 1999: 5.53%.
You may call 1-800-637-1380 to obtain the current 7-day yield.
15
<PAGE>
Portfolio Performance continued
TAX-EXEMPT PORTFOLIO
Calendar Year Total Return
5.86% 4.54% 2.91% 2.27% 2.61% 3.73% 3.33% 3.45% 3.29% 2.98%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Best and Worst
Quarterly Performance:
Best Quarter Return
Q2 `90
+1.47%
Q1 `94
+0.52%
Worst Quarter Return
Average Annual Total Return
(for the periods ended December 31, 1999)
Since
Inception
1-Year 5-Year 10-Year (8/12/83)
- --------------------------------------------------------------------------------
Tax-Exempt Portfolio 2.98% 3.36% 3.53% 3.66%
- --------------------------------------------------------------------------------
The 7-day yield for Shares of the Portfolio as of December 31, 1999: 4.03%.
You may call 1-800-637-1380 to obtain the current 7-day yield.
16
<PAGE>
RISK/RETURN SUMMARY
Portfolio Fees and Expenses
This table describes the fees and expenses that you may pay if you buy
and hold Shares of the Portfolios. Please note that it does not
reflect any charges which may be imposed by Northern, its affiliates,
correspondent banks and other institutions on their Customers (as
defined on page 22. (For more information, please see "Account
Policies and Other Information" on page 25.
Shareholder Fees (fees paid directly from your investment)
----------------------------------------------------------------------
<TABLE>
<CAPTION>
Sales Charge
Sales Charge (Load)
(Load) Imposed on
Imposed on Deferred Sales Reinvested Redemption Exchange
Purchases Charge (Load) Distributions Fees Fees
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government Select None None None None None
- -----------------------------------------------------------------------------------------------------------------------------------
Government None None None None None
- ----------------------------------------------------------------------------------------------------------------------------------
Diversified Assets None None None None None
- ----------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt None None None None None
- ----------------------------------------------------------------------------------------------------------------------------------
Municipal None None None None None
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Portfolio Fees and Expenses continued
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)/1/
-------------------------------------------------------
<TABLE>
<CAPTION>
Total
Annual
Portfolio
Management Distribution Other Operating
Portfolio Fees/2/ (12b-1) Fees Expenses/3/ Expenses/4/
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Select 0.25% None 0.13% 0.38%
- --------------------------------------------------------------------------------------------------------
Government 0.25% None 0.13% 0.38%
- --------------------------------------------------------------------------------------------------------
Diversified Assets 0.25% None 0.13% 0.38%
- --------------------------------------------------------------------------------------------------------
Tax-Exempt 0.25% None 0.14% 0.39%
- --------------------------------------------------------------------------------------------------------
Municipal 0.25% None 0.14% 0.39%
- --------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes /1/ The Municipal Portfolio's annual operating expenses
are based on actual fees and estimated expenses for
the current fiscal year.
/2/ For the fiscal year ended November 30, 1999,
Northern voluntarily waived a portion of its
management fee for the Government Select Portfolio.
As a result of the fee waiver, actual management
fees paid by the Government Select Portfolio were
0.10% of the Portfolio's average daily net assets.
As of the date of this Prospectus, the actual
management fees paid by both the Government Select
and Municipal Portfolios were 0.10% of each
Portfolio's average daily net assets as a result of
fee waivers. Fee waivers may be terminated at any
time at the option of Northern.
/3/ "Other Expenses" include administration or co-
administration fees and all other ordinary
operating expenses of each Portfolio not listed
above. Northern and PFPC Inc., formerly First Data
Investor Services Group, Inc. ("PFPC"), are the
Portfolios' co-administrators, and are entitled to
a co-administration fee from the Portfolios at the
annual rate of 0.10% of the average daily net
assets of each Portfolio. Under their Co-
Administration Agreement with the Trust, which may
be amended without shareholder approval, the co-
administrators have agreed to reimburse expenses
(including fees payable to Northern and PFPC as co-
administrators, but excluding management fees,
transfer agency fees, servicing fees and
extraordinary expenses) which exceed on an
annualized basis 0.10% of each Portfolio's average
daily net assets. As a result of the expense
reimbursement, "Other Expenses" are currently 0.10%
of each Portfolio's average daily net assets.
/4/ As a result of the fee waivers and expense
reimbursements, the actual management fees,
distribution (12b-1) fees, other operating expenses
and total annual operating expenses for each
Portfolio for the fiscal year ended November 30,
1999 were as set forth below. Fee waivers (and
voluntary expense reimbursements, if applicable)
may be terminated at any time at the option of
Northern. If this occurs, "Total Annual Portfolio
Operating Expenses" may increase without
shareholder approval.
18
<PAGE>
RISK/RETURN SUMMARY
<TABLE>
<CAPTION>
Total
All Other Annual
Management Distribution Other Operating
Shares Fees (12b-1) Fees Expenses Expenses
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Select 0.10% 0.00% 0.10% 0.20%
- --------------------------------------------------------------------------------------------------------
Government 0.25% 0.00% 0.10% 0.35%
- --------------------------------------------------------------------------------------------------------
Diversified Assets 0.25% 0.00% 0.10% 0.35%
- --------------------------------------------------------------------------------------------------------
Tax-Exempt 0.25% 0.00% 0.10% 0.35%
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE The following Example is intended to help you compare the
cost of investing in Shares of a Portfolio (without fee
waivers and expense reimbursements) with the cost of
investing in other mutual funds.
The Example assumes that you invest $10,000 in a Portfolio
for the time periods indicated (with reinvestment of all
dividends and distributions) and then redeem all of your
Shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that a
Portfolio's operating expenses remain the same. Although
your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Select
Shares $ 39 $122 $213 $480
------------------------------------------------------------------------------
Government
Shares $ 39 $122 $213 $480
------------------------------------------------------------------------------
Diversified Assets
Shares $ 39 $122 $213 $480
------------------------------------------------------------------------------
Tax-Exempt
Shares $ 40 $125 $219 $493
------------------------------------------------------------------------------
Municipal
Shares $ 40 $125 N/A N/A
------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Investment Adviser
The Northern Trust Company ("Northern" or the "Investment Adviser"),
an Illinois state-chartered bank and member of the Federal Reserve
System, serves as investment adviser for the Portfolios. The
Investment Adviser is located at 50 South LaSalle Street, Chicago,
Illinois 60675 and is a wholly-owned subsidiary of Northern Trust
Corporation, a bank holding company. As of December 31, 1999, Northern
Trust Corporation and its subsidiaries had approximately $28.7 billion
in assets, $21.4 billion in deposits and employed over 8,500 persons.
Northern has for more than 100 years managed the assets of
individuals, charitable organizations, foundations and large corporate
investors. Northern and its affiliates administrated in various
capacities (including as master trustee, investment manager or
custodian) approximately $1.5 trillion of assets as of December 31,
1999, including approximately $299.1 billion of assets for which
Northern and its affiliates had investment management responsibility.
Under its Advisory Agreement with the Trust, the Investment Adviser,
subject to the general supervision of the Trust's Board of Trustees,
is responsible for making investment decisions for the Portfolios and
for placing purchase and sale orders for portfolio securities.
20
<PAGE>
MANAGEMENT OF THE PORTFOLIOS
Advisory Fees
As compensation for its advisory services and its assumption of
related expenses, the Investment Adviser is entitled to an
advisory fee from the Portfolios, computed daily and payable
monthly, at annual rates set forth in the table below (expressed
as a percentage of each Portfolio's respective average daily net
assets). The table also reflects the advisory fees (after
voluntary fee waivers) paid by the Portfolios as a percentage of
net assets for the fiscal year ended November 30, 1999.
<TABLE>
<CAPTION>
Advisory Fee Paid
Contractual for Fiscal Year
Portfolio Rate Ended 11/30/99
---------------------------------------------------------------------------------------
<S> <C> <C>
Government Select 0.25% 0.10%
---------------------------------------------------------------------------------------
Government 0.25% 0.25%
---------------------------------------------------------------------------------------
Diversified Assets 0.25% 0.25%
---------------------------------------------------------------------------------------
Tax-Exempt 0.25% 0.25%
---------------------------------------------------------------------------------------
Municipal 0.25% N/a
---------------------------------------------------------------------------------------
</TABLE>
The difference, if any, between the contractual advisory fees and
the actual advisory fees paid by the Portfolios reflects that the
Investment Adviser did not charge the full amount of the advisory
fees to which it would have been entitled. The Investment Adviser
may discontinue or modify its voluntary limitations in the future
at its discretion.
Other Portfolio Services
- --------------------------------------------------------------------------------
Northern also serves as transfer agent ("Transfer Agent") and
custodian for each Portfolio. As Transfer Agent, Northern
performs various servicing functions, and any shareholder
inquiries should be directed to it. The fees that Northern
receives for its services in those capacities are described in
the Statement of Additional Information. Northern and PFPC act as
co-administrators for each Portfolio. The fees that Northern and
PFPC receive for their co-administrative services are described
on page 18 under "Portfolio Fees and Expenses."
21
<PAGE>
Purchasing and Selling Shares
- --------------------------------------------------------------------------------
INVESTORS Institutional investors, which are acting on their own
behalf or on behalf of their customers, clients,
employees, participants and others ("Customers") may
invest in the Shares of each Portfolio through their
institutional accounts at Northern or an affiliate.
They may also establish accounts directly with the
Trust. There is no sales charge imposed on investments.
Institutional investors ("Institutions") include:
[_] Northern and its affiliates;
[_] Defined contribution plans having at least $30
million in assets or annual contributions of at
least $5 million; and
[_] Other institutions and organizations.
- --------------------------------------------------------------------------------
SHARE Each Portfolio offers three classes of shares: Shares,
CLASSES Service Shares and Premier Shares. Service Shares and
Premier Shares are described in a separate prospectus.
[_] Shares do not provide for payments by the
Portfolio to Institutions for administrative
support or shareholder liaison services.
[_] Service Shares are designed for Institutions that
agree with the Portfolio to provide (or arrange
for the provision of) administrative support
services to Customers.
[_] Premier Shares are designed for Institutions that
agree with the Portfolio to provide (or arrange
for the provision of) administrative support and
shareholder liaison services to Customers.
Shares of each class bear their pro rata portion of all
operating expenses paid by a Portfolio, except amounts
payable under the Service Plan that has been adopted
for the Portfolio's Service Shares and Premier Shares
and transfer agency fees. Because of these class-
specific expenses, the performance of the Shares of a
Portfolio described in this Prospectus is expected to
be higher than the performance of both the Service
Shares and Premier Shares of the same Portfolio and the
performance of a Portfolio's Service Shares is expected
to be higher than the performance of the same
Portfolio's Premier Shares.
22
<PAGE>
ABOUT YOUR ACCOUNT
- -------------------------------------------------------------------------------
OPENING AN You may purchase Shares of each Portfolio through
ACCOUNT your institutional account at Northern (or an
affiliate) or you may open an account directly
with the Trust with a minimum initial investment
of $5 million in one or more portfolios of the
Trust. This minimum does not apply, however, to
Shares purchased through a Northern cash sweep
program. There is no minimum for subsequent
investments.
Through an Institutional Account. If you are
opening an institutional account at Northern, a
Northern representative can assist you with all
phases of your investment. To purchase Shares
through your account, contact your Northern
representative for further information.
Directly from the Trust. An Institution may open a
shareholder account and purchase Shares directly
from the Trust as described in this Prospectus.
--------------------------------------------------
By Mail.
Read this Prospectus carefully. Complete and sign
the new account application.
Include a certified corporate resolution (or other
acceptable evidence of authority).
Enclose a check or Federal Reserve draft payable
to the specific Portfolio. If investing in more
than one Portfolio, please include a separate
check for each.
Mail your check, corporate resolution and
completed application to:
Northern Institutional Funds
c/o The Northern Trust Company
P.O. Box 75943
Chicago, Illinois 60675-5943
All checks must be payable in U.S. dollars and
drawn on a bank located in the United States. Cash
and third party checks are not acceptable.
--------------------------------------------------
By Telephone.
Read this Prospectus carefully. Call the Transfer
Agent at 1-800-637-1380.
To open a new account please provide:
[_] The name of the Portfolio in which you'd like
to invest
[_] The number of Shares or dollar amount to be
invested
[_] The method of payment
To add to an existing account, please provide:
[_] The Institution's name
[_] Your Account Number
--------------------------------------------------
By Wire or Automated Clearing House Transfer ("ACH
Transfer").
To open a new account:
Call the Transfer Agent at 1-800-637-1380 for
instructions.
For more information about the purchase of Shares,
call the Transfer Agent at 1-800-637-1380.
To add to an existing account:
Have your bank 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 No.)
(Reference Shareholder's Name)
23
<PAGE>
- --------------------------------------------------------------------------------
SELLING Through an Institutional Account.
SHARES Institutions may sell (redeem) Shares through
their institutional account by contacting their
Northern account representative.
Directly through the Trust. Institutions that
purchase Shares directly from the Trust may redeem
their Shares through the Transfer Agent in one of
the following ways:
--------------------------------------------------
By Mail.
Send a written request to:
Northern Institutional Funds
c/o The Northern Trust Company
P.O. Box 75943
Chicago, Illinois 60675-5943
The letter of instruction must include:
[_] The signature of a duly authorized person
[_] Your account number
[_] The name of the Portfolio
[_] The number of Shares or the dollar amount to
be redeemed
--------------------------------------------------
By Telephone.
[_] Call the Transfer Agent at 1-800-637-1380 for
instructions.
[_] During periods of unusual economic or market
activity, telephone redemptions may be
difficult to implement. In such event,
shareholders should follow the procedures
outlined above under "Selling Shares By
Mail."
--------------------------------------------------
By Wire.
[_] Call the Transfer Agent at 1-800-637-1380 for
instructions.
[_] You must have given authorization for
expedited wire redemption.
[_] The minimum amount that may be redeemed by
this method is $10,000.
24
<PAGE>
ABOUT YOUR ACCOUNT
Account Policies and Other Information
- -------------------------------------------------------------------------------
Automatic Investment Arrangements. Institutions may purchase Shares through
their institutional accounts at Northern either by directing automatic
investment of cash balances in excess of certain agreed upon amounts or by
directing investments from time to time on a non-automatic basis. Northern will
place a purchase order generated under an automatic investment direction either
on the Business Day that funds are available in the account or on the next
Business Day, depending upon the terms of the automatic investment arrangement.
Similarly, Northern will place a redemption order generated under an automatic
investment direction either on the Business Day Northern calculates the
redemption amount needed to bring the account balance up to the agreed upon
amount or on the next Business Day, depending upon the terms of the automatic
investment arrangement. If a redemption order is placed on the next Business
Day, Northern will normally provide funds by provisionally crediting the
Institution's account on the day the calculation is made. Institutions should
contact Northern for more information about their automatic investment
arrangements.
Purchase and Redemption Minimums. There is a minimum initial investment of $5
million in a Portfolio and one or more other investment portfolios of the Trust.
This minimum does not apply, however, to Shares purchased through a Northern
cash sweep program. There is no minimum for subsequent investments. A $10,000
minimum applies for redemptions by wire. The Trust reserves the right to waive
purchase and redemption minimums and to determine the manner in which a minimum
is satisfied.
Calculating Share Price. The Trust issues Shares and redeems Shares at net asset
value ("NAV"). The NAV for each share class of a Portfolio is calculated by
dividing the value of net assets attributed to that class by the number of
outstanding shares of the class. The NAV for each Portfolio and class is
calculated as of 3:00 p.m., Chicago time, each Business Day. The NAV used in
determining the price of your Shares is the one calculated after your purchase,
exchange or redemption order is received or accepted as described below.
Each Portfolio seeks to maintain an NAV of $1.00 per share by valuing the
obligations held by it at amortized cost in accordance with SEC regulations.
Amortized cost will normally approximate market value.
Timing of Purchase Requests. Requests accepted by the Transfer Agent or other
authorized intermediary by 1:00 p.m., Chicago time, on any Business Day will be
executed the same day, provided that either:
. The Transfer Agent receives the purchase price in Federal or other immediately
available funds prior to 1:00 p.m., Chicago time, the same Business Day;
. The order is accepted by an authorized intermediary and payment is to be made
by the close of the same Business Day in Federal or other immediately
available funds according to procedures authorized by the Trust; or
. Payment in Federal or other immediately available funds is received by the
close of the same Business Day in an institutional account maintained with
Northern or an affiliate.
Orders received by the Transfer Agent or other authorized intermediary on a non-
Business Day or after 1:00 p.m., Chicago time, on a Business Day will be
executed on the next Business Day, provided that payment is made as noted above.
We consider requests to be in "good order" when all required documents are
properly completed, signed and received, including a certified corporate
resolution or other acceptable evidence of authority. If an Institution pays for
Shares by check, Federal
25
<PAGE>
Account Policies and Other Information continued
- --------------------------------------------------------------------------------
funds generally will become available within two Business Days after a purchase
order is received.
If payment is not received as described above from an authorized intermediary on
the same Business Day of acceptance of an order by the authorized intermediary,
the authorized intermediary may be liable for fees and losses and the
transaction may be cancelled.
In certain circumstances, the Trust may advance the time by which purchase
orders must be received. See "Early Closings" on page 28.
Tax Identification Number. Federal regulations require you to provide to the
Transfer Agent a taxpayer identification number when you open an account.
Purchase orders without such a number or an indication that a number has been
applied for will not be accepted. If you have applied for a number, you must
provide it to the Transfer Agent within 60 days of the date of the order.
In-Kind Purchases and Redemptions. The Trust reserves the right to accept
payment for Shares in the form of securities that are permissible investments
for a Portfolio. The Trust also reserves the right to pay redemptions by a
distribution "in-kind" of securities (instead of cash) from a Portfolio. See the
Statement of Additional Information for further information about the terms of
these purchases and redemptions.
Miscellaneous Purchase Information.
. Institutions are responsible for transmitting purchase orders to the Transfer
Agent and delivering required funds on a timely basis.
. Institutions are responsible for all losses and expenses of a Portfolio in the
event of any failure to make payment according to the procedures outlined in
this Prospectus. Northern may redeem shares from any account it maintains to
protect the Portfolios and Northern against loss. In addition, a $20 charge
will be imposed if a check does not clear.
. Shares of a Portfolio are entitled to the dividends declared by the Portfolio
beginning on the Business Day the purchase order is executed, provided payment
in Federal or other immediately available funds is received by the Transfer
Agent by the time designated above.
. The Trust reserves the right to reject any purchase order. The Trust also
reserves the right to change or discontinue any of its purchase procedures.
Timing of Redemption and Exchange Requests. Redemption and exchange requests
will be effected at the NAV next determined after your exchange or redemption
order is received in good order. 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 shares); and the signature of a duly authorized
person (except for telephone and wire redemptions). See "Account Policies and
Other Information -- Making Changes to Your Account Information."
If either the Transfer Agent or Northern (with respect to your institutional
account) receives a redemption order by 1:00 p.m., Chicago time, on a Business
Day, redemption proceeds will normally be paid in Federal funds or other
immediately available funds wired or sent by check to you or, if you so choose,
to your institutional account with Northern, on the same Business Day.
Redemption orders received after 1:00 p.m., Chicago time, will be effected the
next Business Day. Proceeds for redemption orders received on a non-Business Day
will normally be sent on the next Business Day after receipt in good order.
In certain circumstances, the Trust may advance the time by which redemption and
exchange orders must be received. See "Early Closings" on page 28.
26
<PAGE>
ABOUT YOUR ACCOUNT
- --------------------------------------------------------------------------------
Miscellaneous Redemption Information. All redemption proceeds will be sent by
check unless the Transfer Agent is directed otherwise. Redemption proceeds may
also be wired. A redemption request may not be processed if a shareholder has
failed to submit a completed and properly executed new account application,
including a corporate resolution or other acceptable evidence of authority.
. The Trust reserves the right to defer crediting, sending or wiring redemption
proceeds for up to 7 days after receiving the redemption order if, in its
judgment, an earlier payment could adversely affect a Portfolio.
. If you are redeeming recently purchased Shares, your redemption request may
not be honored until your check or electronic transaction has cleared. This
may delay your transaction for up to 15 days.
. Institutions are responsible for transmitting redemption orders to the
Transfer Agent and crediting their Customers' accounts with redemption
proceeds on a timely basis.
. Redemption requests by mail must be signed by a person authorized by
acceptable documentation on file with the Transfer Agent.
. Dividends on Shares are earned through and including the day prior to the day
on which they are redeemed.
. The Trust reserves the right to redeem Shares held by any shareholder who
provides incorrect or incomplete account information or when such involuntary
redemptions are necessary to avoid adverse consequences to the Trust and its
shareholders.
. The Trust may require any information reasonably necessary to ensure that a
redemption request has been duly authorized.
. The Trust reserves the right to change or discontinue any of its redemption
procedures.
Exchange Privileges. Institutions and their Customers (to the extent permitted
by their account agreements) may exchange Shares of a Portfolio for Shares of
another Portfolio. The registration of both accounts involved must be identical.
A $1,000 minimum investment applies. An exchange is a redemption of shares you
own and the purchase of shares you are acquiring. It is considered a taxable
event and may result in a gain or loss.
The Trust reserves the right to change or discontinue the exchange privilege at
any time upon 60 days written notice to shareholders and to reject any exchange
request. Exchanges are only available in states where an exchange can legally be
made. Before making an exchange you should read the prospectus for the shares
you are acquiring.
Telephone Transactions. For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, the Transfer Agent has adopted
procedures in an effort to establish reasonable safeguards against fraudulent
telephone transactions. If reasonable measures are taken to verify that
telephone instructions are genuine, the Trust and its service providers will not
be responsible for any loss resulting from fraudulent or unauthorized
instructions received over the telephone. In these circumstances, shareholders
will bear the risk of loss. During periods of unusual market activity, you may
have trouble placing a request by telephone. In this event, consider sending
your request in writing.
The proceeds of redemption orders received by telephone will be sent by check,
wire or transfer according to proper instructions. All checks will be made
payable to the shareholder of record and mailed only to the shareholder's
address of record.
The Trust reserves the right to refuse a telephone redemption.
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Account Policies and Other Information continued
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Advance Notification of Large Transactions. The Trust requests that an
Institution give advance notice to the Transfer Agent by 11:00 a.m., Chicago
time, if it intends to place a purchase or redemption order of $5 million or
more on a Business Day.
Making Changes to Your Account Information. You may make changes to wiring
instructions, address of record, or other account information only in writing.
These instructions must be accompanied by a certified corporate resolution,
signature guarantee from an institution participating in the Stock Transfer
Agency Medallion Program ("STAMP"), or other acceptable evidence of authority.
In accordance with SEC regulations, the Trust and Transfer Agent may charge a
shareholder reasonable costs in locating a shareholder's current address.
Business Day. A "Business Day" is each Monday through Friday when Northern or
the New York Stock Exchange (the "Exchange") is open for business. A "Business
Day" does not include a holiday observed by Northern and the Exchange. In 2000
these holidays are: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas Day.
Early Closings. The Portfolios reserve the right to cease, or to advance the
time for, accepting purchase, redemption or exchange orders for same Business
Day credit when Northern or the Exchange closes early as a result of unusual
weather or other conditions. They also reserve this right when The Bond Market
Association recommends that securities markets close or close early.
Authorized Intermediaries. The Trust may authorize certain financial
intermediaries (including banks, trust companies, brokers and investment
advisers), which provide recordkeeping, reporting and processing services, to
accept purchase, redemption and exchange orders from their Customers on behalf
of the Trust. They may also designate other intermediaries to accept such
orders, if approved by the Trust. Authorized intermediaries are responsible for
transmitting orders and delivering funds on a timely basis. A Portfolio will be
deemed to have received an order when the order is accepted by the authorized
intermediary on a Business Day, and the order will be priced at the Portfolio's
per share NAV next determined.
Information About Institutions. Customers purchasing Shares through an
Institution should read their account agreements carefully. An Institution's
requirements may differ from those listed in this Prospectus. An Institution may
impose account charges, such as asset allocation fees, account maintenance fees,
and other charges that will reduce the net return on an investment in a
Portfolio. If a Customer has agreed with a particular Institution to maintain a
minimum balance with the Institution and the balance falls below this minimum,
the Customer may be required to redeem all or a part of his investment in a
Portfolio.
Northern may provide compensation to certain dealers and other financial
intermediaries who provide services to their Customers who invest in the Trust
or whose Customers purchase significant amounts of Shares of a Portfolio. 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 earned by Northern as
Investment Adviser (after adjustments). This compensation will be paid by
Northern or its affiliates and will not represent an additional expense to the
Trust or its shareholders.
State securities laws regarding the registration of dealers may differ from
Federal law. As a result, Institutions investing in the Portfolios on behalf of
their Customers may be required to register as dealers.
Shareholder Communications. Shareholders of record will be provided each year
with a semiannual report showing portfolio investments and other information as
of May 31 and, after the close of the Fund's fiscal year on November 30, with an
annual report containing audited financial statements. If you have consented to
the delivery of a single copy of the shareholder reports, prospectuses or (if
and when permitted by law) proxy or information statements to all shareholders
who share the same mailing address with your account, you may revoke your
consent at any time by contacting the Northern Institutional Funds Center by
phone at (800) 637-1380 or by mail at the Northern Institutional Funds, P.O. Box
75943, Chicago, IL 60675.
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ABOUT YOUR ACCOUNT
Distributions and Taxes
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DISTRIBUTIONS
Dividends from net income are declared daily and paid monthly by each Portfolio
to its shareholders. Net income includes the interest accrued on a Portfolio's
assets less estimated expenses. Each Portfolio's net realized short-term capital
gains, if any, are distributed at least annually. The Portfolios do not expect
to realize net long-term capital gains.
Dividends are paid as soon as practicable following the end of each month,
except in the case of a total redemption of Shares in an account that is not
subject to a standing order for the purchase of additional Shares. In that
event, dividends will be paid promptly along with the redemption proceeds.
All distributions are automatically reinvested (without any sales charge) in
additional Shares of the same Portfolio, unless you elect to receive
distributions in cash by notifying the Transfer Agent in writing. You may make
arrangements to credit these distributions to your account with Northern, its
affiliates or its correspondent banks.
There are no fees or sales charges on reinvestments.
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TAXES
Each Portfolio intends to qualify as a regulated investment company for Federal
tax purposes, and to distribute substantially all of its net income to
shareholders each year. Except for exempt-interest dividends paid by the Tax-
Exempt and Municipal Portfolios, dividends derived from taxable interest income
and short-term capital gains will be taxable as ordinary income, and
distributions, if any, derived from net long-term capital gains will generally
be taxable as long-term capital gains, unless you have a tax-advantaged account.
This is true whether dividends and distributions are received in cash or
reinvested in Portfolio Shares.
The Tax-Exempt and Municipal Portfolios intend to pay substantially all of their
dividends as "exempt-interest dividends," which are exempt from Federal income
tax. Shareholders who are recipients of Social Security Act or Railroad
Retirement Act benefits should note that exempt-interest dividends will be taken
into account in determining the taxability of their benefit payments.
If you receive an exempt-interest dividend with respect to any share and the
share is held for six months or less, any loss on the sale or exchange of the
share will be disallowed to the extent of the dividend amount. Interest on
indebtedness incurred by a shareholder to purchase or carry shares of either the
Tax-Exempt or Municipal Portfolios generally will not be deductible for federal
income tax purposes.
In certain instances, dividends paid by the Tax-Exempt and Municipal Portfolios,
while exempt from regular Federal income tax, may be subject to the alternative
minimum tax. In addition, the Tax-Exempt Portfolio may invest a portion of its
assets in securities that generate income that is not exempt from Federal tax.
Any dividends paid by the Tax-Exempt Portfolio that are derived from taxable
interest or from capital gains will be subject to Federal income tax.
The Tax-Exempt and Municipal Portfolios will each determine annually the
percentages of its net investment income which are exempt from the regular
Federal income tax, which constitute an item of tax preference for purposes of
the Federal alternative minimum tax, and which are fully taxable. The Tax-Exempt
and Municipal Portfolios will apply these percentages uniformly to all
distributions declared from net investment income during that year.
Except as stated below, you may be subject to state and local taxes on Portfolio
distributions and redemptions. State income taxes may not apply, however, to the
portions of a Portfolio's distributions, if any, that are attributable to
interest on certain types of Federal securities or interest on securities issued
by the particular state or municipalities within the state.
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Distributions and Taxes continued
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OTHER TAX INFORMATION
Dividends and distributions from each Portfolio will generally be reportable by
you in the tax year in which they are paid with one exception. Dividends and
distributions declared by a Portfolio in October, November or December and paid
in January are taxed as though they were paid by December 31.
Every year, the Trust will send you information detailing the amount of ordinary
income and capital gains distributed to your account for the previous year.
Your investment in the Portfolios could have additional tax consequences.
Shareholders who are nonresident aliens, foreign trusts or estates, or foreign
corporations or partnerships, may be subject to different United States Federal
income tax treatment. You should consult your tax professional for information
regarding all the tax consequences applicable to your investments in the
Portfolios. More information is provided in the Statement of Additional
Information. This short summary is not intended as a substitute for careful tax
planning.
In particular, although the Government Select Portfolio intends to invest
primarily in U.S. government securities, the interest on which is generally
exempt from state income taxation, you should consult your own tax professional
to determine whether this is true in your own situation. Similarly, dividends
paid by the Portfolios (including the Tax-Exempt and Municipal Portfolios) may
be taxable under state or local law as dividend income even though all or a
portion of such dividends may be derived from interest on obligations which, if
realized directly, would be exempt from such income taxes.
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RISKS, SECURITIES AND TECHNIQUES
This section takes a closer look at some of the types of securities in which the
Portfolios may invest and their related risks. It also explores the various
investment techniques that the investment management team may, but is not
required to, use. The Portfolios may invest in other securities and are subject
to further restrictions and risks which are described in the Statement of
Additional Information. The investment objective of the Municipal Portfolio may
be changed by the Trust's Board of Trustees without shareholder approval.
Shareholders will, however, be notified of any changes. Any such change may
result in the Portfolio having an investment objective different from the
objective which the shareholder considered appropriate at the time of investment
in the Portfolio. The investment objectives of the other Portfolios may not be
changed without shareholder approval.
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Asset-Backed Securities. Asset-backed securities are sponsored by entities such
as government agencies, banks, financial companies and commercial or industrial
companies. Asset-backed securities represent participations in, or are secured
by and payable from, pools of assets such as mortgages, motor vehicle
installment sale contracts, installment loan contracts, leases of various types
of real and personal property, receivables from revolving credit (credit card)
agreements, municipal securities and other financial assets. Such asset pools
are securitized through the use of privately-formed trusts or special purpose
corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pooled insurance policy issued by a financial institution, or other
credit enhancements.
Investment strategy. The Diversified Assets Portfolio, Tax-Exempt Portfolio
and Municipal Portfolio may purchase various types of asset-backed
securities that are "Eligible Securities" as defined by the SEC. The
Government Portfolio may only purchase asset-backed securities (such as
mortgage-backed securities) that are guaranteed by the U.S. government, its
agencies or instrumentalities.
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Special risks. In addition to credit and market risk, asset-backed
securities usually involve prepayment risk because the underlying assets
(loans) may usually be prepaid at any time. The value of these securities
may also change because of actual or perceived changes in the
creditworthiness of the originator, the servicing agent, the financial
institution providing the credit support, or the counterparty. 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. In addition,
non-mortgage asset-backed securities may involve certain risks not presented
by mortgage-backed securities. Primarily, these securities may 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.
Automobile receivables are subject to the risk that the trustee for the
holders of the automobile receivables may not have an effective security
interest in all of the obligations backing the receivables.
Borrowings and Reverse Repurchase Agreements. The Portfolios may borrow money
from banks and may enter into reverse repurchase agreements with banks and other
financial institutions. Reverse repurchase agreements involve the sale of money
market securities held by a Portfolio subject to the Portfolio's agreement to
repurchase them at a mutually agreed upon date and price (including interest).
Investment strategy. Each Portfolio may borrow and enter into reverse
repurchase agreements in amounts not exceeding one-third of its total
assets. Each Portfolio may also borrow up to an additional 5% of its total
assets for temporary purposes. The Portfolios may enter into reverse
repurchase agreements when the investment management team expects that the
interest income to be earned from the investment of the transaction proceeds
will be greater than the related interest expense.
Special risks. Borrowings and reverse repurchase agreements involve
leveraging. If the securities held by the Portfolios decline in value while
these transactions are outstanding, the net asset value of the Portfolios'
outstanding shares will decline in value by proportionately more than the
decline in value of the securities. In addition, reverse repurchase
agreements involve the risks that the interest income earned by a Portfolio
(from the investment of the proceeds) will be less than the interest expense
of the transaction, that the market value of the securities sold by a
Portfolio will decline below the price the Portfolio is obligated to pay to
repurchase the securities, and that the securities may not be returned to
the Portfolio.
Custodial Receipts for Treasury Securities. Custodial receipts are
participations in trusts that hold U.S. Treasury securities and are sold under
names such as TIGRs and CATS. Like other stripped obligations, they entitle the
holder to future interest or principal payments on the U.S. Treasury securities.
Investment strategy. The Government, Diversified Assets, Tax-Exempt and
Municipal Portfolios may purchase custodial receipts. Investments by the
Government Portfolio in custodial receipts will not exceed 35% of the value
of its total assets.
Special risks. Like other stripped obligations, custodial receipts may be
subject to greater price volatility than ordinary debt obligations because
of the way in which their principal and interest are returned to investors.
Derivatives. Each Portfolio may purchase certain "derivative" instruments. A
derivative is a financial instrument whose value is derived
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from -- or based upon -- the performance of underlying assets, interest rates,
or indices. Derivatives include structured debt obligations such as
collateralized mortgage obligations and other types of asset-backed securities,
"stripped" securities and various floating rate instruments.
Investment strategy. A Portfolio will invest in derivatives only if the
potential risks and rewards are consistent with the Portfolio's objective,
strategies and overall risk profile.
Special risks. Engaging in derivative transactions involves special risks,
including (a) market risk that the Portfolio's derivatives position will
lose value; (b) credit risk that the counterparty to the transaction will
default; (c) leveraging risk that the value of the derivative instrument
will decline more than the value of the assets on which it is based; (d)
illiquidity risk that a Portfolio will be unable to sell its position
because of lack of market depth or disruption; (e) pricing risk that the
value of a derivative instrument will be difficult to determine; and (f)
operations risk that loss will occur as a result of inadequate systems or
human error. Many types of derivatives have been recently developed and have
not been tested over complete market cycles. For these reasons, a Portfolio
may suffer a loss whether or not the analysis of the investment management
team is accurate.
Diversification. Diversifying its holdings can help a Portfolio reduce the risks
of investing. In accordance with current SEC regulations, each Portfolio will
not invest more than 5% of the value of its total assets at the time of purchase
in the securities of any single issuer. However, a Portfolio may invest up to
25% of the value of its total assets in the securities of a single issuer for up
to three Business Days. These limitations do not apply to cash, certain
repurchase agreements, U.S. government securities or securities of other
investment companies. In addition, securities subject to certain unconditional
guarantees and securities that are not "First Tier Securities" as defined by the
SEC are subject to different diversification requirements as described in the
Statement of Additional Information.
Downgraded Securities. After its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. If this occurs, a Portfolio may continue to
hold the issue if the Investment Adviser believes it is in the best interest of
the Portfolio and its shareholders.
Foreign Securities. The Diversified Assets Portfolio may invest in U.S.
dollar-denominated commercial paper and other obligations of foreign issuers,
including foreign governments, or any of their political subdivisions, agencies
or instrumentalities, foreign commercial banks, foreign branches of U.S. banks
and foreign corporations. Foreign government obligations may include debt
obligations of supranational entities, including international organizations
(such as the European Coal and Steel Community and the International Bank for
Reconstruction and Development (also known as the World Bank)) and international
banking institutions and related government agencies.
Investment strategy. Investments by the Diversified Assets Portfolio in
foreign issuer obligations will not exceed 50% of the Portfolio's total
assets measured at the time of purchase.
Special risks. Foreign securities involve special risks and costs. Foreign
securities, and in particular foreign debt securities, are sensitive to
changes in interest rates. In addition, investment in the securities of
foreign governments involves the risk that foreign governments may default
on their obligations or may otherwise not respect the integrity of their
debt.
Investment in foreign securities may involve higher costs than investment in
U.S. securities, including higher transac-
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tion and custody costs as well as the imposition of additional taxes by
foreign governments. Foreign investments may also involve risks associated
with 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, possible seizure or nationalization of foreign
holdings 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.
Illiquid or Restricted Securities. Illiquid securities include repurchase
agreements and time deposits with notice/termination dates of more than seven
days, certain variable amount master demand notes that cannot be called within
seven days, certain insurance funding agreements (see below), and other
securities that are traded in the U.S. but are subject to trading restrictions
because they are not registered under the Securities Act of 1933, as amended
(the "1933 Act").
Investment strategy. Each Portfolio may invest up to 10% of its net assets
in securities that are illiquid. A domestically traded security which is
not registered under the 1933 Act will not be considered illiquid if the
Investment Adviser determines that an adequate trading market exists for
that security. If otherwise consistent with their investment objectives and
policies, the Portfolios may purchase commercial paper issued pursuant to
Section 4(2) of the 1933 Act and securities that are not registered under
the 1933 Act but can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. These securities will not be
considered illiquid so long as Northern determines, under guidelines
approved by the Trust's Board of Trustees, that an adequate trading market
exists.
Special risks. Because illiquid and restricted securities may be difficult
to sell at an acceptable price, they may be subject to greater volatility
and may result in a loss to a Portfolio. The practice of investing in Rule
144A Securities and commercial paper available to qualified institutional
buyers could increase the level of illiquidity during any period that
qualified institutional buyers become uninterested in purchasing these
securities.
Insurance Funding Agreements. An insurance funding agreement ("IFA") is an
agreement that requires a Portfolio to make cash contributions to a deposit fund
of an insurance company's general account. The insurance company then credits
interest to the Portfolio for a set time period.
Investment strategy. The Diversified Assets Portfolio may invest in IFAs
issued by insurance companies that meet quality and credit standards
established by the Investment Adviser.
Special risks. IFAs are not insured by a government agency --they are
backed only by the insurance company that issues them. As a result, they are
subject to default risk. In addition, an active secondary market in IFAs
does not currently exist. This means that it may be difficult to sell an IFA
at an appropriate price.
Investment Companies. In connection with the management of their daily cash
positions, the Portfolios may invest in shares of other money market funds which
invest in short-term, high quality debt securities and securities issued by
other investment companies consistent with their investment objectives and
policies.
Investment strategy. Investments by a Portfolio in other money market funds
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will be subject to the limitations of the Investment Company Act of 1940.
Although the Portfolios do not expect to do so in the foreseeable future,
each Portfolio is authorized to invest substantially all of its assets in an
open-end investment company that has the same investment objective, policies
and fundamental restrictions as the Portfolio.
Special risks. As a shareholder of another investment company, a Portfolio
would be subject to the same risks as any other investor in that company. It
would also bear a proportionate share of any fees or expenses paid by that
company. These expenses would be in addition to the advisory fees and other
expenses the Portfolio bears directly in connection with its own operations.
Municipal and Related Instruments. Municipal instruments include debt
obligations issued by or on behalf of states, territories and possessions of the
United States and their political subdivisions, agencies, authorities and
instrumentalities.
Municipal instruments include both "general" and "revenue" bonds and may be
issued to obtain funds for various public purposes. General obligations are
secured by the issuer's pledge of its full faith, credit and taxing power.
Revenue obligations are payable only from the revenues derived from a particular
facility or class of facilities. In some cases, revenue bonds are also payable
from the proceeds of a special excise or other specific revenue source such as
lease payments from the user of a facility being financed. Some municipal
instruments, known as private activity bonds, are issued to finance projects for
private companies. Private activity bonds are usually revenue obligations since
they are typically payable by the private user of the facilities financed by the
bonds.
Municipal instruments also include "moral obligation" bonds, municipal leases,
certificates of participation and asset-backed securities such as custodial
receipts. Moral obligation bonds are supported by a moral commitment but not a
legal obligation of a state or municipality. Municipal leases and participation
certificates present the risk that the state or municipality involved will not
appropriate the monies to meet scheduled payments on an annual basis. Custodial
receipts represent interests in municipal instruments held by a trustee.
The Tax-Exempt Portfolio and Municipal Portfolio may each acquire "stand-by
commitments" relating to the municipal instruments it holds. Under a stand-by
commitment, a dealer agrees to purchase, at the Portfolio's option, specified
municipal instruments at a specified price. A stand-by commitment may increase
the cost, and thereby reduce the yield, of the municipal instruments to which
the commitment relates. A Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise their rights for
trading purposes.
Investment strategy. Although it is not their current policy to do so on a
regular basis, in connection with its investments in municipal instruments,
the Tax-Exempt and Municipal Portfolios may each invest more than 25% of its
total assets in municipal instruments the interest upon which is paid solely
from revenues of similar projects. However, neither the Tax-Exempt nor the
Municipal Portfolios intends to invest more than 25% of the value of its
total assets in industrial development bonds or similar obligations where
the non-governmental entities supplying the revenues to be paid are in the
same industry.
The Diversified Assets Portfolio may invest up to 5% of its net assets in
municipal instruments or other securities issued by state and local
governmental bodies. Generally, this will occur when the yield of municipal
instruments, on a pre-tax
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basis, is comparable to that of other permitted short-term taxable
investments. Dividends paid by the Diversified Assets Portfolio on such
investments will be taxable to shareholders.
Special risks. Municipal instruments purchased by the Tax-Exempt and
Municipal Portfolios may be backed by letters of credit, insurance or other
forms of credit enhancement issued by foreign (as well as domestic) banks,
insurance companies and other financial institutions. If the credit quality
of these banks and financial institutions declines, a Portfolio could
suffer a loss to the extent that the Portfolio is relying upon this credit
support. Foreign institutions can present special risks relating to higher
transaction and custody costs, the imposition of additional taxes by
foreign governments, less complete financial information, less market
liquidity, more market volatility and political instability. Foreign banks,
insurance companies and financial institutions may be subject to less
stringent reserve requirements, and to different accounting, auditing and
recordkeeping requirements than U.S banks.
In addition, when a substantial portion of a Portfolio's assets is invested
in instruments which are used to finance facilities involving a particular
industry, whose issuers are in the same state or which are otherwise
related, there is a possibility that an economic, business or political
development affecting one instrument would likewise affect the related
instrument.
Repurchase Agreements. Repurchase agreements involve the purchase of securities
by a Portfolio subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price.
Investment strategy. Each Portfolio may enter into repurchase agreements
with financial institutions such as banks and broker-dealers that are
deemed to be creditworthy by the Investment Adviser. Although the
securities subject to a repurchase agreement may have maturities exceeding
one year, settlement of the agreement will never occur more than one year
after a Portfolio acquires the securities.
Special risks. In the event of a default, a Portfolio will suffer a loss to
the extent that the proceeds from the sale of the underlying securities and
other collateral are less than the repurchase price and the Portfolio's
costs associated with delay and enforcement of the repurchase agreement. In
addition, in the event of bankruptcy, a Portfolio could suffer losses if a
court determines that the Portfolio's interest in the collateral is not
enforceable.
Securities Lending. In order to generate additional income, the Portfolios may
lend securities on a short-term basis to banks, brokers and dealers or other
qualified institutions. In exchange, the Portfolios will receive collateral
equal to at least 100% of the value of the securities loaned.
Investment strategy. Securities lending may represent no more than one-
third the value of a Portfolio's total assets (including the loan
collateral). Any cash collateral received by a Portfolio in connection with
these loans may be invested in U.S. government securities and other liquid
high-grade debt obligations.
Special risks. The main risk when lending portfolio securities is that the
borrower might become insolvent or refuse to honor its obligation to return
the securities. In this event, a Portfolio could experience delays in
recovering its securities and may possibly incur a capital loss. In
addition, a Portfolio may incur a loss in reinvesting the cash collateral
it receives.
Stripped Obligations. These securities are issued by the U.S. government (or
agency or instrumentality), foreign governments or banks and other financial
institutions. They entitle the holder to receive either interest
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payments or principal payments that have been "stripped" from a debt obligation.
These obligations include stripped mortgage-backed securities, which are
derivative multi-class mortgage securities.
Investment strategy. Each of the Portfolios may purchase stripped
securities.
Special risks. Stripped securities are very sensitive to interest rate
changes and to the rate of principal prepayments. A rapid or unexpected
increase in mortgage prepayments could severely depress the price of
certain stripped mortgage-backed securities and adversely affect the
Portfolios' investment performance.
United States Government Obligations. These include U.S. Treasury obligations,
such as bills, notes and bonds, which generally differ only in terms of their
interest rates, maturities and time of issuance. These also include obligations
issued or guaranteed by the U.S. government or its agencies and
instrumentalities. 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.
Investment strategy. To the extent consistent with its investment
objective, each Portfolio may invest in a variety of U.S. Treasury
obligations and obligations issued or guaranteed by the U.S. government or
its agencies and instrumentalities.
Special risks. Not all U.S. government obligations carry the same
guarantees. Some, such as those of the Government National Mortgage
Association ("GNMA"), are supported by the full faith and credit of the
United States Treasury. Other obligations, such as those of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from
the United States Treasury; and others, such as those issued by 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 instrumentality. 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. In addition, the secondary market for
certain participations in loans made to foreign governments or their
agencies may be limited.
