As filed with the Securities and Exchange Commission on January 28, 2000
Securities Act of 1933 Registration No. 2-80543
Investment Company Act of 1940 Registration No. 811-3605
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 43 [X]
and/or
REGISRTATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 44 [X]
(Check appropriate box or boxes)
NORTHERN INSTITUTIONAL FUNDS
(Exact Name of Registrant as Specified in Charter)
50 South LaSalle Street
Chicago, Illinois 60675
(Address of Principal Executive Offices)
800-637-1380
(Registrant's Telephone Number, including Area Code)
Linda Hoard, Secretary with a copy to:
PFPC Inc. W. Bruce McConnel
101 Federal Street, 6th Floor Drinker Biddle & Reath LLP
Boston, Massachusetts 02110 One Logan Square
18th and Cherry Streets
Philadelphia, Pennsylvania
19103-6996
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as practicable after this Registration Statement becomes
effective.
It Is Proposed That This Filing Become Effective (Check Appropriate Box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] On (date)pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] On (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
<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
MarketCommand 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.
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Table of Contents
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<S><C> <C> <C>
Page
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Risk/Return Summary Fixed Income Portfolios
Information about the objectives, principal o U.S. Government Securities Portfolio
strategies and risk characteristics of each o Short-Intermediate Bond Portfolio
Portfolio o Intermediate Bond Portfolio
o U.S. Treasury Index Portfolio
o Bond Portfolio
o International Bond Portfolio
Balanced Portfolio
Equity Portfolios o
Equity Index Portfolio o
Diversified Growth
Portfolio o Focused
Growth Portfolio o
MarketCommand Portfolio o
Mid Cap Growth Portfolio
o Small Company Index
Portfolio o Small Company
Growth Portfolio o
International Equity
Index Portfolio o
International Growth
Portfolio
Principal Investment Risks
Portfolio Performance o
U.S. Government
Securities Portfolio o
Short-Intermediate Bond
Portfolio o Intermediate
Bond Portfolio o U.S.
Treasury Index Portfolio
o Bond Portfolio o
International Bond
Portfolio o Balanced
Portfolio o Equity Index
Portfolio o Diversified
Growth Portfolio o
Focused Growth Portfolio
o Small Company Index
Portfolio o International
Equity Index Portfolio o
International Growth
Portfolio
Portfolio Fees and Expenses
Management of the Portfolios Investment Advisers
Details that apply to the Portfolios as a group Advisory Fees
Portfolio Management
Other Portfolio Management Information
Other Portfolio Services
- ------------------------------------------------------ ---------------------------------------------------------
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About Your Account Purchasing and Selling Shares
How to open, maintain and close an account o Purchasing Shares
o Opening an Account
o Selling Shares
Account Policies and
Other Information o
Purchase and Redemption
Minimums o Calculating
Share Price o Timing of
Purchase Requests o
Additional Transaction
Fee o Tax Identification
Number o In-Kind
Purchases and Redemptions
o Miscellaneous Purchase
Information o Timing of
Redemption and Exchange
Requests
o Miscellaneous Redemption Information
o Exchange Privileges
o Telephone Transactions
o Making Changes to Your Account
Information
o Business Day
o Early Closings
o Authorized Intermediaries
o Servicing Agents
Dividends and Distributions
Tax Considerations
Year 2000 Issues
Risks, Securities, Techniques Risks, Securities and Techniques
and Financial Information o Additional Information on Investment
Objectives, Principal Investment Strategies
and Related Risks
o Additional Description of Securities and
Common Investment Techniques
o Disclaimers
Financial Information
For More Information Annual/Semiannual Report
Statement of Additional Information
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<PAGE>
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 nine 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 ___ 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.
<PAGE>
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
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.
The Portfolio may make significant investments in structured debt securities,
which are derivative instruments, in seeking to achieve its investment
objective. 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,
derivatives and portfolio turnover risks. See page __ for these risks and
primary risks common to all Portfolios.
<PAGE>
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 and convertible
debentures 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.
The Portfolio may make significant investments in structured debt securities,
which are derivative instruments, in seeking to achieve its investment
objective. 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,
government securities, currency, country, foreign regulatory, high-yield and
derivatives risks. See page __ for these risks and primary risks common to all
Portfolios.
<PAGE>
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 and convertible
debentures 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.
The Portfolio may make significant investments in structured debt securities,
which are derivative instruments, in seeking to achieve its investment
objective. 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, currency, country, foreign regulatory and high-yield risks. See
page __ for these risks and primary risks common to all Portfolios.