Taxable Investments. Taxable investments include U.S. dollar-denominated
obligations of U.S. banks, foreign commercial banks and securities issued or
guaranteed by foreign governments; high quality commercial paper and other
obligations; high quality corporate bonds and notes; asset-backed securities;
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and related custodial receipts; and repurchase agreements
relating to the above instruments.
Investment strategy. The Tax-Exempt and Municipal Portfolios may each
invest from time to time, on a temporary basis or for temporary defensive
purposes, in short-term taxable instruments that are "Eligible Securities"
as defined by the SEC for money market funds.
Special risks. Dividends paid by the Tax-Exempt and Municipal Portfolios
that are derived from interest paid on taxable investments will generally
be taxable to each Portfolio's shareholders as ordinary income for Federal
income tax purposes. The Tax-Exempt and Municipal Portfolios each may not
achieve its investment objective when its assets are invested in taxable
obligations.
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Variable and Floating Rate Instruments. Variable and floating rate instruments
have interest rates that are periodically adjusted either at set intervals or
that float at a margin above a generally recognized index rate. These
instruments include long-term variable and floating rate bonds (sometimes
referred to as "Put Bonds") where a Portfolio obtains at the time of purchase
the right to put the bond back to the issuer or a third party at par at a
specified date.
Investment strategy. Each Portfolio may invest in rated and unrated
variable and floating rate instruments to the extent consistent with its
investment objective. Unrated instruments may be purchased by a Portfolio
if they are determined by the Investment Adviser to be of comparable
quality to rated instruments eligible for purchase by the Portfolio. The
Portfolios may invest in variable amount master demand notes.
Special risks. Variable and floating rate instruments are subject to the
same risks as fixed income investments, particularly interest rate and
credit risk. Because there is no active secondary market for certain
variable and floating rate instruments, they may be more difficult to sell
if the issuer defaults on its payment obligations or during periods when
the Portfolios are not entitled to exercise their demand rights. As a
result, the Portfolios could suffer a loss with respect to these
instruments.
When-Issued Securities, Delayed Delivery Transactions and Forward Commitments. A
purchase of "when-issued" securities refers to a transaction made conditionally
because the securities, although authorized, have not yet been issued. A delayed
delivery or forward commitment transaction involves a contract to purchase or
sell securities for a fixed price at a future date beyond the customary
settlement period.
Investment strategy. Each Portfolio may purchase or sell securities on a
when-issued, delayed delivery or forward commitment basis. Although the
Portfolios would generally purchase securities in these transactions with
the intention of acquiring the securities, the Portfolios may dispose of
such securities prior to settlement if the investment management team deems
it appropriate to do so.
Special risks. Purchasing securities on a when-issued, delayed delivery or
forward commitment basis involves the risk that the securities may decrease
in value by the time they are actually issued or delivered. Conversely,
selling securities in these transactions involves the risk that the value
of the securities may increase before the time they are actually issued or
delivered. These transactions also involve the risk that the seller may
fail to deliver the security or cash on the settlement date.
38
<PAGE>
APPENDIX
Appendix
The financial highlights tables are intended to help you understand the
financial performance of Shares of the Portfolios for the past five years.
Certain information reflects financial results for a single Share. The total
returns in the tables represent the rate that an investor would have earned or
lost on an investment in Shares of a Portfolio (assuming reinvestment of all
dividends and distributions). This information has been audited by Ernst & Young
LLP, whose report is included in the Portfolios' annual report along with the
Portfolios' financial statements. The annual report is available upon request
and without charge. As of November 30, 1999, Shares of the Municipal Portfolio
had not been issued to the public.
39
<PAGE>
Appendix continued
Financial Highlights
Government Select Portfolio
<TABLE>
<CAPTION>
Shares
---------------------------------------------------------------
For the Years Ended November 30, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
...................................................................................................................................
Income from investment operations:
Net investment income 0.05 0.05 0.05 0.05 0.06
...................................................................................................................................
Total income from investment operations 0.05 0.05 0.05 0.05 0.06
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (0.05) (0.05) (0.05) (0.05) (0.06)
...................................................................................................................................
Total distributions to shareholders (0.05) (0.05) (0.05) (0.05) (0.06)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
....................................................................................................................................
Total return (a) 4.94% 5.38% 5.41% 5.31% 5.82%(b)
....................................................................................................................................
Ratio to average net assets of:
Expenses, before waivers and reimbursements 0.38% 0.39% 0.39% 0.40% 0.41%
....................................................................................................................................
Expenses, net of waivers and reimbursements 0.20% 0.20% 0.20% 0.20% 0.20%
....................................................................................................................................
Net investment income, before waivers and reimbursements 4.67% 5.12% 5.11% 4.99% 5.46%
....................................................................................................................................
Net investment income, net of waivers and reimbursements 4.85% 5.31% 5.30% 5.19% 5.67%
....................................................................................................................................
Net assets at end of year (in thousands) $2,150,263 $1,694,869 $1,239,393 $836,349 $685,142
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year.
(b) Total return for the year ended November 30, 1995 would have been 5.80%
absent the effect of a capital contribution equivalent to $.0002 per share
received from Northern Trust Corporation.
40
<PAGE>
APPENDIX
Financial Highlights
Government Portfolio
<TABLE>
<CAPTION>
Shares
---------------------------------------------------------------
For the Years Ended November 30, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income...................................... 0.05 0.04 0.05 0.05 0.06
Total income from investment operations........................ 0.05 0.04 0.05 0.05 0.06
Distributions to shareholders from:
Net investment income...................................... (0.05) (0.04) (0.05) (0.05) (0.06)
Total distributions to shareholders............................ (0.05) (0.04) (0.05) (0.05) (0.06)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total return (a)............................................... 5.08% 5.28% 5.31% 5.20% 5.64%(b)
Ratio to average net assets of:
Expenses, before waivers and reimbursements................ 0.38% 0.40% 0.37% 0.38% 0.40%
Expenses, net of waivers and reimbursements................ 0.35% 0.35% 0.35% 0.35% 0.35%
Net investment income, before waivers and reimbursements... 4.72% 5.17% 5.16% 5.05% 5.44%
Net investment income, net of waivers and reimbursements... 4.75% 5.22% 5.18% 5.08% 5.49%
Net assets at end of year (in thousands)....................... $1,565,743 $1,652,870 $1,051,401 $1,268,515 $850,664
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year.
(b) Total return for the year ended November 30, 1995 would have been 5.53%
absent the effect of a capital contribution equivalent to $.0011 per share
received from Northern Trust Corporation.
41
<PAGE>
Appendix continued
Financial Highlights
Diversified Assets Portfolio
<TABLE>
<CAPTION>
Shares
-------------------------------------------------------
For the Years Ended November 30, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
.......................................................................................................................
Income from investment operations:
Net investment income 0.05 0.05 0.05 0.05 0.06
.......................................................................................................................
Total income from investment operations 0.05 0.05 0.05 0.05 0.06
- -----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (0.05) (0.05) (0.05) (0.05) (0.06)
Total distributions to shareholders (0.05) (0.05) (0.05) (0.05) (0.06)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total return (a) 4.99% 5.36% 5.42% 5.30% 5.78%(b)
.......................................................................................................................
Ratio to average net assets of:
Expenses, before waivers and reimbursements 0.38% 0.38% 0.36% 0.34% 0.34%
.......................................................................................................................
Expenses, net of waivers and reimbursements 0.35% 0.35% 0.35% 0.34% 0.34%
.......................................................................................................................
Net investment income, before waivers and reimbursements 4.86% 5.28% 5.29% 5.18% 5.63%
.......................................................................................................................
Net investment income, net of waivers and reimbursements 4.89% 5.31% 5.30% 5.18% 5.63%
.......................................................................................................................
Net assets at end of year (in thousands) $7,475,275 $4,794,830 $3,941,586 $3,179,529 $2,610,347
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year.
(b) Total return for the year ended November 30, 1995 would have been 5.73%
absent the effect of a capital contribution equivalent to $.0005 per share
received from Northern Trust Corporation.
42
<PAGE>
APPENDIX
Financial Highlights
TAX-EXEMPT PORTFOLIO
<TABLE>
<CAPTION>
Shares
-------------------------------------------------
For the Years Ended November 30, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
..........................................................................................................................
Income from investment operations:
Net investment income 0.03 0.03 0.03 0.03 0.04
..........................................................................................................................
Total income from investment operations 0.03 0.03 0.03 0.03 0.04
- --------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (0.03) (0.03) (0.03) (0.03) (0.04)
..........................................................................................................................
Total distributions to shareholders (0.03) (0.03) (0.03) (0.03) (0.04)
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total return (a) 3.03% 3.31% 3.44% 3.37% 3.71%
..........................................................................................................................
Ratio to average net assets of:
Expenses, before waivers and reimbursements 0.39% 0.39% 0.39% 0.40% 0.41%
..........................................................................................................................
Expenses, net of waivers and reimbursements 0.35% 0.35% 0.35% 0.35% 0.35%
..........................................................................................................................
Net investment income, before waivers and reimbursements 2.85% 3.23% 3.34% 3.27% 3.57%
..........................................................................................................................
Net investment income, net of waivers and reimbursements 2.89% 3.27% 3.38% 3.32% 3.63%
..........................................................................................................................
Net assets at end of year (in thousands) $555,692 $748,151 $585,159 $638,507 $803,730
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year.
43
<PAGE>
For More Information
- --------------------------------------------------------------------------------
ANNUAL/ Additional information about the Portfolios' investments is
SEMIANNUAL available in the Portfolios' annual and semiannual reports
REPORT to shareholders.
- --------------------------------------------------------------------------------
STATEMENT OF Additional information about the Portfolios and their policies
ADDITIONAL is also available in the Portfolios' Statement of Additional
INFORMATION Information ("SAI"). The SAI is incorporated by reference into
this Prospectus (is legally considered part of this
Prospectus).
The Portfolios' annual and semiannual reports and the SAI are
available free upon request by calling (800) 637-1380.
To obtain other information and for shareholder inquiries:
By telephone -- Call (800) 637-1380
By mail -- Northern Institutional Funds
P.O. Box 75943
Chicago, IL 60675-5943
On the Internet-- Text-only versions of the Portfolios'
documents are available on the SEC's website at
http://www.sec.gov
You may review and obtain copies of Trust documents by visiting
the SEC's Public Reference Room in Washington, D.C. You may
also obtain copies of Trust documents by sending your request
and a duplicating fee to the SEC's Public Reference Section,
Washington, D.C. 20549-0102 or by electronic request at
[email protected]. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at
1-202-942-8090.
Northern
Institutional Funds
SHARES PROSPECTUS
811-3605
44
<PAGE>
INVESTMENT ADVISERS
The Northern Trust Company
Northern Trust Quantitative Advisors, Inc.
50 South LaSalle Street
Chicago, Illinois 60675
TRANSFER AGENT
AND CUSTODIAN
The Northern Trust Company
NIF SHRPRO0400
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
SHARES
NORTHERN INSTITUTIONAL FUNDS
GOVERNMENT SELECT PORTFOLIO
GOVERNMENT PORTFOLIO
DIVERSIFIED ASSETS PORTFOLIO
TAX-EXEMPT PORTFOLIO
MUNICIPAL PORTFOLIO
This Statement of Additional Information dated April 1, 2000 (the
"Additional Statement") is not a prospectus. Copies of the prospectus dated
April 1, 2000 for the Shares of the Government Select, Government, Diversified
Assets, Municipal and Tax-Exempt Portfolios (the "Portfolios") of Northern
Institutional Funds (each, a "Prospectus") may be obtained without charge by
calling 1-800-637-1380 (toll-free). Each Portfolio also offers two additional
share classes, Service Shares and Premier Shares, which are described in a
separate statement of additional information. Capitalized terms not otherwise
defined have the same meaning as in the Prospectus.
The audited financial statements and related report of Ernst & Young
LLP, independent auditors, contained in the annual report to the Portfolios'
shareholders for the fiscal year ended November 30, 1999 (except for Municipal
Portfolio, which did not commence operations during the period) are incorporated
herein by reference in the section entitled "Financial Statements." No other
parts of the annual report are incorporated herein by reference. Copies of the
annual report may be obtained upon request and without charge by calling
1-800-637-1380 (toll-free).
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL INVESTMENT INFORMATION........................................................ 3
Classification and History................................................ 3
Investment Objectives, Strategies and Risks............................... 3
Investment Restrictions................................................... 12
ADDITIONAL TRUST INFORMATION............................................................. 14
Trustees and Officers..................................................... 14
Investment Adviser, Transfer Agent and Custodian.......................... 19
Portfolio Transactions.................................................... 22
Co-Administrators and Distributor......................................... 23
Counsel and Auditors...................................................... 26
In-Kind Purchases and Redemptions......................................... 26
Third-Party Fees and Requirements......................................... 26
PERFORMANCE INFORMATION.................................................................. 26
AMORTIZED COST VALUATION................................................................. 28
DESCRIPTION OF SHARES.................................................................... 29
ADDITIONAL INFORMATION CONCERNING TAXES.................................................. 33
General................................................................... 33
Special Tax Considerations Pertaining to the Tax-Exempt Portfolio......... 33
Foreign Investors......................................................... 35
Conclusion................................................................ 35
OTHER INFORMATION........................................................................ 35
FINANCIAL STATEMENTS..................................................................... 36
APPENDIX A............................................................................... A-1
</TABLE>
No person has been authorized to give any information or to make any
representations not contained in this Additional Statement or in the Prospectus
in connection with the offering of Shares made by the 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. The 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.
An investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although each of the Portfolios seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Portfolios.
2
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
Classification and History
Northern Institutional Funds (the "Trust") is an open-end, management
investment company. Each Portfolio is classified as diversified under the
Investment Company Act of 1940, as amended (the "1940 Act").
Each Portfolio is a series of the Trust, which was formed as a Delaware
business trust on July 1, 1997 under an Agreement and Declaration of Trust (the
"Trust Agreement"). The Trust, is the result of a reorganization of a
Massachusetts business trust known as The Benchmark Funds on March 31, 1998. The
Trust's name was changed from The Benchmark Funds to the Northern Institutional
Funds on July 15, 1998. The Trust also offers six fixed income, one balanced,
and nine equity portfolios, which are not described in this document.
Investment Objectives, Strategies and Risks
The following supplements the investment objectives, strategies and
risks of the Portfolios as set forth in the Prospectus. The investment objective
of each Portfolio (except Municipal Portfolio) may not be changed without the
vote of the majority of the Portfolio's outstanding shares. Except as expressly
noted below, however, each Portfolio's investment policies may be changed
without shareholder approval.
Commercial Paper, Bankers' Acceptances, Certificates of Deposit and Time
Deposits
Commercial paper represents short-term unsecured promissory notes
issued in bearer form by banks or bank holding companies, corporations and
finance companies. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or bills
of exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties that vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party.
As stated in the Prospectus, the Diversified Assets Portfolio may
invest a portion of its assets in the obligations of foreignbanks and foreign
branches of domestic banks. Such obligations include Eurodollar Certificates of
Deposit ("ECDs"), which are U.S. dollar-denominated certificates of deposit
issued by offices of foreign and domestic banks located outside the United
States; Eurodollar Time Deposits ("ETDs"), which are U.S.dollar-denominated
deposits in a foreign branch of a U.S. bank or a foreign bank; Canadian Time
Deposits ("CTDs"), which are essentially the same as ETDs except they are issued
by Canadian offices of major Canadian banks; Schedule Bs, which are obligations
issued by Canadian branches of foreign or domestic banks; Yankee Certificates of
Deposit ("Yankee CDs"), which are U.S. dollar-denominated certificates of
deposit issued by a U.S. branch of a foreign bank and held in the United States;
and Yankee Bankers' Acceptances ("Yankee Bas"), which are U.S.
dollar-denominated bankers' acceptances issued by a U.S. branch of a foreign
bank and held in the United States.
The Diversified Assets Portfolio may also invest in high quality
commercial paper and other obligations issued or guaranteed by U.S. and foreign
corporations and other issuers rated (at the time of purchase) A-2 or higher by
Standard & Poor's Ratings Group, Inc. ("S&P"), Prime-2 or higher by Moody's
Investors Service, Inc. ("Moody's"), Duff 2 or higher by Duff & Phelps Credit
Rating Co. ("D&P"), F-2 or higher by Fitch IBCA, Inc. ("Fitch") or TBW-2 or
higher by Thomson BankWatch, Inc. ("TBW"). The Diversified Assets Portfolio may
also invest in rated and unrated corporate bonds, notes, paper and other
instruments that are of comparable quality to the commercial paper permitted to
be purchased by the Portfolio.
3
<PAGE>
Zero Coupon Bonds
To the extent consistent with their investment objectives, the
Portfolios may invest in zero coupon bonds. Zero coupon bonds are debt
securities issued or sold at a discount from their face value and which do not
entitle the holder to any periodic payment of interest prior to maturity or a
specified date. The original issue discount varies depending on the time
remaining until maturity or cash payment date, prevailing interest rates, the
liquidity of the security and perceived credit quality of the issuer. These
securities also may take the form of debt securities that have been stripped of
their unmatured interest coupons, the coupons themselves or receipts or
certificates representing interests in such stripped debt obligations or
coupons. The market prices of zero coupon bonds generally are more volatile than
the market prices of interest bearing securities and are likely to respond to a
greater degree of changes in interest rates than interest bearing securities
having similar maturities and credit quality.
Zero coupon bonds involve the additional risk that, unlike securities
that periodically pay interest to maturity, a Portfolio will realize no cash
until a specified future payment date unless a portion of such securities is
sold and, if the issuer of such securities defaults, the Portfolio may obtain no
return at all on its investment. In addition, even though such securities do not
provide for the payment of current interest in cash, a Portfolio is nonetheless
required to accrue income on such investment for each taxable year and generally
is required to distribute such accrued amounts (net of deductible expenses, if
any) to avoid being subject to tax. Because no cash is generally received at the
time of the accrual, a Portfolio may be required to liquidate other portfolio
securities to obtain sufficient cash to satisfy Federal tax distribution
requirements applicable to the Portfolio.
Asset-Backed Securities
To the extent described in the Prospectus, the Diversified Assets,
Tax-Exempt and Municipal Portfolios may purchase asset-backed securities, which
are securities backed by mortgages, installment contracts, credit card
receivables or other assets. Asset-backed securities represent interests in
"pools" of assets in which payments of both interest and principal on the
securities are made periodically, thus in effect "passing through" such payments
made by the individual borrowers on the assets that underlie the securities, net
of any fees paid to the issuer or guarantor of the securities. The average life
of asset-backed securities varies with the maturities of the underlying
instruments, and the average life of a mortgage-backed instrument, in
particular, is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities as a result of mortgage prepayments.
For this and other reasons, an asset-backed security's stated maturity may be
shortened, and the security's total return may be difficult to predict
precisely.
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.
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. Such difficulties are not, however, expected to have a significant
effect on the Diversified Assets, Tax-Exempt and Municipal Portfolios since the
remaining maturity of any asset-backed security acquired, as calculated under
applicable SEC regulations, will be 397 days or less.
Asset-backed securities acquired by the Diversified Assets, Tax-Exempt
and Municipal Portfolios may include collateralized mortgage obligations
("CMOs") issued by private companies. CMOs 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.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
4
<PAGE>
by the GNMA include GNMA Mortgage Pass-Through Certificates (also known as
"Ginnie Maes"), which are guaranteed as to the timely payment of principal and
interest by GNMA and backed by the full faith and credit of the United States.
GNMA is a wholly-owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-backed securities issued by FNMA include FNMA Guaranteed
Mortgage Pass-Through Certificates (also known as "Fannie Maes"), which are
solely the obligations of FNMA and are not backed by or entitled to full faith
and credit of the United States, but are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the FHLMC include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of the
United States, created pursuant to an Act of Congress, which is owned entirely
by Federal Home Loan Banks. Freddie Macs are not guaranteed and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
Non-mortgage asset-backed securities involve certain risks that are 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
have given 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 payments on these securities.
Supranational Bank Obligations
The Diversified Assets, Municipal and Tax-Exempt Portfolios may invest
in obligations of supranational banks. Supranational banks are international
banking institutions designed or supported by national governments to promote
economic reconstruction, development or trade among nations (e.g., the
International Bank for Reconstruction and Development). Obligations of
supranational banks may be supported by appropriated but unpaid commitments of
their member countries and there is no assurance that these commitments will be
undertaken or met in the future.
U.S. Government Obligations
Examples of the types of U.S. Government obligations that may be
acquired by the Portfolios include U.S. Treasury Bills, Treasury Notes and
Treasury Bonds and the obligations of Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Federal National Mortgage Association ("FNMA"), Government
National Mortgage Association ("GNMA"), General Services Administration, Central
Bank for Cooperatives, Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
Intermediate Credit Banks, and the Maritime Administration.
Securities guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities are also deemed to include (i)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. Government or any agency or
instrumentality thereof, and (ii) participations in loans made to foreign
governments or their agencies that are so guaranteed.
To the extent consistent with its investment objectives, the Portfolios
may invest in a variety of US. Treasury obligations and obligations issued by or
guaranteed by the U.S. Government or its agencies and instrumentalities. Not all
5
<PAGE>
U.S. Government obligations carry the same credit support. 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. In addition, the secondary market for certain participations in loans
made to foreign governments or their agencies may be limited.
Custodial Receipts for Treasury Securities
The Portfolios (other than the Government Select Portfolio) may acquire
U.S. Government obligations and their unmatured interest coupons that have been
separated ("stripped") by their holder, typically a custodian bank or investment
brokerage firm. Having separated the interest coupons from the underlying
principal of the U.S. Government obligations, the holder will resell the
stripped securities in custodial receipt programs with a number of different
names, including "Treasury Income Growth Receipts" ("TIGRs") and "Certificate of
Accrual on Treasury Securities" ("CATS"). The stripped coupons are sold
separately from the underlying principal, which is usually sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are ostensibly owned by the
bearer or holder), in trust on behalf of the owners. Counsel to the underwriters
of these certificates or other evidences of ownership of U.S. Treasury
securities have stated that, in their opinion, purchasers of the stripped
securities most likely will be deemed the beneficial holders of the underlying
U.S. Government obligations for Federal tax purposes. The Trust is unaware of
any binding legislative, judicial or administrative authority on this issue.
U.S. Treasury STRIPS
The Treasury Department has facilitated transfers of ownership of zero
coupon securities by accounting separately for the beneficial ownership of
particular interest coupon and principal payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under the
STRIPS program, a Portfolio will be able to have its beneficial ownership of
zero coupon securities recorded directly in the book-entry record-keeping system
in lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities. All Portfolios, including the Government
Select Portfolio, may acquire securities registered under the STRIPS program.
Bank and Deposit Notes
The Diversified Assets Portfolio may purchase bank and deposit notes.
Bank notes rank junior to deposit liabilities of banks and pari passu with other
----------
senior, unsecured obligations of the bank. Bank notes are classified as "other
borrowings" on a bank's balance sheet, while deposit notes and certificates of
deposit are classified as deposits. Bank notes are not insured by the Federal
Deposit Insurance Corporation or any other insurer. Deposit notes are insured by
the Federal Deposit Insurance Corporation only to the extent of $100,000 per
depositor per bank.
Variable and Floating Rate Instruments
With respect to the variable and floating rate instruments that may be
acquired by the Portfolios as described in the Prospectus, Northern Trust
Company (the "Investment Adviser" or "Northern") will consider the earning
power, cash flows and other liquidity ratios of the issuers and guarantors of
such instruments and, if the instruments are subject to demand features, will
monitor their financial status and ability to meet payment on demand. Where
necessary to ensure that a variable or floating rate instrument is of "high
quality," the issuer's obligation to pay the principal of the instrument will be
backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. The Portfolios will invest in variable and floating rate
instruments only when Northern deems the investment to involve minimal credit
risk. 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 that may be purchased by the Portfolios. In determining weighted
average portfolio maturity, an instrument may, subject to the Securities and
Exchange Commission's (the "SEC") regulations, be deemed to have a maturity
shorter than its nominal maturity based on the period remaining until the next
interest rate adjustment or the time the Portfolio involved can recover payment
of principal as specified in the
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instrument. Variable and floating rate instruments eligible for purchase by the
Portfolio include variable amount master demand notes, which permit the
indebtness thereunder to vary in addition to providing for periodic adjustments
in the interest rate.
Variable and floating rate instruments held by a Portfolio will be
subject to the Portfolio's 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
With respect to the investments of the Portfolios in the securities of
other investment companies, such investments will be limited so that, as
determined after a purchase is made, either (a) not more than 3% of the total
outstanding stock of such investment company will be owned by a Portfolio, the
Trust as a whole and their affiliated persons (as defined in the 1940 Act), or
(b)(i) not more than 5% of the value of the total assets of a Portfolio will be
invested in the securities of any one investment company; (ii) not more than 10%
of the value of its total assets will be invested in the aggregate in securities
of investment companies as a group; and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Portfolio.
Certain investment companies whose securities are purchased by the
Portfolios may not be obligated to redeem such securities in an amount exceeding
1% of the investment company's total outstanding securities during any period of
less than 30 days. Therefore, such securities that exceed this amount may be
illiquid.
If required by the 1940 Act, each Portfolio expects to vote the shares
of other investment companies that are held by it in the same proportion as the
vote of all other holders of such securities.
A Portfolio may invest all or substantially all of its assets in a
single open-end investment company or series thereof with substantially the same
investment objective, policies and restrictions as the Portfolio. However, each
Portfolio currently intends to limit its investments in securities issued by
other investment companies to the extent described above. A Portfolio may adhere
to more restrictive limitations with respect to its investments in securities
issued by other investment companies if required by the SEC or deemed to be in
the best interests of the Trust.
Repurchase Agreements
Each Portfolio may agree to purchase portfolio securities from
financial institutions subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price ("repurchase agreements"). Repurchase
agreements are considered loans under the 1940 Act. 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
subject to the agreement in an amount exceeding the repurchase price (including
accrued interest). Default by the seller would, however, expose the Portfolio to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
Reverse Repurchase Agreements
Each Portfolio may borrow funds by selling portfolio securities to
financial institutions such as banks and broker/dealers and agreeing to
repurchase them at a mutually specified date and price ("reverse repurchase
agreements"). The Portfolios may 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. Reverse repurchase agreements involve the risk that the
market value of the securities sold by a Portfolio may decline below the
repurchase price. The Portfolios will pay interest on amounts obtained pursuant
to a reverse repurchase agreement. While reverse repurchase agreements are
outstanding, a Portfolio will segregate liquid assets in an amount at least
equal to the market value of the securities, plus accrued interest, subject to
the agreement. Reverse repurchase agreements are considered to be borrowings
under the 1940 Act.
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Securities Lending
Collateral for loans of portfolio securities made by a Portfolio may
consist of cash, cash equivalents, securities issued or guaranteed by the U.S.
Government or its agencies or irrevocable bank letters of credit (or any
combination thereof). The borrower of securities will be required to maintain
the market value of the collateral at not less than the market value of the
loaned securities, and such value will be monitored on a daily basis. When a
Portfolio lends its securities, it continues to receive dividends and interest
on the securities loaned and may simultaneously earn interest on the investment
of the cash collateral. Although voting rights, or rights to consent, attendant
to securities on loan pass to the borrower, such loans will be called so that
the securities may be voted by a Portfolio if a material event affecting the
investment is to occur.
Forward Commitments and When-Issued Securities
Each Portfolio may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment (sometimes called delayed
delivery) basis. These transactions involve a commitment by the Portfolio to
purchase or sell securities at a future date. The price of the underlying
securities (usually expressed in terms of yield) and the date when the
securities will be delivered and paid for (the settlement date) are fixed at the
time the transaction is negotiated. When-issued purchases and forward commitment
transactions are normally negotiated directly with the other party.
A Portfolio will purchase securities on a when-issued basis or purchase
or sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities. If
deemed advisable as a matter of investment strategy, however, a Portfolio may
dispose of or negotiate a commitment after entering into it. A Portfolio also
may sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. The Portfolio may realize a
capital gain or loss in connection with these transactions.
When a Portfolio purchases securities on a when-issued or forward
commitment basis, the Portfolio will segregate liquid assets having a value
(determined daily) at least equal to the amount of the Portfolio's purchase
commitments until three days prior to the settlement date, or otherwise cover
its position. These procedures are designed to ensure that the Portfolio will
maintain sufficient assets at all times to cover its obligations under
when-issued purchases, forward commitments and delayed-delivery transactions.
For purposes of determining a Portfolio's average dollar-weighted maturity, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date.
Insurance Funding Agreements
The Diversified Assets Portfolio may invest in insurance funding
agreements ("IFAs"). An IFA is normally a general obligation of the issuing
insurance company and not a separate account. The purchase price paid for an IFA
becomes part of the general assets of the insurance company, and the contract is
paid from the company's general assets. Generally, IFAs are not assignable or
transferable without the permission of the issuing insurance companies, and an
active secondary market in IFAs may not exist.
Yields and Ratings
The yields on certain obligations, including the money market
instruments in which the Portfolios invest (such as commercial paper and bank
obligations), are dependent on a variety of factors, including general economic
conditions, conditions in the particular market for the obligation, financial
condition of the issuer, size of the offering, maturity of the obligation and
ratings of the issue. The ratings of S&P, Moody's, D&P, Fitch and TBW represent
their respective opinions as to the quality of the obligations they undertake to
rate. Ratings, however, are general and are not absolute standards of quality.
Consequently, obligations with the same rating, maturity and interest rate may
have different market prices. For a more complete discussion of ratings, see
Appendix A to this document.
Subject to the limitations stated in the Prospectus, if a security held
by the Portfolio undergoes a rating revision, the Portfolios may continue to
hold the security if the Investment Adviser determines such retention is
warranted.
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Municipal Instruments
Municipal instruments are high quality, short-term instruments, the
interest on which is, in the opinion of bond counsel to the issuers, exempt from
Federal income tax. Opinions relating to the validity of municipal instruments
and to Federal and state tax issues relating to these securities are rendered by
bond counsel to the respective issuing authorities at the time of issuance. Such
opinions may contain various assumptions, qualifications or exceptions that are
reasonably acceptable to the Investment Adviser. Neither the Trust nor the
Investment Adviser will review the proceedings relating to the issuance of
municipal instruments or the bases for such opinions.
Municipal instruments include both "general" and "revenue" obligations.
General obligations are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue obligations
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source such as lease revenue payments from the user of
the facility being financed. Industrial development bonds are in most cases
revenue securities and are not payable from the unrestricted revenues of the
issuer. Consequently, the credit quality of an industrial revenue bond is
usually directly related to the credit standing of the private user of the
facility involved.
Industrial development bonds are in most cases revenue securities and
are not payable from the unrestricted revenues of the issuer. Consequently, the
credit quality of an industrial revenue bond is usually directly related to the
credit standing of the private user of the facility involved.
Within the principal classifications of municipal instruments described
above there are a variety of categories, including municipal bonds, municipal
notes, municipal leases, asset-backed securities such as custodial receipts and
participation certificates. Municipal notes include tax, revenue and bond
anticipation notes of short maturity, generally less than three years, which are
issued to obtain temporary funds for various public purposes. Municipal leases
and participation certificates are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Participation certificates may represent participation in a lease,
an installment purchase contract, or a conditional sales contract. Certain
municipal lease obligations (and related participation certificates) may include
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. Custodial receipts are
underwritten by securities dealers or banks and evidence ownership of future
interest payments, principal payments or both on certain municipal securities.
Municipal leases (and participations in such leases) present the risk that a
municipality will not appropriate funds for the lease payments. The Investment
Adviser, under the supervision of the Trust's Board of Trustees, will determine
the credit quality of any unrated municipal leases on an ongoing basis,
including an assessment of the likelihood that the leases will not be cancelled.
The Tax-Exempt and Municipal Portfolios may also invest in "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of a moral obligation bond is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund (if
such a fund has been established), the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
Municipal bonds with a series of maturity dates are called Serial
Bonds. The Tax-Exempt Portfolio and the Municipal Portfolio may purchase Serial
Bonds and other long-term securities provided that they have a remaining
maturity meeting the Portfolios' maturity requirements. The Portfolios may also
purchase long-term variable and floating rate bonds (sometimes referred to as
"Put Bonds") where the Portfolios obtain at the time of purchase the right to
put the bond back to the issuer or a third party at par at least every thirteen
months. Put Bonds with conditional puts (that is, puts which cannot be exercised
if the issuer defaults on its payment obligations) will present risks that are
different than those of other municipal instruments because of the possibility
that the Portfolios might hold long-term Put Bonds on which defaults occur
following acquisition by the Portfolios.
Municipal instruments purchased by the Tax-Exempt Portfolio and
Municipal Portfolio may be backed by letters of credit or other forms of credit
enhancement issued by foreign (as well as domestic) banks and other financial
institutions. The credit quality of these banks and financial institutions
could, therefore, cause loss to a Portfolio that invests in municipal
instruments. Letters of credit and other obligations of foreign financial
institutions may involve
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certain risks in addition to those of domestic obligations.
The Tax-Exempt Portfolio and Municipal Portfolio may invest in fixed
and variable rate notes and similar debt instruments rated MIG-2, VMIG-2 or
Prime-2 or higher by Moody's, SP-2 or A-2 or higher by S&P, AA or higher by D&P
or F-2 or higher by Fitch and tax-exempt commercial paper and similar debt
instruments rated Prime-2 or higher by Moody's, A-2 or higher by S&P, D&P 2 or
higher by D&P or F-2 or higher by Fitch. The Tax-Exempt Portfolio and Municipal
Portfolio may also invest in rated and unrated municipal bonds, notes, paper or
other instruments that are of comparable quality to the tax-exempt commercial
paper permitted to be purchased by the Portfolios.
The Tax-Exempt Portfolio and Municipal Portfolio may acquire securities
in the form of custodial receipts evidencing rights to receive a specific future
interest payment, principal payment or both on certain municipal obligations.
Such obligations are held in custody by a bank on behalf of the holders of the
receipts. These custodial receipts are known by various names, including
"Municipal Receipts," "Municipal Certificates of Accrual on Tax-Exempt
Securities" ("M-CATS") and "Municipal Zero-Coupon Receipts." The Portfolios may
also purchase certificates of participation that, in the opinion of counsel to
the issuer, are exempt from regular Federal income tax. Certificates of
participation are a type of floating or variable rate obligation that represents
interests in a pool of municipal obligations held by a bank.
An issuer's obligations under its municipal instruments are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by Federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on and principal of its municipal instruments may be materially
adversely affected by litigation or other conditions.
From time to time proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on municipal instruments. For example, under the Tax Reform Act of 1986
interest on certain private activity bonds must be included in an investor's
Federal alternative minimum taxable income, and corporate investors must include
all tax-exempt interest in their Federal alternative minimum taxable income. The
Trust cannot predict what legislation, if any, may be proposed in the future in
Congress as regards the Federal income tax status of interest on municipal
instruments or which proposals, if any, might be enacted. Such proposals, if
enacted, might materially and adversely affect the availability of municipal
instruments for investment by the Tax-Exempt and Municipal Portfolios and their
liquidity and value. In such an event the Board of Trustees would reevaluate the
Portfolios' investment objectives and policies and consider changes in its
structure or possible dissolution.
As stated below, as a matter of fundamental policy, at least 80% of the
Tax-Exempt and Municipal Portfolios' net assets, respectively, will be invested
in debt instruments, the interest on which is, in the opinion of bond counsel or
counsel for issuers, if any, exempt from regular Federal income tax, except in
extraordinary circumstances such as when the Investment Adviser believes that
market conditions indicate that the Portfolios should adopt a temporary
defensive posture by holding uninvested cash or investing in taxable securities.
Taxable investments will consist exclusively of instruments that may be
purchased by the Diversified Assets Portfolio. The risks associated with these
investments are described in the Prospectus.
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Certain of the municipal instruments held by the Municipal and the
Tax-Exempt Portfolios may be insured as to the timely payment of principal and
interest. The insurance policies will usually be obtained by the issuer of the
municipal instrument at the time of its original issuance. In the event that the
issuer defaults on an interest or principal payment, the insurer will be
notified and will be required to make payment to the bond holders. There is,
however, no guarantee that the insurer will meet its obligations. In addition,
such insurance will not protect against market fluctuations caused by changes in
interest rates and other factors. The Portfolios may invest more than 25% of its
total assets in municipal instruments covered by insurance policies.
As described in the Prospectus, the Municipal and Tax-Exempt Portfolios
may invest in municipal leases, which may be considered liquid under guidelines
established by the Trust's Board of Trustees. The guidelines will provide for
determination of the liquidity of a municipal lease obligation based on factors
including the following: (i) the frequency of trades and quotes for the
obligation; (ii) the number of dealers willing to purchase or sell the security
and the number of other potential buyers; (iii) the willingness of dealers to
undertake to make a market in the security; and (iv) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer. The Investment
Adviser, under the supervision of the Trust's Board of Trustees, will also
consider marketability of a municipal lease obligations based upon an analysis
of the general credit quality of the municipality issuing the obligation and the
essentiality to the municipality of the property covered by the lease.
Currently, it is not the intention of the Portfolios to invest more
than 25% of the value of their total assets in municipal instruments whose
issuers are in the same state.
Standby Commitments
The Tax-Exempt and Municipal Portfolios may enter into standby
commitments with respect to municipal instruments held by them, respectively.
Under a standby commitment, a dealer agrees to purchase at the Portfolio's
option a specified municipal instrument. Standby commitments may be exercisable
by the Tax-Exempt and Municipal Portfolios at any time before the maturity of
the underlying municipal instruments and may be sold, transferred or assigned
only with the instruments involved.
The Tax-Exempt and Municipal Portfolios expect that standby commitments
will generally be available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Tax-Exempt and Municipal
Portfolios may pay for a standby commitment either separately in cash or by
paying a higher price for municipal instruments which are acquired subject to
the commitment (thus reducing the yield to maturity otherwise available for the
same securities). The total amount paid in either manner for outstanding standby
commitments held by either Portfolio will not exceed 1/2 of 1% of the value of
the Portfolio's total assets calculated immediately after each standby
commitment is acquired.
The Tax-Exempt and Municipal Portfolios intend to enter into standby
commitments only with dealers, banks and broker-dealers which, in the Investment
Adviser's opinion, present minimal credit risks. The Tax-Exempt and Municipal
Portfolios will acquire standby commitments solely to facilitate portfolio
liquidity and do not intend to exercise their rights thereunder for trading
purposes. The acquisition of a standby commitment will not affect the valuation
of the underlying municipal instrument. The actual standby commitment will be
valued at zero in determining net asset value. Accordingly, where the Tax-Exempt
and Municipal Portfolios pay directly or indirectly for a standby commitment,
the Portfolios' costs will be reflected as an unrealized loss for the period
during which the commitment is held by the Tax-Exempt and Municipal Portfolios
and will be reflected in realized gain or loss when the commitment is exercised
or expires.
Illiquid or Restricted Securities
Each Portfolio may invest up to 10% of its net assets in securities
that are illiquid. The Portfolios may purchase commercial paper issued pursuant
to Section 4(2) of the 1933 Act and securities that are not registered under the
1933 Act but can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act. These securities will not be considered illiquid
so long as the Investment Adviser determines, under guidelines approved by the
Trust's Board of Trustees, that an adequate trading market exists. This practice
could increase the level of illiquidity
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during any period that qualified institutional buyers become uninterested in
purchasing these securities.
Investment Restrictions
Each Portfolio is subject to the fundamental investment restrictions enumerated
below which may be changed with respect to a particular Portfolio only by a vote
of the holders of a majority of such Portfolio's outstanding shares.
No Portfolio may:
(1) Make loans, except through (a) the purchase of debt obligations in
accordance with the Portfolio's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, (c) loans of securities, and (d) loans to affiliates of the
Portfolio to the extent permitted by law.
(2) Purchase or sell real estate or securities issued by real estate
investment trusts, but this restriction shall not prevent a Portfolio
from investing directly or indirectly in portfolio instruments secured by
real estate or interests therein.
(3) Invest in commodities or commodity contracts, except that a Portfolio
may invest in currency and financial instruments and contracts that are
commodities or commodity contracts.
(4) Invest in companies for the purpose of exercising control or
management.
(5) Act as underwriter of securities (except as a Portfolio may be deemed
to be an underwriter under the Securities Act of 1933 in connection with
the purchase and sale of portfolio instruments in accordance with its
investment objective and portfolio management policies).
(6) Make any investment inconsistent with the Portfolio's classification
as a diversified investment company under the 1940 Act.
(7) Purchase securities if such purchase would cause more than 25% in the
aggregate of the market value of the total assets of a Portfolio to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, provided that there is no
limitation with respect to, and each Portfolio reserves freedom of
action, when otherwise consistent with its investment policies, to
concentrate its investments in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, obligations (other
than commercial paper) issued or guaranteed by U.S. banks and U.S.
branches of foreign banks and repurchase agreements and securities loans
collateralized by such U.S. Government obligations or such bank
obligations. For the purpose of this restriction, state and municipal
governments and their agencies and authorities are not deemed to be
industries; as to utility companies, the gas, electric, water and
telephone businesses are considered separate industries; personal credit
finance companies and business credit finance companies are deemed to be
separate industries; and wholly-owned finance companies are considered to
be in the industries of their parents if their activities are primarily
related to financing the activities of their parents.
(8) Borrow money, except that to the extent permitted by applicable law
(a) the Portfolios may borrow from banks, other affiliated investment
companies and other persons, and may engage in reverse repurchase
agreements and other transactions which involve borrowings, in amounts up
to 33-1/3% of their total assets (including the amount borrowed) or such
percentage permitted by law (b) the Portfolios may borrow up to an
additional 5% of their total assets for temporary purposes, (c) the
Portfolios may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities, and (d) the
Portfolios may purchase securities on margin. If due to market
fluctuations or other reasons the Portfolios' borrowings exceed the
limitations stated above, the Trust will promptly reduce the borrowings
of such Portfolio in accordance with the 1940 Act. In addition, as a
matter of fundamental policy, a Portfolio will not issue senior
securities to the extent such issuance would violate applicable law.
(9) Notwithstanding any of the Trust's other fundamental investment
restrictions (including, without limitation, those restrictions relating
to issuer diversification, industry concentration and control), each
Portfolio may (a)
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purchase securities of other investment companies to the full extent
permitted under Section 12 of the 1940 Act (or any successor provision
thereto) or under any regulation or order of the Securities and Exchange
Commission; and (b) invest all or substantially all of its assets in a
single open-end investment company or series thereof with substantially
the same investment objective, policies and fundamental restrictions as
the Portfolio.
* * *
For the purposes of Restriction Nos. 1 and 8 above, the Portfolios
expect that they would be required to file an exemptive application with the SEC
and receive the SEC's approval of that application prior to entering into
lending or borrowing arrangements with affiliates. As of April 1, 2000, the
Portfolios had not filed such an exemptive application.
The freedom of action reserved in Restriction No. 7 with respect to
U.S. branches of foreign banks is subject to the requirement that they are
subject to the same regulation as domestic branches of U.S. banks. Obligations
of U.S. branches of foreign banks may include certificates of deposit, bank and
deposit notes, bankers' acceptances and fixed time deposits. These obligations
may be general obligations of the parent bank or may be limited to the issuing
branch. Such obligations will meet the criteria for "Eligible Securities" as
described in the Prospectus.
Also, as a matter of fundamental policy, changeable only with the
approval of the holders of a majority of the outstanding shares of the
Tax-Exempt Portfolio and Municipal Portfolio, at least 80% of the net assets of
the Portfolios will be invested in debt instruments, the interest on which is,
in the opinion of bond counsel or counsel for issuers, exempt from regular
Federal income tax, except in extraordinary circumstances such as when the
Investment Adviser believes that market conditions indicate that the Portfolios
should adopt a temporary defensive posture by holding uninvested cash or
investing in taxable securities. Interest earned on "private activity bonds"
that is treated as an item of tax preference under Federal alternative minimum
tax will be deemed by the Municipal Portfolio, but will not be deemed by the
Tax-Exempt Portfolio, to be exempt from regular Federal income tax for purposes
of determining whether the Municipal and Tax-Exempt Portfolios meet this
fundamental policy.
Except to the extent otherwise provided in Investment Restriction No.
7, for the purpose of such restriction in determining industry classification
the Trust intends to use the industry classification titles in the Bloomberg
Industry Group Classifications.
In applying Restriction No. 7 above, a security is considered to be
issued by the entity, or entities, whose assets and revenues back the security.
A guarantee of a security is not deemed to be a security issued by the guarantor
when the value of all securities issued and guaranteed by the guarantor, and
owned by a Portfolio, does not exceed 10% of the value of the Portfolio's total
assets.
Any restriction which involves a maximum percentage will not be
considered violated unless an excess over the percentage occurs immediately
after, and is caused by, an acquisition or encumbrance of securities or assets
of, or borrowings by, a Portfolio.
The Portfolios intend, as a non-fundamental policy, to diversify their
investments in accordance with current SEC regulations. Investments in the
securities of any single issuer (excluding cash, cash items, certain repurchase
agreements, U.S. Government securities and securities of other investment
companies) will be limited to not more than 5% of the value of a Portfolio's
total assets at the time of purchase, except that 25% of the value of the total
assets of each Portfolio may be invested in the securities of any one issuer for
a period of up to three Business Days. A security that has an unconditional
guarantee meeting special SEC requirements (a "Guarantee") does not need to
satisfy the foregoing issuer diversification requirements that would otherwise
apply, but the Guarantee is instead subject to the following diversification
requirements: immediately after the acquisition of the security, a Portfolio may
not have invested more than 10% of its total assets in securities issued by or
subject to Guarantees from the same person, except that a Portfolio may, subject
to certain conditions, invest up to 25% of its total assets in securities issued
or subject to Guarantees of the same person. This percentage is 100% if the
Guarantee is issued by the U.S. Government or an agency thereof. In addition,
the Tax-Exempt and Municipal Portfolios will limit their investments in certain
conduit securities that are not rated in the highest short-term rating category
as determined by two nationally recognized statistical rating organizations
(each an "NRSRO") (or one NRSRO if the security is rated by only one NRSRO) or,
if unrated, are not of comparable quality to First Tier Securities ("Second Tier
Securities"), to 5% of its total assets, with investments in any
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one such issuer being limited to no more than 1% of the Portfolio's total assets
or $1 million, whichever is greater, measured at the time of purchase. Conduit
securities subject to this limitation are municipal instruments that are not
subject to a Guarantee and involve an arrangement whereunder a person, other
than a municipal issuer, provides for or secures repayment of the security and
are not: (i) fully and unconditionally guaranteed by a municipal issuer; or (ii)
payable from the general revenues of the municipal issuer or other municipal
issuers; or (iii) related to a project owned and operated by a municipal issuer;
or (iv) related to a facility leased to and under the control of an industrial
or commercial enterprise that is part of a public project which, as a whole, is
owned and under the control of a municipal issuer. The Diversified Assets
Portfolio will limit its investments in all Second Tier Securities (that are not
subject to a Guarantee) in accordance with the foregoing percentage limitations.
In addition to the foregoing, each Portfolio is subject to additional
diversification requirements imposed by SEC regulations on the acquisition of
securities subject to other types of demand features.
ADDITIONAL TRUST INFORMATION
Trustees and Officers
The business and affairs of the Trust and each Portfolio are managed under the
direction of the Trust's Board of Trustees. Information pertaining to the
Trustees and officers of the Trust is set forth below.
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Richard G. Cline 65 Trustee Chairman, Hawthorne Investors, Inc. (a
4200 Commerce Court management advisory services and private
Suite 300 investment company) since January 1996;
Lisle, IL 60532 Chairman, Hussman International, Inc. (a
refrigeration company) since 1998, Chairman
and CEO of NICOR Inc. (a diversified public
utility holding company) from 1986 to 1995,
and President, 1992-1993; Chairman, Federal
Reserve Bank of Chicago from 1992 to 1995; and
Deputy Chairman from 1995 to 1996. Director:
Whitman Corporation (a diversified holding
company); Kmart Corporation (a retailing
company); Ryerson Tull, Inc. (a metals
distribution company) and University of
Illinois Foundation. Trustee: Northern Funds.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Edward J. Condon, Jr. 60 Trustee Chairman of The Paradigm Group, Ltd. (a
Sears Tower, Suite 9650 financial advisor) since July 1993; Vice
233 S. Wacker Drive President and Treasurer of Sears, Roebuck and
Chicago, IL 60606 Co. (a retail corporation) from February 1989
to July 1993; Member of Advisory Board of Real-
Time USA, Inc. (a software development
company); Member of the Board of Managers of
The Liberty Hampshire Company, LLC (a
receivable securitization company); Vice
Chairman and Director of Energenics L.L.C. (a
waste to energy recycling company). Director:
University Eldercare, Inc. (an Alzheimer's
disease research and treatment company);
Financial Pacific Company (a small business
leasing company). Trustee: Dominican
University. Trustee: Northern Funds.
Mr. Wesley M. Dixon, Jr. 72 Trustee Director of Kinship Capital Corporation (a
400 Skokie Blvd., Suite 300 financial services company) since 1985 to 1996,
Northbrook, IL 60062 Vice Chairman and Director of G.D. Searle & Co.
(manufacture and sale of food products and
pharmaceuticals) from 1977 to 1985 and
President of G.D. Searle & Co. prior thereto.
Trustee: Northern Funds.
Mr. William J. Dolan, Jr. 67 Trustee Partner of Arthur Andersen & Co. S.C. (an
1534 Basswood Circle accounting firm) from 1966 to 1989. Financial
Glenview, IL 60025 Consultant, Ernst & Young (an accounting firm)
from 1992 to 1993 and 1997. Trustee: Northern
Funds.
John W. English 67 Trustee Private Investor; Vice President and Chief
50-H New England Ave. Investment Officer of The Ford Foundation (a
P.O. Box 640 charitable trust) from 1981 to 1993. Trustee:
Summit, NJ 07902-0640 The China Fund, Inc., Select Sector SPDR Trust;
WM Funds; American Red Cross in Greater New
York; Mote Marine Laboratory (a non-profit
marine research facility); and United Board
for Christian Higher Education in Asia.
Trustee: Northern Funds.
Mr. Raymond E. George, Jr. * 69 Trustee Senior Vice President and Senior Fiduciary
703 Prospect Avenue Officer of The Northern Trust Company from 1990
Winnetka, IL 60093 to 1993. Trustee: Northern Funds.
Sandra Polk Guthman 56 Trustee President and CEO of Polk Bros. Foundation (an
420 N. Wabash Avenue Illinois not-for-profit corporation) from 1993
Suite 204 to present; Director of Business Transformation
Chicago, IL 60611 from 1992-1993, and Midwestern Director of
Marketing from 1988-1992, IBM (a technology
company); Director: MBIA Insurance Corporation
of Illinois (a municipal bond insurance
company). Trustee: Northern Funds.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Mr. Michael E. Murphy** 63 Trustee President of Sara Lee Foundation
Suite 2222 (philanthropic organization) since November
20 South Clark Street 1997. Vice Chairman and Chief Administrative
Chicago, IL 60603 Officer of Sara Lee Corporation (a consumer
product company) from November 1994 to October
1997; Vice Chairman and Chief Financial and
Administrative Officer of Sara Lee Corporation
from July 1993 to November 1994. Director:
Payless Shoe Source, Inc., (a retail shoe
store business); True North Communications,
Inc. (a global advertising and communications
holding company); American General Corporation
(a diversified financial services company);
GATX Corporation (a railroad holding company);
Bassett Furniture Industries, Inc. (a
furniture manufacturer) Trustee: Northern
Funds.
Mary Jacobs Skinner, Esq.*** 42 Trustee Partner in the law firm of Sidley & Austin.
One First National Plaza Trustee: Northern Funds.
Chicago, IL 06063
William H. Springer 71 Chairman and Vice Chairman of Ameritech (a
701 Morningside Drive Trustee telecommunications holding company) from
Lake Forest, IL 60045 February 1987 to August 1992; Vice Chairman,
Chief Financial and Administrative Officer of
Ameritech prior to 1987. Director: Walgreen Co.
(a retail drug store business); Baker,
Fentress & Co. (a closed-end, non-diversified
management investment company). Trustee:
Goldman Sachs Trust; Goldman Sachs Variable
Insurance Trust. Trustee: Northern Funds.
Richard P. Strubel 61 Trustee President and Chief Operating Officer,
737 N. Michigan Avenue UNext.com (a provider of educational services
Suite 1405 via the internet) since 1999; Managing Director
Chicago, IL 60611 of Tandem Partners, Inc. (a privately held
management services firm) from 1990 to 1999;
President and Chief Executive Officer,
Microdot, Inc. (a privately held manufacturing
firm) from 1984 to 1994; Director: Gildan
Activewear, Inc. (an athletic clothing
marketing and manufacturing company);
Children's Memorial Medical Center. Trustee:
University of Chicago; Goldman Sachs Trust;
Goldman Sachs Variable Insurance Trust.
Trustee: Northern Funds.
Stephen Timbers**** 55 Trustee President of Northern Trust Global Investments,
50 South LaSalle Street a division of Northern Trust Corporation and
Chicago, IL 60675 Executive Vice President, The Northern Trust
Company since 1998; President, Chief Executive
Officer and Director of Zurich Kemper
Investments (a financial services company)
from 1996 to 1998; President, Chief Operating
Officer and Director of Kemper Corporation (a
financial services company) from 1992 to 1996;
President and Director of Kemper Funds (a
registered investment company) from 1990 to
1998. Director: LTV Corporation (a steel
producer). Trustee: Northern Funds.
</TABLE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C>
Jylanne M. Dunne 40 President Senior Vice President for Distribution Services
4400 Computer Drive at PFPC Inc. ("PFPC") (formerly First Data
Westborough, MA 01581 Investor Services Group, Inc. ("FDISG")) (since
1988).
Archibald E. King 42 Vice President Senior Vice President and other positions at
50 South LaSalle Street The Northern Trust Company (since 1979).
Chicago, IL 60675
Lloyd A. Wennlund 42 Vice President Senior Vice President and other positions at
50 South LaSalle Street The Northern Trust Company, President of
Chicago, IL 60675 Northern Trust Securities, Inc., and Managing
Executive, Mutual Funds for Northern Trust
Global Investments (since 1989).
Brian R. Curran 32 Vice President Director of Fund Administration at PFPC
4400 Computer Drive and Treasurer (formerly FDISG) (since 1997); Director of Fund
Westborough, MA 01581 Administration at State Street Bank & Trust
Company (February 1997 to October 1997);
Senior Auditor at Price Waterhouse L.L.P. (an
accounting firm) (February 1994 to February
1997).
Judith E. Clear 33 Assistant Client Treasury Manager of Mutual Fund
4400 Computer Drive Treasurer Administration at PFPC since 1997; Compliance
Westborough, MA 01581 Manager at Citizens Trust from 1994 to 1996.
Suzanne E. Anderson 27 Assistant Client Treasury Manager of Mutual Fund
4400 Computer Drive Treasurer Administration at PFPC Inc. (since August
Westborough, MA 01581 1998); Manager of Fund Administration at State
Street Bank & Trust Company (October 1996 to
August 1998); Fund Administrator at State
Street Bank & Trust Company (October 1995 to
October 1996); Mutual Fund Accountant at The
Boston Company (prior thereto).
Jeffrey A. Dalke 49 Secretary Partner in the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Linda J. Hoard 52 Assistant Vice President at PFPC (formerly FDISG) (since
4400 Computer Drive Secretary 1998); Attorney Consultant for Fidelity
Westborough, MA 01581 Management & Research (a financial service
company); Investors Bank & Trust Company (a
financial service provider) and FDISG
(September 1994 to June 1998).
Therese Hogan 37 Assistant Director of the State Regulation Department at
4400 Computer Drive Secretary PFPC (formerly FDISG) (since 1994).
Westborough, MA 01581
</TABLE>
* Mr. George is deemed to be an "interested" Trustee because he owns
shares of Northern Trust Corporation.
** Mr. Murphy is deemed to be an "interested" Trustee because he owns
shares of Northern Trust Corporation.
*** Ms. Skinner is deemed to be an "interested" Trustee because her law
firm provides legal services to Northern.
**** Mr. Timbers is deemed to be an "interested" Trustee because he is an
officer, director, employee and shareholder of Northern Trust
Corporation and/or Northern and NTQA.
Certain of the Trustees and officers and the organizations with which
they are associated have had in the past, and may have in the future,
transactions with Northern, PFPC, Northern Funds Distributors, LLC ("NFD"), and
their respective affiliates. The Trust has been advised by such Trustees and
officers that all such transactions have been and
17
<PAGE>
are expected to be in the ordinary course of business and the terms of such
transactions, including all loans and loan commitments by such persons, have
been and are expected to be substantially the same as the prevailing terms for
comparable transactions for other customers. As a result of the responsibilities
assumed by Northern under its Advisory Agreement, Transfer Agency Agreement,
Custodian Agreement, Foreign Custody Agreement and Co-Administration Agreement
with the Trust, by PFPC under its Co-Administration Agreement with the Trust and
by NFD under its Distribution Agreement with the Trust, the Trust itself
requires no employees.
Each officer holds comparable positions with certain other investment
companies of which NFD, PFPC or an affiliate thereof is the investment adviser,
administrator and/or distributor.
Each Trustee, except Mr. Timbers, earns a quarterly retainer of $6,750
and the Chairman of the Board earns a quarterly retainer of $10,125. Each
Trustee, including the Chairman of the Board, earns an additional fee of $2,500
for each meeting attended, plus reimbursement of expenses incurred as a Trustee.
In addition, the Trustees have established an Audit Committee
consisting of two members, including a Chairman of the Committee. The Audit
Committee members are Messrs. Condon and Strubel (Chairman). Each member earns a
fee of $2,500 for each meeting attended and the Chairman earns a quarterly
retainer of $1,500.
Each Trustee will hold office for an indefinite term until the earliest
of (i) the next meeting of shareholders, if any, called for the purpose of
considering the election or re-election of such Trustee and until the election
and qualification of his or her successor, if any, elected at such meeting; (ii)
the date a Trustee resigns or retires, or a Trustee is removed by the Board of
Trustees or shareholders, in accordance with the Trust's Agreement and
Declaration of Trust, or (iii) effective December 31, 2001, in accordance with
the current resolutions of the Board of Trustees (which may be changed without
shareholder vote), on the last day of the fiscal year of the Trust in which he
or she attains the age of 72 years.
The Trust's officers do not receive fees from the Trust for services in
such capacities, although PFPC, of which certain of the Trust's officers are
also officers (except Mr. Dalke, Mr. King and Mr. Wennlund), receives fees
from the Trust for administrative services.
Drinker Biddle & Reath LLP, of which Mr. Dalke is a partner, receives
fees from the Trust for legal Services.
Northern Trust Company, of which Mr. King and Mr. Wennlund are
officers, receives fees from the Trust as investment adviser, custodian,
transfer agent and co-administrator.
18
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended November
30, 1999:
<TABLE>
<CAPTION>
Total
Government Diversified Compensation
Select Government Assets Municipal Tax-Exempt from Fund
Portfolio Portfolio Portfolio Portfolio+ Portfolio Complex
--------- --------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Stephen B. Timbers** $ 0 $ 0 $ 0 n/a $ 0 $ 0
William H. Springer 7,950 6,890 19,610 n/a 3,180 53,000
Richard G. Cline 5,925 5,135 14,615 n/a 2,370 39,500
Edward J. Condon, Jr. 6,675 5,785 16,465 n/a 2,670 44,500
John W. English 5,925 5,135 14,615 n/a 2,370 39,500
Sandra Polk Guthman 5,925 5,135 14,615 n/a 2,370 39,500
Frederick T. Kelsey* 6,675 5,785 16,465 n/a 2,670 44,500
Richard P. Strubel 7,575 6,565 18,685 n/a 3,030 50,500
Wesley M. Dixon, Jr.** 0 0 0 n/a 0 22,500
William J. Dolan, Jr.** 0 0 0 n/a 0 22,500
Raymond E. George, Jr.** 0 0 0 n/a 0 21,250
Michael E. Murphy** 0 0 0 n/a 0 22,500
Mary Jacobs Skinner** 0 0 0 n/a 0 22,500
</TABLE>
* Frederick Kelsey retired from the Board of Trustees on November 30,
1999.
** Not a Trustee of the Northern Institutional Funds during the period
ended November 30, 1999.
+ Municipal Portfolio did not commence operations during the period
The Trust does not provide pension or retirement benefits to its
Trustees.
The Trust, its investment adviser and principal underwriter have
adopted codes of ethics (the "Codes of Ethics") under rule 17j-1 of the 1940
Act. The Codes of Ethics permit personnel, subject to the Codes of Ethics and
their provisions, to invest in securities, including securities that may be
purchased or held by the Trust.
Investment Adviser, Transfer Agent and Custodian
Northern Trust Company (the "Investment Adviser" or "Northern"), a
wholly-owned subsidiary of Northern Trust Corporation, a bank holding company,
is one of the nation's leading providers of trust and investment management
services. As of December 31, 1999, Northern and its affiliates had over $299.1
billion in assets under management for clients including public and private
retirement funds, endowments, foundations, trusts, corporations, and
individuals. Northern is one of the strongest banking organizations in the
United States. Northern believes it has built its organization by serving
clients with integrity, a commitment to quality, and personal attention. Its
stated mission with respect to all its financial products and services is to
achieve unrivaled client satisfaction. With respect to such clients, the Trust
is designed to assist (i) defined contribution plan sponsors and their employees
by offering a range of diverse investment options to help comply with 404(c)
regulation and may also provide educational material to their employees, (ii)
employers who provide post-retirement Employees' Beneficiary Associations
("VEBA") and require investments that respond to the impact of Federal
regulations, (iii) insurance companies with the day-to-day management of
uninvested cash balances as well as with longer-term investment needs, and (iv)
charitable and not-for-profit organizations, such as endowments and foundations,
demanding investment management solutions that balance the requirement for
sufficient current income to meet operating expenses and the need for capital
appreciation to meet future investment objectives.
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 each Portfolio and placing purchase and sale orders for
the portfolio transactions of the Portfolios. In connection with portfolio
transactions for the Portfolios, which are generally done at a net price without
a broker's commission, Northern's Advisory Agreement provides that Northern
shall attempt to obtain the best net price and execution.
19
<PAGE>
Northern's investment advisory duties for the Trust are carried out
through its Trust Department. On occasions when Northern deems the purchase or
sale of a security to be in the best interests of a Portfolio as well as other
fiduciary or agency accounts managed by it (including any other Portfolio,
investment company or account for which Northern acts as adviser), the
Investment Advisory Agreement provides that Northern, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for such Portfolio with those to be sold or purchased for such other
accounts in order to obtain best net price and execution. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by Northern in the manner it considers
to be most equitable and consistent with its fiduciary obligations to the
Portfolio and other accounts involved. In some instances, this procedure may
adversely affect the size of the position obtainable for a Portfolio or the
amount of the securities that are able to be sold for a Portfolio. To the extent
that the execution and price available from more than one broker or dealer are
believed to be comparable, the Investment Advisory Agreement permits Northern,
at its discretion but subject to applicable law, to select the executing broker
or dealer on the basis of Northern's opinion of the reliability and quality of
such broker or dealer.
The Advisory Agreement provides that Northern may render similar
services to others so long as its services under such Agreement are not impaired
thereby. The Advisory Agreement also provides that the Trust will indemnify
Northern against certain liabilities (including liabilities under the Federal
securities laws relating to untrue statements or omissions of material fact and
actions that are in accordance with the terms of the Agreement) or, in lieu
thereof, contribute to resulting losses.
Under its Transfer Agency Agreement with the Trust, Northern has
undertaken to (i) answer customer inquiries regarding the current yield of, and
certain other matters (e.g. account status information) pertaining to, the
Trust, (ii) process purchase and redemption transactions, including transactions
generated by any service provided outside of the Agreement by Northern, its
affiliates or correspondent banks whereby customer account cash balances are
automatically invested in shares of the Portfolios, and the disbursement of the
proceeds of redemptions, (iii) establish and maintain separate omnibus accounts
with respect to shareholders investing through Northern or any of its affiliates
and correspondent banks and act as transfer agent and perform sub-accounting
services with respect to each such account, (iv) provide periodic statements
showing account balances, (v) mail reports and proxy materials to shareholders,
(vi) provide information in connection with the preparation by the Trust of
various regulatory reports and prepare reports to the Trustees and management,
(vii) answer inquiries (including requests for prospectuses and statements of
additional information, and assistance in the completion of new account
applications) from investors and respond to all requests for information
regarding the Trust (such as current price, recent performance, and yield data)
and questions relating to accounts of investors (such as possible errors in
statements, and transactions), (viii) respond to and seek to resolve all
complaints of investors with respect to the Trust or their accounts, (ix)
furnish proxy statements and proxies, annual and semi-annual financial
statements, and dividend, distribution and tax notices to investors, (x) furnish
the Trust all pertinent Blue Sky information, (xi) perform all required tax
withholding, (xii) preserve records, and (xiii) furnish necessary office space,
facilities and personnel. Northern may appoint one or more sub-transfer agents
in the performance of its services.
As compensation for the services rendered by Northern under the
Transfer Agency Agreement with respect to the Shares described in this
Additional Statement and the assumption by Northern of related expenses,
Northern is entitled to a fee from the Trust, calculated daily and payable
monthly, at an annual rate equal to $18 for each subaccount relating to such
Shares of the Portfolios. This fee which is borne solely by the Shares described
in this Additional Statement and not by the Portfolios' other share classes, is
subject to annual upward adjustments based on increases in the Consumer Price
Index for All Urban Consumers, provided that Northern may permanently or
temporarily waive all or any portion of any upward adjustment. Different
transfer agency fees are payable with respect to the Portfolios' different share
classes. Northern's affiliates and correspondent banks may receive compensation
for performing the services described in the preceding paragraph that Northern
would otherwise receive. Conflict-of-interest restrictions under state and
Federal law (including the Employee Retirement Income Security Act of 1974) may
apply to the receipt by such affiliates or correspondent banks of such
compensation in connection with the investment of fiduciary funds in Shares of
the Portfolios.
Under its Custodian Agreement with the Trust, Northern (i) holds each
Portfolio's cash and securities, (ii) maintains such cash and securities in
separate accounts in the name of the Portfolio, (iii) makes receipts and
disbursements of funds on behalf of the Portfolio, (iv) receives, delivers and
releases securities on behalf of the
20
<PAGE>
Portfolio, (v) collects and receives all income, principal and other payments in
respect of the Portfolio's securities held by Northern under the Custodian
Agreement, and (vi) maintains the accounting records of the Trust. Northern may
employ one or more subcustodians, provided that Northern, subject to certain
monitoring responsibilities, shall have no more responsibility or liability to
the Trust on account of any action or omission of any subcustodian so employed
than such subcustodian has to Northern and that the responsibility or liability
of the subcustodian to Northern shall conform to the resolution of the Trustees
of the Trust authorizing the appointment of the particular subcustodian.
Northern may also appoint agents to carry out such of the provisions of the
Custodian Agreement as Northern may from time to time direct, provided that the
appointment of an agent shall not relieve Northern of any of its
responsibilities under the Agreement.
As compensation for the services rendered to the Trust by Northern as
custodian, and the assumption by Northern of certain related expenses, Northern
is entitled to payment from the Trust as follows: (i) $18,000 annually for each
Portfolio, plus (ii) 1/100th of 1% annually of each Portfolio's average daily
net assets to the extent they exceed $100 million, plus (iii) a fixed dollar fee
for each trade in portfolio securities, plus (iv) a fixed dollar fee for each
time that Northern as custodian receives or transmits funds via wire, plus (v)
reimbursement of expenses incurred by Northern as custodian for telephone,
postage, courier fees, office supplies and duplicating. The fees referred to in
clauses (iii) and (iv) are subject to annual upward adjustments based on
increases in the Consumer Price Index for All Urban Consumers, provided that
Northern may permanently or temporarily waive all or any portion of any upward
adjustment.
Northern's fees under the Custodian Agreement are subject to reduction
based on the Portfolios' daily uninvested cash balances (if any).
Unless sooner terminated, each of the Advisory Agreement, Transfer
Agency Agreement and Custodian Agreement between Northern and the Trust will
continue in effect with respect to a particular Portfolio until April 30, 2001,
and thereafter for successive 12-month periods, provided that the continuance is
approved at least annually (i) by the vote of a majority of the Trustees who are
not parties to the agreement or "interested persons" (as such term is defined in
the 1940 Act) of any party thereto, cast in person at a meeting called for the
purpose of voting on such approval and (ii) by the Trustees or by the vote of a
majority of the outstanding shares of such Portfolio (as defined below under
"Other Information"). Each agreement is terminable at any time without penalty
by the Trust (by specified Trustee or shareholder action) on 60 days' written
notice to Northern and by Northern on 60 days' written notice to the Trust.
For the fiscal years ended November 30 as indicated, the amount of
advisory fees incurred by each Portfolio (except Municipal Portfolio, which did
not commence operations during the period) (after fee waivers) was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Government Select Portfolio $ 1,857,385 $1,460,037 $ 1,018,270
Government Portfolio 3,854,646 3,337,292 3,243,435
Diversified Assets Portfolio 13,909,480 10,271,332 8,945,126
Tax-Exempt Portfolio 1,665,500 1,712,721 1,731,407
</TABLE>
In addition, for the fiscal years ended November 30, 1999, 1998 and
1997, Northern waived advisory fees with respect to the Government Select
Portfolio in the amounts of $2,786,104, $2,193,181 and $1,527,701, respectively.
21
<PAGE>
For the fiscal years ended November 30 as indicated, the amount of
transfer agency fees incurred by each Portfolio (except Municipal Portfolio,
which did not commence operations during the period) was as follows:
1999 1998 1997
---- ---- ----
Government Select Portfolio $ 35,078 $ 28,041 $30,361
Government Portfolio 36,436 51,087 35,042
Diversified Assets Portfolio 153,309 182,267 127,270
Tax-Exempt Portfolio 22,320 28,191 22,028
For the fiscal years ended November 30 as indicated, the amount of
custodian fees incurred by each Portfolio (except Municipal Portfolio, which did
not commence operations during the period) was as follows:
1999 1998 1997
---- ---- ----
Government Select Portfolio $205,435 $ 181,920 $ 97,683
Government Portfolio 176,812 179,186 140,110
Diversified Assets Portfolio 577,833 425,371 412,075
Tax-Exempt Portfolio 90,540 86,026 100,513
Northern is active as an underwriter of municipal instruments. Under
the 1940 Act, the Portfolios are precluded, subject to certain exceptions, from
purchasing in the primary market those municipal instruments with respect to
which Northern is serving as a principal underwriter. In the opinion of
Northern, this limitation will not significantly affect the ability of the
Portfolios to pursue their respective investment objectives.
Under a Service Mark License Agreement (the "Agreement") with the
Trust, Northern Trust Corporation has agreed that the name "Northern
Institutional Funds" may be used in connection with the Trust's business on a
royalty-free basis. Northern Trust Corporation has reserved to itself the right
to grant the non-exclusive right to use the name "Northern Institutional Funds"
to any other person. The Agreement provides that at such time as the Agreement
is no longer in effect, the Trust will cease using the name "Northern
Institutional Funds."
Portfolio Transactions
For the fiscal years ended November 30, 1999, 1998 and 1997, all
portfolio transactions for the Portfolios were executed on a principal basis
and, therefore, no brokerage commissions were paid by the Portfolios. Purchases
by the Portfolios from underwriters of portfolio securities, however, normally
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers include the spread between the dealer's cost for a given
security and the resale price of the security.
During the fiscal year ended November 30, 1999, the Diversified Assets
Portfolio acquired and sold securities of Bear Sterns & Co., Morgan Stanley Dean
Witter & Co., and Lehman Brothers, Inc., each a regular broker/dealer. At
November 30, 1999, the Diversified Assets Portfolio owned the following amounts
of securities of its regular broker/dealers, as defined in Rule 10b-1 under the
1940 Act, or their parents: Morgan Stanley Dean Witter & Co., with an
approximate aggregate market value of $36,619,000.
During the fiscal year ended November 30, 1999, the Government
Portfolio did not acquire, sell or own any securities of its regular
broker/dealers or their parents.
During the fiscal year ended November 30, 1999, the Government Select
Portfolio did not acquire, sell or own any securities of its regular
broker/dealers or their parents.
During the fiscal year ended November 30, 1999, the Tax-Exempt
Portfolio did not acquire, sell or own any securities of its regular
broker/dealers or their parents.
22
<PAGE>
During the fiscal year ended November 30, 1999, the Municipal Portfolio
had not yet commenced operations.
Co-Administrators and Distributor
Effective May 1, 1999, Northern and PFPC (formerly FDISG), 4400
Computer Drive, Westborough, Massachusetts 01581, act as co-administrators for
the Portfolios under a Co-Administration Agreement with the Trust. Subject to
the general supervision of the Trust's Board of Trustees, Northern and PFPC (the
"Co-Administrators") provide supervision of all aspects of the Trust's
non-investment advisory operations and perform various corporate secretarial,
treasury and blue sky services, including but not limited to: (i) maintaining
office facilities and furnishing corporate officers for the Trust; (ii)
furnishing data processing services, clerical services, and executive and
administrative services and standard stationery and office supplies; (iii)
performing all functions ordinarily performed by the office of a corporate
treasurer, and furnishing the services and facilities ordinarily incident
thereto, such as expense accrual monitoring and payment of the Trust's bills,
preparing monthly reconciliation of the Trust's expense records, updating
projections of annual expenses, preparing materials for review by the Board of
Trustees and compliance testing; (iv) preparing and submitting reports to the
Trust's shareholders and the SEC; (v) preparing and printing financial
statements; (vi) preparing monthly Portfolio profile reports; (vii) preparing
and filing the Trust's Federal and state tax returns (other than those required
to be filed by the Trust's custodian and transfer agent) and providing
shareholder tax information to the Trust's transfer agent; (viii) assisting in
marketing strategy and product development; (ix) performing oversight/management
responsibilities, such as the supervision and coordination of certain of the
Trust's service providers; (x) effecting and maintaining, as the case may be,
the registration of shares of the Trust for sale under the securities laws of
various jurisdictions; (xi) assisting in maintaining corporate records and good
standing status of the Trust in its state of organization; and (xii) monitoring
the Trust's arrangements with respect to services provided by Servicing Agents
to their customers who are the beneficial owners of shares, pursuant to
servicing agreements between the Trust and such Servicing Agents.
Subject to the limitations described below, as compensation for their
administrative services and the assumption of related expenses, the
Co-Administrators are entitled to a fee from each Portfolio, computed daily and
payable monthly, at an annual rate of .10% of the average daily net assets of
each Portfolio. The Co-Administrators will reimburse each Portfolio for its
expenses (including administration fees payable to the Co-Administrators, but
excluding advisory fees, transfer agency fees, servicing fees and extraordinary
expenses) which exceed on an annualized basis .10% of each Portfolio's average
daily net assets.
For the period May 1, 1999, through the fiscal year ended November 30,
1999, the Co-Administrators received fees under their co-administration
agreement with the Trust (except for the Municipal Portfolio which did not
commence operations during the period) in the amount of:
May 1, 1999 -
November 30, 1999
-----------------
Government Select Portfolio........................... $1,111,703
Government Portfolio.................................. 944,829
Diversified Assets Portfolio.......................... 3,551,511
Tax-Exempt Portfolio.................................. 340,887
23
<PAGE>
Additionally, for the period May 1, 1999 through the fiscal year ended
November 30, 1999, the Co-Administrators voluntarily reimbursed each Portfolio
(except for the Municipal Portfolio which did not commence operations during the
period) for its expenses reducing administration fees in the following amounts:
May 1, 1999 -
November 30, 1999
-----------------
Government Select Portfolio........................... $325,664
Government Portfolio.................................. 272,925
Diversified Assets Portfolio.......................... 804,125
Tax-Exempt Portfolio.................................. 147,691
Prior to May 1, 1999, Goldman, Sachs & Co. ("Goldman Sachs"), 85 Broad
Street, New York, New York 10004, acted as the Trust's administrator pursuant to
an administration agreement similar to the Co-Administration Agreement currently
in effect with Northern and PFPC. For the fiscal years ended November 30 as
indicated, Goldman Sachs received fees under its administration agreement with
the Trust in the amount of:
<TABLE>
<CAPTION>
December 1, 1998
through April 30, 1999 1998 1997
---------------------- ---- ----
<S> <C> <C> <C>
Government Select Portfolio $745,682 $1,460,037 $1,048,482
Government Portfolio 597,018 1,334,907 1,208,401
Diversified Assets Portfolio 2,012,240 4,108,503 3,082,370
Tax-Exempt Portfolio 325,308 685,084 749,232
</TABLE>
In addition, pursuant to an undertaking that commenced August 1, 1992,
Goldman Sachs had agreed that, if its administration fees (less expense
reimbursements paid by Goldman Sachs to the Trust and less certain marketing
expenses paid by Goldman Sachs) exceeded a specified amount ($1 million for the
Trust's first twelve investment portfolios plus $50,000 for each additional
portfolio) during a fiscal year, Goldman Sachs would waive a portion of its
administration fees during the following fiscal year. There were no waivers by
Goldman Sachs pursuant to this agreement during the last three fiscal years.
Prior to April 1, 1998, Goldman Sachs had voluntarily agreed to
reimburse each Portfolio for its expenses (including fees payable to Goldman
Sachs as administrator, but excluding the fees payable to Northern for its
duties as investment adviser and extraordinary expenses) which exceeded on an
annualized basis .10% of each Portfolio's average daily net assets.
Effective April 1, 1998, (upon the offering of the Service and Premier
Shares), Goldman Sachs had agreed to reimburse expenses of each Portfolio
(including fees payable to Goldman Sachs as administrator, but excluding the
fees payable to Northern for its duties as adviser and transfer agent, payments
under the service plan for Service and Premier Shares, and certain extraordinary
expenses) which exceeded on an annualized basis .10% of each Portfolio's average
daily net assets.
24
<PAGE>
For the fiscal years ended November 30 as indicated, the effect of
these reimbursements by Goldman Sachs was to reduce other expenses by the
following amounts:
<TABLE>
<CAPTION>
December 1,
1998 through
April 30, 1999 1998 1997
------------- ---- ----
<S> <C> <C> <C>
Government Select Portfolio $ 221,061 $ 544,124 $ 360,250
Government Portfolio 206,434 606,764 262,895
Diversified Assets Portfolio 694,265 1,328,789 477,791
Tax-Exempt Portfolio 129,348 279,774 305,530
</TABLE>
Unless sooner terminated, the Co-Administration Agreement among
Northern, PFPC and the Trust will continue in effect until April 30, 2001, and
thereafter for successive one-year terms with respect to each Portfolio,
provided that the Agreement is approved annually (i) by the Board of Trustees or
(ii) by the vote of a majority of the outstanding shares of such Portfolio (as
defined below under "Other Information"), provided that in either event the
continuance is also approved by a majority of the Trustees who are not parties
to the Agreement and who are not interested persons (as defined in the 1940 Act)
of any party thereto, by vote cast in person at a meeting called for the purpose
of voting on such approval. The Co-Administration Agreement is terminable at any
time after April 30, 2001, without penalty by the Trust on at least 60 days
written notice to the Co-Administrators. Each Co-Administrator may terminate the
Co-Administration Agreement with respect to itself at any time after April 30,
2001 without penalty on at least 60 days written notice to the Trust and the
other Co-Administrator.
The Trust may terminate the Co-Administration Agreement prior to April
30, 2001 in the event that the Trust or its shareholders incur damages in excess
of $100,000 as a result of the willful misfeasance, bad faith or negligence of
the Co-Administrators, or the reckless disregard of their duties under the
Agreement. The Trust may also terminate the Co-Administration Agreement prior to
April 30, 2001 in the event that the Co-Administrators fail to meet one of the
performance standards set forth in the Agreement.
The Trust has entered into a Distribution Agreement with NFD, under
which NFD, as agent, sells shares of each Portfolio on a continuous basis. NFD
pays the cost of printing and distributing prospectuses to persons who are not
shareholders of the Trust (excluding preparation and typesetting expenses) and
of certain other distribution efforts. No compensation is payable by the Trust
to NFD for such distribution services. NFD is a wholly-owned subsidiary of
Provident Distributors, Inc. ("PDI"). PDI, based in West Conshohocken,
Pennsylvania, is an independently owned and operated broker-dealer. Between May
1, 1999 and November 30, 1999, First Data Distributors Inc. ("FDDI") acted as
the Trust's distributor pursuant to a distribution agreement similar to the
Distribution Agreement currently in effect with NFD. Prior to May1, 1999,
Goldman Sachs acted as the Trust's distributor pursuant to a distribution
agreement similar to the Distribution Agreement currently in effect with NFD.
The Co-Administration Agreement provides that the Co-Administrators may
render similar services to others so long as their services under such Agreement
are not impaired thereby. The Co-Administration Agreement also provides that the
Trust will indemnify each Co-Administrator against all claims except those
resulting from the willful misfeasance, bad faith or negligence of such
Co-Administrator, or the Co-Administrator's breach of confidentiality. The
Distribution Agreement provides that the Trust will indemnify NFD against
certain liabilities relating to untrue statements or omissions of material fact
except those resulting from the reliance on information furnished to the Trust
by NFD, or those resulting from the willful misfeasance, bad faith or negligence
of NFD, or NFD's breach of confidentiality.
Under a Service Mark License Agreement (the "License Agreement") with
NFD, Northern Trust Corporation agrees that the name "Northern Institutional
Funds" may be used in connection with Northern Institutional Funds' business on
a royalty-free basis. Northern Trust Corporation has reserved to itself the
right to grant the non-exclusive right to use the name ("Northern Institutional
Funds") to any other person. The License Agreement provides that at such time as
the License Agreement is no longer in effect NFD will cease using the name
"Northern Institutional Funds."
Counsel and Auditors
25
<PAGE>
Drinker Biddle & Reath LLP, with offices at One Logan Square, 18th and
Cherry Streets, Philadelphia, Pennsylvania 19103-6996, serve as counsel to the
Trust.
Ernst & Young LLP, independent auditors, 233 S. Wacker Drive, Chicago,
Illinois 60606, have been selected as auditors of the Trust. In addition to
audit services, Ernst & Young LLP reviews the Trust's Federal and state tax
returns, and provides consultation and assistance on accounting, internal
control and related matters.
In-Kind Purchases and Redemptions
Payment for shares of a Portfolio may, in the discretion of Northern,
be made in the form of securities that are permissible investments for the
Portfolio as described in the Prospectus. For further information about this
form of payment, contact Northern. In connection with an in-kind securities
payment, a Portfolio will require, among other things, that the securities be
valued on the day of purchase in accordance with the pricing methods used by the
Portfolio and that the Portfolio receive satisfactory assurances that it will
have good and marketable title to the securities received by it; that the
securities be in proper form for transfer to the Portfolio; and that adequate
information be provided concerning the basis and other tax matters relating to
the securities.
Although each Portfolio generally will redeem shares in cash, each
Portfolio reserves the right to pay redemptions by a distribution in kind of
securities (instead of cash) from such Portfolio. The securities distributed in
kind would be readily marketable and would be valued for this purpose using the
same method employed in calculating the Portfolio's net asset value per share.
If a shareholder receives redemption proceeds in kind, the shareholder should
expect to incur transaction costs upon the disposition of the securities
received in the redemption.
Third-Party Fees and Requirements
Shares 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.
The exercise of voting rights and the delivery to Customers of
shareholder communications from the Trust will be governed by the Customers'
account agreements with the Institutions. Customers should read the 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.
PERFORMANCE INFORMATION
The performance of a class of shares of a Portfolio may be compared to
those of other money market funds with similar investment objectives 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 shares may be compared to data
prepared by IBC Financial Data, Inc. or other independent mutual fund reporting
services. 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 shares of a Portfolio.
From time to time, the Portfolios may advertise their "yields" and
"effective yields," and the Government Select Portfolio, Municipal Portfolio and
Tax-Exempt Portfolio may advertise their "tax-equivalent yields" and
"tax-equivalent effective yields." Yield, effective yield, tax-equivalent yield
and tax-equivalent effective yield are computed separately for each class of
shares. Each class of shares has different fees and expenses, and consequently,
may have different yields for the same period. These yield figures will
fluctuate, are based on historical earnings and are not intended to indicate
future performance. "Yield" refers to the net investment income generated by an
investment in the Portfolio over a seven-day period identified in the
advertisement. This net investment income is then "annualized." That is, the
amount of net investment income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment.
In arriving at such quotations as to "yield," the Trust first
determines the net change, exclusive of capital changes, during the seven-day
period in the value of a hypothetical pre-existing account having a balance of
one Share at
26
<PAGE>
the beginning of the period, then divides such net change by the value of the
account at the beginning of the period to obtain the base period return, and
then multiplies the base period return by 365/7.
"Effective yield" is calculated similarly but, when annualized, the net
investment income earned by an investment in the Portfolio is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment. The "effective
yield" with respect to the Shares of a Portfolio is computed by adding 1 to the
base period return (calculated as above), raising the sum to a power equal to
365 divided by 7, and subtracting 1 from the result.
The "tax-equivalent yield" demonstrates the level of taxable yield
necessary to produce an after-tax yield equivalent to a Portfolio's tax-free
yield. It is calculated by taking that portion of the seven-day "yield" which is
tax-exempt and adjusting it to reflect the tax savings associated with a stated
tax rate. The "tax-equivalent current yield" will always be higher than the
Portfolio's yield.
"Tax-equivalent yield" is computed by dividing the tax-exempt portion
of the yield by 1 minus a stated income tax rate, and then adding the quotient
to the taxable portion of the yield, if any. There may be more than one
tax-equivalent current yield, if more than one stated income tax rate is used.
The "tax-equivalent effective yield" demonstrates the level of taxable
yield necessary to produce an after-tax yield equivalent to a Portfolio's
tax-free effective yield. It is calculated by taking that portion of the
seven-day "effective yield" which is tax-exempt and adjusting it to reflect the
tax savings associated with a stated tax rate. The "tax-equivalent effective
yield" will always be higher than the Portfolio's effective yield.
"Tax-equivalent effective yield" is computed by dividing the tax-exempt
portion of the effective yield by 1 minus a stated income tax-rate, and then
adding the quotient to the taxable portion of the effective yield, if any. There
may be more than one tax-equivalent effective yield, if more than one stated
income tax rate is used.
Quotations of yield, effective yield, tax-equivalent current yield and
tax-equivalent effective yield provided by the Trust are carried to at least the
nearest hundredth of one percent. Any fees imposed by Northern, its affiliates
or correspondent banks on their customers in connection with investments in
Shares of the Portfolios are not reflected in the calculation of yields for the
Portfolios.
The annualized yield of each Portfolio (except Municipal Portfolio,
which did not commence operations during the period) with respect to Shares for
the seven-day period ended November 30, 1999 was as follows/1/:
<TABLE>
<CAPTION>
Effective Tax Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
Government Select
Portfolio 5.40% 5.55% n/a n/a
Government Portfolio 5.40% 5.54% n/a n/a
Diversified Assets
Portfolio 5.42% 5.57% n/a n/a
Tax-Exempt Portfolio 3.40% 3.46% 5.57% 5.67%
</TABLE>
______________
/1/ An income tax rate of 39% is used in the calculation of tax-equivalent
current yield and tax-equivalent effective yield.
27
<PAGE>
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations. See "Additional Trust Information --
Co-Administrators and Distributor" and "-- Investment Adviser, Transfer Agent
and Custodian." In the absence of such fee reductions and expense limitations,
the annualized yield of each Portfolio (except Municipal Portfolio, which did
not commence operations during the period) with respect to Service Shares for
the same seven-day period would have been as follows/2/:
<TABLE>
<CAPTION>
Effective Tax Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
Government Select Portfolio 5.22% 5.37% n/a n/a
Government Portfolio 5.37% 5.51% n/a n/a
Diversified Assets
Portfolio 5.39% 5.54% n/a n/a
Tax-Exempt Portfolio 3.36% 3.42% 5.51% 5.61%
</TABLE>
The Portfolios' yields may not provide a basis for comparison with bank
deposits and other investments which provide a fixed yield for a stated period
of time. Each Portfolio's yields fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. The
annualization of one week's income is not necessarily indicative of future
actual yields. Actual yields will depend on such variables as portfolio quality,
average portfolio maturity, the type of portfolio instruments acquired, changes
in money market interest rates, portfolio expenses and other factors. Yields are
one basis investors may use to analyze a class of shares of the Portfolio as
compared to comparable classes of shares of other money market funds and other
investment vehicles. However, yields of other money market funds and other
investment vehicles may not be comparable because of the foregoing variables,
and differences in the methods used in valuing their portfolio instruments,
computing net asset value and determining yield.
Each Portfolio may also quote from time to time the total return of its
Shares in accordance with SEC regulations.
The yields and total returns of the Portfolios' Service Shares and
Premier Shares are calculated separately from the calculations of the yield and
total return of the Shares described in this Additional Statement.
AMORTIZED COST VALUATION
As stated in the Prospectus, each Portfolio seeks to maintain a net
asset value of $1.00 per share and, in this connection, values its instruments
on the basis of amortized cost pursuant to Rule 2a-7 under the 1940 Act. This
method values a security at its cost on the date of purchase and thereafter
assumes a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price a Portfolio would receive if the Portfolio sold the
instrument. During such periods the yield to investors in the Portfolio may
differ somewhat from that obtained in a similar entity which uses available
indications as to market value to value its portfolio instruments. For example,
if the use of amortized cost resulted in a lower (higher) aggregate Portfolio
value on a particular day, a prospective investor in the Portfolio would be able
to obtain a somewhat higher (lower) yield and ownership interest than would
result from investment in such similar entity and existing investors would
receive less (more) investment income and ownership interest. However, the Trust
expects that the procedures and limitations referred to in the following
paragraphs of this section will tend to minimize the differences referred to
above.