<PAGE>
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. These securities
will be bought and sold based on their expected contribution to the Portfolio's
overall duration and total return as compared to the Lehman Index and comparable
investment characteristics.
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.
The Portfolio may make significant investments in structured debt securities,
which are derivative instruments, in seeking to achieve its investment
objective. 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 __ for these risks and primary risks common to all
Portfolios.
<PAGE>
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 and convertible
debentures 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.
The Portfolio may make significant investments in structured debt securities,
which are derivative instruments, in seeking to achieve its investment
objective. 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, currency, country, foreign regulatory and high-yield risks. See
page __ for these risks and primary risks common to all Portfolios.
<PAGE>
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 and convertible debentures 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 also invest 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.
The Portfolio may make significant investments in structured debt securities,
which are derivative instruments, in seeking to achieve its investment
objective. 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,
government securities, derivatives, currency, country, foreign regulatory,
emerging markets, high-yield and non-diversification risks. See page __ for
these risks and primary risks common to all Portfolios.
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.
<PAGE>
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 and convertible debentures 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 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.
The Portfolio may make significant investments in structured debt securities,
which are derivative instruments, in seeking to achieve its investment
objective. 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,
government securities, derivatives, currency, country, foreign regulatory,
high-yield and stock risks. See page __ for these risks and primary risks common
to all Portfolios.
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 Index was between $395 million and $464.7
billion.
S&P does not endorse any stock in the Index. It is not a sponsor of the Equity
Index Portfolio and is not affiliated with the Portfolio in any way.
<PAGE>
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 __ for these risks and primary risks common to all
Portfolios.
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 __ for these risks and
primary risks common to all Portfolios.
<PAGE>
Focused Growth Portfolio
Investment Objective
The Portfolio seeks to provide long-term capital appreciation. Any income
received is incidental to this objective.
Primary 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 (as compared to
the Diversified Growth Portfolio) 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 analyze 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 and foreign regulatory risks. See page __
for these risks and primary risks common to all Portfolios.
MarketCommand 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 primarily (and at least 65% of its
total assets) in the equity securities of a focused group of companies that the
investment management team believes have significant "market command," that is,
companies possessing dominant market share and other characteristics, including
patents, strong brand names and economies of scale, which allow these companies
to protect that share. The Portfolio will normally focus its investments in the
equity securities of 20 to 40 such companies with market capitalization in
excess of $300 million.
<PAGE>
Using fundamental research and quantitative analysis, the investment management
team first screens a broad universe of companies in order to identify a group of
firms with "market command" characteristics. From this group, the management
team then employs further quantitative analysis to select a narrower group of
companies expected to achieve superior returns (based on an analysis of expected
earnings) but whose stock is deemed to be undervalued relative to the market.
Once a company's stock is selected for inclusion, the investment management team
monitors its continued appropriateness for the Portfolio. The management team
might decide to sell, for example, when a company shifts its emphasis from a
traditional core business (from which the majority of profits are derived) to
another business, or experiences an erosion of its market command or when the
management team identifies a more attractive investment opportunity or
determines that a company's full value has been achieved.
Although the Portfolio invests primarily in the securities of U.S. companies, it
may invest to a limited extent in the stock of foreign issuers. The Portfolio is
"non-diversified" under the 1940 Act and may invest more of its assets in fewer
issuers than "diversified" mutual funds.
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, portfolio turnover, currency, country, foreign regulatory,
technology and non-diversification risks. See page __ for these risks and
primary risks common to all Portfolios.
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 MidCap 400 Stock
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 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 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 __ for these risks and primary risks common to all Portfolios.
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 U.S. 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 Index. It is not a sponsor of the
Small Company Index Portfolio and is not affiliated with the Portfolio in any
way.
Primary 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 and small company stock risks. See page __ for these risks and primary
risks common to all Portfolios.
<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:
o Financial condition (such as debt to equity ratio); o Market share
and competitive leadership of the company's products; o Earnings
growth relative to relevant competitors;
o 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 __ for these risks and primary risks common to all Portfolios.
<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 Index").
The EAFE 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 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 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 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.
Because the proportion of assets allocated to each country will approximate the
relative country weights in the EAFE 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 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 __ for these
risks and primary risks common to all Portfolios.
<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 common, preferred and convertible stocks of
issuers located in at least three different foreign countries. The Portfolio may
invest in mature markets (such as Germany and Japan) as well as 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 __ for these risks and primary risks common to all Portfolios.
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.
<PAGE>
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.