Under Rule 2a-7, the Trust's Board of Trustees, in supervising the
Trust's operations and delegating special responsibilities involving portfolio
management to Northern, has established procedures that are intended, taking
into account current market conditions and the Portfolios' investment
objectives, to stabilize the net asset value of each Portfolio, as computed for
the purposes of purchases and redemptions, at $1.00 per share. The Trustees'
procedures include periodic monitoring of the difference (the "Market Value
Difference") between the amortized cost value per share and the net asset value
per share based upon available indications of market value. Available
indications of market
_________________
/2/ An income tax rate of 39% is used in the calculation of tax-equivalent
current yield and tax-equivalent effective yield.
28
<PAGE>
value used by the Trust consist of actual market quotations or appropriate
substitutes which reflect current market conditions and include (i) quotations
or estimates of market value for individual portfolio instruments and/or (ii)
values for individual portfolio instruments derived from market quotations
relating to varying maturities of a class of money market instruments. In the
event the Market Value Difference of a given Portfolio exceeds certain limits or
Northern believes that the Market Value Difference may result in material
dilution or other unfair results to investors or existing shareholders, the
Trust will take action in accordance with the 1940 Act and the Trustees will
take such steps as they consider appropriate (e.g., selling portfolio
instruments to shorten average portfolio maturity or to realize capital gains or
losses, reducing or suspending shareholder income accruals, redeeming shares in
kind or utilizing a net asset value per share based upon available indications
of market value which under such circumstances would vary from $1.00) to
eliminate or reduce to the extent reasonably practicable any material dilution
or other unfair results to investors or existing shareholders which might arise
from Market Value Differences. In particular, if losses were sustained by a
Portfolio, the number of outstanding shares might be reduced in order to
maintain a net asset value per share of $1.00. Such reduction would be effected
by having each shareholder proportionately contribute to the Portfolio's capital
the necessary shares to restore such net asset value per share. Each shareholder
will be deemed to have agreed to such contribution in these circumstances by
investing in the Portfolio.
Rule 2a-7 requires that each Portfolio limit its investments to
instruments which Northern determines (pursuant to guidelines established by the
Board of Trustees) to present minimal credit risks and which are "Eligible
Securities" as defined by the SEC and described in the Prospectus. The Rule also
requires that each Portfolio maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to its policy of maintaining a
stable net asset value per share and precludes the purchase of any instrument
deemed under the Rule to have a remaining maturity of more than 397 calendar
days. Should the disposition of a portfolio security result in a dollar-weighted
average portfolio maturity of more than 90 days, the Rule requires a Portfolio
to invest its available cash in such a manner as to reduce such maturity to the
prescribed limit as soon as reasonably practicable.
DESCRIPTION OF SHARES
The Trust Agreement permits the Trust's Board of Trustees to issue an
unlimited number of full and fractional shares of beneficial interest of one or
more separate series representing interests in one or more investment
portfolios. The Trustees may hereafter create series in addition to the Trust's
twenty-one existing series, which represent interests in the Trust's twenty-one
respective portfolios. The Trust Agreement also permits the Board of Trustees to
classify or reclassify any unissued shares into classes within a series.
Pursuant to such authority, the Trustees have authorized the issuance of an
unlimited number of shares of beneficial interest in three separate classes of
shares in each of the Portfolios: Shares, Service Shares and Premier Shares.
This Additional Statement (and the related Prospectus) relates only to the
Shares of the five Portfolios discussed herein. For information on the other
share classes in each Portfolio and on the Trust's other investment portfolios,
call the toll-free number on page 1.
Under the terms of the Trust Agreement, each share of each Portfolio is
without par value, represents an equal proportionate interest in the particular
Portfolio with each other share of its class in the same Portfolio and is
entitled to such dividends and distributions out of the income belonging to the
Portfolio as are declared by the Trustees. Upon any liquidation of a Portfolio,
shareholders of each class of a Portfolio are entitled to share pro rata in the
net assets belonging to that class available for distribution. Shares do not
have any preemptive or conversion rights. The right of redemption is described
under "About Your Account - Selling Shares and Account Policies and Other
Information" in the Prospectus and under "Amortized Cost Valuation" in this
Additional Statement. In addition, pursuant to the terms of the 1940 Act, the
right of a shareholder to redeem shares and the date of payment by a Portfolio
may be suspended for more than seven days (i) for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or trading in the markets the Portfolio normally utilizes is closed or
is restricted as determined by the SEC, (ii) during any emergency, as determined
by the SEC, as a result of which it is not reasonably practicable for the
Portfolio to dispose of instruments owned by it or fairly to determine the value
of its net assets, or (iii) for such other period as the SEC may by order permit
for the protection of the shareholders of the Portfolio. The Trust may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions. In addition, shares of each
Portfolio are redeemable at the unilateral option of the Trust if the Trustees
determine in their sole discretion that failure to so redeem may have material
adverse consequences to the shareholders of the Portfolio. Shares when issued as
described in the Prospectus are validly issued, fully paid and nonassessable,
except as stated below. In the interests of economy and convenience,
certificates representing Shares of the Portfolios are not issued.
29
<PAGE>
The proceeds received by each Portfolio for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Portfolio. The underlying assets
of each Portfolio will be segregated on the books of account, and will be
charged with the liabilities in respect to that Portfolio and with a share of
the general liabilities of the Trust. Expenses with respect to the Portfolios
are normally allocated in proportion to the net asset value of the respective
Portfolios except where allocations of direct expenses can otherwise be fairly
made.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each Portfolio affected by the matter. A Portfolio is affected by a matter
unless it is clear that the interests of each Portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
Portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a Portfolio only if approved by a majority of the outstanding
shares of such Portfolio. However, the Rule also provides that the ratification
of the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees are exempt from the separate
voting requirements stated above. In addition, shareholders of each of the
classes in a particular investment portfolio have equal voting rights except
that only shares of a particular class of an investment portfolio will be
entitled to vote on matters submitted to a vote of shareholders (if any)
relating to shareholder servicing expenses and transfer agency fees that are
payable by that class.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees without the vote or consent of shareholders, either to one vote for
each share or to one vote for each dollar of net asset value represented by such
shares on all matters presented to shareholders, including the election of
Trustees (this method of voting being referred to as "dollar-based voting").
However, to the extent required by the 1940 Act or otherwise determined by the
Trustees, series and classes of the Trust will vote separately from each other.
Shareholders of the Trust do not have cumulative voting rights in the election
of Trustees and, accordingly, the holders of more than 50% of the aggregate
voting power of the Trust may elect all of the Trustees irrespective of the vote
of the other shareholders. Meetings of shareholders of the Trust, or any series
or class thereof, may be called by the Trustees, certain officers or upon the
written request of holders of 10% or more of the shares entitled to vote at such
meeting. The shareholders of the Trust will have voting rights only with respect
to the limited number of matters specified in the Trust Agreement and such other
matters as the Trustees may determine or may be required by law. The Trust does
not presently intend to hold annual meetings of shareholders except as required
by the 1940 Act or other applicable law. The Trustees will promptly call a
meeting of shareholders to vote upon the removal of any Trustee when so
requested in writing by the record holders of 10% or more of the outstanding
shares. To the extent required by law, the Trust will assist in shareholder
communications in connection with such a meeting.
The Trust Agreement authorizes the Trustees, without shareholder
approval (except as stated in the next paragraph), to cause the Trust, or any
series thereof, to merge or consolidate with any corporation, association, trust
or other organization or sell or exchange all or substantially all of the
property belonging to the Trust, or any series thereof. In addition, the
Trustees, without shareholder approval, may adopt a "master-feeder" structure by
investing substantially all of the assets of a series of the Trust in the
securities of another open-end investment company or pooled portfolio.
The Trust Agreement also authorizes the Trustees, in connection with
the merger, consolidation, termination or other reorganization of the Trust or
any series or class, to classify the shareholders of any class into one or more
separate groups and to provide for the different treatment of shares held by the
different groups, provided that such merger, consolidation, termination or other
reorganization is approved by a majority of the outstanding voting securities
(as defined in the 1940 Act) of each group of shareholders that are so
classified.
The Trust Agreement permits the Trustees to amend the Trust Agreement
without a shareholder vote. However, shareholders of the Trust have the right to
vote on any amendment: (i) that would adversely affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Trust Agreement; or (iv) that the
Trustees determine to submit to shareholders.
30
<PAGE>
The Trust Agreement permits the termination of the Trust or of any
series or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors and
events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any series or class to maintain its
assets at an appropriate size; (ii) changes in laws or regulations governing the
Trust or any series or class thereof, or affecting assets of the type in which
it invests; or (iii) economic developments or trends having a significant
adverse impact on their business or operations.
Under the Delaware Business Trust Act (the "Delaware Act"),
shareholders are not personally liable for obligations of the Trust. The
Delaware Act entitles shareholders of the Trust to the same limitation of
liability as is available to shareholders of private for-profit corporations.
However, no similar statutory or other authority limiting business trust
shareholder liability exists in many other states. As a result, to the extent
that the Trust or a shareholder is subject to the jurisdiction of courts in such
other states, those courts may not apply Delaware law and may subject the
shareholders to liability. To offset this risk, the Trust Agreement (i) contains
an express disclaimer of shareholder liability for acts or obligations of the
Trust and requires that notice of such disclaimer be given in each agreement,
obligation and instrument entered into or executed by the Trust or its Trustees
and (ii) provides for indemnification out of the property of the applicable
series of the Trust of any shareholder held personally liable for the
obligations of the Trust solely by reason of being or having been a shareholder
and not because of the shareholder's acts or omissions or for some other reason.
Thus, the risk of a shareholder incurring financial loss beyond his or her
investment because of shareholder liability is limited to circumstances in which
all of the following factors are present: (i) a court refuses to apply Delaware
law; (ii) the liability arises under tort law or, if not, no contractual
limitation of liability is in effect; and (iii) the applicable series of the
Trust is unable to meet its obligations.
The Trust Agreement provides that the Trustees will not be liable to
any person other than the Trust or a shareholder and that a Trustee will not be
liable for any act as a Trustee. However, nothing in the Trust Agreement
protects a Trustee against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
The Trust Agreement provides for indemnification of Trustees, officers and
agents of the Trust unless the recipient is liable by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such person's office.
The Trust Agreement provides that each shareholder, 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.
In addition to the requirements of Delaware law, the Trust Agreement
provides that a shareholder of the Trust may bring a derivative action on behalf
of the Trust only if the following conditions are met: (i) shareholders eligible
to bring such derivative action under Delaware law who hold at least 10% of the
outstanding shares of the Trust, or 10% of the outstanding shares of the series
or class to which such action relates, must join in the request for the Trustees
to commence such action; and (ii) the Trustees must be afforded a reasonable
amount of time to consider such shareholder request and to investigate the basis
of such claim. The Trust Agreement also provides that no person, other than the
Trustees, who is not a shareholder of a particular series or class shall be
entitled to bring any derivative action, suit or other proceeding on behalf of
or with respect to such series or class. The Trustees will be entitled to retain
counsel or other advisers in considering the merits of the request and may
require an undertaking by the shareholders making such request to reimburse the
Trust for the expense of any such advisers in the event that the Trustees
determine not to bring such action.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). To the extent
provided by the Trustees in the appointment of Series Trustees, Series Trustees
(i) may, but are not required to, serve as Trustees of the Trust or any other
series or class of the Trust; (ii) may have, to the exclusion of any other
Trustee of the Trust, all the powers and authorities of Trustees under the Trust
Agreement with respect to such series or class; and/or (iii) may have no power
or authority with respect to any other series or class. The Trustees are not
currently considering the appointment of Series Trustees for the Trust.
As of February 29, 2000, substantially all of the Trust's Portfolios'
outstanding shares were held of record by Northern for the benefit of its
customers and the customers of its affiliates and correspondent banks that have
invested in
31
<PAGE>
the Portfolios. As of the same date, Northern possessed sole or shared voting
and/or investment power for its customer accounts with respect to less than 10%
of the Trust's outstanding shares. As of the same date, the Trust's Trustees and
officers as a group owned beneficially less than 1% of the outstanding shares of
each class of each Portfolio.
Northern has advised the Trust that the following persons (whose
mailing address is: c/o The Northern Trust Company, 50 South LaSalle, Chicago,
IL 60675) beneficially owned five percent or more of the outstanding shares of
the Portfolios' classes as of February 29, 2000:
<TABLE>
<CAPTION>
Number Percentage
of Shares of Shares
--------- ---------
<S> <C> <C>
DIVERSIFIED ASSETS PORTFOLIO
Shares
MCCA-Western Asset Management 353,714,105.58 5.5%
Service Shares
First Mid-Illinois Bank & Trust 7,101,961.29 20.2%
Merchants National Bank 15,838,606.52 45.0%
Premier Shares
Riverview Community Bank 11,532,495.64 100.0%
GOVERNMENT PORTFOLIO
Shares
Grinnell Pooled 97,866,038.69 5.4%
Service Shares
Cole Taylor Bank 5,011,217.08 39.9%
Secured Trust 3,481,422.03 27.7%
Bankers/West Michigan 687,102.82 5.5%
Premier Shares
Chitenden Bank 38,732,600.00 100.0%
GOVERNMENT SELECT PORTFOLIO
Shares
TNT-London FBO Food & Agricultural 169,573,947.00 8.2%
Organization
Service Shares
Cape Coe Bank & Trust 77,107,301.12 85.7%
Richfield Bank & Trust Co. 6,951,975.36 7.7%
Premier Shares
South Central Bank & Trust 236,788.71 5.6%
Richfield Bank & Trust Co. 4,018,295.33 94.4%
TAX-EXEMPT PORTFOLIO
Shares
Tisch 27,602,844.78 5.3%
Service Shares
Chitenden Bank 22,205,771.00 73.8%
Merchants National Bank. 6,920,658.02 23.0%
<CAPTION>
Number Percentage
of Shares of Shares
--------- ---------
<S> <C> <C>
MUNICIPAL PORTFOLIO
Shares
Mercantile National Bank 3,100,319.00 7.5%
Indiana Trust & Investment Management Co. 7,321,904.58 17.8%
Trust Co of Toledo 28,914,948.04 70.2%
</TABLE>
32
<PAGE>
ADDITIONAL INFORMATION CONCERNING TAXES
General
Each Portfolio will elect to be taxed separately as a regulated
investment company (a "RIC"). To qualify as a RIC, each Portfolio generally must
distribute an amount equal to at least the sum of 90% of its investment company
taxable income and 90% of its net tax-exempt interest income (net investment
income and the excess of net short-term capital gain over net long-term capital
loss), if any, for each year (the "Distribution Requirement") and satisfy
certain other requirements.
Each Portfolio must derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities or currencies. Also , at the close of each quarter of the
taxable year, it is generally required that at least 50% of the value of each
Portfolio's assets must consist of cash and cash items, U.S. Government
securities, securities of other RICs and securities of other issuers (as to
which the Portfolio has not invested more than 5% of the value of its total
assets in securities of such issuer and as to which the Portfolio does not hold
more than 10% of the outstanding voting securities of such issuer), and no more
than 25% of the value of each Portfolio's total assets may be invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other RICs), or in two or more issuers which such Portfolio
controls and which are engaged in the same or similar trades or businesses. Each
Portfolio intends to comply with these RIC requirements.
If for any taxable year any Portfolio were not to qualify as a RIC, all
of its taxable income would be subject to tax at regular corporate rates without
any deduction for distributions to shareholders. In such event, all
distributions by the Portfolio would be taxable to shareholders as ordinary
income to the extent of the Portfolio's current and accumulated earnings and
profits, and would be eligible for the dividends-received deduction in the case
of corporate shareholders.
The Internal Revenue Code imposes a nondeductible 4% excise tax on RICs
that fail currently to distribute an amount equal to specified percentages of
their ordinary taxable income and capital gain net income (excess of capital
gains over capital losses). Each Portfolio intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax. Each
Portfolio also intends to make sufficient distributions or deemed distributions
each year to avoid liability for corporate income tax. If a Portfolio were to
fail to make sufficient distributions, it could be liable for corporate income
tax and for excise tax.
The Trust will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of taxable interest or
dividend income properly, or (iii) who has failed to certify to the Trust, when
required to do so, that he or she is not subject to backup withholding or that
he or she is an "exempt recipient."
Special Tax Considerations Pertaining to the Tax-Exempt and Municipal Portfolios
Investors in either of Tax-Exempt and Municipal Portfolios should note
that taxpayers are required to report the receipt of tax-exempt interest and
"exempt-interest dividends" on their Federal income tax returns and that in two
circumstances such amounts, while exempt from regular Federal income tax, are
taxable to persons subject to alternative minimum taxes. First, tax-exempt
interest and "exempt-interest dividends" derived from certain private activity
bonds
33
<PAGE>
issued after August 7, 1986 generally will constitute an item of tax preference
for corporate and noncorporate taxpayers in determining alternative minimum tax
liability. Second, all tax-exempt interest and "exempt-interest dividends" must
be taken into account by corporate taxpayers in determining certain adjustments
for alternative minimum tax purposes.
As described above and in the Prospectus, the Tax-Exempt and Municipal
Portfolios are designed to provide investors with Federally tax-exempt interest
income.
Neither the Tax-Exempt Portfolio nor the Municipal Portfolio is
intended to constitute a balanced investment program and is not designed for
investors seeking capital appreciation or maximum tax-exempt income irrespective
of fluctuations in principal. Shares of these Portfolios would not be suitable
for tax-exempt institutions or for retirement plans qualified under Section 401
of the Code, H.R.10 plans and individual retirement accounts because such plans
and accounts are generally tax-exempt and, therefore, would not gain any
additional benefit from the Portfolio's dividends being tax-exempt. In addition,
the Portfolios may not be an appropriate investment for persons or entities that
are "substantial users" of facilities financed by private activity bonds or
"related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person which regularly uses a part of such
facilities in its trade or business and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds are more than 5% of
the total revenues derived by all users of such facilities, or which occupies
more than 5% of the usable area of such facilities or for which such facilities
or a part thereof were specifically constructed, reconstructed or acquired.
"Related persons" include certain related natural persons, affiliated
corporations, partnerships and its partners and an S corporation and its
shareholders.
In order for the Tax-Exempt and Municipal Portfolios to pay Federal
exempt-interest dividends with respect to any taxable year, at the close of each
taxable quarter at least 50% of the aggregate value of the Portfolio must
consist of tax-exempt obligations. An exempt-interest dividend is any dividend
or part thereof (other than a capital gain dividend) paid by the Tax-Exempt or
Municipal Portfolios and designated as an exempt-interest dividend in a written
notice mailed to shareholders not later than 60 days after the close of the
Portfolio's taxable year. However, the aggregate amount of dividends so
designated by either Portfolio cannot exceed the excess of the amount of
interest exempt from tax under Section 103 of the Code received by the Portfolio
during the taxable year over any amounts disallowed as deductions under Sections
265 and 171(a)(2) of the Code. The percentage of total dividends paid by each of
the Tax-Exempt and Municipal Portfolios with respect to any taxable year which
qualifies as Federal exempt-interest dividends will be the same for all
shareholders receiving dividends from the Portfolio with respect to such year.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Tax-Exempt and Municipal Portfolios generally is not deductible
for Federal income tax purposes to the extent attributable to
exempt-interest-dividends. If a shareholder holds either Tax-Exempt or Municipal
Portfolio shares for six months or less, any loss on the sale or exchange of
those shares will be disallowed to the extent of the amount of exempt-interest
dividends earned with respect to the shares. The Treasury Department, however,
is authorized to issue regulations reducing the six-month holding requirement to
a period of not less than the greater of 31 days or the period between regular
distributions for investment companies that regularly distribute at least 90% of
its net tax-exempt interest. No such regulations had been issued as of the date
of this Additional Statement.
The Tax-Exempt and Municipal Portfolios will determine annually the
percentages of their net investment income which is exempt from tax, which
constitute an item of tax preference for purposes of the Federal alternative
minimum tax, and which is fully taxable, and will apply these percentages
uniformly to all dividends declared from net investment income during that year.
These percentages may differ significantly from the actual percentages for any
particular day.
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Tax-Exempt and Municipal Portfolios.
Income from the Tax-Exempt Portfolio may not be tax-exempt in its
entirety and may be subject to taxes in certain jurisdictions.
Foreign Investors
34
<PAGE>
Foreign shareholders generally will be subject to U.S. withholding tax
at a rate of 30% (or a lower treaty rate, if applicable) on distributions by a
Portfolio of net investment income, other ordinary income, and the excess, if
any, of net short-term capital gain over net long-term capital loss for the
year, regardless of the extent, if any, to which the income or gain is derived
from non-U.S. investments of the Portfolio. For this purpose, foreign
shareholders include individuals other than U.S. citizens, residents and certain
nonresident aliens, and foreign corporations, partnerships, trusts and estates.
Different tax consequences may apply to a foreign shareholder engaged in a U.S.
trade or business or present in the U.S. for 183 days or more in a year. Foreign
shareholders should consult their tax advisers regarding the U.S. and foreign
tax consequences of investing in a Portfolio.
Conclusion
The foregoing discussion is based on Federal tax laws and regulations
which are in effect on the date of this Additional Statement. Such laws and
regulations may be changed by legislative or administrative action. No attempt
is made to present a detailed explanation of the tax treatment of the Portfolio
or its shareholders, and the discussion here and in the Prospectus is not
intended as a substitute for careful tax planning. Shareholders are advised to
consult their tax advisers with specific reference to their own tax situation,
including the application of state and local taxes.
Although each Portfolio expects to qualify as a RIC and to be relieved
of all or substantially all Federal taxes, depending upon the extent of its
activities in states and localities in which its offices are maintained, in
which its agents or independent contractors are located or in which it is
otherwise deemed to be conducting business, each Portfolio may be subject to the
tax laws of such states or localities.
OTHER INFORMATION
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
Securities Act of 1933 with respect to the securities offered by the Trust's
Prospectus. Certain portions of the Registration Statement have been omitted
from the Prospectus and this Additional Statement pursuant to the rules and
regulations of the SEC. The Registration Statement including the exhibits filed
therewith may be examined at the office of the SEC in Washington, D.C.
Each Portfolio is responsible for the payment of its expenses. Such
expenses include, without limitation, the fees and expenses payable to Northern
and PFPC, brokerage fees and commissions, fees for the registration or
qualification of Portfolio shares 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 for violation of any law, legal, tax and
auditing fees and expenses, 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 shareholders and
regulatory authorities, compensation and expenses of its Trustees, expenses for
industry organizations such as the Investment Company Institute, miscellaneous
expenses and extraordinary expenses incurred by the Trust.
The term "majority of the outstanding shares" of either the Trust or a
particular Portfolio means, with respect to the approval of an investment
advisory agreement or a change in a fundamental investment restriction, the vote
of the lesser of (i) 67% or more of the shares of the Trust or such Portfolio
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Trust or such Portfolio are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Trust or such Portfolio.
Statements contained in the Prospectus or in this Additional Statement
as to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the registration statement of
which the Prospectus and this Additional Statement form a part, each such
statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related report of Ernst & Young
LLP, independent auditors, contained in the annual report to the Portfolios'
shareholders for the fiscal year ended November 30, 1999 (the "Annual Report")
are
35
<PAGE>
hereby incorporated herein by reference and attached hereto. No other parts of
the Annual Report, including without limitation, "Management's Discussion of
Portfolio Performance," are incorporated by reference herein. Copies of the
Annual Report may be obtained upon request and without charge by calling 1-800-
637-1380 (toll-free). No financial statements are supplied for the Municipal
Portfolio because it did not commence operations during the period ended
November 30, 1999.
36
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's Ratings Group, Inc. ("S&P") commercial paper rating
is a current assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper that is a
permissible investment for the Portfolios:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's
capacity to meet its financial commitment on these obligations is
extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is
satisfactory.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the rating
categories used by Moody's for commercial paper that is a permissible investment
for the Portfolios:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established
industries; high rates of return on funds employed; conservative
capitalization structure with moderate reliance on debt and ample asset
protection; broad margins in earnings coverage of fixed financial
charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate
liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
The following summarizes the rating categories used by Duff & Phelps
Credit Rating Co. ("D&P") for commercial paper that is a permissible investment
for the Portfolios:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
D&P employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category.
Fitch IBCA ("Fitch") short-term ratings apply to debt obligations that have time
horizons of less than 12 months for
A-1
<PAGE>
most obligations, or up to three years for U.S. public finance securities. The
following summarizes the rating categories used by Fitch for short-term
obligations that are permissible investments for the Portfolios:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally
strong credit feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of
the higher ratings.
Thomson BankWatch, Inc. ("TBW") short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by TBW
for short-term obligations that are permissible investments for the Portfolios:
"TBW-1" - This designation represents TBW's highest category and
indicates a very high likelihood that principal and interest will be
paid on a timely basis.
"TBW-2" - This designation represents TBW's second-highest category and
indicates that while the degree of safety regarding timely repayment of
principal and interest is strong, the relative degree of safety is not
as high as for issues rated "TBW-1."
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by S&P's for corporate and municipal
debt that are permissible investments for the Portfolios:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its
financial commitment on the obligation is very strong.
PLUS (+) OR MINUS (-) - The "AA" rating classification may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
"r" - This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's Investors Service, Inc.
("Moody's") for corporate and municipal long-term debt that are permissible
investments for the Portfolios:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long- term risk appear
somewhat larger than the "Aaa" securities.
A-2
<PAGE>
Con. (---) - Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (i) earnings of projects under construction, (ii) earnings of
projects unseasoned in operating experience, (iii) rentals which begin when
facilities are completed, or (iv) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in the rating
classification "Aa". The modifier 1 indicates that the obligation ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of its generic
rating category.
The following summarizes the long-term debt ratings used by D&P for corporate
and municipal long-term debt that are permissible investments for the
Portfolios:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
To provide more detailed indications of credit quality, the "AA" and "A" ratings
may be modified by the addition of a plus (+) or minus (-) sign to show relative
standing within these major categories.
The following summarizes the ratings used by Fitch for corporate and municipal
bonds that are permissible investments for the Portfolio:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of credit
risk and are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to
foreseeable events.
To provide more detailed indications of credit quality, the Fitch rating "AA"
may be modified by the addition of a plus (+) or minus (-) sign to show relative
standing within the major rating category.
TBW assesses the likelihood of an untimely repayment of principal or interest
over the term to maturity of long term debt and preferred stock which are issued
by United States commercial banks, thrifts and non-bank banks; non-United States
banks; and broker-dealers. The following summarizes the rating categories used
by TBW for long-term debt ratings for those investments which are permissible
investments for the Portfolios:
"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.
PLUS (+) OR MINUS (-) - The ratings "AAA" and "AA" may include a plus or minus
sign designation which indicates where within the respective category the issue
is placed.
Municipal Note Ratings
- ----------------------
A S&P's rating reflects the liquidity concerns and market access risks unique to
notes due in three years or less. The following summarizes the ratings used by
S&P's Ratings Group for municipal notes that are permissible investments
A-3
<PAGE>
for the Portfolios:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity
to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG") and variable rate demand obligations
are designated Variable Moody's Investment Grade ("VMIG"). Such ratings
recognize the differences between short-term credit risk and long-term risk. The
following summarizes the ratings by Moody's for short-term notes that are
permissible investments for the Portfolios:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins
of protection that are ample although not so large as in the preceding
group.
Fitch and D&P use the short-term ratings described under Commercial Paper
Ratings for municipal notes that are permissible investments for the Portfolios.
A-4
<PAGE>
Money Market Portfolios
Premier &
Service Shares
APRIL 1, 2000
Prospectus
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Northern Institutional Funds
- --------------------------------------------------------------------------------
MONEY MARKET . Government Select Portfolio
-------------------------------------------------------
PORTFOLIOS . Government Portfolio
-------------------------------------------------------
SERVICE SHARES . Diversified Assets Portfolio
-------------------------------------------------------
PREMIER SHARES . Tax-Exempt Portfolio
-------------------------------------------------------
. Municipal Portfolio
-------------------------------------------------------
Prospectus dated April 1, 2000
An investment in a Portfolio is not a deposit of any
bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government
agency. Although each of the Portfolios seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the
Portfolios.
The Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the
adequacy of this Prospectus. Any representation to the
contrary is a criminal offense.
<PAGE>
Contents
PAGE
- --------------------------------------------------------------------------------
OVERVIEW 4
- --------------------------------------------------------------------------------
RISK/RETURN Portfolios
SUMMARY .....................................................
Information about the Government Select Portfolio 5
objectives, principal .....................................................
strategies and risk Government Portfolio 6
characteristics of .....................................................
each Portfolio Diversified Assets Portfolio 7
.....................................................
Tax-Exempt Portfolio 8
.....................................................
Municipal Portfolio 9
-------------------------------------------------------
Principal Investment Risks 10
-------------------------------------------------------
Portfolio Performance 13
.....................................................
Government Select Portfolio 14
.....................................................
Government Portfolio 15
.....................................................
Diversified Assets Portfolio 16
.....................................................
Tax-Exempt Portfolio 17
-------------------------------------------------------
Portfolio Fees and Expenses 18
- --------------------------------------------------------------------------------
MANAGEMENT Investment Adviser 22
-------------------------------------------------------
OF THE Advisory Fees 23
-------------------------------------------------------
PORTFOLIOS Other Portfolio Services 24
Details that apply
to the Portfolios as
a group
- --------------------------------------------------------------------------------
ABOUT YOUR Purchasing and Selling Service Shares
ACCOUNT and Premier Shares 25
......................................................
How to open, maintain Investors 25
and close an account ......................................................
Share Classes 25
......................................................
Opening an Account 26
......................................................
Selling Service Shares and Premier Shares 27
-------------------------------------------------------
Account Policies and Other Information 28
......................................................
Automatic Investment Arrangements 28
......................................................
Purchase and Redemption Minimums 28
......................................................
<PAGE>
- --------------------------------------------------------------------------------
Calculating Share Price 28
......................................................
Timing of Purchase Requests 28
......................................................
Tax Identification Number 29
......................................................
In-Kind Purchases and Redemptions 29
......................................................
Miscellaneous Purchase Information 29
......................................................
Timing of Redemption and Exchange Requests 29
......................................................
Miscellaneous Redemption Information 30
......................................................
Exchange Privileges 30
......................................................
Telephone Transactions 30
......................................................
Advance Notification of Large Transactions 31
......................................................
Making Changes to Your Account Information 31
......................................................
Business Day 31
......................................................
Early Closings 31
......................................................
Authorized Intermediaries 31
......................................................
Servicing Agents 31
......................................................
Shareholder Communications 32
-------------------------------------------------------
Distributions and Taxes 33
......................................................
Distributions 33
......................................................
Taxes 33
......................................................
Other Tax Information 34
- --------------------------------------------------------------------------------
RISKS, Risks, Securities and Techniques 35
SECURITIES AND
TECHNIQUES
- --------------------------------------------------------------------------------
APPENDIX Portfolio Financial Highlights 43
- --------------------------------------------------------------------------------
FOR MORE Annual/Semiannual Reports 48
-------------------------------------------------------
INFORMATION Statement of Additional Information 48
<PAGE>
OVERVIEW
Northern Institutional Funds (the "Trust") offers five money
market portfolios (each a "Portfolio") to institutional
investors. Each Portfolio is authorized to offer three
classes of shares: Shares, Service Shares and Premier
Shares. Shares are described in a separate prospectus.
The descriptions on the following pages may help you choose
the Portfolio that best fits your investment needs. Keep in
mind, however, that no Portfolio can guarantee it will meet
its investment objective and no Portfolio should be relied
upon as a complete investment program. The Trust's six fixed
income, one balanced and nine equity portfolios are
described in a separate prospectus.
The Portfolios seek to maintain a stable net asset value of
$1.00 per share. Consistent with this policy, each of the
Portfolios:
. Limits its dollar-weighted average portfolio maturity to
90 days or less;
. Buys securities with remaining maturities of 397 days or
less (except for certain variable and floating rate
instruments and securities collateralizing repurchase
agreements); and
. Invests only in U.S. dollar-denominated securities that
represent minimal credit risks.
In addition, each Portfolio limits its investments to
"Eligible Securities" as defined by the Securities and
Exchange Commission ("SEC"). Eligible Securities include,
generally, securities that either (a) have short-term debt
ratings at the time of purchase in the two highest rating
categories or (b) are issued or guaranteed by, or otherwise
allow a Portfolio to demand payment from, an issuer with
those ratings. Securities that are unrated (including
securities of issuers that have long-term but not short-term
ratings) may be deemed to be Eligible Securities if
determined to be of comparable quality by The Northern Trust
Company ("Northern") under the direction of the Board of
Trustees. Securities that are in the highest short-term
rating category (and comparable unrated securities) are
called "First Tier Securities." Under normal circumstances,
the Government Select, Government and Diversified Assets
Portfolios intend to limit purchases of securities to First
Tier Securities. Securities in which the Portfolios may
invest may not earn as high a level of income as long-term
or lower quality securities, which generally have greater
market risk and more fluctuation in market value.
In addition to the instruments described above and on the
pages below, each Portfolio may use various investment
techniques in seeking its investment objective. You can
learn more about these techniques and related risks by
reading "Risks, Securities and Techniques" beginning on page
35 of this Prospectus and the Statement of Additional
Information.
4
<PAGE>
RISK/RETURN SUMMARY
GOVERNMENT SELECT PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT The Portfolio seeks to maximize current income to the extent
OBJECTIVE consistent with the preservation of capital and maintenance
of liquidity by investing exclusively in high-quality money
market instruments.
- --------------------------------------------------------------------------------
PRINCIPAL Investment Strategies
INVESTMENT
STRATEGIES The Portfolio seeks its objective by investing exclusively
AND RISKS in securities issued or guaranteed as to principal and
interest by the U.S. government, its agencies or
instrumentalities. Under normal market conditions, the
Portfolio will seek to acquire only those U.S. government
securities the interest upon which is generally exempt from
state income taxation. These securities include obligations
issued by the U.S. Treasury and certain U.S. government
agencies and instrumentalities, such as the Federal Home
Loan Bank and the Federal Farm Credit Banks Funding Corp.
When appropriate securities which are exempt from state
taxes are unavailable, the Portfolio may also invest in non-
exempt U.S. government securities and cash equivalents
including money market funds and time deposits with a
maturity of three months or less, and hold uninvested cash.
Risks
These primary investment risks apply to the Portfolio:
stable NAV risk, interest rate risk, prepayment (or call)
risk, debt extension risk, Government securities risk,
guarantor (or credit enhancement) risk, management risk and
liquidity risk. These and other risks are summarized on page
10.
More information on the Portfolio's investment strategies
and techniques is provided in "Risks, Securities and
Techniques" beginning on page 35 of this Prospectus.
5
<PAGE>
GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT The Portfolio seeks to maximize current income to the extent
OBJECTIVE consistent with the preservation of capital and maintenance
of liquidity by investing exclusively in high-quality money
market instruments.
- --------------------------------------------------------------------------------
PRINCIPAL Investment Strategies
INVESTMENT
STRATEGIES The Portfolio seeks its objective by investing in
AND RISKS marketable securities issued or guaranteed as to
principal and interest by the U.S. government, its agencies
or instrumentalities, and repurchase agreements backed by
such securities. The Portfolio may invest up to 35% of its
total assets in custodial receipts (such as TIGRs and CATS)
representing interests in U.S. government securities.
Risks
These primary investment risks apply to the Portfolio:
stable NAV risk, interest rate risk, prepayment (or call)
risk, debt extension risk, Government securities risk,
guarantor (or credit enhancement) risk, management risk and
liquidity risk. These and other risks are summarized on page
10.
More information on the Portfolio's investment strategies
and techniques is provided in "Risks, Securities and
Techniques" beginning on page 35 of this Prospectus.
6
<PAGE>
RISK/RETURN SUMMARY
DIVERSIFIED ASSETS PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT The Portfolio seeks to maximize current income to the extent
OBJECTIVE consistent with the preservation of capital and maintenance
of liquidity by investing exclusively in high-quality money
market instruments.
- --------------------------------------------------------------------------------
PRINCIPAL Investment Strategies
INVESTMENT
STRATEGIES The Portfolio seeks its objective by investing in a broad
AND RISKS range of government, bank and commercial obligations that
are available in the money markets, including:
. U.S. dollar-denominated obligations of U.S. banks with
total assets in excess of $1 billion (including
obligations of foreign branches of such banks);
. U.S. dollar-denominated obligations of foreign commercial
banks where such banks have total assets in excess of $5
billion;
. High-quality commercial paper and other obligations issued
or guaranteed by U.S. and foreign corporations and other
issuers;
. Corporate bonds, notes, paper and other instruments that
are of high quality;
. Asset-backed securities (such as credit card and
automobile receivables);
. Securities issued or guaranteed as to principal and
interest by the U.S. government or by its agencies or
instrumentalities and custodial receipts with respect
thereto;
. U.S. dollar-denominated securities issued or guaranteed by
one or more foreign governments or political subdivisions,
agencies or instrumentalities;
. Repurchase agreements relating to the above instruments;
and
. Municipal securities issued or guaranteed by state or
local governmental bodies.
Risks
These primary investment risks apply to the Portfolio:
stable NAV risk, interest rate risk, credit (or default)
risk, guarantor (or credit enhancement) risk, management
risk, liquidity risk, prepayment (or call) risk, debt
extension risk and foreign securities risk. These and other
risks are summarized on page 10.
More information on the Portfolio's investment strategies
and techniques is provided in "Risks, Securities and
Techniques" beginning on page 35 of this Prospectus.
7
<PAGE>
TAX-EXEMPT PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT The Portfolio seeks to provide its shareholders, to the
OBJECTIVE extent consistent with the preservation of capital and
prescribed portfolio standards, with a high level of income
exempt from Federal income tax by investing primarily in
municipal instruments.
- --------------------------------------------------------------------------------
PRINCIPAL Investment Strategies
INVESTMENT
STRATEGIES The Portfolio seeks to achieve its objective by investing
AND RISKS primarily in high-quality short-term instruments, the
interest on which is exempt from Federal income tax
("municipal instruments"). The high level of income sought
by the Portfolio is relative to yields currently available
in the tax-exempt marketplace. Municipal instruments may
include:
. Fixed and variable rate notes and similar debt
instruments;
. Asset-backed securities which are considered municipal
instruments (such as trust certificates backed by
municipal bonds);
. Tax-exempt commercial paper;
. Rated and unrated municipal bonds, notes, paper or other
instruments; and
. Municipal bonds and notes which are guaranteed as to
principal and interest or backed by the U.S. government or
its agencies or instrumentalities.
Under normal market conditions, at least 80% of the
Portfolio's net assets will be invested in municipal
instruments. Interest earned by the Portfolio on AMT
obligations ("private activity bonds") the interest on which
may be treated as an item of tax preference to shareholders
under the Federal alternative minimum tax, will not be
deemed to have been derived from municipal instruments for
the purposes of determining whether the Portfolio meets this
policy. For shareholders subject to AMT, a limited portion
of the Portfolio's dividends may be subject to Federal tax.
During extraordinary circumstances, however, the Portfolio
may take a temporary defensive posture and hold uninvested
cash or invest in AMT obligations and taxable short-term
securities without limitation. During temporary defensive
periods the Portfolio may not achieve its investment
objective.
Taxable investments will consist exclusively of those
instruments that may be purchased by the Diversified Assets
Portfolio including U.S. dollar-denominated obligations of
U.S. banks, foreign commercial banks and securities issued
or guaranteed by foreign governments; high quality
commercial paper and other obligations; high-quality
corporate bonds and notes; asset-backed securities;
securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities and custodial receipts with
respect thereto; and repurchase agreements relating to the
above instruments.
Risks
These primary investment risks apply to the Portfolio:
stable NAV risk, interest rate risk, credit (or default)
risk, guarantor (or credit enhancement) risk, management
risk, liquidity risk, prepayment (or call) risk, debt
extension risk, project/industrial development bond risk and
tax risk. These and other risks are summarized on page 10.
More information on the Portfolio's investment strategies
and techniques is provided in "Risks, Securities and
Techniques" beginning on page 35 of this Prospectus.
8
<PAGE>
RISK/RETURN SUMMARY
MUNICIPAL PORTFOLIO
- --------------------------------------------------------------------------------
INVESTMENT The Portfolio seeks to provide, to the extent consistent
OBJECTIVE with the preservation of capital, a high level of income
exempt from regular Federal income tax by investing
primarily in municipal instruments. This objective may be
changed without shareholder approval.
- --------------------------------------------------------------------------------
PRINCIPAL Investment Strategies
INVESTMENT
STRATEGIES The Portfolio seeks to achieve its objective by investing
AND RISKS primarily in high-quality short-term municipal instruments.
The high level of income sought by the Portfolio is relative
to yields currently available in the tax-exempt
marketplace. Municipal instruments may include:
. Fixed and variable rate notes and similar debt
instruments;
. Asset-backed securities which are considered municipal
instruments (such as trust certificates backed by
municipal bonds);
. Tax-exempt commercial paper;
. Rated and unrated municipal bonds, notes, paper or other
instruments; and
. Muncipal bonds and notes which are guaranteed as to
principal and interest or backed by the U.S. government or
its agencies or instrumentalities.
Under normal circumstances, at least 80% of the Portfolio's
net assets will be invested in municipal instruments.
Subject to this limitation, the Portfolio may hold
uninvested cash and invest in taxable instruments. During
temporary defensive periods, however, all or any portion of
the Portfolio's assets may be held uninvested or invested in
taxable instruments. During temporary defensive periods the
Portfolio may not achieve its investment objective.
The Portfolio is not limited in the amount of its assets
that may be invested in AMT obligations ("private activity
bonds") the interest on which may be treated as an item of
tax preference to shareholders under the Federal alternative
minimum tax. For shareholders subject to AMT, a significant
portion of the Portfolio's dividends may be subject to
Federal tax. The Portfolio does not currently intend to
invest in AMT obligations. The Portfolio retains, however,
the ability to invest any or all of its assets in AMT
obligations, and may do so in the future.
Taxable investments will consist exclusively of those
instruments that may be purchased by the Diversified Assets
Portfolio including U.S. dollar-denominated obligations of
U.S. banks, foreign commercial banks and securities issued
or guaranteed by foreign governments; high quality
commercial paper and other obligations; high-quality
corporate bonds and notes; asset-backed securities;
securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities and custodial receipts with
respect thereto; and repurchase agreements relating to the
above instruments.
Risks
These primary investment risks apply to the Portfolio:
stable NAV risk, interest rate risk, credit (or default)
risk, guarantor (or credit enhancement) risk, management
risk, liquidity risk, prepayment (or call) risk, debt
extension risk, project/industrial development bond risk and
tax risk. These and other risks are summarized on page 10.
More information on the Portfolio's investment strategies
and techniques is provided in "Risks, Securities and
Techniques" beginning on page 35 of this Prospectus.
9
<PAGE>
PRINCIPAL INVESTMENT RISKS
All investments carry some degree of risk which will affect
the value of a Portfolio's investments, investment
performance, yield and the price of its shares.
An investment in a Portfolio is not a deposit of any bank
and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Although each of the Portfolios seeks to preserve the value
of your investment at $1.00 per share, it is possible to
lose money by investing in the Portfolios.
The following summarizes the principal risks that may affect
the Portfolios.
- --------------------------------------------------------------------------------
RISKS THAT Stable NAV risk is the risk that a Portfolio will not be
APPLY TO ALL able to maintain a net asset value per share of $1.00 at all
PORTFOLIOS times.
Interest rate risk is the risk that during periods of rising
interest rates, a Portfolio's yield (and the market value of
its securities) will tend to be lower than prevailing market
rates; in periods of falling interest rates, a Portfolio's
yield (and the market value of its securities) will tend to
be higher.
Guarantor (or Credit enhancement) risk is the risk that
changes in credit quality of a U.S. or foreign bank,
insurance company or other financial institution could cause
a Portfolio's investments in securities backed by letters of
credit or other credit enhancements issued by such bank or
institution to decline in value.
Management risk is the risk that a strategy used by the
investment management team may fail to produce the intended
results.
Liquidity risk is the risk that a Portfolio will not be able
to pay redemption proceeds on the same Business Day that
shares are redeemed, because of unusual market conditions,
an unusually high volume of redemption requests or other
reasons.
10
<PAGE>
RISK/RETURN SUMMARY
- --------------------------------------------------------------------------------
RISK THAT Government securities risk is the risk that the U.S.
APPLIES government will not provide financial support to U.S.
PRIMARILY government agencies, instrumentalities or sponsored
TO THE GOVERN- enterprises if it is not obligated to do so by law..
MENT SELECT
AND GOVERNMENT
PORTFOLIOS
- --------------------------------------------------------------------------------
RISKS THAT Credit (or Default) risk is the risk that an issuer of fixed
APPLY PRIMARILY income securities held by the Portfolio may default on its
TO THE DIVERSIFIED obligation to pay interest and repay principal. Generally,
ASSETS, TAX-EXEMPT the lower the credit rating of a security, the greater the
AND MUNICIPAL risk that the issuer of the security will default on its
PORTFOLIOS obligation. High-quality securities are generally believed
to have relatively low degrees of credit risk.
Prepayment (or Call) risk is the risk that an issuer will
exercise its right to pay principal on an obligation held by
a Portfolio (such as an asset-backed security) earlier than
expected. This may happen during a period of declining
interest rates. Under these circumstances, a Portfolio may
be unable to recoup all of its initial investment and will
suffer from having to reinvest in lower yielding securities.
The loss of higher yielding securities and the reinvestment
at lower interest rates can reduce a Portfolio's income.
Debt extension risk is the risk that an issuer will exercise
its right to pay principal on an obligation held by the
Portfolio (such as an asset-backed security) later than
expected. This may happen during a period of rising interest
rates. Under these circumstances, the value of the
obligation will decrease and a Portfolio will suffer from
the inability to invest in higher yielding securities.
11
<PAGE>
Principal Investment Risks continued
- --------------------------------------------------------------------------------
RISKS THAT Project/industrial development bond risk is the risk that a
APPLY TO THE Portfolio may be more sensitive to an adverse economic,
TAX-EXEMPT AND Project/industrial development bond risk is the risk that a
MUNICIPAL Portfolio may be more sensitive to an adverse economic,
PORTFOLIOS business or political development if it invests more than
25% of its assets in municipal instruments the interest upon
which is paid solely from revenues of similar projects, or
in industrial development bonds.
Tax risk is the risk that future legislative or
administrative changes or court decisions may materially
affect the ability of the Portfolio to pay tax-exempt
dividends.
RISK THAT Foreign securities risk is the risk that a foreign security,
APPLIES TO THE even if it is a U.S. dollar-denominated foreign security,
DIVERSIFIED ASSETS could lose value as a result of political, financial and
PORTFOLIO economic events in foreign countries, less stringent foreign
securities regulations and accounting and disclosure
standards, or other factors.
More information about the risks of investing in the
Portfolios is provided in "Risks, Securities and Techniques"
beginning on page 35. You should carefully consider the
risks discussed in these sections before investing in a
Portfolio.
12
<PAGE>
RISK/RETURN SUMMARY
Portfolio Performance
The bar charts and tables that follow provide an indication of the
risks of investing in a Portfolio. The bar charts and tables assume
reinvestment of dividends and distributions. A Portfolio's past
performance is not necessarily an indication of how the Portfolio will
perform in the future. Performance reflects certain expense
limitations (as set forth in the Footnotes to the "Portfolio Fees and
Expenses" table on page 19) that were in effect during the periods
presented. If expense limitations were not in place, a Portfolio's
performance would have been reduced. The bar charts and tables have
been omitted for the Municipal Portfolio because the Portfolio has
been in operation for less than one calendar year.
Service Shares of the Government Select, Government and Tax-Exempt
Portfolios have less than one calendar year's performance. Premier
Shares of the Government Select, Diversified Assets and Tax-Exempt
Portfolios have less than one calendar year's performance. For this
reason, the performance information shown below for the Government
Portfolio is only for Premier Shares, the performance information
shown below for the Diversified Assets Portfolio is only for Service
Shares, and the performance information shown below for the Government
Select and Tax-Exempt Portfolios is for another class of shares
(Shares) that is not offered in this Prospectus. Service Shares,
Premier Shares and Shares are all invested in the same portfolio of
securities. In reviewing this performance information, however, you
should be aware that Service Shares have a 0.33% (annualized) Service
Fee and a 0.01% (annualized) Transfer Agency fee, Premier Shares have
a 0.58% (annualized) Service Fee and a 0.02% (annualized) Transfer
Agency fee, while Shares have neither of these fees.
13
<PAGE>
Portfolio Performance continued
Government Select Portfolio
Calendar Year Total Return (Shares)
[GRAPH APPEARS HERE]
<TABLE>
<S> <C>
1991 5.95%
1992 3.68%
1993 3.04%
1994 4.09%
1995 5.82%
1996 5.29%
1997 5.44%
1998 5.40%
1999 4.99%
</TABLE>
Best and Worst
Quarterly Performance (Shares):
Best Quarter Return
Q4 `91
+1.70%
Q2 `93
+0.74%
Worst Quarter Return
Average Annual Total Return (Shares)
(for the periods ended December 31, 1999)
Since
Inception
1-Year 5-Year (11/7/90)
---------------------------------------------------------------------
Government Select Portfolio 4.99% 5.38% 4.89%
---------------------------------------------------------------------
The 7-day yield for Shares of the Portfolio as of December 31, 1999:
5.23%.
The 7-day yield for Service Shares of the Portfolio as of December 31,
1999: 4.89%.
The 7-day yield for Premier Shares of the Portfolio as of December 31,
1999: 4.63%.
You may call 1-800-637-1380 to obtain the current 7-day yield.
14
<PAGE>
RISK/RETURN SUMMARY
Government Portfolio
Calendar Year Total Return (Premier Shares)
[GRAPH APPEARS HERE]
<TABLE>
<S> <C>
1999 4.27%
</TABLE>
Best and Worst
Quarterly Performance (Premier Shares):
Best Quarter Return
Q4 `99
+1.18%
Q2 `99
+0.96%
Worst Quarter Return
Average Annual Total Return (Premier Shares)
(for the periods ended December 31, 1999)
Since
Inception
1-Year (12/15/98)
--------------------------------------------------------
Government Portfolio 4.27% 4.47%
--------------------------------------------------------
The 7-day yield for Service Shares of the Portfolio as of December 31,
1999: 4.93%.
The 7-day yield for Premier Shares of the Portfolio as of December 31,
1999: 4.67%.
You may call 1-800-637-1380 to obtain the current 7-day yield.
15
<PAGE>
Portfolio Performance continued
Diversified Assets Portfolio
Calendar Year Total Return (Service Shares)
[GRAPH]
1999
4.67%
Best and Worst
Quarterly Performance (Service Shares):
Best Quarter Return Q4 `99 +1.20%
Worst Quarter Return Q3 `99 +1.09%
Average Annual Total Return (Service Shares)
(for the periods ended December 31, 1999)
Since
Inception
1-Year (7/1/98)
--------------------------------------------------------
Diversified Assets Portfolio 4.67% 4.78%
--------------------------------------------------------
The 7-day yield for Service Shares of the Portfolio as of
December 31, 1999: 5.19%.
The 7-day yield for Premier Shares of the Portfolio as of
December 31, 1999: 4.94%.
You may call 1-800-637-1380 to obtain the current 7-day yield.
16
<PAGE>
Tax-Exempt Portfolio
Calendar Year Total Return (Shares)
[GRAPH]
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5.86% 4.54% 2.91% 2.27% 2.61% 3.73% 3.33% 3.45% 3.29% 2.98%
</TABLE>
Best and Worst
Quarterly Performance (Shares):
Best Quarter Return Q2 `90 +1.47%
Worst Quarter Return Q1 `94 +0.52%
Average Annual Total Return (Shares)
(for the periods ended December 31, 1999)
Since
Inception
1-Year 5-Year 10-Year (8/12/83)
--------------------------------------------------------------
Tax-Exempt Portfolio 2.98% 3.36% 3.53% 3.66%
--------------------------------------------------------------
The 7-day yield for Shares of the Portfolio as of December 31,
1999: 4.03%.
The 7-day yield for Service Shares of the Portfolio as of
December 31, 1999: 3.69%.
You may call 1-800-637-1380 to obtain the current 7-day yield.
17
<PAGE>
Portfolio Fees and Expenses
This table describes the fees and expenses that you may pay if
you buy and hold Service Shares and Premier Shares of the
Portfolios. Please note that it does not reflect any charges
which may be imposed by Northern, its affiliates, correspondent
banks and other institutions on their Customers (as defined on
page 25). (For more information, please see "Account Policies
and Other Information" on page 28.)
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
--------------------------------------------------------------------------
Sales Charge
Sales Charge (Load)
(Load) Imposed on
Imposed on Deferred Sales Reinvested Redemption Exchange
Portfolio Purchases Charge (Load) Distributions Fees Fees
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GOVERNMENT SELECT
Premier Shares None None None None None
Service Shares None None None None None
- ------------------------------------------------------------------------------------------------------
GOVERNMENT
Premier Shares None None None None None
Service Shares None None None None None
- ------------------------------------------------------------------------------------------------------
DIVERSIFIED ASSETS
Premier Shares None None None None None
Service Shares None None None None None
- ------------------------------------------------------------------------------------------------------
TAX-EXEMPT
Premier Shares None None None None None
Service Shares None None None None None
- ------------------------------------------------------------------------------------------------------
MUNICIPAL
Premier Shares None None None None None
Service Shares None None None None None
- ------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
RISK/RETURN SUMMARY
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)/1/
-----------------------------------------------------------------------------------------------------
Total Annual
Other Portfolio
Management Distribution Operating Servicing Transfer Other Operating
Portfolio Fees/2/ (12b-1) Fees Expenses Agent Fees Agency Fees Expenses/3/ Expenses/4/
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Government Select
Premier Shares 0.25% None 0.73% 0.50% 0.02% 0.21% 0.98%
Service Shares 0.25% None 0.47% 0.25% 0.01% 0.21% 0.72%
- --------------------------------------------------------------------------------------------------------------------------------
Government
Premier Shares 0.25% None 0.73% 0.50% 0.02% 0.21% 0.98%
Service Shares 0.25% None 0.47% 0.25% 0.01% 0.21% 0.72%
- --------------------------------------------------------------------------------------------------------------------------------
Diversified Assets
Premier Shares 0.25% None 0.73% 0.50% 0.02% 0.21% 0.98%
Service Shares 0.25% None 0.47% 0.25% 0.01% 0.21% 0.72%
- --------------------------------------------------------------------------------------------------------------------------------
Tax-exempt
Premier Shares 0.25% None 0.74% 0.50% 0.02% 0.22% 0.99%
Service Shares 0.25% None 0.48% 0.25% 0.01% 0.22% 0.73%
- --------------------------------------------------------------------------------------------------------------------------------
Municipal
Premier Shares 0.25% None 0.74% 0.50% 0.02% 0.22% 0.99%
Service Shares 0.25% None 0.48% 0.25% 0.01% 0.22% 0.73%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FOOTNOTES /1/ The Municipal Portfolio's annual operating expenses are
based on actual fees and estimated expenses for the current
fiscal year.
/2/ For the fiscal year ended November 30, 1999, Northern
voluntarily waived a portion of its management fee for the
Government Select Portfolio. As a result of the fee waiver,
actual management fees paid by the Government Select
Portfolio were 0.10% of the Portfolio's average daily net
assets. As of the date of this Prospectus, the actual
management fees paid by both the Government Select and
Municipal Portfolios were 0.10% of each Portfolio's average
daily net assets as a result of fee waivers. Fee waivers
may be terminated at any time at the option of Northern.
/3/ "Other Expenses" include (1) administration or co-
administration fees and all other ordinary operating
expenses of each Portfolio not listed above and (2) the
payment of a fee to Northern or other institutions under a
Service Plan equal to 0.08% of the average daily net asset
value of the Service Shares and Premier Shares for systems
support and related services. Northern and PFPC Inc.,
formerly First Data Investor Services Group, Inc. ("PFPC"),
are the Portfolios' co-administrators, and are entitled to
a co-administration fee from the Portfolios at the annual
rate of 0.10% of the average daily net assets of each
Portfolio. Under their Co-Administration Agreement with the
Trust, which may be amended without shareholder approval,
the co-administrators have agreed to reimburse expenses
(including fees payable to Northern and PFPC as co-
administrators, but excluding management fees, transfer
agency fees, servicing fees and extraordinary expenses)
which exceed on an annualized basis 0.10% of each
Portfolio's average daily net assets. As a result of the
expense reimbursement, "Other Expenses" are currently 0.18%
of each Portfolio's average daily net assets.
19
<PAGE>
Portfolio Fees and Expenses continued
/4/ As a result of the fee waivers and expense
reimbursements, the actual management fees, distribution
(12b-1) fees, other operating expenses and total annual
operating expenses for each Portfolio for the fiscal
year ended November 30, 1999 were as set forth below.
Fee waivers (and voluntary expense reimbursements, if
applicable) may be terminated at any time at the option
of Northern. If this occurs, "Total Annual Portfolio
Operating Expenses" may increase without shareholder
approval.
<TABLE>
<CAPTION>
Total
All Other Annual
Management Distribution Operating Operating
Portfolio Fees (12b-1) Fees Expenses Expenses
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Select
Premier Shares 0.10% 0.00% 0.70% 0.80%
Service Shares 0.10% 0.00% 0.44% 0.54%
---------------------------------------------------------------------------------
Government
Premier Shares 0.25% 0.00% 0.70% 0.95%
Service Shares 0.25% 0.00% 0.44% 0.69%
---------------------------------------------------------------------------------
Diversified Assets
Premier Shares 0.25% 0.00% 0.70% 0.95%
Service Shares 0.25% 0.00% 0.44% 0.69%
---------------------------------------------------------------------------------
Tax-exempt
Service Shares 0.25% 0.00% 0.44% 0.69%
---------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
RISK/RETURN SUMMARY
________________________________________________________________________________
EXAMPLE The following Example is intended to help you compare the cost of
investing in a Portfolio (without fee waivers and expense
reimbursements) with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in a Portfolio for
the time periods indicated (with reinvestment of all dividends
and distributions) and then redeem all of your shares at the end
of those periods. The Example also assumes that your investment
has a 5% return each year and that a Portfolio's operating
expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
Portfolio 1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Select
Premier Shares $100 $312 $542 $1,201
Service Shares 74 230 401 894
----------------------------------------------------------------------------
Government
Premier Shares $100 $312 $542 $1,201
Service Shares 74 230 401 894
----------------------------------------------------------------------------
Diversified Assets
Premier Shares $100 $312 $542 $1,201
Service Shares 74 230 401 894
----------------------------------------------------------------------------
Tax-exempt
Premier Shares $101 $315 $547 $1,213
Service Shares 75 233 406 906
----------------------------------------------------------------------------
Municipal
Premier Shares $101 $315 N/A N/A
Service Shares 75 233 N/A N/A
----------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Investment Adviser
The Northern Trust Company ("Northern" or the "Investment
Adviser"), an Illinois state-chartered bank and member of the
Federal Reserve System, serves as investment adviser for the
Portfolios. The Investment Adviser is located at 50 South LaSalle
Street, Chicago, Illinois 60675 and is a wholly-owned subsidiary
of Northern Trust Corporation, a bank holding company. As of
December 31, 1999, Northern Trust Corporation and its
subsidiaries had approximately $28.7 billion in assets, $21.4
billion in deposits and employed over 8,500 persons.
Northern has for more than 100 years managed the assets of
individuals, charitable organizations, foundations and large
corporate investors. Northern and its affiliates administrated in
various capacities (including as master trustee, investment
manager or custodian) approximately $1.5 trillion of assets as of
December 31, 1999, including approximately $299.1 billion of
assets for which Northern and its affiliates had investment
management responsibility. Under its Advisory Agreement with the
Trust, the Investment Adviser, subject to the general supervision
of the Trust's Board of Trustees, is responsible for making
investment decisions for the Portfolios and for placing purchase
and sale orders for portfolio securities.
22
<PAGE>
RISK/RETURN SUMMARY
Advisory Fees
As compensation for its advisory services and its assumption of
related expenses, the Investment Adviser is entitled to an
advisory fee from the Portfolios, computed daily and payable
monthly, at annual rates set forth in the table below (expressed
as a percentage of each Portfolio's respective average daily net
assets). The table also reflects the advisory fees (after
voluntary fee waivers) paid by the Portfolios as a percentage of
net assets for the fiscal year ended November 30, 1999.
<TABLE>
<CAPTION>
Advisory Fee Paid
Contractual for Fiscal Year
Portfolio Rate Ended 11/30/99
----------------------------------------------------------------
<S> <C> <C>
Government Select 0.25% 0.10%
----------------------------------------------------------------
Government 0.25% 0.25%
----------------------------------------------------------------
Diversified Assets 0.25% 0.25%
----------------------------------------------------------------
Tax-exempt 0.25% 0.25%
----------------------------------------------------------------
Municipal 0.25% N/A
----------------------------------------------------------------
</TABLE>
The difference, if any, between the contractual advisory fees and
the actual advisory fees paid by the Portfolios reflects that the
Investment Adviser did not charge the full amount of the advisory
fees to which it would have been entitled. The Investment Adviser
may discontinue or modify its voluntary limitations in the future
at its discretion.
23
<PAGE>
Other Portfolio Services
________________________________________________________________________________
Northern also serves as transfer agent ("Transfer Agent") and
custodian for each Portfolio. As Transfer Agent, Northern
performs various servicing functions, and any shareholder
inquiries should be directed to it. The fees that Northern
receives for its services in those capacities are described in
the Statement of Additional Information. In addition, Northern
and its affiliates, banks, trust companies and other institutions
and organizations may enter into agreements for the provision of
administrative support services for the Service Share and Premier
Share investors. Northern and other institutions may provide
consulting, technology and systems support services and receive
fees relating to cash management or sweep account services under
a Service Plan described under "Account Policies and Other
Information -- Servicing Agents" on page 31.
Northern and PFPC act as co-administrators for each Portfolio.
The fees that Northern and PFPC receive for their co-
administrative services are described on page 19 under
"Portfolio Fees and Expenses."
24
<PAGE>
ABOUT YOUR ACCOUNT
Purchasing and Selling Service Shares and Premier Shares
- --------------------------------------------------------------------------------
INVESTORS Institutional investors, which are acting on their own
behalf or on behalf of their customers, clients,
employees, participants and others ("Customers") and
enter into a servicing agreement with the Trust
("Servicing Agreement"), may invest in the Service
Shares and Premier Shares of each Portfolio through
their institutional accounts at Northern or an
affiliate. They may also establish accounts directly
with the Trust. There is no sales charge imposed on
investments. Institutional investors ("Institutions")
include:
. Northern and its affiliates;
. Defined contribution plans having at least $30
million in assets or annual contributions of at
least $5 million; and
. Other institutions and organizations.
- --------------------------------------------------------------------------------
SHARE Each Portfolio offers three classes of shares:
CLASSES Shares, Service Shares and Premier Shares.
Shares are described in a separate prospectus.
. Shares do not provide for payments by the
Portfolio to Institutions for administrative
support or shareholder liaison services.
. Service Shares are designed for Institutions that
agree with the Portfolio to provide (or arrange
for the provision of) administrative support
services to Customers.
. Premier Shares are designed for Institutions that
agree with the Portfolio to provide (or arrange
for the provision of) administrative support and
shareholder liaison services to Customers.
Shares of each class bear their pro rata portion of all
operating expenses paid by the Portfolio, except
amounts payable under the Service Plan that has been
adopted for the Portfolio's Service Shares and Premier
Shares and transfer agency fees. The Service Plan
provides for payments at an annual rate of up to 0.33%
and 0.58% of the average daily net asset value of
Service Shares and Premier Shares, respectively.
Because of these class-specific expenses, the
performance of the Shares of a Portfolio is expected to
be higher than the performance of both the Service
Shares and Premier Shares of the same Portfolio and the
performance of a Portfolio's Service Shares is expected
to be higher than the performance of the same
Portfolio's Premier Shares.
25
<PAGE>
Purchasing and Selling Service Shares and Premier Shares continued
- --------------------------------------------------------------------------------
OPENING AN You may purchase Service Shares and Premier Shares of
ACCOUNT each Portfolio through your institutional account at
Northern (or an affiliate) or you may open an account
directly with the Trust with a minimum initial
investment of $5 million in one or more portfolios of
the Trust. This minimum does not apply, however, to
Service Shares and Premier Shares purchased through a
Northern cash sweep program. There is no minimum for
subsequent investments.
Through an Institutional Account.
If you are opening an institutional account at
Northern, a Northern representative can assist you with
all phases of your investment. To purchase Service
Shares or Premier Shares through your account, contact
your Northern representative for further information.
Directly from the Trust. An Institution may open a
shareholder account and purchase Service Shares and
Premier Shares directly from the Trust as described in
this Prospectus.
-------------------------------------------------------
By Mail.
Read this Prospectus carefully.
Complete and sign the new account application.
Include a certified corporate resolution
(or other acceptable evidence of authority).
Enclose a check or Federal Reserve draft payable to the
specific Portfolio. If investing in more than one
Portfolio, please include a separate check for each.
Mail your check, corporate resolution and completed
application to:
Northern Institutional Funds
c/o The Northern Trust Company
P.O. Box 75943
Chicago, Illinois 60675-5943
All checks must be payable in U.S. dollars and drawn on
a bank located in the United States. Cash and third
party checks are not acceptable.
-------------------------------------------------------
By Telephone.
Read this Prospectus carefully.
Call the Transfer Agent at 1-800-637-1380.
To open a new account please provide:
. The name of the Portfolio in which you'd like to
invest
. The number of Service Shares or Premier Shares or
dollar amount to be invested
. The method of payment
To add to an existing account, please provide:
. The Institution's name
. Your Account Number
-------------------------------------------------------
By Wire or Automated Clearing House Transfer ("ACH
Transfer").
To open a new account:
Call the Transfer Agent at 1-800-637-1380 for
instructions.
For more information about the purchase of Service
Shares or Premier Shares, call the Transfer Agent
at 1-800-637-1380.
To add to an existing account:
Have your bank 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 No.)
(Reference Shareholder's Name)
26
<PAGE>
ABOUT YOUR ACCOUNT
- --------------------------------------------------------------------------------
SELLING Through an Institutional Account. Institutions may sell
SERVICE (redeem) Service Shares and Premier Shares through
SHARES AND their institutional account by contacting their
PREMIER Northern account representative.
SHARES
Directly through the Trust. Institutions that purchase
Service Shares and Premier Shares directly from the
Trust may redeem their Service Shares and Premier
Shares through the Transfer Agent in one of the
following ways:
-------------------------------------------------------
By Mail.
Send a written request to:
Northern Institutional Funds
c/o The Northern Trust Company
P.O. Box 75943
Chicago, Illinois 60675-5943
The letter of instruction must include:
. The signature of a duly authorized person
. Your account number
. The name of the Portfolio
. The number of Service Shares or Premier Shares or
the dollar amount to be redeemed.
-------------------------------------------------------
By Telephone.
. Call the Transfer Agent at 1-800-637-1380 for
instructions.
. During periods of unusual economic or market
activity, telephone redemptions may be difficult
to implement. In such event, shareholders should
follow the procedures outlined above under
"Selling Service Shares and Premier Shares By
Mail."
--------------------------------------------------
By Wire.
. Call the Transfer Agent at 1-800-637-1380 for
instructions.
. You must have given prior authorization for
expedited wire redemption.
. The minimum amount that may be redeemed by
this method is $10,000.
27
<PAGE>
Account Policies and Other Information
- --------------------------------------------------------------------------------
Automatic Investment Arrangements. Institutions may purchase Service Shares and
Premier Shares through their institutional accounts at Northern either by
directing automatic investment of cash balances in excess of certain agreed upon
amounts or by directing investments from time to time on a non-automatic basis.
Northern will place a purchase order generated under an automatic investment
direction either on the Business Day that funds are available in the account or
on the next Business Day, depending upon the terms of the automatic investment
arrangement. Similarly, Northern will place a redemption order generated under
an automatic investment direction either on the Business Day Northern calculates
the redemption amount needed to bring the account balance up to the agreed upon
amount or on the next Business Day, depending upon the terms of the automatic
investment arrangement. If a redemption order is placed on the next Business
Day, Northern will normally provide funds by provisionally crediting the
Institution's account on the day the calculation is made. Institutions should
contact Northern for more information about their automatic investment
arrangements.
Purchase and Redemption Minimums.
There is a minimum initial investment of $5 million in a Portfolio and one or
more other investment portfolios of the Trust. This minimum does not apply,
however, to Service Shares or Premier Shares purchased through a Northern cash
sweep program. There is no minimum for subsequent investments. A $10,000 minimum
applies for redemptions by wire. The Trust reserves the right to waive purchase
and redemption minimums and to determine the manner in which a minimum is
satisfied.
Calculating Share Price. The Trust issues and redeems Service Shares and Premier
Shares at net asset value ("NAV"). The NAV for each share class of a Portfolio
is calculated by dividing the value of net assets attributed to that class by
the number of outstanding shares of the class. The NAV for each Portfolio and
class is calculated as of 3:00 p.m., Chicago time, each Business Day. The NAV
used in determining the price of your Service Shares and Premier Shares is the
one calculated after your purchase, exchange or redemption order is received or
accepted as described below.
Each Portfolio seeks to maintain an NAV of $1.00 per share by valuing the
obligations held by it at amortized cost in accordance with SEC regulations.
Amortized cost will normally approximate market value.
Timing of Purchase Requests. Requests accepted by the Transfer Agent or other
authorized intermediary by 1:00 p.m., Chicago time, on any Business Day will be
executed the same day, provided that either:
. The Transfer Agent receives the purchase price in Federal or other
immediately available funds prior to 1:00 p.m., Chicago time, the same
Business Day;
. The order is accepted by an authorized intermediary and payment is to be
made by the close of the same Business Day in Federal or other immediately
available funds according to procedures authorized by the Trust; or
. Payment in Federal or other immediately available funds is received by the
close of the same Business Day in an institutional account maintained with
Northern or an affiliate.
Orders received by the Transfer Agent or other authorized intermediary on a non-
Business Day or after 1:00 p.m., Chicago time, on a Business Day will be
executed on the next Business Day, provided that payment is made as noted above.
We consider requests to be in "good order" when all required documents are
properly completed, signed and received, including a certified corporate
resolution or other acceptable evidence of authority. If an Institution pays for
Service Shares or Premier Shares by check, Federal funds generally will become
available within two Business Days after a purchase order is received.
28
<PAGE>
ABOUT YOUR ACCOUNT
-------------------------------------------------------
If payment is not received as described above from an
authorized intermediary on the same Business Day of
acceptance of an order by the authorized intermediary,
the authorized intermediary may be liable for fees and
losses and the transaction may be cancelled.
In certain circumstances, the Trust may advance the
time by which purchase orders must be received. See
"Early Closings" on page 31.
Tax Identification Number. Federal regulations require
you to provide to the Transfer Agent a taxpayer
identification number when you open an account.
Purchase orders without such a number or an indication
that a number has been applied for will not be
accepted. If you have applied for a number, you must
provide it to the Transfer Agent within 60 days of the
date of the order.
In-Kind Purchases and Redemptions. The Trust reserves
the right to accept payment for Service Shares and
Premier Shares in the form of securities that are
permissible investments for a Portfolio. The Trust also
reserves the right to pay redemptions by a distribution
"in-kind" of securities (instead of cash) from a
Portfolio. See the Statement of Additional Information
for further information about the terms of these
purchases and redemptions.
Miscellaneous Purchase Information.
. Institutions are responsible for transmitting
purchase orders to the Transfer Agent and
delivering required funds on a timely basis.
. Institutions are responsible for all losses and
expenses of a Portfolio in the event of any
failure to make payment according to the
procedures outlined in this Prospectus. Northern
may redeem shares from any account it maintains to
protect the Portfolios and Northern against loss.
In addition, a $20 charge will be imposed if a
check does not clear.
. Service Shares and Premier Shares of a Portfolio
are entitled to the dividends declared by the
Portfolio beginning on the Business Day the
purchase order is executed, provided payment in
Federal or other immediately available funds is
received by the Transfer Agent by the time
designated above.
. The Trust reserves the right to reject any
purchase order. The Trust also reserves the right
to change or discontinue any of its purchase
procedures
Timing of Redemption and Exchange Requests. Redemption
and exchange requests will be effected at the NAV next
determined after your exchange or redemption order is
received in good order. 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 shares); and the signature of a
duly authorized person (except for telephone and wire
redemptions). See "Account Policies and Other
Information -- Making Changes to Your Account
Information."
If either the Transfer Agent or Northern (with respect
to your institutional account) receives a redemption
order by 1:00 p.m., Chicago time, on a Business Day,
redemption proceeds will normally be paid in Federal
funds or other immediately available funds wired or
sent by check to you or, if you so choose, to your
institutional account with Northern, on the same
Business Day.
Redemption orders received after 1:00 p.m., Chicago
time, will be effected the next Business Day. Proceeds
for redemption orders received on a non-Business Day
will normally be sent on the next Business Day after
receipt in good order.
In certain circumstances, the Trust may advance the
time by which redemption and exchange orders must be
received. See "Early Closings" on page 31.
29
<PAGE>
Account Policies and Other Information continued
-------------------------------------------------------
Miscellaneous Redemption Information. All redemption
proceeds will be sent by check unless the Transfer
Agent is directed otherwise. Redemption proceeds may
also be wired. A redemption request may not be
processed if a shareholder has failed to submit a
completed and properly executed new account
application, including a corporate resolution or other
acceptable evidence of authority.
. The Trust reserves the right to defer crediting,
sending or wiring redemption proceeds for up to 7
days after receiving the redemption order if, in
its judgment, an earlier payment could adversely
affect a Portfolio.
. If you are redeeming recently purchased Service
Shares or Premier Shares, your redemption request
may not be honored until your check or electronic
transaction has cleared. This may delay your
transaction for up to 15 days.
. Institutions are responsible for transmitting
redemption orders to the Transfer Agent and
crediting their Customers' accounts with
redemption proceeds on a timely basis.
. Redemption requests by mail must be signed by a
person authorized by acceptable documentation on
file with the Transfer Agent.
. Dividends on Service Shares and Premier Shares are
earned through and including the day prior to the
day on which they are redeemed.
. The Trust reserves the right to redeem Service
Shares and Premier Shares held by any shareholder
who provides incorrect or incomplete account
information or when such involuntary redemptions
are necessary to avoid adverse consequences to the
Trust and its shareholders.
. The Trust may require any information reasonably
necessary to ensure that a redemption request has
been duly authorized.
. The Trust reserves the right to change or
discontinue any of its redemption procedures.
Exchange Privileges. Institutions and their Customers
(to the extent permitted by their account agreements)
may exchange Service Shares and Premier Shares of a
Portfolio for Service Shares and Premier Shares,
respectively, of another Portfolio. The registration of
both accounts involved must be identical. A $1,000
minimum investment applies. An exchange is a redemption
of shares you own and the purchase of shares you are
acquiring. It is considered a taxable event and may
result in a gain or loss.
The Trust reserves the right to change or discontinue
the exchange privilege at any time upon 60 days written
notice to shareholders and to reject any exchange
request. Exchanges are only available in states where
an exchange can legally be made. Before making an
exchange you should read the prospectus for the shares
you are acquiring.
Telephone Transactions. For your protection, telephone
requests may be recorded in order to verify their
accuracy. In addition, the Transfer Agent has adopted
procedures in an effort to establish reasonable
safeguards against fraudulent telephone transactions.
If reasonable measures are taken to verify that
telephone instructions are genuine, the Trust and its
service providers will not be responsible for any loss
resulting from fraudulent or unauthorized instructions
received over the telephone. In these circumstances,
shareholders will bear the risk of loss. During periods
of unusual market activity, you may have trouble
placing a request by telephone. In this event, consider
sending your request in writing.
The proceeds of redemption orders received by telephone
will be sent by check, wire or transfer according to
proper instructions. All checks will be made payable to
the shareholder of record and mailed only to the
shareholder's address of record.
The Trust reserves the right to refuse a telephone
redemption.
30
<PAGE>
ABOUT YOUR ACCOUNT
-------------------------------------------------------
Advance Notification of Large Transactions. The Trust
requests that an Institution give advance notice to the
Transfer Agent by 11:00 a.m., Chicago time, if it
intends to place a purchase or redemption order of $5
million or more on a Business Day.
Making Changes to Your Account Information. You may
make changes to wiring instructions, address of record,
or other account information only in writing. These
instructions must be accompanied by a certified
corporate resolution, signature guarantee from an
institution participating in the Stock Transfer Agency
Medallion Program ("STAMP"), or other acceptable
evidence of authority. In accordance with SEC
regulations, the Trust and Transfer Agent may charge a
shareholder reasonable costs in locating a
shareholder's current address.
Business Day. A "Business Day" is each Monday through
Friday when Northern or the New York Stock Exchange
(the "Exchange") is open for business. A "Business Day"
does not include a holiday observed by Northern and the
Exchange. In 2000 these holidays are: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Memorial
Day, Independence Day, Labor Day, Thanksgiving and
Christmas Day .
Early Closings. The Portfolios reserve the right to
cease, or to advance the time for, accepting purchase,
redemption or exchange orders for same Business Day
credit when Northern or the Exchange closes early as a
result of unusual weather or other conditions. They
also reserve this right when The Bond Market
Association recommends that securities markets close or
close early.
Authorized Intermediaries. The Trust may authorize
certain financial intermediaries (including banks,
trust companies, brokers and investment advisers),
which provide recordkeeping, reporting and processing
services, to accept purchase, redemption and exchange
orders from their Customers on behalf of the Trust.
They may also designate other intermediaries to accept
such orders, if approved by the Trust. Authorized
intermediaries are responsible for transmitting orders
and delivering funds on a timely basis. A Portfolio
will be deemed to have received an order when the order
is accepted by the authorized intermediary on a
Business Day, and the order will be priced at the
Portfolio's per share NAV next determined.
Servicing Agents. Institutions perform (or arrange to
have performed) various administrative support services
for Customers who are the beneficial owners of either
Service Shares or Premier Shares through Servicing
Agreements with the Trust ("Servicing Agents"). In
addition, institutions perform (or arrange to have
performed) account maintenance services under their
Servicing Agreements for Premier Shares. These
Servicing Agreements are permitted under the Trust's
Service Plan ("Service Plan"). For both Service Shares
and Premier Shares, these services may include:
. establishing and maintaining individual accounts
and records;
. processing purchase, redemption and exchange
orders;
. placing net purchase and redemption orders with
Northern acting as the Trust's Transfer Agent; and
. providing cash management or sweep accounts and
similar programs and services.
Servicing Agents will receive fees from the Portfolios
for these services at an annual rate of up to 0.25% of
the average daily net asset value of the Service Shares
and Premier Shares beneficially owned by their
Customers.
Personal and account maintenance services provided
under the Service Plan for Premier Shares may include:
. providing information to investors regarding the
Portfolios or relating to the status of their
accounts; and
31
<PAGE>
Account Policies and Other Information continued
- --------------------------------------------------------------------------------
. acting as liaison between investors and the Trust.
Servicing Agents will receive additional fees from the Portfolios for these
services at an annual rate of up to 0.25% of the average daily net asset value
of Premier Shares beneficially owned by their Customers.
The Service Plan also provides for the payment of fees to Northern, PFPC or
other Institutions at an annual rate of up to 0.08% of the average daily net
asset value of Service Shares and Premier Shares serviced by Institutions for
ongoing consulting, technology and systems support services relating to cash
management or sweep account services. All fees payable under the Service Plan
are borne solely by the share class to which the services are provided and not
by the Portfolios' other share classes.
Northern may provide additional compensation to certain dealers and other
financial intermediaries who provide services to their Customers who invest in
the Trust or whose Customers purchase significant amounts of Service Shares or
Premier Shares of a Portfolio. 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 earned by Northern as Investment Adviser (after adjustments). This
compensation will be paid by Northern or its affiliates and will not represent
an additional expense to the Trust or its shareholders.
You should read your account agreement with your Institution carefully. Your
Institution's requirements may differ from those listed in this Prospectus. An
Institution may impose account charges, such as asset allocation fees, account
maintenance fees, and other charges that will reduce the net return on an
investment in a Portfolio. If you have agreed to maintain a minimum balance with
your Institution and the balance falls below this minimum, you may be required
to redeem all or a part of your investment in a Portfolio.
Conflict of interest restrictions may apply to the receipt of compensation from
the Trust by an Institution in connection with the investment of fiduciary funds
in Service Shares or Premier Shares of a Portfolio. 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.
State securities laws regarding the registration of dealers may differ from
Federal law. As a result, Institutions investing in the Portfolios on behalf of
their Customers may be required to register as dealers.
Shareholder Communications. Shareholders of record will be provided each year
with a semiannual report showing portfolio investments and other information as
of May 31 and, after the close of the Fund's fiscal year on November 30, with an
annual report containing audited financial statements. If you have consented to
the delivery of a single copy of the shareholder reports, prospectuses or (if
and when permitted by law) proxy or information statements to all shareholders
who share the same mailing address with your account, you may revoke your
consent at any time by contacting the Northern Institutional Funds Center by
phone at (800) 637-1380 or by mail at the Northern Institutional Funds, P.O. Box
75943, Chicago, IL 60675.
32
<PAGE>
ABOUT YOUR ACCOUNT
Distributions and Taxes
- --------------------------------------------------------------------------------
DISTRIBUTIONS Dividends from net income are declared daily and paid monthly by
each Portfolio to its shareholders. Net income includes the
interest accrued on a Portfolio's assets less estimated
expenses. Each Portfolio's net realized short-term capital
gains, if any, are distributed at least annually. The Portfolios
do not expect to realize net long-term capital gains.
Dividends are paid as soon as practicable following the end of
each month, except in the case of a total redemption of Service
Shares or Premier Shares in an account that is not subject to a
standing order for the purchase of additional shares of the same
class. In that event, dividends will be paid promptly along with
the redemption proceeds.
All distributions are automatically reinvested (without any
sales charge) in additional Service Shares or Premier Shares of
the same Portfolio, unless you elect to receive distributions in
cash by notifying the Transfer Agent in writing. You may make
arrangements to credit these distributions to your account with
Northern, its affiliates or its correspondent banks.
There are no fees or sales charges on reinvestments.
- --------------------------------------------------------------------------------
TAXES Each Portfolio intends to qualify as a regulated investment
company for Federal tax purposes, and to distribute
substantially all of its net income to shareholders each year.
Except for exempt-interest dividends paid by the Tax-Exempt and
Municipal Portfolios, dividends derived from taxable interest
income and short-term capital gains will be taxable as ordinary
income, and distributions, if any, derived from net long-term
capital gains will generally be taxable as long-term capital
gains, unless you have a tax-advantaged account. This is true
whether dividends and distributions are received in cash or
reinvested in Portfolio Service Shares or Premier Shares.
The Tax-Exempt and Municipal Portfolios intend to pay
substantially all of their dividends as "exempt-interest
dividends," which are exempt from Federal income taxes.
Shareholders who are recipients of Social Security Act or
Railroad Retirement Act benefits should note that exempt-
interest dividends will be taken into account in determining the
taxability of their benefit payments.
If you receive an exempt-interest dividend with respect to any
share and the share is held for six months or less, any loss on
the sale or exchange of the share will be disallowed to the
extent of the dividend amount. Interest on indebtedness incurred
by a shareholder to purchase or carry shares of either the Tax-
Exempt or Municipal Portfolios generally will not be deductible
for federal income tax purposes.
In certain instances, dividends paid by the Tax-Exempt and
Municipal Portfolios, while exempt from regular Federal income
tax, may be subject to the alternative minimum tax. In addition,
the Tax-Exempt Portfolio may invest a portion of its assets in
securities that generate income that is not exempt from Federal
tax. Any dividends paid by the Tax-Exempt Portfolio that are
derived from taxable interest or from capital gains will be
subject to Federal income tax.
The Tax-Exempt and Municipal Portfolios will each determine
annually the percentages of its net investment income which are
exempt from the regular Federal income tax, which constitute an
item of tax preference for purposes of the Federal alternative
minimum tax, and which are fully taxable. The Tax-Exempt and
Municipal Portfolios will apply these percentages uniformly to
all distributions declared from net investment income during
that year.
Except as stated below, you may be subject to state and local
taxes on Portfolio distributions
33
<PAGE>
Distributions and Taxes continued
and redemptions. State income taxes may not apply, however, to
the portions of a Portfolio's distributions, if any, that are
attributable to interest on certain types of Federal securities
or interest on securities issued by the particular state or
municipalities within the state.
- --------------------------------------------------------------------------------
OTHER TAX Dividends and distributions from each Portfolio will generally
INFORMATION be reportable by you in the tax year in which they are paid with
one exception. Dividends and distributions declared by a
Portfolio in October, November or December and paid in January
are taxed as though they were paid by December 31.
Every year, the Trust will send you information detailing the
amount of ordinary income and capital gains distributed to your
account for the previous year.
Your investment in the Portfolios could have additional tax
consequences. Shareholders who are nonresident aliens, foreign
trusts or estates, or foreign corporations or partnerships, may
be subject to different United States Federal income tax
treatment. You should consult your tax professional for
information regarding all the tax consequences applicable to
your investments in the Portfolios. More information is provided
in the Statement of Additional Information. This short summary
is not intended as a substitute for careful tax planning.
In particular, although the Government Select Portfolio intends
to invest primarily in U.S. government securities, the interest
on which is generally exempt from state income taxation, you
should consult your own tax professional to determine whether
this is true in your own situation. Similarly, dividends paid by
the Portfolios (including the Tax-Exempt and Municipal
Portfolios) may be taxable under state or local law as dividend
income even though all or a portion of such dividends may be
derived from interest on obligations which, if realized
directly, would be exempt from such income taxes.
34
<PAGE>
RISKS, SECURITIES AND TECHNIQUES
This section takes a closer look at some of the types of
securities in which the Portfolios may invest and their related
risks. It also explores the various investment techniques that
the investment management team may, but is not required to, use.
The Portfolios may invest in other securities and are subject to
further restrictions and risks which are described in the
Statement of Additional Information. The investment objective of
the Municipal Portfolio may be changed by the Trust's Board of
Trustees without shareholder approval. Shareholders will,
however, be notified of any changes. Any such change may result
in the Portfolio having an investment objective different from
the objective which the shareholder considered appropriate at
the time of investment in the Portfolio. The investment
objectives of the other Portfolios may not be changed without
shareholder approval.
- --------------------------------------------------------------------------------
Asset-Backed Securities. Asset-backed securities are sponsored
by entities such as government agencies, banks, financial
companies and commercial or industrial companies. Asset-backed
securities represent participations in, or are secured by and
payable from, pools of assets such as mortgages, motor vehicle
installment sale contracts, installment loan contracts, leases
of various types of real and personal property, receivables from
revolving credit (credit card) agreements, municipal securities
and other financial assets. Such asset pools are securitized
through the use of privately-formed trusts or special purpose
corporations. Payments or distributions of principal and
interest may be guaranteed up to certain amounts and for a
certain time period by a letter of credit or a pooled insurance
policy issued by a financial institution, or other credit
enhancements.
Investment strategy. The Diversified Assets Portfolio, Tax-
Exempt Portfolio and Municipal Portfolio may purchase various
types of asset-backed securities that are "Eligible Securities"
as defined by the SEC. The Government Portfolio may only
purchase asset-backed securities (such as mortgage-backed
securities) that are guaranteed by the U.S. government, its
agencies or instrumentalities.
Special risks. In addition to credit and market risk, asset-
backed securities usually involve prepayment risk because the
underlying assets (loans) may usually be prepaid at any time.
The value of these securities may also change because of actual
or perceived changes in the creditworthiness of the originator,
the servicing agent, the financial institution providing the
credit
35
<PAGE>
- --------------------------------------------------------------------------------
support, or the counterparty. 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. In addition, non-mortgage asset-backed
securities may involve certain risks not presented by mortgage-
backed securities. Primarily, these securities may 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. Automobile receivables are
subject to the risk that the trustee for the holders of the
automobile receivables may not have an effective security
interest in all of the obligations backing the receivables.
Borrowings and Reverse Repurchase Agreements. The Portfolios may
borrow money from banks and may enter into reverse repurchase
agreements with banks and other financial institutions. Reverse
repurchase agreements involve the sale of money market securities
held by a Portfolio subject to the Portfolio's agreement to
repurchase them at a mutually agreed upon date and price (including
interest).
Investment strategy. Each Portfolio may borrow and enter into
reverse repurchase agreements in amounts not exceeding one-third
of its total assets. Each Portfolio may also borrow up to an
additional 5% of its total assets for temporary purposes. The
Portfolios may enter into reverse repurchase agreements when the
investment management team expects that the interest income to
be earned from the investment of the transaction proceeds will
be greater than the related interest expense.
Special risks. Borrowings and reverse repurchase agreements
involve leveraging. If the securities held by the Portfolios
decline in value while these transactions are outstanding, the
net asset value of the Portfolios' outstanding shares will
decline in value by proportionately more than the decline in
value of the securities. In addition, reverse repurchase
agreements involve the risks that the interest income earned by
a Portfolio (from the investment of the proceeds) will be less
than the interest expense of the transaction, that the market
value of the securities sold by a Portfolio will decline below
the price the Portfolio is obligated to pay to repurchase the
securities, and that the securities may not be returned to the
Portfolio.
Custodial Receipts for Treasury Securities. Custodial receipts are
participations in trusts that hold U.S. Treasury securities and are
sold under names such as TIGRs and CATS. Like other stripped
obligations, they entitle the holder to future interest or principal
payments on the U.S. Treasury securities.
Investment strategy. The Government, Diversified Assets, Tax-
Exempt and Municipal Portfolios may purchase custodial receipts.
Investments by the Government Portfolio in custodial receipts
will not exceed 35% of the value of its total assets.
Special risks. Like other stripped obligations, custodial
receipts may be subject to greater price volatility than
ordinary debt obligations because of the way in which their
principal and interest are returned to investors.
Derivatives. Each Portfolio may purchase certain "derivative"
instruments. A derivative is a financial instrument whose value is
derived from -- or based upon -- the performance of underlying
assets, interest rates, or indices. Derivatives include structured
debt obligations such as collateralized mortgage obligations and
other types of asset-backed securities, "stripped" securities and
various floating rate instruments.
36
<PAGE>
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Investment strategy. A Portfolio will invest in derivatives only
if the potential risks and rewards are consistent with the
Portfolio's objective, strategies and overall risk profile.