[Year2000 risk is the risk that a Portfolio's operations or value will be
adversely affected by the "Year 2000 Problem." This risk may be of
greater significance with respect to a Portfolio's investments in the
securities of foreign issuers. (For more information, please see "Year
2000 Issues" on page __.)]
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.
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.
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:
Stockrisk 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:
Smallcompany 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.
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
become 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 MarketCommand and 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 U.S.
Government Securities Portfolio and International Growth Portfolio
exceeded 100%. It is expected that the annual portfolio turnover rates
of the Small Company Growth, MarketCommand Portfolio and Mid Cap
Growth Portfolios may also exceed 100%.
More information about the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on 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
38) 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, Mid Cap Growth and MarketCommand Portfolios because these Portfolios
have been in operation for less than one calendar year.
U.S. Government Securities Portfolio
[Bar Chart]
Calendar Year Total Return (Class A)
1994: -0.71%
1995: 11.84%
1996: 4.14%
1997: 6.76%
1998: 6.93%
1999: ____%
<PAGE>
Best and Worst
Quarterly
Performance (for the periods ended December 31, 1999):
Best Quarter Return: [Q2 '95 +3.51%]
Worst Quarter Return: [Q1 '94 -1.11%]
Average Annual Total Return (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Since
1 Year 5 Year Inception
Class A (Inception 4/5/93) ____% ____% ____%
Merrill Lynch 1-5 Government Index* ____% ____% ____%
- ------------------------------------------------------- ------------------- ------------------- -------------------
Class C (Inception 12/29/95) ____% N/A ____%
Merrill Lynch 1-5 Government Index* ____% N/A ____%
- ------------------------------------------------------- ------------------ ------------------- -------------------
Class D (Inception 9/15/94) ____% ____% ____%
Merrill Lynch 1-5 Government Index* ____% ____% ____%
- ------------------------------------------------------- ------------------ ------------------- -------------------
</TABLE>
* The Index figures do not reflect any fees or expenses.
Short-Intermediate Bond Portfolio
[Bar Chart]
Calendar Year Total Return (Class A)
1994: 0.91%
1995: 12.06%
1996: 4.55%
1997: 6.76%
1998: 7.69%
1999: ____%
Best and Worst
Quarterly
Performance (for the periods ended December 31, 1999):
Best Quarter Return: [Q2 '95 +3.84%]
Worst Quarter Return: [Q1 '96 -0.17%]
Average Annual Total Return (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Since
1 Year 5 Year Inception
Class A (Inception 1/11/93) ____% ____% ____%
Merrill Lynch 1-5 Corporate/
Government Bond Index* ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
Class D (Inception 9/14/94) ____% ____% ____%
Merrill Lynch 1-5 Corporate/
Government Bond Index* ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
</TABLE>
* The Index figures do not reflect any fees or expenses.
Intermediate Bond Portfolio
[Bar Chart]
Calendar Year Total Return (Class A)
1998: 7.11%
1999: ____%
Best and Worst
Quarterly
Performance (for the periods ended December 31, 1999):
Best Quarter Return: [Q3 '98 +2.94%]
Worst Quarter Return: [Q4 '98 +0.26%]
Average Annual Total Return (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Since
1 Year 5 Year Inception
Class A (Inception 8/1/97) ____% N/A ____%
Lehman Brothers Intermediate
Government/Corporate Bond Index* ____% N/A ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
</TABLE>
* The Index figures do not reflect any fees or expenses.
<PAGE>
U.S. Treasury Index Portfolio
[Bar Chart]
Calendar Year Total Return (Class A)
1994: -3.41%
1995: 17.83%
1996: 2.57%
1997: 9.64%
1998: 9.89%
1999: ____%
Best and Worst
Quarterly
Performance (for the periods ended December 31, 1999):
Best Quarter Return: [Q2 '95 +6.20%]
Worst Quarter Return: [Q1 '96 -2.37%]
Average Annual Total Return (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Since
1 Year 5 Year Inception
Class A (Inception 1/11/93) ____% ____% ____%
Lehman Brothers Treasury Bond Index*
----% ----% ----%
- -------------------------------------------------- ------------------ ------------------ -------------------
Class D (Inception 11/16/94) ____% ____% ____%
Lehman Brothers Treasury Bond Index*
----% ----% ----%
- -------------------------------------------------- ------------------ ------------------ -------------------
</TABLE>
* The Index figures do not reflect any fees or expenses.