Special risks. Engaging in derivative transactions involves
special risks, including (a) market risk that the Portfolio's
derivatives position will lose value; (b) credit risk that the
counterparty to the transaction will default; (c) leveraging
risk that the value of the derivative instrument will decline
more than the value of the assets on which it is based; (d)
illiquidity risk that a Portfolio will be unable to sell its
position because of lack of market depth or disruption; (e)
pricing risk that the value of a derivative instrument will be
difficult to determine; and (f) operations risk that loss will
occur as a result of inadequate systems or human error. Many
types of derivatives have been recently developed and have not
been tested over complete market cycles. For these reasons, a
Portfolio may suffer a loss whether or not the analysis of the
investment management team is accurate.
Diversification. Diversifying its holdings can help a Portfolio
reduce the risks of investing. In accordance with current SEC
regulations, each Portfolio will not invest more than 5% of the
value of its total assets at the time of purchase in the securities
of any single issuer. However, a Portfolio may invest up to 25% of
the value of its total assets in the securities of a single issuer
for up to three Business Days. These limitations do not apply to
cash, certain repurchase agreements, U.S. government securities or
securities of other investment companies. In addition, securities
subject to certain unconditional guarantees and securities that are
not "First Tier Securities" as defined by the SEC are subject to
different diversification requirements as described in the Statement
of Additional Information.
Downgraded Securities. After its purchase, a portfolio security may
be assigned a lower rating or cease to be rated. If this occurs, a
Portfolio may continue to hold the issue if the Investment Adviser
believes it is in the best interest of the Portfolio and its
shareholders.
Foreign Securities. The Diversified Assets Portfolio may invest in
U.S. dollar-denominated commercial paper and other obligations of
foreign issuers, including foreign governments, or any of their
political subdivisions, agencies or instrumentalities, foreign
commercial banks, foreign branches of U.S. banks and foreign
corporations. Foreign government obligations may include debt
obligations of supranational entities, including international
organizations (such as the European Coal and Steel Community and the
International Bank for Reconstruction and Development (also known as
the World Bank)) and international banking institutions and related
government agencies.
Investment strategy. Investments by the Diversified Assets
Portfolio in foreign issuer obligations will not exceed 50% of
the Portfolio's total assets measured at the time of purchase.
Special risks. Foreign securities involve special risks and
costs. Foreign securities, and in particular foreign debt
securities, are sensitive to changes in interest rates. In
addition, investment in the securities of foreign governments
involves the risk that foreign governments may default on their
obligations or may otherwise not respect the integrity of their
debt.
Investment in foreign securities may involve 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 less complete financial information about the
37
<PAGE>
- --------------------------------------------------------------------------------
issuers, less market liquidity, more market volatility and
political instability. Future political and economic
developments, the possible imposition of withholding taxes on
dividend income, possible seizure or nationalization of foreign
holdings 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.
Illiquid or Restricted Securities. Illiquid securities include
repurchase agreements and time deposits with notice/termination
dates of more than seven days, certain variable amount master demand
notes that cannot be called within seven days, certain insurance
funding agreements (see below), and other securities that are traded
in the U.S. but are subject to trading restrictions because they are
not registered under the Securities Act of 1933, as amended (the
"1933 Act").
Investment strategy. Each Portfolio may invest up to 10% of its
net assets in securities that are illiquid. A domestically
traded security which is not registered under the 1933 Act will
not be considered illiquid if the Investment Adviser determines
that an adequate trading market exists for that security. If
otherwise consistent with their investment objectives and
policies, the Portfolios may purchase commercial paper issued
pursuant to Section 4(2) of the 1933 Act and securities that are
not registered under the 1933 Act but can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the
1933 Act. These securities will not be considered illiquid so
long as Northern determines, under guidelines approved by the
Trust's Board of Trustees, that an adequate trading market
exists.
Special risks. Because illiquid and restricted securities may be
difficult to sell at an acceptable price, they may be subject to
greater volatility and may result in a loss to a Portfolio. The
practice of investing in Rule 144A Securities and commercial
paper available to qualified institutional buyers could increase
the level of illiquidity during any period that qualified
institutional buyers become uninterested in purchasing these
securities.
Insurance Funding Agreements. An insurance funding agreement ("IFA")
is an agreement that requires a Portfolio to make cash contributions
to a deposit fund of an insurance company's general account. The
insurance company then credits interest to the Portfolio for a set
time period.
Investment Strategy. The Diversified Assets Portfolio may invest
in IFAs issued by insurance companies that meet quality and
credit standards established by the Investment Adviser.
Special risks. IFAs are not insured by a government agency --
they are backed only by the insurance company that issues them.
As a result, they are subject to default risk. In addition, an
active secondary market in IFAs does not currently exist. This
means that it may be difficult to sell an IFA at an appropriate
price.
Investment Companies. In connection with the management of their
daily cash positions, the Portfolios may invest in shares of other
money market funds which invest in short-term, high quality debt
securities and securities issued by other investment companies
consistent with their investment objectives and policies.
Investment strategy. Investments by a Portfolio in other money
market funds will be subject to the limitations of the
38
<PAGE>
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Investment Company Act of 1940. Although the Portfolios do not expect to do
so in the foreseeable future, each Portfolio is authorized to invest
substantially all of its assets in an open-end investment company that has
the same investment objective, policies and fundamental restrictions as the
Portfolio.
Special risks. As a shareholder of another investment company, a Portfolio
would be subject to the same risks as any other investor in that company. It
would also bear a proportionate share of any fees or expenses paid by that
company. These expenses would be in addition to the advisory fees and other
expenses the Portfolio bears directly in connection with its own operations.
Municipal and Related Instruments. Municipal instruments include debt
obligations issued by or on behalf of states, territories and possessions of the
United States and their political subdivisions, agencies, authorities and
instrumentalities.
Municipal instruments include both "general" and "revenue" bonds and may be
issued to obtain funds for various public purposes. General obligations are
secured by the issuer's pledge of its full faith, credit and taxing power.
Revenue obligations are payable only from the revenues derived from a particular
facility or class of facilities. In some cases, revenue bonds are also payable
from the proceeds of a special excise or other specific revenue source such as
lease payments from the user of a facility being financed. Some municipal
instruments, known as private activity bonds, are issued to finance projects for
private companies. Private activity bonds are usually revenue obligations since
they are typically payable by the private user of the facilities financed by the
bonds.
Municipal instruments also include "moral obligation" bonds, municipal leases,
certificates of participation and asset-backed securities such as custodial
receipts. Moral obligation bonds are supported by a moral commitment but not a
legal obligation of a state or municipality. Municipal leases and participation
certificates present the risk that the state or municipality involved will not
appropriate the monies to meet scheduled payments on an annual basis. Custodial
receipts represent interests in municipal instruments held by a trustee.
The Tax-Exempt Portfolio and Municipal Portfolio each may acquire "stand-by
commitments" relating to the municipal instruments it holds. Under a stand-by
commitment, a dealer agrees to purchase, at the Portfolio's option, specified
municipal instruments at a specified price. A stand-by commitment may increase
the cost, and thereby reduce the yield, of the municipal instruments to which
the commitment relates. A Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise their rights for
trading purposes.
Investment strategy. Although it is not their current policy to do so on a
regular basis, in connection with its investments in municipal instruments,
the Tax-Exempt and Municipal Portfolios may each invest more than 25% of its
total assets in municipal instruments the interest upon which is paid solely
from revenues of similar projects. However, neither the Tax-Exempt nor the
Municipal Portfolios intends to invest more than 25% of the value of its
total assets in industrial development bonds or similar obligations where the
non-governmental entities supplying the revenues to be paid are in the same
industry.
The Diversified Assets Portfolio may invest up to 5% of its net assets in
municipal instruments or other securities issued by state and local
governmental bodies. Generally, this will occur when the yield of municipal
instruments, on a pre-tax basis, is comparable to that of other permitted
short-term taxable investments. Dividends paid by the Diversified Assets
39
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Portfolio on such investments will be taxable to shareholders.
Special risks. Municipal instruments purchased by the Tax-Exempt and
Municipal Portfolios may be backed by letters of credit, insurance or other
forms of credit enhancement issued by foreign (as well as domestic) banks,
insurance companies and other financial institutions. If the credit quality
of these banks and financial institutions declines, a Portfolio could suffer
a loss to the extent that the Portfolio is relying upon this credit support.
Foreign institutions can present special risks relating to higher transaction
and custody costs, the imposition of additional taxes by foreign governments,
less complete financial information, less market liquidity, more market
volatility and political instability. Foreign banks, insurance companies and
financial institutions may be subject to less stringent reserve requirements,
and to different accounting, auditing and recordkeeping requirements than U.S
banks.
In addition, when a substantial portion of a Portfolio's assets is invested
in instruments which are used to finance facilities involving a particular
industry, whose issuers are in the same state or which are otherwise related,
there is a possibility that an economic, business or political development
affecting one instrument would likewise affect the related instrument.
Repurchase Agreements. Repurchase agreements involve the purchase of securities
by a Portfolio subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price.
Investment strategy. Each Portfolio may enter into repurchase agreements with
financial institutions such as banks and broker-dealers that are deemed to be
creditworthy by the Investment Adviser. Although the securities subject to a
repurchase agreement may have maturities exceeding one year, settlement of
the agreement will never occur more than one year after a Portfolio acquires
the securities.
Special risks. In the event of a default, a Portfolio will suffer a loss to
the extent that the proceeds from the sale of the underlying securities and
other collateral are less than the repurchase price and the Portfolio's costs
associated with delay and enforcement of the repurchase agreement. In
addition, in the event of bankruptcy, a Portfolio could suffer losses if a
court determines that the Portfolio's interest in the collateral is not
enforceable.
Securities Lending. In order to generate additional income, the Portfolios may
lend securities on a short-term basis to banks, brokers and dealers or other
qualified institutions. In exchange, the Portfolios will receive collateral
equal to at least 100% of the value of the securities loaned.
Investment strategy. Securities lending may represent no more than one-third
the value of a Portfolio's total assets (including the loan collateral). Any
cash collateral received by a Portfolio in connection with these loans may be
invested in U.S. government securities and other liquid high-grade debt
obligations.
Special risks. The main risk when lending portfolio securities is that the
borrower might become insolvent or refuse to honor its obligation to return
the securities. In this event, a Portfolio could experience delays in
recovering its securities and may possibly incur a capital loss. In addition,
a Portfolio may incur a loss in reinvesting the cash collateral it receives.
Stripped Obligations. These securities are issued by the U.S. government (or
agency or instrumentality), foreign governments or banks and other financial
institutions. They entitle the holder to receive either interest payments or
principal payments that have been "stripped" from a debt obligation. These
obligations include stripped mortgage-backed
40
<PAGE>
- --------------------------------------------------------------------------------
securities, which are derivative multi-class mortgage securities.
Investment strategy. Each of the Portfolios may purchase stripped securities.
Special risks. Stripped securities are very sensitive to interest rate
changes and to the rate of principal prepayments. A rapid or unexpected
increase in mortgage prepayments could severely depress the price of certain
stripped mortgage-backed securities and adversely affect the Portfolios'
investment performance.
United States Government Obligations. These include U.S. Treasury obligations,
such as bills, notes and bonds, which generally differ only in terms of their
interest rates, maturities and time of issuance. These also include obligations
issued or guaranteed by the U.S. government or its agencies and
instrumentalities. 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.
Investment strategy. To the extent consistent with its investment objective,
each Portfolio may invest in a variety of U.S. Treasury obligations and
obligations issued or guaranteed by the U.S. government or its agencies and
instrumentalities.
Special risks. Not all U.S. government obligations carry the same guarantees.
Some, such as those of the Government National Mortgage Association ("GNMA"),
are supported by the full faith and credit of the United States Treasury.
Other obligations, such as those of the Federal Home Loan Banks, are
supported by the right of the issuer to borrow from the United States
Treasury; and others, such as those issued by 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 instrumentality. 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. In addition, the secondary market for certain participations in
loans made to foreign governments or their agencies may be limited.
Taxable Investments. Taxable investments include U.S. dollar-denominated
obligations of U.S. banks, foreign commercial banks and securities issued or
guaranteed by foreign governments; high quality commercial paper and other
obligations; high quality corporate bonds and notes; asset-backed securities;
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and related custodial receipts; and repurchase agreements
relating to the above instruments.
Investment strategy. The Tax-Exempt and Municipal Portfolios may each invest
from time to time, on a temporary basis or for temporary defensive purposes,
in short-term taxable instruments that are "Eligible Securities" as defined
by the SEC for money market funds.
Special risks. Dividends paid by the Tax-Exempt and Municipal Portfolios that
are derived from interest paid on taxable investments will generally be
taxable to each Portfolio's shareholders as ordinary income for Federal
income tax purposes. The Tax-Exempt and Municipal Portfolios each may not
achieve its investment objective when its assets are invested in taxable
obligations.
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Variable and Floating Rate Instruments. Variable and floating rate instruments
have interest rates that are periodically adjusted either at set intervals or
that float at a margin above a generally recognized index rate. These
instruments include long-term variable and floating rate bonds (sometimes
referred to as "Put Bonds") where a Portfolio obtains at the time of purchase
the right to put the bond back to the issuer or a third party at par at a
specified date.
Investment strategy. Each Portfolio may invest in rated and unrated variable
and floating rate instruments to the extent consistent with its investment
objective. Unrated instruments may be purchased by a Portfolio if they are
determined by the Investment Adviser to be of comparable quality to rated
instruments eligible for purchase by the Portfolio. The Portfolios may invest
in variable amount master demand notes.
Special risks. Variable and floating rate instruments are subject to the same
risks as fixed income investments, particularly interest rate and credit
risk. Because there is no active secondary market for certain variable and
floating rate instruments, they may be more difficult to sell if the issuer
defaults on its payment obligations or during periods when the Portfolios are
not entitled to exercise their demand rights. As a result, the Portfolios
could suffer a loss with respect to these instruments.
When-Issued Securities, Delayed Delivery Transactions and Forward Commitments. A
purchase of "when-issued" securities refers to a transaction made conditionally
because the securities, although authorized, have not yet been issued. A delayed
delivery or forward commitment transaction involves a contract to purchase or
sell securities for a fixed price at a future date beyond the customary
settlement period.
Investment strategy. Each Portfolio may purchase or sell securities on a
when-issued, delayed delivery or forward commitment basis. Although the
Portfolios would generally purchase securities in these transactions with the
intention of acquiring the securities, the Portfolios may dispose of such
securities prior to settlement if the investment management team deems it
appropriate to do so.
Special risks. Purchasing securities on a when-issued, delayed delivery or
forward commitment basis involves the risk that the securities may decrease
in value by the time they are actually issued or delivered. Conversely,
selling securities in these transactions involves the risk that the value of
the securities may increase before the time they are actually issued or
delivered. These transactions also involve the risk that the seller may fail
to deliver the security or cash on the settlement date.
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Appendix
The financial highlights tables are intended to help you understand the
financial performance of a Portfolio's Service Shares and Premier Shares
for the period from the date each class was initially issued to the public
to November 30, 1999. Certain information reflects financial results for a
single Service Share or Premier Share. The total returns in the tables
represent the rate that an investor would have earned or lost on an
investment in Service Shares or Premier Shares of a Portfolio (assuming
reinvestment of all dividends and distributions). This information has been
audited by Ernst & Young LLP, whose report is included in the Portfolios'
annual report along with the Portfolios' financial statements. The annual
report is available upon request and without charge. As of November 30,
1999, no Premier Shares of the Tax-Exempt and no Service Shares or Premier
Shares of the Municipal Portfolio had been issued to the public.
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Appendix continued
Financial Highlights
Government Select Portfolio
<TABLE>
<CAPTION>
Service Premier
Shares Shares
........... ........................
For the Years Ended November 30, 1999 (c) 1999 1998 (d)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00 $1.00
....................................................................................................................
Income from investment operations:
Net investment income 0.03 0.03 --
....................................................................................................................
Total income from investment operations 0.03 0.03 --
- --------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (0.03) (0.03) --
....................................................................................................................
Total distributions to shareholders (0.03) (0.03) --
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $1.00
Total return (a) 2.72% 3.30% 0.10%
....................................................................................................................
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 0.72% 0.98% 0.99%
....................................................................................................................
Expenses, net of waivers and reimbursements 0.54% 0.80% 0.80%
....................................................................................................................
Net investment income, before waivers and reimbursements 4.33% 4.07% 4.52%
....................................................................................................................
Net investment income, net of waivers and reimbursements 4.51% 4.25% 4.71%
....................................................................................................................
Net assets at end of year (in thousands) $11,846 $7,417 $ 108
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(b) Annualized for periods less than one year.
(c) For the period May 28, 1999 (Service Shares issue date) through November
30, 1999.
(d) For the period November 23, 1998 (Premier Shares issue date) through
November 30, 1998. Per share amounts from net investment income and
distributions from net investment income were less than $0.01 per share.
44
<PAGE>
Appendix continued
Financial Highlights
Government Portfolio
<TABLE>
<CAPTION>
Service Premier
Shares Shares
......... .........
For the Year Ended November 30, 1999 (c) 1999 (d)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00
.............................................................................................
Income from investment operations:
Net investment income 0.03 0.04
.............................................................................................
Total income from investment operations 0.03 0.04
- ---------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (0.03) (0.04)
.............................................................................................
Total distributions to shareholders (0.03) (0.04)
- ---------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00
Total return (a) 3.03% 4.56%
.............................................................................................
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 0.72% 0.98%
.............................................................................................
Expenses, net of waivers and reimbursements 0.69% 0.95%
.............................................................................................
Net investment income, before waivers and reimbursements 4.38% 4.12%
.............................................................................................
Net investment income, net of waivers and reimbursements 4.41% 4.15%
.............................................................................................
Net assets at end of year (in thousands) $32,555 $44,575
- ---------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(b) Annualized for periods less than one year.
(c) For the period April 1, 1999 (Service Shares issue date) through November
30, 1999.
(d) For the period December 15, 1998 (Premier Shares issue date) through
November 30, 1999.
45
<PAGE>
Appendix continued
Financial Highlights
Diversified Assets Portfolio
<TABLE>
<CAPTION>
Service Premier
Shares Shares
......................... .............
For the Years Ended November 30, 1999 1998 (c) 1999 (d)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00
....................................................................................................
Income from investment operations:
Net investment income 0.05 0.02 0.03
....................................................................................................
Total income from investment operations 0.05 0.02 0.03
- ----------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (0.05) (0.02) (0.03)
....................................................................................................
Total distributions to shareholders (0.05) (0.02) (0.03)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00
Total return (a) 4.68% 1.76% 2.57%
....................................................................................................
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 0.72% 0.72% 0.98%
....................................................................................................
Expenses, net of waivers and reimbursements 0.69% 0.69% 0.95%
....................................................................................................
Net investment income, before waivers and reimbursements 4.52% 4.91% 4.26%
....................................................................................................
Net investment income, net of waivers and reimbursements 4.55% 4.94% 4.29%
....................................................................................................
Net assets at end of year (in thousands) $59,815 $7,060 $4,552
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(b) Annualized for periods less than one year.
(c) For the period July 1, 1998 (Service Shares issue date) through November
30, 1998.
(d) For the period April 1, 1999 (Premier Shares issue date) through November
30, 1999.
46
<PAGE>
Appendix continued
Financial Highlights
Tax-Exempt Portfolio
<TABLE>
<CAPTION>
Service
Shares
.........
For the Year Ended November 30, 1999 (c)
- -------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of year $ 1.00
...............................................................................
Income from investment operations:
Net investment income 0.02
...............................................................................
Total income from investment operations 0.02
- -------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (0.02)
...............................................................................
Total distributions to shareholders (0.02)
- -------------------------------------------------------------------------------
Net asset value, end of year $ 1.00
Total return (a) 1.58%
...............................................................................
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 0.73%
...............................................................................
Expenses, net of waivers and reimbursements 0.69%
...............................................................................
Net investment income, before waivers and reimbursements 2.67%
...............................................................................
Net investment income, net of waivers and reimbursements 2.71%
...............................................................................
Net assets at end of year (in thousands) $35,536
- -------------------------------------------------------------------------------
</TABLE>
(a) Assumes investment at net asset value at the beginning of the year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(b) Annualized for periods less than one year.
(c) For the period May 13, 1999 (Service Shares issue date) through November
30, 1999.
47
<PAGE>
APPENDICES
For More Information
- --------------------------------------------------------------------------------
ANNUAL/ Additional information about the Portfolios'
SEMIANNUAL investments is available in the Portfolios'
REPORT annual and semiannual reports to shareholders.
- --------------------------------------------------------------------------------
STATEMENT OF Additional information about the Portfolios and their
ADDITIONAL policies is also available in the Portfolios' Statement of
INFORMATION Additional Information ("SAI"). The SAI is incorporated by
reference into this Prospectus (is legally considered part
of this Prospectus).
The Portfolios' annual and semiannual reports and the SAI
are available free upon request by calling (800) 637-1380.
To obtain other information and for shareholder inquiries:
By telephone -- Call (800) 637-1380
By mail -- Northern Institutional Funds
P.O. Box 75943
Chicago, IL 60675-5943
On the Internet -- Text-only versions of the Portfolios'
documents are available on the SEC's website at
http://www.sec.gov
You may review and obtain copies of Trust documents by
visiting the SEC's Public Reference Room in Washington, D.C.
You may also obtain copies of Trust documents by sending
your request and a duplicating fee to the SEC's Public
Reference Section, Washington, D.C. 20549-6009 or by
electronic request at [email protected]. Information on the
operation of the Public Reference Room may be obtained by
calling the SEC at 1-202-942-8090.
Northern
Institutional Funds
PREMIER SHARES AND SERVICE SHARES PROSPECTUS
811-3605
48
<PAGE>
INVESTMENT ADVISERS
The Northern Trust Company
Northern Trust Quantitative Advisors, Inc.
50 South LaSalle Street
Chicago, Illinois 60675
TRANSFER AGENT
AND CUSTODIAN
The Northern Trust Company
NIF PREPRO0400
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
PREMIER SHARES
NORTHERN INSTITUTIONAL FUNDS
GOVERNMENT SELECT PORTFOLIO
GOVERNMENT PORTFOLIO
DIVERSIFIED ASSETS PORTFOLIO
TAX-EXEMPT PORTFOLIO
MUNICIPAL PORTFOLIO
This Statement of Additional Information dated April 1, 2000 (the
"Additional Statement") is not a prospectus. Copies of the prospectuses dated
April 1, 2000 for the Service Shares and Premier Shares of the Government
Select, Government, Diversified Assets, Municipal and Tax-Exempt Portfolios (the
"Portfolios") of Northern Institutional Funds (each, a "Prospectus") may be
obtained without charge by calling 1-800-637-1380 (toll-free). Each Portfolio
also offers one additional share class, Shares, which is described in a separate
statement of additional information. Capitalized terms not otherwise defined
have the same meaning as in the Prospectus.
The audited financial statements and related report of Ernst & Young
LLP, independent auditors, contained in the annual report to the Portfolios'
shareholders for the fiscal year ended November 30, 1999 (except for Municipal
Portfolio, which did not commence operations during the period) are incorporated
herein by reference in the section entitled "Financial Statements." No other
parts of the annual report are incorporated herein by reference. Copies of the
annual report may be obtained upon request and without charge by calling
1-800-637-1380 (toll-free).
<PAGE>
INDEX
Page
ADDITIONAL INVESTMENT INFORMATION........................................... 3
Classification and History.......................................... 3
Investment Objectives, Strategies and Risks......................... 3
Investment Restrictions............................................. 12
ADDITIONAL TRUST INFORMATION................................................ 14
Trustees and Officers............................................... 14
Investment Adviser, Transfer Agent and Custodian.................... 19
Portfolio Transactions.............................................. 21
Co-Administrators and Distributor................................... 22
Counsel and Auditors................................................ 25
In-Kind Purchases and Redemptions................................... 25
Third-Party Fees and Requirements................................... 25
PERFORMANCE INFORMATION..................................................... 25
AMORTIZED COST VALUATION.................................................... 28
DESCRIPTION OF SERVICE SHARES AND PREMIER SHARES............................ 29
ADDITIONAL INFORMATION CONCERNING TAXES..................................... 32
General............................................................. 32
Special Tax Considerations Pertaining to the Tax-Exempt Portfolio... 33
Foreign Investors................................................... 34
Conclusion.......................................................... 34
SERVICE PLAN................................................................ 35
OTHER INFORMATION........................................................... 36
FINANCIAL STATEMENTS........................................................ 36
APPENDIX A.................................................................. A-1
No person has been authorized to give any information or to make any
representations not contained in this Additional Statement or in the Prospectus
in connection with the offering of Service Shares and Premier Shares made by the
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. The
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.
An investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although each of the Portfolios seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Portfolios.
2
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
Classification and History
Northern Institutional Funds (the "Trust") is an open-end, management
investment company. Each Portfolio is classified as diversified under the
Investment Company Act of 1940, as amended (the "1940 Act").
Each Portfolio is a series of the Trust, which was formed as a Delaware
business trust on July 1, 1997 under an Agreement and Declaration of Trust (the
"Trust Agreement"). The Trust, is the result of a reorganization of a
Massachusetts business trust known as The Benchmark Funds on March 31, 1998. The
Trust's name was changed from The Benchmark Funds to the Northern Institutional
Funds on July 15, 1998. The Trust also offers six fixed income, one balanced,
and nine equity portfolios, which are not described in this document.
Investment Objectives, Strategies and Risks
The following supplements the investment objectives, strategies and
risks of the Portfolios as set forth in the Prospectus. The investment objective
of each Portfolio (except Municipal Portfolio) may not be changed without the
vote of the majority of the Portfolio's outstanding shares. Except as expressly
noted below, however, each Portfolio's investment policies may be changed
without shareholder approval.
Commercial Paper, Bankers' Acceptances, Certificates of Deposit and Time
Deposits
Commercial paper represents short-term unsecured promissory notes
issued in bearer form by banks or bank holding companies, corporations and
finance companies. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or bills
of exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties that vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party.
As stated in the Prospectus, the Diversified Assets Portfolio may
invest a portion of its assets in the obligations of foreign banks and foreign
branches of domestic banks. Such obligations include Eurodollar Certificates of
Deposit ("ECDs"), which are U.S. dollar-denominated certificates of deposit
issued by offices of foreign and domestic banks located outside the United
States; Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated
deposits in a foreign branch of a U.S. bank or a foreign bank; Canadian Time
Deposits ("CTDs"), which are essentially the same as ETDs except they are issued
by Canadian offices of major Canadian banks; Schedule Bs, which are obligations
issued by Canadian branches of foreign or domestic banks; Yankee Certificates of
Deposit ("Yankee CDs"), which are U.S. dollar-denominated certificates of
deposit issued by a U.S. branch of a foreign bank and held in the United States;
and Yankee Bankers' Acceptances ("Yankee Bas"), which are U.S.
dollar-denominated bankers' acceptances issued by a U.S. branch of a foreign
bank and held in the United States.
The Diversified Assets Portfolio may also invest in high quality
commercial paper and other obligations issued or guaranteed by U.S. and foreign
corporations and other issuers rated (at the time of purchase) A-2 or higher by
Standard & Poor's Ratings Group, Inc. ("S&P"), Prime-2 or higher by Moody's
Investors Service, Inc. ("Moody's"), Duff 2 or higher by Duff & Phelps Credit
Rating Co. ("D&P"), F-2 or higher by Fitch IBCA, Inc. ("Fitch") or TBW-2 or
higher by Thomson BankWatch, Inc. ("TBW"). The Diversified Assets Portfolio may
also invest in rated and unrated corporate bonds, notes, paper and other
instruments that are of comparable quality to the commercial paper permitted to
be purchased by the Portfolio.
3
<PAGE>
Zero Coupon Bonds
To the extent consistent with their investment objectives, the
Portfolios may invest in zero coupon bonds. Zero coupon bonds are debt
securities issued or sold at a discount from their face value and which do not
entitle the holder to any periodic payment of interest prior to maturity or a
specified date. The original issue discount varies depending on the time
remaining until maturity or cash payment date, prevailing interest rates, the
liquidity of the security and perceived credit quality of the issuer. These
securities also may take the form of debt securities that have been stripped of
their unmatured interest coupons, the coupons themselves or receipts or
certificates representing interests in such stripped debt obligations or
coupons. The market prices of zero coupon bonds generally are more volatile than
the market prices of interest bearing securities and are likely to respond to a
greater degree of changes in interest rates than interest bearing securities
having similar maturities and credit quality.
Zero coupon bonds involve the additional risk that, unlike securities
that periodically pay interest to maturity, a Portfolio will realize no cash
until a specified future payment date unless a portion of such securities is
sold and, if the issuer of such securities defaults, the Portfolio may obtain no
return at all on its investment. In addition, even though such securities do not
provide for the payment of current interest in cash, a Portfolio is nonetheless
required to accrue income on such investment for each taxable year and generally
is required to distribute such accrued amounts (net of deductible expenses, if
any) to avoid being subject to tax. Because no cash is generally received at the
time of the accrual, a Portfolio may be required to liquidate other portfolio
securities to obtain sufficient cash to satisfy Federal tax distribution
requirements applicable to the Portfolio.
Asset-Backed Securities
To the extent described in the Prospectus, the Diversified Assets,
Tax-Exempt and Municipal Portfolios may purchase asset-backed securities, which
are securities backed by mortgages, installment contracts, credit card
receivables or other assets. Asset-backed securities represent interests in
"pools" of assets in which payments of both interest and principal on the
securities are made periodically, thus in effect "passing through" such payments
made by the individual borrowers on the assets that underlie the securities, net
of any fees paid to the issuer or guarantor of the securities. The average life
of asset-backed securities varies with the maturities of the underlying
instruments, and the average life of a mortgage-backed instrument, in
particular, is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities as a result of mortgage prepayments.
For this and other reasons, an asset-backed security's stated maturity may be
shortened, and the security's total return may be difficult to predict
precisely.
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.
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. Such difficulties are not, however, expected to have a significant
effect on the Diversified Assets, Tax-Exempt and Municipal Portfolios since the
remaining maturity of any asset-backed security acquired, as calculated under
applicable SEC regulations, will be 397 days or less.
Asset-backed securities acquired by the Diversified Assets, Tax-Exempt
and Municipal Portfolios may include collateralized mortgage obligations
("CMOs") issued by private companies. CMOs 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.
4
<PAGE>
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
by the GNMA include GNMA Mortgage Pass-Through Certificates (also known as
"Ginnie Maes"), which are guaranteed as to the timely payment of principal and
interest by GNMA and backed by the full faith and credit of the United States.
GNMA is a wholly-owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-backed securities issued by FNMA include FNMA Guaranteed
Mortgage Pass-Through Certificates (also known as "Fannie Maes"), which are
solely the obligations of FNMA and are not backed by or entitled to full faith
and credit of the United States, but are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the FHLMC include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of the
United States, created pursuant to an Act of Congress, which is owned entirely
by Federal Home Loan Banks. Freddie Macs are not guaranteed and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
Non-mortgage asset-backed securities involve certain risks that are 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
have given 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 payments on these securities.
Supranational Bank Obligations
The Diversified Assets, Municipal and Tax-Exempt Portfolios may invest
in obligations of supranational banks. Supranational banks are international
banking institutions designed or supported by national governments to promote
economic reconstruction, development or trade among nations (e.g., the
International Bank for Reconstruction and Development). Obligations of
supranational banks may be supported by appropriated but unpaid commitments of
their member countries and there is no assurance that these commitments will be
undertaken or met in the future.
U.S. Government Obligations
Examples of the types of U.S. Government obligations that may be
acquired by the Portfolios include U.S. Treasury Bills, Treasury Notes and
Treasury Bonds and the obligations of Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Federal National Mortgage Association ("FNMA"), Government
National Mortgage Association ("GNMA"), General Services Administration, Central
Bank for Cooperatives, Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
Intermediate Credit Banks, and the Maritime Administration.
Securities guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities are also deemed to include (i)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. Government or any agency or
instrumentality thereof, and (ii) participations in loans made to foreign
governments or their agencies that are so guaranteed.
To the extent consistent with its investment objectives, the Portfolios
may invest in a variety of US. Treasury obligations and obligations issued by or
guaranteed by the U.S. Government or its agencies and instrumentalities. Not all
5
<PAGE>
U.S. Government obligations carry the same credit support. 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. In addition, the secondary market for certain participations in loans
made to foreign governments or their agencies may be limited.
Custodial Receipts for Treasury Securities
The Portfolios (other than the Government Select Portfolio) may acquire
U.S. Government obligations and their unmatured interest coupons that have been
separated ("stripped") by their holder, typically a custodian bank or investment
brokerage firm. Having separated the interest coupons from the underlying
principal of the U.S. Government obligations, the holder will resell the
stripped securities in custodial receipt programs with a number of different
names, including "Treasury Income Growth Receipts" ("TIGRs") and "Certificate of
Accrual on Treasury Securities" ("CATS"). The stripped coupons are sold
separately from the underlying principal, which is usually sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are ostensibly owned by the
bearer or holder), in trust on behalf of the owners. Counsel to the underwriters
of these certificates or other evidences of ownership of U.S. Treasury
securities have stated that, in their opinion, purchasers of the stripped
securities most likely will be deemed the beneficial holders of the underlying
U.S. Government obligations for Federal tax purposes. The Trust is unaware of
any binding legislative, judicial or administrative authority on this issue.
U.S. Treasury STRIPS
The Treasury Department has facilitated transfers of ownership of zero
coupon securities by accounting separately for the beneficial ownership of
particular interest coupon and principal payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under the
STRIPS program, a Portfolio will be able to have its beneficial ownership of
zero coupon securities recorded directly in the book-entry record-keeping system
in lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities. All Portfolios, including the Government
Select Portfolio, may acquire securities registered under the STRIPS program.
Bank and Deposit Notes
The Diversified Assets Portfolio may purchase bank and deposit notes.
Bank notes rank junior to deposit liabilities of banks and pari passu with other
----------
senior, unsecured obligations of the bank. Bank notes are classified as "other
borrowings" on a bank's balance sheet, while deposit notes and certificates of
deposit are classified as deposits. Bank notes are not insured by the Federal
Deposit Insurance Corporation or any other insurer. Deposit notes are insured by
the Federal Deposit Insurance Corporation only to the extent of $100,000 per
depositor per bank.
Variable and Floating Rate Instruments
With respect to the variable and floating rate instruments that may be
acquired by the Portfolios as described in the Prospectus, Northern Trust
Company (the "Investment Adviser" or "Northern") will consider the earning
power, cash flows and other liquidity ratios of the issuers and guarantors of
such instruments and, if the instruments are subject to demand features, will
monitor their financial status and ability to meet payment on demand. Where
necessary to ensure that a variable or floating rate instrument is of "high
quality," the issuer's obligation to pay the principal of the instrument will be
backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. The Portfolios will invest in variable and floating rate
instruments only when Northern deems the investment to involve minimal credit
risk. 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 that may be purchased by the Portfolios. In determining weighted
average portfolio maturity, an instrument may, subject to the Securities and
Exchange Commission's (the "SEC") regulations, be deemed to have a maturity
shorter than its nominal maturity based on the period remaining until the next
interest rate adjustment or the time the Portfolio involved can recover payment
of principal as specified in the instrument. Variable and floating rate
instruments eligible for purchase by the Portfolio include variable amount
master demand notes, which permit the indebtness thereunder
6
<PAGE>
to vary in addition to providing for periodic adjustments in the interest rate.
Variable and floating rate instruments held by a Portfolio will be
subject to the Portfolio's 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
With respect to the investments of the Portfolios in the securities of
other investment companies, such investments will be limited so that, as
determined after a purchase is made, either (a) not more than 3% of the total
outstanding stock of such investment company will be owned by a Portfolio, the
Trust as a whole and their affiliated persons (as defined in the 1940 Act), or
(b)(i) not more than 5% of the value of the total assets of a Portfolio will be
invested in the securities of any one investment company; (ii) not more than 10%
of the value of its total assets will be invested in the aggregate in securities
of investment companies as a group; and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Portfolio.
Certain investment companies whose securities are purchased by the
Portfolios may not be obligated to redeem such securities in an amount exceeding
1% of the investment company's total outstanding securities during any period of
less than 30 days. Therefore, such securities that exceed this amount may be
illiquid.
If required by the 1940 Act, each Portfolio expects to vote the shares
of other investment companies that are held by it in the same proportion as the
vote of all other holders of such securities.
A Portfolio may invest all or substantially all of its assets in a
single open-end investment company or series thereof with substantially the same
investment objective, policies and restrictions as the Portfolio. However, each
Portfolio currently intends to limit its investments in securities issued by
other investment companies to the extent described above. A Portfolio may adhere
to more restrictive limitations with respect to its investments in securities
issued by other investment companies if required by the SEC or deemed to be in
the best interests of the Trust.
Repurchase Agreements
Each Portfolio may agree to purchase portfolio securities from
financial institutions subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price ("repurchase agreements"). Repurchase
agreements are considered loans under the 1940 Act. 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
subject to the agreement in an amount exceeding the repurchase price (including
accrued interest). Default by the seller would, however, expose the Portfolio to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
Reverse Repurchase Agreements
Each Portfolio may borrow funds by selling portfolio securities to
financial institutions such as banks and broker/dealers and agreeing to
repurchase them at a mutually specified date and price ("reverse repurchase
agreements"). The Portfolios may 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. Reverse repurchase agreements involve the risk that the
market value of the securities sold by a Portfolio may decline below the
repurchase price. The Portfolios will pay interest on amounts obtained pursuant
to a reverse repurchase agreement. While reverse repurchase agreements are
outstanding, a Portfolio will segregate liquid assets in an amount at least
equal to the market value of the securities, plus accrued interest, subject to
the agreement. Reverse repurchase agreements are considered to be borrowings
under the 1940 Act.
Securities Lending
Collateral for loans of portfolio securities made by a Portfolio may
consist of cash, cash equivalents, securities issued or guaranteed by the U.S.
Government or its agencies or irrevocable bank letters of credit (or any
combination
7
<PAGE>
thereof). The borrower of securities will be required to maintain the market
value of the collateral at not less than the market value of the loaned
securities, and such value will be monitored on a daily basis. When a Portfolio
lends its securities, it continues to receive dividends and interest on the
securities loaned and may simultaneously earn interest on the investment of the
cash collateral. Although voting rights, or rights to consent, attendant to
securities on loan pass to the borrower, such loans will be called so that the
securities may be voted by a Portfolio if a material event affecting the
investment is to occur.
Forward Commitments and When-Issued Securities
Each Portfolio may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment (sometimes called delayed
delivery) basis. These transactions involve a commitment by the Portfolio to
purchase or sell securities at a future date. The price of the underlying
securities (usually expressed in terms of yield) and the date when the
securities will be delivered and paid for (the settlement date) are fixed at the
time the transaction is negotiated. When-issued purchases and forward commitment
transactions are normally negotiated directly with the other party.
A Portfolio will purchase securities on a when-issued basis or purchase
or sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities. If
deemed advisable as a matter of investment strategy, however, a Portfolio may
dispose of or negotiate a commitment after entering into it. A Portfolio also
may sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. The Portfolio may realize a
capital gain or loss in connection with these transactions.
When a Portfolio purchases securities on a when-issued or forward
commitment basis, the Portfolio will segregate liquid assets having a value
(determined daily) at least equal to the amount of the Portfolio's purchase
commitments until three days prior to the settlement date, or otherwise cover
its position. These procedures are designed to ensure that the Portfolio will
maintain sufficient assets at all times to cover its obligations under
when-issued purchases, forward commitments and delayed-delivery transactions.
For purposes of determining a Portfolio's average dollar-weighted maturity, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date.
Insurance Funding Agreements
The Diversified Assets Portfolio may invest in insurance funding
agreements ("IFAs"). An IFA is normally a general obligation of the issuing
insurance company and not a separate account. The purchase price paid for an IFA
becomes part of the general assets of the insurance company, and the contract is
paid from the company's general assets. Generally, IFAs are not assignable or
transferable without the permission of the issuing insurance companies, and an
active secondary market in IFAs may not exist.
Yields and Ratings
The yields on certain obligations, including the money market
instruments in which the Portfolios invest (such as commercial paper and bank
obligations), are dependent on a variety of factors, including general economic
conditions, conditions in the particular market for the obligation, financial
condition of the issuer, size of the offering, maturity of the obligation and
ratings of the issue. The ratings of S&P, Moody's, D&P, Fitch and TBW represent
their respective opinions as to the quality of the obligations they undertake to
rate. Ratings, however, are general and are not absolute standards of quality.
Consequently, obligations with the same rating, maturity and interest rate may
have different market prices. For a more complete discussion of ratings, see
Appendix A to this document.
Subject to the limitations stated in the Prospectus, if a security held
by the Portfolio undergoes a rating revision, the Portfolios may continue to
hold the security if the Investment Adviser determines such retention is
warranted.
Municipal Instruments
Municipal instruments are high quality, short-term instruments, the
interest on which is, in the opinion of bond counsel to the issuers, exempt from
Federal income tax. Opinions relating to the validity of municipal instruments
and to Federal and state tax issues relating to these securities are rendered by
bond counsel to the respective issuing authorities at the time of issuance. Such
opinions may contain various assumptions, qualifications or exceptions that are
reasonably
8
<PAGE>
acceptable to the Investment Adviser. Neither the Trust nor the Investment
Adviser will review the proceedings relating to the issuance of municipal
instruments or the bases for such opinions.
Municipal instruments include both "general" and "revenue" obligations.
General obligations are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue obligations
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source such as lease revenue payments from the user of
the facility being financed. Industrial development bonds are in most cases
revenue securities and are not payable from the unrestricted revenues of the
issuer. Consequently, the credit quality of an industrial revenue bond is
usually directly related to the credit standing of the private user of the
facility involved.
Industrial development bonds are in most cases revenue securities and
are not payable from the unrestricted revenues of the issuer. Consequently, the
credit quality of an industrial revenue bond is usually directly related to the
credit standing of the private user of the facility involved.
Within the principal classifications of municipal instruments described
above there are a variety of categories, including municipal bonds, municipal
notes, municipal leases, asset-backed securities such as custodial receipts and
participation certificates. Municipal notes include tax, revenue and bond
anticipation notes of short maturity, generally less than three years, which are
issued to obtain temporary funds for various public purposes. Municipal leases
and participation certificates are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Participation certificates may represent participation in a lease,
an installment purchase contract, or a conditional sales contract. Certain
municipal lease obligations (and related participation certificates) may include
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. Custodial receipts are
underwritten by securities dealers or banks and evidence ownership of future
interest payments, principal payments or both on certain municipal securities.
Municipal leases (and participations in such leases) present the risk that a
municipality will not appropriate funds for the lease payments. The Investment
Adviser, under the supervision of the Trust's Board of Trustees, will determine
the credit quality of any unrated municipal leases on an ongoing basis,
including an assessment of the likelihood that the leases will not be cancelled.
The Tax-Exempt and Municipal Portfolios may also invest in "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of a moral obligation bond is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund (if
such a fund has been established), the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
Municipal bonds with a series of maturity dates are called Serial
Bonds. The Tax-Exempt Portfolio and the Municipal Portfolio may purchase Serial
Bonds and other long-term securities provided that they have a remaining
maturity meeting the Portfolios' maturity requirements. The Portfolios may also
purchase long-term variable and floating rate bonds (sometimes referred to as
"Put Bonds") where the Portfolios obtain at the time of purchase the right to
put the bond back to the issuer or a third party at par at least every thirteen
months. Put Bonds with conditional puts (that is, puts which cannot be exercised
if the issuer defaults on its payment obligations) will present risks that are
different than those of other municipal instruments because of the possibility
that the Portfolios might hold long-term Put Bonds on which defaults occur
following acquisition by the Portfolios.
9
<PAGE>
Municipal instruments purchased by the Tax-Exempt Portfolio and
Municipal Portfolio may be backed by letters of credit or other forms of credit
enhancement issued by foreign (as well as domestic) banks and other financial
institutions. The credit quality of these banks and financial institutions
could, therefore, cause loss to a Portfolio that invests in municipal
instruments. Letters of credit and other obligations of foreign financial
institutions may involve certain risks in addition to those of domestic
obligations.
The Tax-Exempt Portfolio and Municipal Portfolio may invest in fixed
and variable rate notes and similar debt instruments rated MIG-2, VMIG-2 or
Prime-2 or higher by Moody's, SP-2 or A-2 or higher by S&P, AA or higher by D&P
or F-2 or higher by Fitch and tax-exempt commercial paper and similar debt
instruments rated Prime-2 or higher by Moody's, A-2 or higher by S&P, Duff 2 or
higher by D&P or F-2 or higher by Fitch. The Tax-Exempt Portfolio and Municipal
Portfolio may also invest in rated and unrated municipal bonds, notes, paper or
other instruments that are of comparable quality to the tax-exempt commercial
paper permitted to be purchased by the Portfolios.
The Tax-Exempt Portfolio and Municipal Portfolio may acquire securities
in the form of custodial receipts evidencing rights to receive a specific future
interest payment, principal payment or both on certain municipal obligations.
Such obligations are held in custody by a bank on behalf of the holders of the
receipts. These custodial receipts are known by various names, including
"Municipal Receipts," "Municipal Certificates of Accrual on Tax-Exempt
Securities" ("M-CATS") and "Municipal Zero-Coupon Receipts." The Portfolios may
also purchase certificates of participation that, in the opinion of counsel to
the issuer, are exempt from regular Federal income tax. Certificates of
participation are a type of floating or variable rate obligation that represents
interests in a pool of municipal obligations held by a bank.
An issuer's obligations under its municipal instruments are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by Federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on and principal of its municipal instruments may be materially
adversely affected by litigation or other conditions.
From time to time proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on municipal instruments. For example, under the Tax Reform Act of 1986
interest on certain private activity bonds must be included in an investor's
Federal alternative minimum taxable income, and corporate investors must include
all tax-exempt interest in their Federal alternative minimum taxable income. The
Trust cannot predict what legislation, if any, may be proposed in the future in
Congress as regards the Federal income tax status of interest on municipal
instruments or which proposals, if any, might be enacted. Such proposals, if
enacted, might materially and adversely affect the availability of municipal
instruments for investment by the Tax-Exempt and Municipal Portfolios and their
liquidity and value. In such an event the Board of Trustees would reevaluate the
Portfolios' investment objectives and policies and consider changes in its
structure or possible dissolution.
As stated below, as a matter of fundamental policy, at least 80% of the
Tax-Exempt Portfolio and Municipal Portfolio net assets will be invested in debt
instruments, the interest on which is, in the opinion of bond counsel or counsel
for issuers, if any, exempt from regular Federal income tax, except in
extraordinary circumstances such as when the Investment Adviser believes that
market conditions indicate that the Portfolios should adopt a temporary
defensive posture by holding uninvested cash or investing in taxable securities.
Taxable investments will consist exclusively of instruments that may be
purchased by the Diversified Assets Portfolio. The risks associated with these
investments are described in the Prospectus.
Certain of the municipal instruments held by the Municipal and the
Tax-Exempt Portfolios may be insured as to the timely payment of principal and
interest. The insurance policies will usually be obtained by the issuer of the
municipal instrument at the time of its original issuance. In the event that the
issuer defaults on an interest or principal payment, the insurer will be
notified and will be required to make payment to the bond holders. There is,
however, no guarantee that the insurer will meet its obligations. In addition,
such insurance will not protect against market fluctuations caused by changes in
interest rates and other factors. The Portfolios may invest more than 25% of its
total assets in municipal instruments covered by insurance policies.
As described in the Prospectus, the Municipal and Tax-Exempt Portfolios
may invest in municipal leases, which
10
<PAGE>
may be considered liquid under guidelines established by the Trust's Board of
Trustees. The guidelines will provide for determination of the liquidity of a
municipal lease obligation based on factors including the following: (i) the
frequency of trades and quotes for the obligation; (ii) the number of dealers
willing to purchase or sell the security and the number of other potential
buyers; (iii) the willingness of dealers to undertake to make a market in the
security; and (iv) the nature of the marketplace trades, including the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of transfer. The Investment Adviser, under the supervision of the
Trust's Board of Trustees, will also consider marketability of a municipal lease
obligations based upon an analysis of the general credit quality of the
municipality issuing the obligation and the essentiality to the municipality of
the property covered by the lease.
Currently, it is not the intention of the Portfolios to invest more
than 25% of the value of their total assets in municipal instruments whose
issuers are in the same state.
Standby Commitments
The Tax-Exempt and Municipal Portfolios may enter into standby
commitments with respect to municipal instruments held by them, respectively.
Under a standby commitment, a dealer agrees to purchase at the Portfolio's
option a specified municipal instrument. Standby commitments may be exercisable
by the Tax-Exempt and Municipal Portfolios at any time before the maturity of
the underlying municipal instruments and may be sold, transferred or assigned
only with the instruments involved.
The Tax-Exempt and Municipal Portfolios expect that standby commitments
will generally be available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Tax-Exempt and Municipal
Portfolios may pay for a standby commitment either separately in cash or by
paying a higher price for municipal instruments which are acquired subject to
the commitment (thus reducing the yield to maturity otherwise available for the
same securities). The total amount paid in either manner for outstanding standby
commitments held by either Portfolio will not exceed 1/2 of 1% of the value of
the Portfolio's total assets calculated immediately after each standby
commitment is acquired.
The Tax-Exempt and Municipal Portfolios intend to enter into standby
commitments only with dealers, banks and broker-dealers which, in the Investment
Adviser's opinion, present minimal credit risks. The Tax-Exempt and Municipal
Portfolios will acquire standby commitments solely to facilitate portfolio
liquidity and do not intend to exercise their rights thereunder for trading
purposes. The acquisition of a standby commitment will not affect the valuation
of the underlying municipal instrument. The actual standby commitment will be
valued at zero in determining net asset value. Accordingly, where the Tax-Exempt
and Municipal Portfolios pay directly or indirectly for a standby commitment,
the Portfolios' costs will be reflected as an unrealized loss for the period
during which the commitment is held by the Tax-Exempt and Municipal Portfolios
and will be reflected in realized gain or loss when the commitment is exercised
or expires.
Illiquid or Restricted Securities
Each Portfolio may invest up to 10% of its net assets in securities
that are illiquid. The Portfolios may purchase commercial paper issued pursuant
to Section 4(2) of the 1933 Act and securities that are not registered under the
1933 Act but can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act. These securities will not be considered illiquid
so long as the Investment Adviser determines, under guidelines approved by the
Trust's Board of Trustees, that an adequate trading market exists. This practice
could increase the level of illiquidity during any period that qualified
institutional buyers become uninterested in purchasing these securities.
11
<PAGE>
Investment Restrictions
Each Portfolio is subject to the fundamental investment restrictions
enumerated below which may be changed with respect to a particular Portfolio
only by a vote of the holders of a majority of such Portfolio's outstanding
shares.
No Portfolio may:
(1) Make loans, except through (a) the purchase of debt obligations in
accordance with the Portfolio's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, (c) loans of securities, and (d) loans to affiliates of the
Portfolio to the extent permitted by law.
(2) Purchase or sell real estate or securities issued by real estate
investment trusts, but this restriction shall not prevent a Portfolio
from investing directly or indirectly in portfolio instruments secured by
real estate or interests therein.
(3) Invest in commodities or commodity contracts, except that a Portfolio
may invest in currency and financial instruments and contracts that are
commodities or commodity contracts.
(4) Invest in companies for the purpose of exercising control or
management.
(5) Act as underwriter of securities (except as a Portfolio may be deemed
to be an underwriter under the Securities Act of 1933 in connection with
the purchase and sale of portfolio instruments in accordance with its
investment objective and portfolio management policies).
(6) Make any investment inconsistent with the Portfolio's classification
as a diversified investment company under the 1940 Act.
(7) Purchase securities if such purchase would cause more than 25% in the
aggregate of the market value of the total assets of a Portfolio to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, provided that there is no
limitation with respect to, and each Portfolio reserves freedom of
action, when otherwise consistent with its investment policies, to
concentrate its investments in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, obligations (other
than commercial paper) issued or guaranteed by U.S. banks and U.S.
branches of foreign banks and repurchase agreements and securities loans
collateralized by such U.S. Government obligations or such bank
obligations. For the purpose of this restriction, state and municipal
governments and their agencies and authorities are not deemed to be
industries; as to utility companies, the gas, electric, water and
telephone businesses are considered separate industries; personal credit
finance companies and business credit finance companies are deemed to be
separate industries; and wholly-owned finance companies are considered to
be in the industries of their parents if their activities are primarily
related to financing the activities of their parents.
(8) Borrow money, except that to the extent permitted by applicable law
(a) the Portfolios may borrow from banks, other affiliated investment
companies and other persons, and may engage in reverse repurchase
agreements and other transactions which involve borrowings, in amounts up
to 33-1/3% of their total assets (including the amount borrowed) or such
percentage permitted by law (b) the Portfolios may borrow up to an
additional 5% of their total assets for temporary purposes, (c) the
Portfolios may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities, and (d) the
Portfolios may purchase securities on margin. If due to market
fluctuations or other reasons the Portfolios' borrowings exceed the
limitations stated above, the Trust will promptly reduce the borrowings
of such Portfolio in accordance with the 1940 Act. In addition, as a
matter of fundamental policy, a Portfolio will not issue senior
securities to the extent such issuance would violate applicable law.
(9) Notwithstanding any of the Trust's other fundamental investment
restrictions (including, without limitation, those restrictions relating
to issuer diversification, industry concentration and control), each
Portfolio may (a) purchase securities of other investment companies to
the full extent permitted under Section 12 of the 1940 Act (or any
successor provision thereto) or under any regulation or order of the
Securities and Exchange Commission; and (b) invest all or substantially
all of its assets in a single open-end investment company or series
thereof with substantially
12
<PAGE>
the same investment objective, policies and fundamental restrictions as
the Portfolio.
* * *
For the purposes of Restriction Nos. 1 and 8 above, the Portfolios
expect that they would be required to file an exemptive application with the SEC
and receive the SEC's approval of that application prior to entering into
lending or borrowing arrangements with affiliates. As of April 1, 2000, the
Portfolios had not filed such an exemptive application.
The freedom of action reserved in Restriction No. 7 with respect to
U.S. branches of foreign banks is subject to the requirement that they are
subject to the same regulation as domestic branches of U.S. banks. Obligations
of U.S. branches of foreign banks may include certificates of deposit, bank and
deposit notes, bankers' acceptances and fixed time deposits. These obligations
may be general obligations of the parent bank or may be limited to the issuing
branch. Such obligations will meet the criteria for "Eligible Securities" as
described in the Prospectus.
Also, as a matter of fundamental policy, changeable only with the
approval of the holders of a majority of the outstanding shares of the
Tax-Exempt Portfolio and Municipal Portfolio, at least 80% of the net assets of
the Portfolios will be invested in debt instruments, the interest on which is,
in the opinion of bond counsel or counsel for issuers, exempt from regular
Federal income tax, except in extraordinary circumstances such as when the
Investment Adviser believes that market conditions indicate that the Portfolios
should adopt a temporary defensive posture by holding uninvested cash or
investing in taxable securities. Interest earned on "private activity bonds"
that is treated as an item of tax preference under Federal alternative minimum
tax will be deemed by the Municipal Portfolio, but will not be deemed by the
Tax-Exempt Portfolio, to be exempt from regular Federal income tax for purposes
of determining whether the Municipal and Tax-Exempt Portfolios meet this
fundamental policy.
Except to the extent otherwise provided in Investment Restriction No.
7, for the purpose of such restriction in determining industry classification
the Trust intends to use the industry classification titles in the Bloomberg
Industry Group Classifications.
In applying Restriction No. 7 above, a security is considered to be
issued by the entity, or entities, whose assets and revenues back the security.
A guarantee of a security is not deemed to be a security issued by the guarantor
when the value of all securities issued and guaranteed by the guarantor, and
owned by a Portfolio, does not exceed 10% of the value of the Portfolio's total
assets.
Any restriction which involves a maximum percentage will not be
considered violated unless an excess over the percentage occurs immediately
after, and is caused by, an acquisition or encumbrance of securities or assets
of, or borrowings by, a Portfolio.
The Portfolios intend, as a non-fundamental policy, to diversify their
investments in accordance with current SEC regulations. Investments in the
securities of any single issuer (excluding cash, cash items, certain repurchase
agreements, U.S. Government securities and securities of other investment
companies) will be limited to not more than 5% of the value of a Portfolio's
total assets at the time of purchase, except that 25% of the value of the total
assets of each Portfolio may be invested in the securities of any one issuer for
a period of up to three Business Days. A security that has an unconditional
guarantee meeting special SEC requirements (a "Guarantee") does not need to
satisfy the foregoing issuer diversification requirements that would otherwise
apply, but the Guarantee is instead subject to the following diversification
requirements: immediately after the acquisition of the security, a Portfolio may
not have invested more than 10% of its total assets in securities issued by or
subject to Guarantees from the same person, except that a Portfolio may, subject
to certain conditions, invest up to 25% of its total assets in securities issued
or subject to Guarantees of the same person. This percentage is 100% if the
Guarantee is issued by the U.S. Government or an agency thereof. In addition,
the Tax-Exempt and Municipal Portfolios will limit their investments in certain
conduit securities that are not rated in the highest short-term rating category
as determined by two nationally recognized statistical rating organizations
(each an "NRSRO") (or one NRSRO if the security is rated by only one NRSRO) or,
if unrated, are not of comparable quality to First Tier Securities ("Second Tier
Securities"), to 5% of its total assets, with investments in any one such issuer
being limited to no more than 1% of the Portfolio's total assets or $1 million,
whichever is greater, measured at the time of purchase. Conduit securities
subject to this limitation are municipal instruments that are not subject to a
Guarantee and involve an arrangement whereunder a person, other than a municipal
issuer, provides for or secures repayment of the security and are not: (i) fully
13
<PAGE>
and unconditionally guaranteed by a municipal issuer; or (ii) payable from the
general revenues of the municipal issuer or other municipal issuers; or (iii)
related to a project owned and operated by a municipal issuer; or (iv) related
to a facility leased to and under the control of an industrial or commercial
enterprise that is part of a public project which, as a whole, is owned and
under the control of a municipal issuer. The Diversified Assets Portfolio will
limit its investments in all Second Tier Securities (that are not subject to a
Guarantee) in accordance with the foregoing percentage limitations.
In addition to the foregoing, each Portfolio is subject to additional
diversification requirements imposed by SEC regulations on the acquisition of
securities subject to other types of demand features.
ADDITIONAL TRUST INFORMATION
Trustees and Officers
The business and affairs of the Trust and each Portfolio are managed under the
direction of the Trust's Board of Trustees. Information pertaining to the
Trustees and officers of the Trust is set forth below.
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Richard G. Cline 65 Trustee Chairman, Hawthorne Investors, Inc. (a
4200 Commerce Court management advisory services and private
Suite 300 investment company) since January 1996;
Lisle, IL 60532 Chairman, Hussman International, Inc. (a
refrigeration company) since 1998, Chairman
and CEO of NICOR Inc. (a diversified public
utility holding company) from 1986 to 1995,
and President, 1992-1993; Chairman, Federal
Reserve Bank of Chicago from 1992 to 1995; and
Deputy Chairman from 1995 to 1996. Director:
Whitman Corporation (a diversified holding
company); Kmart Corporation (a retailing
company); Ryerson Tull, Inc. (a metals
distribution company) and University of
Illinois Foundation. Trustee: Northern Funds.
Edward J. Condon, Jr. 60 Trustee Chairman of The Paradigm Group, Ltd. (a
Sears Tower, Suite 9650 financial advisor) since July 1993; Vice
233 S. Wacker Drive President and Treasurer of Sears, Roebuck and
Chicago, IL 60606 Co. (a retail corporation) from February 1989
to July 1993; Member of Advisory Board of Real-
Time USA, Inc. (a software development
company); Member of the Board of Managers of
The Liberty Hampshire Company, LLC (a
receivable securitization company); Vice
Chairman and Director of Energenics L.L.C. (a
waste to energy recycling company). Director:
University Eldercare, Inc. (an Alzheimer's
disease research and treatment company);
Financial Pacific Company (a small business
leasing company). Trustee: Dominican
University. Trustee: Northern Funds.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Mr. Wesley M. Dixon, Jr. 72 Trustee Director of Kinship Capital Corporation (a
400 Skokie Blvd., Suite 300 financial services company) since 1985 to 1996,
Northbrook, IL 60062 Vice Chairman and Director of G.D. Searle & Co.
(manufacture and sale of food products and
pharmaceuticals) from 1977 to 1985 and
President of G.D. Searle & Co. prior thereto.
Trustee: Northern Funds.
Mr. William J. Dolan, Jr. 67 Trustee Partner of Arthur Andersen & Co. S.C. (an
1534 Basswood Circle accounting firm) from 1966 to 1989. Financial
Glenview, IL 60025 Consultant, Ernst & Young (an accounting firm)
from 1992 to 1993 and 1997. Trustee: Northern
Funds.
John W. English 67 Trustee Private Investor; Vice President and Chief
50-H New England Ave. Investment Officer of The Ford Foundation (a
P.O. Box 640 charitable trust) from 1981 to 1993. Trustee:
Summit, NJ 07902-0640 The China Fund, Inc., Select Sector SPDR Trust;
WM Funds; American Red Cross in Greater New
York; Mote Marine Laboratory (a non-profit
marine research facility); and United Board for
Christian Higher Education in Asia. Trustee:
Northern Funds.
Mr. Raymond E. George, Jr. * 69 Trustee Senior Vice President and Senior Fiduciary
703 Prospect Avenue Officer of The Northern Trust Company from 1990
Winnetka, IL 60093 to 1993. Trustee: Northern Funds.
Sandra Polk Guthman 56 Trustee President and CEO of Polk Bros. Foundation (an
420 N. Wabash Avenue Illinois not-for-profit corporation) from 1993
Suite 204 to present; Director of Business Transformation
Chicago, IL 60611 from 1992-1993, and Midwestern Director of
Marketing from 1988-1992, IBM (a technology
company); Director: MBIA Insurance Corporation
of Illinois (a municipal bond insurance
company). Trustee: Northern Funds.
Mr. Michael E. Murphy** 63 Trustee President of Sara Lee Foundation
Suite 2222 (philanthropic organization) since November
20 South Clark Street 1997. Vice Chairman and Chief Administrative
Chicago, IL 60603 Officer of Sara Lee Corporation (a consumer
product company) from November 1994 to October
1997; Vice Chairman and Chief Financial and
Administrative Officer of Sara Lee Corporation
from July 1993 to November 1994. Director:
Payless Shoe Source, Inc., (a retail shoe store
business); True North Communications, Inc. (a
global advertising and communications holding
company); American General Corporation (a
diversified financial services company); GATX
Corporation (a railroad holding company);
Bassett Furniture Industries, Inc. (a furniture
manufacturer) Trustee: Northern Funds.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Mary Jacobs Skinner, Esq.*** 42 Trustee Partner in the law firm of Sidley & Austin.
One First National Plaza Trustee: Northern Funds.
Chicago, IL 06063
William H. Springer 71 Chairman and Vice Chairman of Ameritech (a
701 Morningside Drive Trustee telecommunications holding company) from
Lake Forest, IL 60045 February 1987 to August 1992; Vice Chairman,
Chief Financial and Administrative Officer of
Ameritech prior to 1987. Director: Walgreen Co.
(a retail drug store business); Baker, Fentress &
Co. (a closed-end, non-diversified management
investment company). Trustee: Goldman Sachs
Trust; Goldman Sachs Variable Insurance Trust.
Trustee: Northern Funds.
Richard P. Strubel 61 Trustee President and Chief Operating Officer,
737 N. Michigan Avenue UNext.com (a provider of educational services
Suite 1405 via the internet) since 1999; Managing Director
Chicago, IL 60611 of Tandem Partners, Inc. (a privately held
management services firm) from 1990 to 1999;
President and Chief Executive Officer,
Microdot, Inc. (a privately held manufacturing
firm) from 1984 to 1994; Director: Gildan
Activewear, Inc. (an athletic clothing
marketing and manufacturing company);
Children's Memorial Medical Center. Trustee:
University of Chicago; Goldman Sachs Trust;
Goldman Sachs Variable Insurance Trust.
Trustee: Northern Funds.
Stephen Timbers**** 55 Trustee President of Northern Trust Global Investments,
50 South LaSalle Street a division of Northern Trust Corporation and
Chicago, IL 60675 Executive Vice President, The Northern Trust
Company since 1998; President, Chief Executive
Officer and Director of Zurich Kemper
Investments (a financial services company) from
1996 to 1998; President, Chief Operating
Officer and Director of Kemper Corporation (a
financial services company) from 1992 to 1996;
President and Director of Kemper Funds (a
registered investment company) from 1990 to
1998. Director: LTV Corporation (a steel
producer). Trustee: Northern Funds.
Jylanne M. Dunne 40 President Senior Vice President for Distribution Services
4400 Computer Drive at PFPC Inc. ("PFPC") (formerly First Data
Westborough, MA 01581 Investor Services Group, Inc. ("FDISG")) (since
1988).
Archibald E. King 42 Vice President Senior Vice President and other positions at
50 South LaSalle Street The Northern Trust Company (since 1979).
Chicago, IL 60675
Lloyd A. Wennlund 42 Vice President Senior Vice President and other positions at
50 South LaSalle Street The Northern Trust Company, President of
Chicago, IL 60675 Northern Trust Securities, Inc., and Managing
Executive, Mutual Funds for Northern Trust
Global Investments (since 1989).
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Position(s) Principal Occupation(s)
Name and Address Age with Trust During the Past 5 Years
- ---------------- --- ---------- -----------------------
<S> <C> <C> <C>
Brian R. Curran 32 Vice President Director of Fund Administration at PFPC
4400 Computer Drive and Treasurer (formerly FDISG) (since 1997); Director of Fund
Westborough, MA 01581 Administration at State Street Bank & Trust
Company (February 1997 to October 1997); Senior
Auditor at Price Waterhouse L.L.P. (an
accounting firm) (February 1994 to February
1997).
Judith E. Clear 33 Assistant Client Treasury Manager of Mutual Fund
4400 Computer Drive Treasurer Administration at PFPC (since 1997); Compliance
Westborough, MA 01581 Manager at Citizens Trust (1994 to 1996).
Suzanne E. Anderson 27 Assistant Client Treasury Manager of Mutual Fund
4400 Computer Drive Treasurer Administration at PFPC Inc. (since August
Westborough, MA 01581 1998); Manager of Fund Administration at State
Street Bank & Trust Company (October 1996 to
August 1998); Fund Administrator at State
Street Bank & Trust Company (October 1995 to
October 1996); Mutual Fund Accountant at The
Boston Company (prior thereto).
Jeffrey A. Dalke 49 Secretary Partner in the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Linda J. Hoard 52 Assistant Vice President at PFPC (formerly FDISG) (since
4400 Computer Drive Secretary 1998); Attorney Consultant for Fidelity
Westborough, MA 01581 Management & Research (a financial service
company); Investors Bank & Trust Company (a financial
service provider) and FDISG (September 1994 to June 1998).
Therese Hogan 37 Assistant Director of the State Regulation Department at
4400 Computer Drive Secretary PFPC (formerly FDISG) (since 1994).
Westborough, MA 01581
</TABLE>
* Mr. George is deemed to be an "interested" Trustee because he owns
shares of Northern Trust Corporation.
** Mr. Murphy is deemed to be an "interested" Trustee because he owns
shares of Northern Trust Corporation.
*** Ms. Skinner is deemed to be an "interested" Trustee because her law
firm provides legal services to Northern.
**** Mr. Timbers is deemed to be an "interested" Trustee because he is an
officer, director, employee and shareholder of Northern Trust
Corporation and/or Northern and NTQA.
Certain of the Trustees and officers and the organizations with which
they are associated have had in the past, and may have in the future,
transactions with Northern, PFPC, Northern Funds Distributors, LLC ("NFD"), and
their respective affiliates. The Trust has been advised by such Trustees and
officers that all such transactions have been and are expected to be in the
ordinary course of business and the terms of such transactions, including all
loans and loan commitments by such persons, have been and are expected to be
substantially the same as the prevailing terms for comparable transactions for
other customers. As a result of the responsibilities assumed by Northern under
its Advisory Agreement, Transfer Agency Agreement, Custodian Agreement, Foreign
Custody Agreement and Co-Administration Agreement with the Trust, by PFPC under
its Co-Administration Agreement with the Trust and by NFD under its Distribution
Agreement with the Trust, the Trust itself requires no employees.
Each officer holds comparable positions with certain other investment
companies of which NFD, PFPC or an affiliate thereof is the investment adviser,
administrator and/or distributor.
Each Trustee, except Mr. Timbers, earns a quarterly retainer of $6,750
and the Chairman of the Board earns a
17
<PAGE>
quarterly retainer of $10,125. Each Trustee, including the Chairman of the
Board, earns an additional fee of $2,500 for each meeting attended, plus
reimbursement of expenses incurred as a Trustee.
In addition, the Trustees have established an Audit Committee
consisting of two members, including a Chairman of the Committee. The Audit
Committee members are Messrs. Condon and Strubel (Chairman). Each member earns a
fee of $2,500 for each meeting attended and the Chairman earns a quarterly
retainer of $1,500.
Each Trustee will hold office for an indefinite term until the earliest
of (i) the next meeting of shareholders, if any, called for the purpose of
considering the election or re-election of such Trustee and until the election
and qualification of his or her successor, if any, elected at such meeting; (ii)
the date a Trustee resigns or retires, or a Trustee is removed by the Board of
Trustees or shareholders, in accordance with the Trust's Agreement and
Declaration of Trust, or (iii) effective December 31, 2001, in accordance with
the current resolutions of the Board of Trustees (which may be changed without
shareholder vote), on the last day of the fiscal year of the Trust in which he
or she attains the age of 72 years.
The Trust's officers do not receive fees from the Trust for services in
such capacities, although PFPC, of which certain of the Trust's officers are
also officers (except Mr. Dalke, Mr. King and Mr. Wennlund), receives fees from
the Trust for administrative services.
Drinker Biddle & Reath LLP, of which Mr. Dalke is a partner, receives
fees from the Trust for legal services.
Northern Trust Company, of which Mr. King and Mr. Wennlund are
officers, receives fees from the Trust as investment adviser, custodian,
transfer agent and co-administrator.
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended November
30, 1999:
<TABLE>
<CAPTION>
Total
Government Diversified Compensation
Select Government Assets Municipal Tax-Exempt from Fund
Portfolio Portfolio Portfolio Portfolio+ Portfolio Complex
--------- --------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Stephen B. Timbers** $ 0 $ 0 $ 0 n/a $ 0 $ 0
William H. Springer 7,950 6,890 19,610 n/a 3,180 53,000
Richard G. Cline 5,925 5,135 14,615 n/a 2,370 39,500
Edward J. Condon, Jr. 6,675 5,785 16,465 n/a 2,670 44,500
John W. English 5,925 5,135 14,615 n/a 2,370 39,500
Sandra Polk Guthman 5,925 5,135 14,615 n/a 2,370 39,500
Frederick T. Kelsey* 6,675 5,785 16,465 n/a 2,670 44,500
Richard P. Strubel 7,575 6,565 18,685 n/a 3,030 50,500
Wesley M. Dixon, Jr.** 0 0 0 n/a 0 22,500
William J. Dolan, Jr.** 0 0 0 n/a 0 22,500
Raymond E. George, Jr.** 0 0 0 n/a 0 21,250
Michael E. Murphy** 0 0 0 n/a 0 22,500
Mary Jacobs Skinner** 0 0 0 n/a 0 22,500
</TABLE>
* Frederick Kelsey retired from the Board of Trustees on November 30,
1999.
** Not a Trustee of the Northern Institutional Funds during the period
ended November 30, 1999.
+ Municipal Portfolio did not commence operations during the period
The Trust, its investment adviser and principal underwriter have
adopted codes of ethics (the "Codes of Ethics") under rule 17j-1 of the 1940
Act. The Codes of Ethics permit personnel, subject to the Codes of Ethics and
their provisions, to invest in securities, including securities that may be
purchased or held by the Trust.
The Trust does not provide pension or retirement benefits to its
Trustees.
18
<PAGE>
Investment Adviser, Transfer Agent and Custodian
Northern Trust Company (the "Investment Adviser" or "Northern"), a
wholly-owned subsidiary of Northern Trust Corporation, a bank holding company,
is one of the nation's leading providers of trust and investment management
services. As of December 31, 1999, Northern and its affiliates had over $299.1
billion in assets under management for clients including public and private
retirement funds, endowments, foundations, trusts, corporations, and
individuals. Northern is one of the strongest banking organizations in the
United States. Northern believes it has built its organization by serving
clients with integrity, a commitment to quality, and personal attention. Its
stated mission with respect to all its financial products and services is to
achieve unrivaled client satisfaction. With respect to such clients, the Trust
is designed to assist (i) defined contribution plan sponsors and their employees
by offering a range of diverse investment options to help comply with 404(c)
regulation and may also provide educational material to their employees, (ii)
employers who provide post-retirement Employees' Beneficiary Associations
("VEBA") and require investments that respond to the impact of Federal
regulations, (iii) insurance companies with the day-to-day management of
uninvested cash balances as well as with longer-term investment needs, and (iv)
charitable and not-for-profit organizations, such as endowments and foundations,
demanding investment management solutions that balance the requirement for
sufficient current income to meet operating expenses and the need for capital
appreciation to meet future investment objectives.
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 each Portfolio and placing purchase and sale orders for
the portfolio transactions of the Portfolios. In connection with portfolio
transactions for the Portfolios, which are generally done at a net price without
a broker's commission, Northern's Advisory Agreement provides that Northern
shall attempt to obtain the best net price and execution.
Northern's investment advisory duties for the Trust are carried out
through its Trust Department. On occasions when Northern deems the purchase or
sale of a security to be in the best interests of a Portfolio as well as other
fiduciary or agency accounts managed by it (including any other Portfolio,
investment company or account for which Northern acts as adviser), the
Investment Advisory Agreement provides that Northern, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for such Portfolio with those to be sold or purchased for such other
accounts in order to obtain best net price and execution. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by Northern in the manner it considers
to be most equitable and consistent with its fiduciary obligations to the
Portfolio and other accounts involved. In some instances, this procedure may
adversely affect the size of the position obtainable for a Portfolio or the
amount of the securities that are able to be sold for a Portfolio. To the extent
that the execution and price available from more than one broker or dealer are
believed to be comparable, the Investment Advisory Agreement permits Northern,
at its discretion but subject to applicable law, to select the executing broker
or dealer on the basis of Northern's opinion of the reliability and quality of
such broker or dealer.
The Advisory Agreement provides that Northern may render similar
services to others so long as its services under such Agreement are not impaired
thereby. The Advisory Agreement also provides that the Trust will indemnify
Northern against certain liabilities (including liabilities under the Federal
securities laws relating to untrue statements or omissions of material fact and
actions that are in accordance with the terms of the Agreement) or, in lieu
thereof, contribute to resulting losses.
Under its Transfer Agency Agreement with the Trust, Northern has
undertaken to (i) answer customer inquiries regarding the current yield of, and
certain other matters (e.g. account status information) pertaining to, the
Trust, (ii) process purchase and redemption transactions, including transactions
generated by any service provided outside of the Agreement by Northern, its
affiliates or correspondent banks whereby customer account cash balances are
automatically invested in shares of the Portfolios, and the disbursement of the
proceeds of redemptions, (iii) establish and maintain separate omnibus accounts
with respect to shareholders investing through Northern or any of its affiliates
and correspondent banks and act as transfer agent and perform sub-accounting
services with respect to each such account, (iv) provide periodic statements
showing account balances, (v) mail reports and proxy materials to shareholders,
(vi) provide information in connection with the preparation by the Trust of
various regulatory reports and prepare reports to the Trustees and management,
(vii) answer inquiries (including requests for prospectuses and statements of
additional information, and assistance in the completion of new account
applications) from investors and respond to all requests for information
regarding the Trust (such as current price, recent performance, and yield data)
and questions relating to accounts of investors (such as possible errors in
19
<PAGE>
statements, and transactions), (viii) respond to and seek to resolve all
complaints of investors with respect to the Trust or their accounts, (ix)
furnish proxy statements and proxies, annual and semi-annual financial
statements, and dividend, distribution and tax notices to investors, (x) furnish
the Trust all pertinent Blue Sky information, (xi) perform all required tax
withholding, (xii) preserve records, and (xiii) furnish necessary office space,
facilities and personnel. Northern may appoint one or more sub-transfer agents
in the performance of its services.
As compensation for the services rendered by Northern under the
Transfer Agency Agreement with respect to Service Shares and Premier Shares
described in this Additional Statement and the assumption by Northern of related
expenses, Northern is entitled to a fee from the Trust, calculated daily and
payable monthly, at the following annual rates: (i) .01% of the average daily
net asset value of the outstanding Service Shares of each Portfolio; and (ii)
.02% of the average daily net asset value of the outstanding Premier Shares of
each Portfolio. The transfer agency fee attributable to each class of shares is
borne solely by that class. Northern's affiliates and correspondent banks may
receive compensation for performing the services described in the preceding
paragraph that Northern would otherwise receive. Conflict-of-interest
restrictions under state and Federal law (including the Employee Retirement
Income Security Act of 1974) may apply to the receipt by such affiliates or
correspondent banks of such compensation in connection with the investment of
fiduciary funds in Service Shares and Premier Shares of the Portfolios.
Under its Custodian Agreement with the Trust, Northern (i) holds each
Portfolio's cash and securities, (ii) maintains such cash and securities in
separate accounts in the name of the Portfolio, (iii) makes receipts and
disbursements of funds on behalf of the Portfolio, (iv) receives, delivers and
releases securities on behalf of the Portfolio, (v) collects and receives all
income, principal and other payments in respect of the Portfolio's securities
held by Northern under the Custodian Agreement, and (vi) maintains the
accounting records of the Trust. Northern may employ one or more subcustodians,
provided that Northern, subject to certain monitoring responsibilities, shall
have no more responsibility or liability to the Trust on account of any action
or omission of any subcustodian so employed than such subcustodian has to
Northern and that the responsibility or liability of the subcustodian to
Northern shall conform to the resolution of the Trustees of the Trust
authorizing the appointment of the particular subcustodian. Northern may also
appoint agents to carry out such of the provisions of the Custodian Agreement as
Northern may from time to time direct, provided that the appointment of an agent
shall not relieve Northern of any of its responsibilities under the Agreement.
As compensation for the services rendered to the Trust by Northern as
custodian, and the assumption by Northern of certain related expenses, Northern
is entitled to payment from the Trust as follows: (i) $18,000 annually for each
Portfolio, plus (ii) 1/100th of 1% annually of each Portfolio's average daily
net assets to the extent they exceed $100 million, plus (iii) a fixed dollar fee
for each trade in portfolio securities, plus (iv) a fixed dollar fee for each
time that Northern as custodian receives or transmits funds via wire, plus (v)
reimbursement of expenses incurred by Northern as custodian for telephone,
postage, courier fees, office supplies and duplicating. The fees referred to in
clauses (iii) and (iv) are subject to annual upward adjustments based on
increases in the Consumer Price Index for All Urban Consumers, provided that
Northern may permanently or temporarily waive all or any portion of any upward
adjustment.
Northern's fees under the Custodian Agreement are subject to reduction
based on the Portfolios' daily uninvested cash balances (if any).
Unless sooner terminated, each of the Advisory Agreement, Transfer
Agency Agreement and Custodian Agreement between Northern and the Trust will
continue in effect with respect to a particular Portfolio until April 30, 2001,
and thereafter for successive 12-month periods, provided that the continuance is
approved at least annually (i) by the vote of a majority of the Trustees who are
not parties to the agreement or "interested persons" (as such term is defined in
the 1940 Act) of any party thereto, cast in person at a meeting called for the
purpose of voting on such approval and (ii) by the Trustees or by the vote of a
majority of the outstanding shares of such Portfolio (as defined below under
"Other Information"). Each agreement is terminable at any time without penalty
by the Trust (by specified Trustee or shareholder action) on 60 days written
notice to Northern and by Northern on 60 days written notice to the Trust.
20
<PAGE>
For the fiscal years ended November 30 as indicated, the amount of
advisory fees incurred by each Portfolio (except Municipal Portfolio, which did
not commence operations during the period) (after fee waivers) was as follows:
1999 1998 1997
---- ---- ----
Government Select Portfolio $ 1,857,385 $1,460,037 $ 1,018,270
Government Portfolio 3,854,646 3,337,292 3,243,435
Diversified Assets Portfolio 13,909,480 10,271,332 8,945,126
Tax-Exempt Portfolio 1,665,500 1,712,721 1,731,407
In addition, for the fiscal years ended November 30, 1999, 1998 and
1997, Northern waived advisory fees with respect to the Government Select
Portfolio in the amounts of $2,786,104, $2,193,181 and $1,527,701, respectively.
For the fiscal years ended November 30 as indicated, the amount of
transfer agency fees incurred by each Portfolio (except Municipal Portfolio,
which did not commence operations during the period) was as follows:
1999 1998 1997
---- ---- ----
Government Select Portfolio $ 35,078 $ 28,041 $30,361
Government Portfolio 36,436 51,087 35,042
Diversified Assets Portfolio 153,309 182,267 127,270
Tax-Exempt Portfolio 22,320 28,191 22,028
For the fiscal years ended November 30 as indicated, the amount of
custodian fees incurred by each Portfolio (except Municipal Portfolio, which did
not commence operations during the period) was as follows:
1999 1998 1997
---- ---- ----
Government Select Portfolio $205,435 $ 181,920 $ 97,683
Government Portfolio 176,812 179,186 140,110
Diversified Assets Portfolio 577,833 425,371 412,075
Tax-Exempt Portfolio 90,540 86,026 100,513
Northern is active as an underwriter of municipal instruments. Under
the 1940 Act, the Portfolios are precluded, subject to certain exceptions, from
purchasing in the primary market those municipal instruments with respect to
which Northern is serving as a principal underwriter. In the opinion of
Northern, this limitation will not significantly affect the ability of the
Portfolios to pursue their respective investment objectives.
Under a Service Mark License Agreement (the "Agreement") with the
Trust, Northern Trust Corporation has agreed that the name "Northern
Institutional Funds" may be used in connection with the Trust's business on a
royalty-free basis. Northern Trust Corporation has reserved to itself the right
to grant the non-exclusive right to use the name "Northern Institutional Funds"
to any other person. The Agreement provides that at such time as the Agreement
is no longer in effect, the Trust will cease using the name "Northern
Institutional Funds."
Portfolio Transactions
For the fiscal years ended November 30, 1999, 1998 and 1997, all
portfolio transactions for the Portfolios were executed on a principal basis
and, therefore, no brokerage commissions were paid by the Portfolios. Purchases
by the Portfolios from underwriters of portfolio securities, however, normally
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers include the spread between the dealer's cost for a given
security and the resale price of the security.
During the fiscal year ended November 30, 1999, the Diversified Assets
Portfolio acquired and sold securities of Bear Sterns & Co., Morgan Stanley Dean
Witter & Co., and Lehman Brothers, Inc., each a regular broker/dealer. At
November 30, 1999, the Diversified Assets Portfolio owned the following amounts
of securities of its regular broker/dealers, as defined in Rule 10b-1 under the
1940 Act, or their parents: Morgan Stanley Dean Witter & Co., with an
approximate aggregate market value of $36,619,000.
21
<PAGE>
During the fiscal year ended November 30, 1999, the Government
Portfolio did not acquire, sell or own any securities of its regular
broker/dealers or their parents.
During the fiscal year ended November 30, 1999, the Government Select
Portfolio did not acquire, sell or own any securities of its regular
broker/dealers or their parents.
During the fiscal year ended November 30, 1999, the Tax-Exempt
Portfolio did not acquire, sell or own any securities of its regular
broker/dealers or their parents.
During the fiscal year ended November 30, 1999, the Municipal Portfolio
had not yet commenced operations.
Co-Administrators and Distributor
Effective May 1, 1999, Northern and PFPC (formerly FDISG), 4400
Computer Drive, Westborough, Massachusetts 01581, act as co-administrators for
the Portfolios under a Co-Administration Agreement with the Trust. Subject to
the general supervision of the Trust's Board of Trustees, Northern and PFPC (the
"Co-Administrators") provide supervision of all aspects of the Trust's
non-investment advisory operations and perform various corporate secretarial,
treasury and blue sky services, including but not limited to: (i) maintaining
office facilities and furnishing corporate officers for the Trust; (ii)
furnishing data processing services, clerical services, and executive and
administrative services and standard stationery and office supplies; (iii)
performing all functions ordinarily performed by the office of a corporate
treasurer, and furnishing the services and facilities ordinarily incident
thereto, such as expense accrual monitoring and payment of the Trust's bills,
preparing monthly reconciliation of the Trust's expense records, updating
projections of annual expenses, preparing materials for review by the Board of
Trustees and compliance testing; (iv) preparing and submitting reports to the
Trust's shareholders and the SEC; (v) preparing and printing financial
statements; (vi) preparing monthly Portfolio profile reports; (vii) preparing
and filing the Trust's Federal and state tax returns (other than those required
to be filed by the Trust's custodian and transfer agent) and providing
shareholder tax information to the Trust's transfer agent; (viii) assisting in
marketing strategy and product development; (ix) performing oversight/management
responsibilities, such as the supervision and coordination of certain of the
Trust's service providers; (x) effecting and maintaining, as the case may be,
the registration of shares of the Trust for sale under the securities laws of
various jurisdictions; (xi) assisting in maintaining corporate records and good
standing status of the Trust in its state of organization; and (xii) monitoring
the Trust's arrangements with respect to services provided by Servicing Agents
to their customers who are the beneficial owners of shares, pursuant to
servicing agreements between the Trust and such Servicing Agents.
Subject to the limitations described below, as compensation for their
administrative services and the assumption of related expenses, the
Co-Administrators are entitled to a fee from each Portfolio, computed daily and
payable monthly, at an annual rate of .10% of the average daily net assets of
each Portfolio. The Co-Administrators will reimburse each Portfolio for its
expenses (including administration fees payable to the Co-Administrators, but
excluding advisory fees, transfer agency fees, servicing fees and extraordinary
expenses) which exceed on an annualized basis .10% of each Portfolio's average
daily net assets.
22
<PAGE>
For the period May 1, 1999, through the fiscal year ended November 30,
1999, the Co-Administrators received fees under their co-administration
agreement with the Trust (except for the Municipal Portfolio which did not
commence operations during the period) in the amount of:
May 1, 1999 -
November 30, 1999
-----------------
Government Select Portfolio......................... $1,111,703
Government Portfolio................................ 944,829
Diversified Assets Portfolio........................ 3,551,511
Tax-Exempt Portfolio................................ 340,887
Additionally, for the period May 1, 1999 through the fiscal year ended
November 30, 1999, the Co-Administrators voluntarily reimbursed each Portfolio
(except for the Municipal Portfolio which did not commence operations during the
period) for its expenses reducing administration fees in the following amounts:
May 1, 1999 -
November 30, 1999
-----------------
Government Select Portfolio......................... $325,664
Government Portfolio................................ 272,925
Diversified Assets Portfolio........................ 804,125
Tax-Exempt Portfolio................................ 147,691
Prior to May 1, 1999, Goldman, Sachs & Co. ("Goldman Sachs"), 85 Broad
Street, New York, New York 10004, acted as the Trust's administrator pursuant to
an administration agreement similar to the Co-Administration Agreement currently
in effect with Northern and PFPC. For the fiscal years ended November 30 as
indicated, Goldman Sachs received fees under its administration agreement with
the Trust in the amount of:
<TABLE>
<CAPTION>
December 1, 1998
through April 30, 1999 1998 1997
---------------------- ---- ----
<S> <C> <C> <C>
Government Select Portfolio $745,682 $1,460,037 $1,048,482
Government Portfolio 597,018 1,334,907 1,208,401
Diversified Assets Portfolio 2,012,240 4,108,503 3,082,370
Tax-Exempt Portfolio 325,308 685,084 749,232
</TABLE>
In addition, pursuant to an undertaking that commenced August 1, 1992,
Goldman Sachs had agreed that, if its administration fees (less expense
reimbursements paid by Goldman Sachs to the Trust and less certain marketing
expenses paid by Goldman Sachs) exceeded a specified amount ($1 million for the
Trust's first twelve investment portfolios plus $50,000 for each additional
portfolio) during a fiscal year, Goldman Sachs would waive a portion of its
administration fees during the following fiscal year. There were no waivers by
Goldman Sachs pursuant to this agreement during the last three fiscal years.
Prior to April 1, 1998, Goldman Sachs had voluntarily agreed to
reimburse each Portfolio for its expenses (including fees payable to Goldman
Sachs as administrator, but excluding the fees payable to Northern for its
duties as investment adviser and extraordinary expenses) which exceeded on an
annualized basis .10% of each Portfolio's average daily net assets.
Effective April 1, 1998, (upon the offering of the Service and Premier
Shares), Goldman Sachs had agreed to reimburse expenses of each Portfolio
(including fees payable to Goldman Sachs as administrator, but excluding the
fees payable to Northern for its duties as adviser and transfer agent, payments
under the service plan (described below) for Service and Premier Shares, and
certain extraordinary expenses) which exceeded on an annualized basis .10% of
each Portfolio's average daily net assets.
23
<PAGE>
For the fiscal years ended November 30 as indicated, the effect of
these reimbursements by Goldman Sachs was to reduce other expenses by the
following amounts:
<TABLE>
<CAPTION>
December 1,
1998 through
April 30, 1999 1998 1997
-------------- ---- ----
<S> <C> <C> <C>
Government Select Portfolio $ 221,061 $544,124 $360,250
Government Portfolio 206,434 606,764 262,895
Diversified Assets Portfolio 694,265 1,328,789 477,791
Tax-Exempt Portfolio 129,348 279,774 305,530
</TABLE>
Unless sooner terminated, the Co-Administration Agreement among
Northern, PFPC and the Trust will continue in effect until April 30, 2001, and
thereafter for successive one-year terms with respect to each Portfolio,
provided that the Agreement is approved annually (i) by the Board of Trustees or
(ii) by the vote of a majority of the outstanding shares of such Portfolio (as
defined below under "Other Information"), provided that in either event the
continuance is also approved by a majority of the Trustees who are not parties
to the Agreement and who are not interested persons (as defined in the 1940 Act)
of any party thereto, by vote cast in person at a meeting called for the purpose
of voting on such approval. The Co-Administration Agreement is terminable at any
time after April 30, 2001, without penalty by the Trust on at least 60 days
written notice to the Co-Administrators. Each Co-Administrator may terminate the
Co-Administration Agreement with respect to itself at any time after April 30,
2001 without penalty on at least 60 days written notice to the Trust and the
other Co-Administrator.
The Trust may terminate the Co-Administration Agreement prior to April
30, 2001 in the event that the Trust or its shareholders incur damages in excess
of $100,000 as a result of the willful misfeasance, bad faith or negligence of
the Co-Administrators, or the reckless disregard of their duties under the
Agreement. The Trust may also terminate the Co-Administration Agreement prior to
April 30, 2001 in the event that the Co-Administrators fail to meet one of the
performance standards set forth in the Agreement.
The Trust has entered into a Distribution Agreement with NFD, under
which NFD, as agent, sells shares of each Portfolio on a continuous basis. NFD
pays the cost of printing and distributing prospectuses to persons who are not
shareholders of the Trust (excluding preparation and typesetting expenses) and
of certain other distribution efforts. No compensation is payable by the Trust
to NFD for such distribution services. NFD is a wholly-owned subsidiary of
Provident Distributors, Inc. ("PDI"). PDI, based in West Conshohocken,
Pennsylvania, is an independently owned and operated broker-dealer. Between May
1, 1999 and November 30, 1999, First Data Distributors Inc. ("FDDI") acted as
the Trust's distributor pursuant to a distribution agreement similar to the
Distribution Agreement currently in effect with NFD. Prior to May 1, 1999,
Goldman Sachs acted as the Trust's distributor pursuant to a distribution
agreement similar to the Distribution Agreement currently in effect with NFD.
The Co-Administration Agreement provides that the Co-Administrators may
render similar services to others so long as their services under such Agreement
are not impaired thereby. The Co-Administration Agreement also provides that the
Trust will indemnify each Co-Administrator against all claims except those
resulting from the willful misfeasance, bad faith or negligence of such
Co-Administrator, or the Co-Administrator's breach of confidentiality. The
Distribution Agreement provides that the Trust will indemnify NFD against
certain liabilities relating to untrue statements or omissions of material fact
except those resulting from the reliance on information furnished to the Trust
by NFD, or those resulting from the willful misfeasance, bad faith or negligence
of NFD, or NFD's breach of confidentiality.
Under a Service Mark License Agreement (the "License Agreement") with
NFD, Northern Trust Corporation agrees that the name "Northern Institutional
Funds" may be used in connection with Northern Institutional Funds' business on
a royalty-free basis. Northern Trust Corporation has reserved to itself the
right to grant the non-exclusive right to use the name ("Northern Institutional
Funds") to any other person. The License Agreement provides that at such time as
the License Agreement is no longer in effect NFD will cease using the name
"Northern Institutional Funds."
Counsel and Auditors
24
<PAGE>
Drinker Biddle & Reath LLP, with offices at One Logan Square, 18th and
Cherry Streets, Philadelphia, Pennsylvania 19103-6996, serve as counsel to the
Trust.
Ernst & Young LLP, independent auditors, 233 S. Wacker Drive, Chicago,
Illinois 60606, have been selected as auditors of the Trust. In addition to
audit services, Ernst & Young LLP reviews the Trust's Federal and state tax
returns, and provides consultation and assistance on accounting, internal
control and related matters.
In-Kind Purchases and Redemptions
Payment for Service Shares and Premier Shares of the Portfolios may, in
the discretion of Northern, be made in the form of securities that are
permissible investments for the Portfolio as described in the Prospectus. For
further information about this form of payment, contact Northern. In connection
with an in-kind securities payment, a Portfolio will require, among other
things, that the securities be valued on the day of purchase in accordance with
the pricing methods used by the Portfolio and that the Portfolio receive
satisfactory assurances that it will have good and marketable title to the
securities received by it; that the securities be in proper form for transfer to
the Portfolio; and that adequate information be provided concerning the basis
and other tax matters relating to the securities.
Although each Portfolio generally will redeem Service Shares and
Premier Shares in cash, each Portfolio reserves the right to pay redemptions by
a distribution in-kind of securities (instead of cash) from such Portfolio. The
securities distributed in-kind would be readily marketable and would be valued
for this purpose using the same method employed in calculating the Portfolio's
net asset value per share. If a shareholder receives redemption proceeds
in-kind, the shareholder should expect to incur transaction costs upon the
disposition of the securities received in the redemption.
Third-Party Fees and Requirements
Service and Premier Shares 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.
The exercise of voting rights and the delivery to Customers of
shareholder communications from the Trust will be governed by the Customers'
account agreements with the Institutions. Customers should read the 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.
PERFORMANCE INFORMATION
The performance of a class of shares of a Portfolio may be compared to
those of other money market funds with similar investment objectives 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 shares may be compared to data
prepared by IBC Financial Data, Inc. or other independent mutual fund reporting
services. 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 shares of a Portfolio.
From time to time, the Portfolios may advertise their "yields" and
"effective yields", and the Government Select Portfolio, Municipal Portfolio and
Tax-Exempt Portfolio may advertise their "tax-equivalent yields" and
"tax-equivalent effective yields". Yield, effective yield, tax equivalent yield
and tax-equivalent effective yield are computed separately for each class of
shares. Each class of shares has different fees and expenses, and consequently,
may have different yields for the same period. These yield figures will
fluctuate, are based on historical earnings and are not intended to indicate
future performance. "Yield" refers to the net investment income generated by an
investment in the Portfolio over a seven-day period identified in the
advertisement. This net investment income is then "annualized." That is, the
amount of net investment income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment.
In arriving at such quotations as to "yield," the Trust first
determines the net change, exclusive of capital changes,
25
<PAGE>
during the seven-day period in the value of a hypothetical pre-existing account
having a balance of one Service Share or Premier Share at the beginning of the
period, then divides such net change by the value of the account at the
beginning of the period to obtain the base period return, and then multiplies
the base period return by 365/7.
"Effective yield" is calculated similarly but, when annualized, the net
investment income earned by an investment in the Portfolio is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment. The "effective
yield" with respect to the Service Shares and Premier Shares of a Portfolio is
computed by adding 1 to the base period return (calculated as above), raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the result.
The "tax-equivalent yield" demonstrates the level of taxable yield
necessary to produce an after-tax yield equivalent to a Portfolio's tax-free
yield. It is calculated by taking that portion of the seven-day "yield" which is
tax-exempt and adjusting it to reflect the tax savings associated with a stated
tax rate. The "tax-equivalent current yield" will always be higher than the
Portfolio's yield.
"Tax-equivalent yield" is computed by dividing the tax-exempt portion
of the yield by 1 minus a stated income tax rate, and then adding the quotient
to the taxable portion of the yield, if any. There may be more than one
tax-equivalent current yield, if more than one stated income tax rate is used.
The "tax-equivalent effective yield" demonstrates the level of taxable
yield necessary to produce an after-tax yield equivalent to a Portfolio's
tax-free effective yield. It is calculated by taking that portion of the
seven-day "effective yield" which is tax-exempt and adjusting it to reflect the
tax savings associated with a stated tax rate. The "tax-equivalent effective
yield" will always be higher than the Portfolio's effective yield.
"Tax-equivalent effective yield" is computed by dividing the tax-exempt
portion of the effective yield by 1 minus a stated income tax rate, and then
adding the quotient to the taxable portion of the effective yield, if any. There
may be more than one tax-equivalent effective yield, if more than one stated
income tax rate is used.
Quotations of yield, effective yield, tax-equivalent current yield and
tax-equivalent effective yield provided by the Trust are carried to at least the
nearest hundredth of one percent. Any fees imposed by Northern, its affiliates
or correspondent banks on their customers in connection with investments in
Service Shares and Premier Shares of the Portfolios are not reflected in the
calculation of yields for the Portfolios.
The annualized yield of each Portfolio (except Municipal Portfolio,
which did not commence operations during the period) with respect to Service
Shares for the seven-day period ended November 30, 1999 was as follows/1/:
<TABLE>
<CAPTION>
Effective Tax Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
Government Select
Portfolio 5.06% 5.19% n/a n/a
Government Portfolio 5.06% 5.19% n/a n/a
Diversified Assets
Portfolio 5.09% 5.22% n/a n/a
Tax-Exempt Portfolio 3.06% 3.11% 5.02% 5.10%
</TABLE>
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations. See "Additional Trust Information --
Co-Administrators and Distributor" and "-- Investment Adviser, Transfer Agent
and Custodian." In the absence of such fee reductions and expense limitations,
the annualized yield of each Portfolio (except Municipal Portfolio, which did
not commence operations during the period) with respect to Service Shares for
the same seven-day period would have been as follows/2/:
- -----------
1 An income tax rate of 39% is used in the calculation of
tax-equivalent current yield and tax-equivalent effective yield.
2 An income tax rate of 39% is used in the calculation of
tax-equivalent current yield and tax-equivalent effective yield.
26
<PAGE>
<TABLE>
<CAPTION>
Effective Tax Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
Government Select Portfolio 4.88% 5.01% n/a n/a
Government Portfolio 5.03% 5.16% n/a n/a
Diversified Assets
Portfolio 5.06% 5.19% n/a n/a
Tax-Exempt Portfolio 3.02% 3.07% 4.95% 5.03%
</TABLE>
The annualized yield of each Portfolio (except Municipal Portfolio and
Premier shares of the Tax-Exempt Portfolio, which did not commence operations
during the period) with respect to Premier Shares for the seven-day period ended
November 30, 1999 was as follows/3/:
<TABLE>
<CAPTION>
Effective Tax Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
Government Select
Portfolio 4.80% 4.92% n/a n/a
Government Portfolio 4.80% 4.89% n/a n/a
Diversified Assets
Portfolio 4.83% 4.94% n/a n/a
</TABLE>
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations. See "Additional Trust Information --
Co-Administrators and Distributor" and "-- Investment Adviser, Transfer Agent
and Custodian." In the absence of such fee reductions and expense limitations,
the annualized yield of each Portfolio (except Municipal Portfolio and Premier
shares of the Tax-Exempt Portfolio, which did not commence operations during the
period) with respect to Premier Shares for the same seven-day period would have
been as follows/4/:
<TABLE>
<CAPTION>
Effective Tax Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
Government Select
Portfolio 4.62% 4.74% n/a n/a
Government Portfolio 4.77% 4.89% n/a n/a
Diversified Assets
Portfolio 4.80% 4.91% n/a n/a
</TABLE>
The Portfolios' yields may not provide a basis for comparison with bank
deposits and other investments which provide a fixed yield for a stated period
of time. Each Portfolio's yields fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. The
annualization of one week's income is not necessarily indicative of future
actual yields. Actual yields will depend on such variables as portfolio quality,
average portfolio maturity, the type of portfolio instruments acquired, changes
in money market interest rates, portfolio expenses and other factors. Yields are
one basis investors may use to analyze a class of shares of the Portfolio as
compared to comparable classes of shares of other money market funds and other
investment vehicles. However, yields of comparable classes of shares of other
money market funds and other investment vehicles may not be comparable because
of the foregoing variables, and differences in the methods used in valuing their
portfolio instruments, computing net asset value and determining yield.
- ----------------
3 An income tax rate of 39% is used in the calculation of
tax-equivalent current yield and tax-equivalent effective yield.
4 An income tax rate of 39% is used in the calculation tax-equivalent
current yield and tax-equivalent effective yield.
27
<PAGE>
Each Portfolio may also quote from time to time the total return of its
Service Shares or Premier Shares in accordance with SEC regulations.
The yields and total returns of Service Shares and Premier Shares of
each Portfolio will be calculated separately from the yields and total returns
of Shares, of each Portfolio, which are not described in this Additional
Statement.
AMORTIZED COST VALUATION
As stated in the Prospectus, each Portfolio seeks to maintain a net
asset value of $1.00 per share and, in this connection, values its instruments
on the basis of amortized cost pursuant to Rule 2a-7 under the 1940 Act. This
method values a security at its cost on the date of purchase and thereafter
assumes a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price a Portfolio would receive if the Portfolio sold the
instrument. During such periods the yield to investors in the Portfolio may
differ somewhat from that obtained in a similar entity which uses available
indications as to market value to value its portfolio instruments. For example,
if the use of amortized cost resulted in a lower (higher) aggregate Portfolio
value on a particular day, a prospective investor in the Portfolio would be able
to obtain a somewhat higher (lower) yield and ownership interest than would
result from investment in such similar entity and existing investors would
receive less (more) investment income and ownership interest. However, the Trust
expects that the procedures and limitations referred to in the following
paragraphs of this section will tend to minimize the differences referred to
above.
Under Rule 2a-7, the Trust's Board of Trustees, in supervising the
Trust's operations and delegating special responsibilities involving portfolio
management to Northern, has established procedures that are intended, taking
into account current market conditions and the Portfolios' investment
objectives, to stabilize the net asset value of each Portfolio, as computed for
the purposes of purchases and redemptions, at $1.00 per share. The Trustees'
procedures include periodic monitoring of the difference (the "Market Value
Difference") between the amortized cost value per share and the net asset value
per share based upon available indications of market value. Available
indications of market value used by the Trust consist of actual market
quotations or appropriate substitutes which reflect current market conditions
and include (i) quotations or estimates of market value for individual portfolio
instruments and/or (ii) values for individual portfolio instruments derived from
market quotations relating to varying maturities of a class of money market
instruments. In the event the Market Value Difference of a given Portfolio
exceeds certain limits or Northern believes that the Market Value Difference may
result in material dilution or other unfair results to investors or existing
shareholders, the Trust will take action in accordance with the 1940 Act and the
Trustees will take such steps as they consider appropriate (e.g., selling
portfolio instruments to shorten average portfolio maturity or to realize
capital gains or losses, reducing or suspending shareholder income accruals,
redeeming shares in kind, or utilizing a net asset value per share based upon
available indications of market value which under such circumstances would vary
from $1.00) to eliminate or reduce to the extent reasonably practicable any
material dilution or other unfair results to investors or existing shareholders
which might arise from Market Value Differences. In particular, if losses were
sustained by a Portfolio, the number of outstanding shares might be reduced in
order to maintain a net asset value per share of $1.00. Such reduction would be
effected by having each shareholder proportionately contribute to the
Portfolio's capital the necessary shares to restore such net asset value per
share. Each shareholder will be deemed to have agreed to such contribution in
these circumstances by investing in the Portfolio.
Rule 2a-7 requires that each Portfolio limit its investments to
instruments which Northern determines (pursuant to guidelines established by the
Board of Trustees) to present minimal credit risks and which are "Eligible
Securities" as defined by the SEC and described in the Prospectus. The Rule also
requires that each Portfolio maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to its policy of maintaining a
stable net asset value per share and precludes the purchase of any instrument
deemed under the Rule to have a remaining maturity of more than 397 calendar
days. Should the disposition of a portfolio security result in a dollar-weighted
average portfolio maturity of more than 90 days, the Rule requires a Portfolio
to invest its available cash in such a manner as to reduce such maturity to the
prescribed limit as soon as reasonably practicable.
DESCRIPTION OF SERVICE SHARES AND PREMIER SHARES
The Trust Agreement permits the Trust's Board of Trustees to issue an
unlimited number of full and fractional
28
<PAGE>
shares of beneficial interest of one or more separate series representing
interests in one or more investment portfolios. The Trustees may hereafter
create series in addition to the Trust's twenty-one existing series, which
represent interests in the Trust's twenty-one respective portfolios. The Trust
Agreement also permits the Board of Trustees to classify or reclassify any
unissued shares into classes within a series. Pursuant to such authority, the
Trustees have authorized the issuance of an unlimited number of shares of
beneficial interest in three separate classes of shares in each of the
Portfolios: Shares, Service Shares and Premier Shares. This Additional Statement
(and the related Prospectus) relates only to the Service Shares and Premier
Shares of the five Portfolios discussed herein. For information on the other
class of shares in each Portfolio and on the Trust's other investment
portfolios, call the toll-free number on page 1.
Under the terms of the Trust Agreement, each share of each Portfolio is
without par value, represents an equal proportionate interest in the particular
Portfolio with each other share of its class in the same Portfolio and is
entitled to such dividends and distributions out of the income belonging to the
Portfolio as are declared by the Trustees. Upon any liquidation of a Portfolio,
shareholders of each class of a Portfolio are entitled to share pro rata in the
net assets belonging to that class available for distribution. Shares do not
have any preemptive or conversion rights. The right of redemption is described
under "About Your Account - Selling Shares and Account Policies and Other
Information" in the Prospectus and under "Amortized Cost Valuation" in this
Additional Statement. In addition, pursuant to the terms of the 1940 Act, the
right of a shareholder to redeem shares and the date of payment by a Portfolio
may be suspended for more than seven days (i) for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or trading in the markets the Portfolio normally utilizes is closed or
is restricted as determined by the SEC, (ii) during any emergency, as determined
by the SEC, as a result of which it is not reasonably practicable for the
Portfolio to dispose of instruments owned by it or fairly to determine the value
of its net assets, or (iii) for such other period as the SEC may by order permit
for the protection of the shareholders of the Portfolio. The Trust may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions. In addition, shares of each
Portfolio are redeemable at the unilateral option of the Trust if the Trustees
determine in their sole discretion that failure to so redeem may have material
adverse consequences to the shareholders of the Portfolio. Service and Premier
Shares when issued as described in the Prospectus are validly issued, fully paid
and nonassessable, except as stated below. In the interests of economy and
convenience, certificates representing Service Shares and Premier Shares of the
Portfolios are not issued.
The proceeds received by each Portfolio for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Portfolio. The underlying assets
of each Portfolio will be segregated on the books of account, and will be
charged with the liabilities in respect to that Portfolio and with a share of
the general liabilities of the Trust. Expenses with respect to the Portfolios
are normally allocated in proportion to the net asset value of the respective
Portfolios except where allocations of direct expenses can otherwise be fairly
made.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each Portfolio affected by the matter. A Portfolio is affected by a matter
unless it is clear that the interests of each Portfolio in the matter are
substantially identical or that the matter does not affect any interest of the
Portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a Portfolio only if approved by a majority of the outstanding
shares of such Portfolio. However, the Rule also provides that the ratification
of the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees are exempt from the separate
voting requirements stated above. In addition, shareholders of each of the
classes in a particular investment portfolio have equal voting rights except
that only shares of a particular class of an investment portfolio will be
entitled to vote on matters submitted to a vote of shareholders (if any)
relating to shareholder servicing expenses and transfer agency fees that are
payable by that class.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees without the vote or consent of shareholders, either to one vote for
each share or to one vote for each dollar of net asset value represented by such
shares on all matters presented to shareholders, including the election of
Trustees (this method of voting being referred to as "dollar-based voting").
However, to the extent required by the 1940 Act or otherwise determined by the
Trustees, series and classes of the Trust will vote separately from each other.
Shareholders of the Trust do not have cumulative voting rights in the election
of Trustees and, accordingly, the holders of more than 50% of the aggregate
voting
29
<PAGE>
power of the Trust may elect all of the Trustees irrespective of the vote of the
other shareholders. Meetings of shareholders of the Trust, or any series or
class thereof, may be called by the Trustees, certain officers or upon the
written request of holders of 10% or more of the shares entitled to vote at such
meeting. The shareholders of the Trust will have voting rights only with respect
to the limited number of matters specified in the Trust Agreement and such other
matters as the Trustees may determine or may be required by law. The Trust does
not presently intend to hold annual meetings of shareholders except as required
by the 1940 Act or other applicable law. The Trustees will promptly call a
meeting of shareholders to vote upon the removal of any Trustee when so
requested in writing by the record holders of 10% or more of the outstanding
shares. To the extent required by law, the Trust will assist in shareholder
communications in connection with such a meeting.
The Trust Agreement authorizes the Trustees, without shareholder
approval (except as stated in the next paragraph), to cause the Trust, or any
series thereof, to merge or consolidate with any corporation, association, trust
or other organization or sell or exchange all or substantially all of the
property belonging to the Trust, or any series thereof. In addition, the
Trustees, without shareholder approval, may adopt a "master-feeder" structure by
investing substantially all of the assets of a series of the Trust in the
securities of another open-end investment company or pooled portfolio.
The Trust Agreement also authorizes the Trustees, in connection with
the merger, consolidation, termination or other reorganization of the Trust or
any series or class, to classify the shareholders of any class into one or more
separate groups and to provide for the different treatment of shares held by the
different groups, provided that such merger, consolidation, termination or other
reorganization is approved by a majority of the outstanding voting securities
(as defined in the 1940 Act) of each group of shareholders that are so
classified.
The Trust Agreement permits the Trustees to amend the Trust Agreement
without a shareholder vote. However, shareholders of the Trust have the right to
vote on any amendment: (i) that would adversely affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Trust Agreement; or (iv) that the
Trustees determine to submit to shareholders.
The Trust Agreement permits the termination of the Trust or of any
series or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors and
events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any series or class to maintain its
assets at an appropriate size; (ii) changes in laws or regulations governing the
Trust or any series or class thereof, or affecting assets of the type in which
it invests; or (iii) economic developments or trends having a significant
adverse impact on their business or operations.
Under the Delaware Business Trust Act (the "Delaware Act"),
shareholders are not personally liable for obligations of the Trust. The
Delaware Act entitles shareholders of the Trust to the same limitation of
liability as is available to shareholders of private for-profit corporations.
However, no similar statutory or other authority limiting business trust
shareholder liability exists in many other states. As a result, to the extent
that the Trust or a shareholder is subject to the jurisdiction of courts in such
other states, those courts may not apply Delaware law and may subject the
shareholders to liability. To offset this risk, the Trust Agreement (i) contains
an express disclaimer of shareholder liability for acts or obligations of the
Trust and requires that notice of such disclaimer be given in each agreement,
obligation and instrument entered into or executed by the Trust or its Trustees
and (ii) provides for indemnification out of the property of the applicable
series of the Trust of any shareholder held personally liable for the
obligations of the Trust solely by reason of being or having been a shareholder
and not because of the shareholder's acts or omissions or for some other reason.
Thus, the risk of a shareholder incurring financial loss beyond his or her
investment because of shareholder liability is limited to circumstances in which
all of the following factors are present: (i) a court refuses to apply Delaware
law; (ii) the liability arises under tort law or, if not, no contractual
limitation of liability is in effect; and (iii) the applicable series of the
Trust is unable to meet its obligations.
The Trust Agreement provides that the Trustees will not be liable to
any person other than the Trust or a shareholder and that a Trustee will not be
liable for any act as a Trustee. However, nothing in the Trust Agreement
protects a Trustee against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
The Trust Agreement provides for indemnification of Trustees, officers and
agents of the Trust unless the recipient is liable by reason of willful
30
<PAGE>
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such person's office.
The Trust Agreement provides that each shareholder, 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.
In addition to the requirements of Delaware law, the Trust Agreement
provides that a shareholder of the Trust may bring a derivative action on behalf
of the Trust only if the following conditions are met: (i) shareholders eligible
to bring such derivative action under Delaware law who hold at least 10% of the
outstanding shares of the Trust, or 10% of the outstanding shares of the series
or class to which such action relates, must join in the request for the Trustees
to commence such action; and (ii) the Trustees must be afforded a reasonable
amount of time to consider such shareholder request and to investigate the basis
of such claim. The Trust Agreement also provides that no person, other than the
Trustees, who is not a shareholder of a particular series or class shall be
entitled to bring any derivative action, suit or other proceeding on behalf of
or with respect to such series or class. The Trustees will be entitled to retain
counsel or other advisers in considering the merits of the request and may
require an undertaking by the shareholders making such request to reimburse the
Trust for the expense of any such advisers in the event that the Trustees
determine not to bring such action.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). To the extent
provided by the Trustees in the appointment of Series Trustees, Series Trustees
(i) may, but are not required to, serve as Trustees of the Trust or any other
series or class of the Trust; (ii) may have, to the exclusion of any other
Trustee of the Trust, all the powers and authorities of Trustees under the Trust
Agreement with respect to such series or class; and/or (iii) may have no power
or authority with respect to any other series or class. The Trustees are not
currently considering the appointment of Series Trustees for the Trust.
As of February 29, 2000, substantially all of the Trust's Portfolios'
outstanding shares were held of record by Northern for the benefit of its
customers and the customers of its affiliates and correspondent banks that have
invested in the Portfolios. As of the same date, Northern possessed sole or
shared voting and/or investment power for its customer accounts with respect to
less than 10% of the Trust's outstanding shares. As of the same date, the
Trust's Trustees and officers as a group owned beneficially less than 1% of the
outstanding shares of each class of each Portfolio.
Northern has advised the Trust that the following persons (whose
mailing address is: c/o The Northern Trust Company, 50 South LaSalle, Chicago,
IL 60675) beneficially owned five percent or more of the outstanding shares of
the Portfolios' classes as of February 29, 2000:
<TABLE>
<CAPTION>
Number Percentage
of Shares of Shares
--------- ---------
<S> <C> <C>
DIVERSIFIED ASSETS PORTFOLIO
Shares
MCCA-Western Asset Management 353,714,105.58 5.5%
Service Shares
First Mid-Illinois Bank & Trust 7,101,961.29 20.2%
Merchants National Bank 15,838,606.52 45.0%
Premier Shares
Riverview Community Bank 11,532,495.64 100.0%
GOVERNMENT PORTFOLIO
Shares
Grinnell Pooled 97,866,038.69 5.4%
Service Shares
Cole Taylor Bank 5,011,217.08 39.9%
Secured Trust 3,481,422.03 27.7%
Bankers/West Michigan 687,102.82 5.5%
Premier Shares
Chitenden Bank 38,732,600.00 100.0%
GOVERNMENT SELECT PORTFOLIO
</TABLE>
31
<PAGE>
<TABLE>
<S> <C> <C>
Shares
TNT-London FBO Food & Agricultural 169,573,947.00 8.2%
Organization
Service Shares
Cape Coe Bank & Trust 77,107,301.12 85.7%
Richfield Bank & Trust Co. 6,951,975.36 7.7%
Premier Shares
South Central Bank & Trust 236,788.71 5.6%
Richfield Bank & Trust Co. 4,018,295.33 94.4%
TAX-EXEMPT PORTFOLIO
Shares
Tisch 27,602,844.78 5.3%
Service Shares
Chitenden Bank 22,205,771.00 73.8%
Merchants National Bank. 6,920,658.02 23.0%
MUNICIPAL PORTFOLIO
Shares
Mercantile National Bank 3,100,319.00 7.5%
Indiana Trust & Investment Management Co. 7,321,904.58 17.8%
Trust Co of Toledo 28,914,948.04 70.2%
</TABLE>
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ADDITIONAL INFORMATION CONCERNING TAXES
General
Each Portfolio will elect to be taxed separately as a regulated
investment company (a "RIC"). To qualify as a RIC, each Portfolio generally must
distribute an amount equal to at least the sum of 90% of its investment company
taxable income and 90% of its net tax-exempt interest income (net investment
income and the excess of net short-term capital gain over net long-term capital
loss), if any, for each year (the "Distribution Requirement") and satisfy
certain other requirements.
Each Portfolio must derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities or currencies. Also , at the close of each quarter of the
taxable year, it is generally required that at least 50% of the value of each
Portfolio's assets must consist of cash and cash items, U.S. Government
securities, securities of other RICs and securities of other issuers (as to
which the Portfolio has not invested more than 5% of the value of its total
assets in securities of such issuer and as to which the Portfolio does not hold
more than 10% of the outstanding voting securities of such issuer), and no more
than 25% of the value of each Portfolio's total assets may be invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other RICs), or in two or more issuers which such Portfolio
controls and which are engaged in the same or similar trades or businesses. Each
Portfolio intends to comply with these RIC requirements.
If for any taxable year any Portfolio were not to qualify as a RIC, all
of its taxable income would be subject to tax at regular corporate rates without
any deduction for distributions to shareholders. In such event, all
distributions by the Portfolio would be taxable to shareholders as ordinary
income to the extent of the Portfolio's current and accumulated earnings and
profits, and would be eligible for the dividends-received deduction in the case
of corporate shareholders.
The Internal Revenue Code imposes a nondeductible 4% excise tax on RICs
that fail currently to distribute an amount equal to specified percentages of
their ordinary taxable income and capital gain net income (excess of capital
gains over capital losses). Each Portfolio intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax. Each
Portfolio also intends to make sufficient distributions or deemed distributions
each year to avoid liability for corporate income tax. If a Portfolio were to
fail to make sufficient distributions, it could be liable for corporate income
tax and for excise tax.
The Trust will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of taxable interest or
dividend income properly, or (iii) who has failed to certify to the Trust, when
required to do so, that he or she is not subject to backup withholding or that
he or she is an "exempt recipient."
Special Tax Considerations Pertaining to the Tax-Exempt and Municipal Portfolios
Investors in either of Tax-Exempt and Municipal Portfolios should note
that taxpayers are required to report the receipt of tax-exempt interest and
"exempt-interest dividends" on their Federal income tax returns and that in two
circumstances such amounts, while exempt from regular Federal income tax, are
taxable to persons subject to alternative minimum taxes. First, tax-exempt
interest and "exempt-interest dividends" derived from certain private activity
bonds issued after August 7, 1986 generally will constitute an item of tax
preference for corporate and noncorporate taxpayers in determining alternative
minimum tax liability. Second, all tax-exempt interest and "exempt-interest
dividends" must be taken into account by corporate taxpayers in determining
certain adjustments for alternative minimum tax purposes.
As described above and in the Prospectus, the Tax-Exempt and Municipal
Portfolios are designed to provide investors with Federally tax-exempt interest
income.
Neither the Tax-Exempt Portfolio nor the Municipal Portfolio is
intended to constitute a balanced investment program and is not designed for
investors seeking capital appreciation or maximum tax-exempt income irrespective
of fluctuations in principal. Shares of these Portfolios would not be suitable
for tax-exempt institutions or for retirement plans
33
<PAGE>
qualified under Section 401 of the Code, H.R.10 plans and individual retirement
accounts because such plans and accounts are generally tax-exempt and,
therefore, would not gain any additional benefit from the Portfolio's dividends
being tax-exempt. In addition, the Portfolios may not be an appropriate
investment for persons or entities that are "substantial users" of facilities
financed by private activity bonds or "related persons" thereof. "Substantial
user" is defined under U.S. Treasury Regulations to include a non-exempt person
which regularly uses a part of such facilities in its trade or business and
whose gross revenues derived with respect to the facilities financed by the
issuance of bonds are more than 5% of the total revenues derived by all users of
such facilities, or which occupies more than 5% of the usable area of such
facilities or for which such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
related natural persons, affiliated corporations, partnerships and its partners
and an S corporation and its shareholders.
In order for the Tax-Exempt and Municipal Portfolios to pay Federal
exempt-interest dividends with respect to any taxable year, at the close of each
taxable quarter at least 50% of the aggregate value of the Portfolio must
consist of tax-exempt obligations. An exempt-interest dividend is any dividend
or part thereof (other than a capital gain dividend) paid by the Tax-Exempt or
Municipal Portfolios and designated as an exempt-interest dividend in a written
notice mailed to shareholders not later than 60 days after the close of the
Portfolio's taxable year. However, the aggregate amount of dividends so
designated by either Portfolio cannot exceed the excess of the amount of
interest exempt from tax under Section 103 of the Code received by the Portfolio
during the taxable year over any amounts disallowed as deductions under Sections
265 and 171(a)(2) of the Code. The percentage of total dividends paid by each of
the Tax-Exempt and Municipal Portfolios with respect to any taxable year which
qualifies as Federal exempt-interest dividends will be the same for all
shareholders receiving dividends from the Portfolio with respect to such year.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Tax-Exempt and Municipal Portfolios generally is not deductible
for Federal income tax purposes to the extent attributable to
exempt-interest-dividends. If a shareholder holds either Tax-Exempt or Municipal
Portfolio shares for six months or less, any loss on the sale or exchange of
those shares will be disallowed to the extent of the amount of exempt-interest
dividends earned with respect to the shares. The Treasury Department, however,
is authorized to issue regulations reducing the six-month holding requirement to
a period of not less than the greater of 31 days or the period between regular
distributions for investment companies that regularly distribute at least 90% of
its net tax-exempt interest. No such regulations had been issued as of the date
of this Additional Statement.
The Tax-Exempt and Municipal Portfolios will determine annually the
percentages of their net investment income which is exempt from tax, which
constitute an item of tax preference for purposes of the Federal alternative
minimum tax, and which is fully taxable, and will apply these percentages
uniformly to all dividends declared from net investment income during that year.
These percentages may differ significantly from the actual percentages for any
particular day.
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Tax-Exempt and Municipal Portfolios.
Income from the Tax-Exempt Portfolio may not be tax-exempt in its
entirety and may be subject to taxes in certain jurisdictions.
Foreign Investors
Foreign shareholders generally will be subject to U.S. withholding tax
at a rate of 30% (or a lower treaty rate, if applicable) on distributions by a
Portfolio of net investment income, other ordinary income, and the excess, if
any, of net short-term capital gain over net long-term capital loss for the
year, regardless of the extent, if any, to which the income or gain is derived
from non-U.S. investments of the Portfolio. For this purpose, foreign
shareholders include individuals other than U.S. citizens, residents and certain
nonresident aliens, and foreign corporations, partnerships, trusts and estates.
Different tax consequences may apply to a foreign shareholder engaged in a U.S.
trade or business or present in the U.S. for 183 days or more in a year. Foreign
shareholders should consult their tax advisers regarding the U.S. and foreign
tax consequences of investing in a Portfolio.
Conclusion
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The foregoing discussion is based on Federal tax laws and regulations
which are in effect on the date of this Additional Statement. Such laws and
regulations may be changed by legislative or administrative action. No attempt
is made to present a detailed explanation of the tax treatment of the Portfolio
or its shareholders, and the discussion here and in the Prospectus is not
intended as a substitute for careful tax planning. Shareholders are advised to
consult their tax advisers with specific reference to their own tax situation,
including the application of state and local taxes.
Although each Portfolio expects to qualify as a RIC and to be relieved
of all or substantially all Federal taxes, depending upon the extent of its
activities in states and localities in which its offices are maintained, in
which its agents or independent contractors are located or in which it is
otherwise deemed to be conducting business, each Portfolio may be subject to the
tax laws of such states or localities.
SERVICE PLAN
The Trust, on behalf of the Portfolios, has adopted a Service Plan (the
"Plan") with respect to the Service Shares and Premier Shares. Under the Plan,
the Trust, on behalf of the Service Shares and the Premier Shares of each
Portfolio, is authorized to pay to Northern a monthly or quarterly service fee
in respect of (i) administrative support services performed and expenses
incurred in connection with such Portfolio's Service Shares and Premier Shares
and (ii) personal and account maintenance services performed and expenses
incurred in connection with such Portfolio's Premier Shares as set forth below.
The fee paid for such services (the "Service Fee") during any one year shall not
exceed: (i) .33% of the average daily net asset value of the Service Shares of
such Portfolio and (ii) .58% of the average daily net asset value of the Premier
Shares of such Portfolio during such period; provided, however, that the fee
paid for personal and account maintenance services and expenses shall not exceed
.25% of the average daily net asset value of the Premier Shares of such
Portfolio for such period. Northern will determine the amount of the Service Fee
to be paid to one or more brokers, dealers, other financial institutions or
other industry professionals (collectively, "Servicing Agents") and the basis on
which such payments will be made. Payments to a Servicing Agent will be subject
to compliance by the Servicing Agent with the terms of the related Plan
agreement entered into by the Servicing Agent. The Service Fees payable pursuant
to this Plan shall not pertain to services or expenses which are primarily
intended to result in the sales of Service Shares and Premier Shares.
Payments of the Service Fee with respect to Service Shares and Premier
Shares will be used to compensate or reimburse Northern and the Servicing Agents
for administrative support services and expenses, which may include without
limitation: (i) acting or arranging for another party to act, as recordholder
and nominee of Service Shares and Premier Shares of a Portfolio beneficially
owned by Customers; (ii) establishing and maintaining individual accounts and
records with respect to Service Shares and Premier Shares of a Portfolio owned
by Customers; (iii) processing and issuing confirmations concerning Customer
orders to purchase, redeem and exchange Service Shares and Premier Shares of a
Portfolio; (iv) receiving and transmitting funds representing the purchase price
or redemption proceeds of Service Shares and Premier Shares of a Portfolio; (v)
processing dividend payments on behalf of Customers; (vi) forwarding shareholder
communications from the Trust (such as proxy statements and proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices); (vii) providing such statistical and other information as may
be reasonably requested by the Trust or necessary for the Trust to comply with
applicable Federal or state law; (viii) facilitating the inclusion of a
Portfolio in investment, retirement, asset allocation, cash management or sweep
accounts or similar programs or services offered to their Customers or to
Customers of other Servicing Agents; (ix) facilitating electronic or computer
trading and/or processing in a Portfolio to their Customers or to Customers of
other Servicing Agents; and (x) performing any other similar administrative
support services. Payments of the Service Fee with respect to the Premier Shares
will also be used to compensate or reimburse Northern and the Servicing Agents
for personal and account maintenance services and expenses, which may include,
without limitation: (i) providing facilities to answer inquiries and respond to
correspondence with Customers and other investors about the status of their
accounts or about other aspects of the Trust or the applicable Portfolio; (ii)
assisting Customers in completing application forms, selecting dividend and
other account options and opening custody accounts with the Servicing Agents;
(iii) providing services to Customers intended to facilitate, or improve their
understanding of the benefits and risks of, a Portfolio to Customers, including
asset allocation and other similar services; (iv) acting as liaison between
Customers and the Trust, including obtaining information from the Trust and
assisting the Trust in correcting errors and resolving problems; and (v)
performing any similar personal and account maintenance services.
Conflict of interest restrictions (including the Employee Retirement
Income Security Act of 1974) may apply to a Servicing Agent's receipt of
compensation paid by the Trust in connection with the investment of fiduciary
funds in Service
35
<PAGE>
or Premier Shares. Servicing Agents, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board or the Federal Deposit
Insurance Corporation, 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 advisers before investing fiduciary
assets in Service or Premier Shares.
The Trustees, including a majority of the Trustees who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of such Plan or the related agreements, most recently
re-approved the Plan and the related agreements for each Portfolio at a meeting
called for the purpose of voting on such Plan and related agreements on January
24, 2000.
The Plan and related agreement will remain in effect until April 30,
2001 and will continue in effect thereafter only if such continuance is
specifically approved annually by a vote of the Board of Trustees in the manner
described above.
The Plan may not be amended to increase materially the amount to be
spent for the services described therein without approval of the Board of
Trustees in the manner described above. The Plan may be terminated as to the
Service Class and the Premier Class at any time by a majority of the
non-interested Trustees. A service agreement may be terminated at any time,
without payment of any penalty, by vote of a majority of the Trustees as
described above or by any party to the agreement on not more than sixty (60)
days' written notice to any other party to the agreement. Each service agreement
shall terminate automatically if assigned. While the Plan is in effect, the
selection and nomination of those Trustees who are not interested persons shall
be committed to the non-interested members of the Board of Trustees. The Board
of Trustees has determined that, in its judgment, there is a reasonable
likelihood that the Plan will benefit each Portfolio and holders of Service and
Premier Shares of such Portfolio. The Plan provides that the Board of Trustees
will review, at least quarterly, a written report of the amount expended under
the Plan and the purposes of the expenditures.
OTHER INFORMATION
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
Securities Act of 1933 with respect to the securities offered by the Trust's
Prospectus. Certain portions of the Registration Statement have been omitted
from the Prospectus and this Additional Statement pursuant to the rules and
regulations of the SEC. The Registration Statement including the exhibits filed
therewith may be examined at the office of the SEC in Washington, D.C.
Each Portfolio is responsible for the payment of its expenses. Such
expenses include, without limitation, the fees and expenses payable to Northern
and PFPC, brokerage fees and commissions, fees for the registration or
qualification of Portfolio shares 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 for violation of any law, legal, tax and
auditing fees and expenses, Service 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
shareholders and regulatory authorities, compensation and expenses of its
Trustees, expenses for industry organizations such as the Investment Company
Institute, miscellaneous expenses and extraordinary expenses incurred by the
Trust.
The term "majority of the outstanding shares" of either the Trust or a
particular Portfolio means, with respect to the approval of an investment
advisory agreement or a change in a fundamental investment restriction, the vote
of the lesser of (i) 67% or more of the shares of the Trust or such Portfolio
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Trust or such Portfolio are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Trust or such Portfolio.
Statements contained in the Prospectus or in this Additional Statement
as to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the registration statement of
which the Prospectus and this Additional Statement form a part, each such
statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
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The audited financial statements and related report of Ernst & Young
LLP, independent auditors, contained in the annual report to the Portfolios'
shareholders for the fiscal year ended November 30, 1999 (the "Annual Report")
are hereby incorporated herein by reference and attached hereto. No other parts
of the Annual Report, including without limitation, "Management's Discussion of
Portfolio Performance," are incorporated by reference herein. Copies of the
Annual Report may be obtained upon request and without charge by calling
1-800-637-1380 (toll-free). No financial statements are supplied for the
Municipal Portfolio because it did not commence operations during the period
ended November 30, 1999.
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APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's Ratings Group, Inc. ("S&P") commercial paper rating
is a current assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper that is a
permissible investment for the Portfolios:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's
capacity to meet its financial commitment on these obligations is
extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is
satisfactory.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually senior debt obligations not having an original maturity in
excess of one year, unless explicitly noted. The following summarizes the rating
categories used by Moody's for commercial paper that is a permissible investment
for the Portfolios:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established
industries; high rates of return on funds employed; conservative
capitalization structure with moderate reliance on debt and ample asset
protection; broad margins in earnings coverage of fixed financial
charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate
liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
The following summarizes the rating categories used by Duff & Phelps
Credit Rating Co. ("D&P") for commercial paper that is a permissible investment
for the Portfolios:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
D&P employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category.
Fitch IBCA ("Fitch") short-term ratings apply to debt obligations that have time
horizons of less than 12 months for
A-1
<PAGE>
most obligations, or up to three years for U.S. public finance securities. The
following summarizes the rating categories used by Fitch for short-term
obligations that are permissible investments for the Portfolios:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally
strong credit feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of
the higher ratings.
Thomson BankWatch, Inc. ("TBW") short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by TBW
for short-term obligations that are permissible investments for the Portfolios:
"TBW-1" - This designation represents TBW's highest category and
indicates a very high likelihood that principal and interest will be
paid on a timely basis.
"TBW-2" - This designation represents TBW's second-highest category and
indicates that while the degree of safety regarding timely repayment of
principal and interest is strong, the relative degree of safety is not
as high as for issues rated "TBW-1."
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by S&P's for corporate and municipal
debt that are permissible investments for the Portfolios:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its
financial commitment on the obligation is very strong.
PLUS (+) OR MINUS (-) - The "AA" rating classification may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
"r" - This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's Investors Service, Inc.
("Moody's") for corporate and municipal long-term debt that are permissible
investments for the Portfolios:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long- term risk appear
somewhat larger than the "Aaa" securities.
A-2
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Con. (---) - Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (i) earnings of projects under construction, (ii) earnings of
projects unseasoned in operating experience, (iii) rentals which begin when
facilities are completed, or (iv) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in the rating
classification "Aa". The modifier 1 indicates that the obligation ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of its generic
rating category.
The following summarizes the long-term debt ratings used by D&P for corporate
and municipal long-term debt that are permissible investments for the
Portfolios:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
To provide more detailed indications of credit quality, the "AA" and "A" ratings
may be modified by the addition of a plus (+) or minus (-) sign to show relative
standing within these major categories.
The following summarizes the ratings used by Fitch for corporate and municipal
bonds that are permissible investments for the Portfolio:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of credit
risk and are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to
foreseeable events.
To provide more detailed indications of credit quality, the Fitch rating "AA"
may be modified by the addition of a plus (+) or minus (-) sign to show relative
standing within the major rating category.
TBW assesses the likelihood of an untimely repayment of principal or interest
over the term to maturity of long term debt and preferred stock which are issued
by United States commercial banks, thrifts and non-bank banks; non-United States
banks; and broker-dealers. The following summarizes the rating categories used
by TBW for long-term debt ratings for those investments which are permissible
investments for the Portfolios:
"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.
PLUS (+) OR MINUS (-) - The ratings "AAA" and "AA" may include a plus or minus
sign designation which indicates where within the respective category the issue
is placed.
Municipal Note Ratings
- ----------------------
A S&P's rating reflects the liquidity concerns and market access risks unique to
notes due in three years or less. The following summarizes the ratings used by
S&P's Ratings Group for municipal notes that are permissible investments
A-3
<PAGE>
for the Portfolios:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity
to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG") and variable rate demand obligations
are designated Variable Moody's Investment Grade ("VMIG"). Such ratings
recognize the differences between short-term credit risk and long-term risk. The
following summarizes the ratings by Moody's for short-term notes that are
permissible investments for the Portfolios:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins
of protection that are ample although not so large as in the preceding
group.
Fitch and D&P use the short-term ratings described under Commercial Paper
Ratings for municipal notes that are permissible investments for the Portfolios.
A-4