Bond Portfolio
[Bar Chart]
Calendar Year Total Return (Class A)
1994: -3.84%
1995: 22.70%
1996: 3.39%
1997: 10.00%
1998: 9.29%
1999: ____%
Best and Worst
Quarterly
Performance (for the periods ended December 31, 1999):
Best Quarter Return: [Q2 '95 +7.66%]
Worst Quarter Return: [Q1 '96 -2.00%]
Average Annual Total Return (for the periods ended December 31,
1999)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Since
1 Year 5 Year Inception
Class A (Inception 1/11/93) ____% ____% ____%
Lehman Brothers Government/
Corporate Bond Index* ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
Class C (Inception 7/3/95) ____% N/A ____%
Lehman Brothers Government/
Corporate Bond Index* ____% N/A ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
Class D (Inception 9/14/94) ____% ____% ____%
Lehman Brothers Government/
Corporate Bond Index* ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
</TABLE>
* The Index figures do not reflect any fees or expenses.
International Bond Portfolio
[Bar Chart]
Calendar Year Total Return (Class A)
1995: 20.58%
1996: 7.18%
1997: -3.42%
1998: 15.45%
1999: ____%
Best and Worst
Quarterly
Performance (for the periods ended December 31, 1999):
Best Quarter Return: [Q1 '95 +10.89%]
Worst Quarter Return: [Q1 '97 -5.89%]
Average Annual Total Return (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Since
1 Year 5 Year Inception
Class A (Inception 3/28/94) ____% ____% ____%
J.P. Morgan Non-U.S. Government
Bond Index* ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
Class D (Inception 11/20/95) ____% N/A ____%
J.P. Morgan Non-U.S. Government
Bond Index* ____% N/A ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
</TABLE>
* The Index figures do not reflect any fees or expenses.
<PAGE>
Balanced Portfolio
[Bar Chart]
Calendar Year Total Return (Class A)
1994: -6.01%
1995: 20.59%
1996: 11.23%
1997: 20.21%
1998: 22.37%
1999: ____%
Best and Worst
Quarterly
Performance (for the periods ended December 31, 1999):
Best Quarter Return: [Q4 '98 +13.42%]
Worst Quarter Return: [Q3 '98 -4.69%]
Average Annual Total Return (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Since
1 Year 5 Year Inception
Class A (Inception 7/1/93) ____% ____% ____%
Lehman Bros. Intermediate
Government/Corporate Bond Index* ____% ____% ____%
S&P 500(R)Index* ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
Class C (Inception 12/29/95) ____% N/A ____%
Lehman Bros. Intermediate
Government/Corporate Bond Index* ____% N/A ____%
S&P 500(R)Index* ____% N/A ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
Class D (Inception 2/20/96) ____% N/A ____%
Lehman Bros. Intermediate
Government/Corporate Bond Index* ____% N/A ____%
S&P 500(R)Index* ____% N/A ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
</TABLE>
* The Index figures do not reflect any fees or expenses.
<PAGE>
Equity Index Portfolio
[Bar Chart]
Calendar Year Total Return (Class A)
1994: 1.15%
1995: 37.18%
1996: 22.65%
1997: 32.74%
1998: 28.31%
1999: ____%
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)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Since
1 Year 5 Year Inception
Class A (Inception 1/11/93) ____% ____% ____%
S&P 500(R) Index* ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
Class C (Inception 9/28/95) ____% N/A ____%
S&P 500(R) Index* ____% N/A ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
Class D (Inception 9/14/94) ____% ____% ____%
S&P 500(R) Index* ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
</TABLE>
* The Index figures do not reflect any fees or expenses.
Diversified Growth Portfolio
[Bar Chart]
Calendar Year Total Return (Class A)
1994: -9.37%
1995: 24.54%
1996: 17.46%
1997: 31.36%
1998: 34.96%
1999: ____%
<PAGE>
Best and Worst
Quarterly
Performance (for the periods ended December 31, 1999):
Best Quarter Return: [Q4 '98 +24.51%]
Worst Quarter Return: [Q3 '98 -9.77%]
Average Annual Total Return (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Since
1 Year 5 Year Inception
Class A (Inception 1/11/93) ____% ____% ____%
S&P 500(R) Index* ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
Class D (Inception 9/14/94) ____% ____% ____%
S&P 500(R) Index* ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
</TABLE>
* The Index figures do not reflect any fees or expenses.
Focused Growth Portfolio
[Bar Chart]
Calendar Year Total Return (Class A)
1994: -6.62%
1995: 23.67%
1996: 14.26%
1997: 33.68%
1998: 36.50%
1999: ____%
Best and Worst
Quarterly
Performance (for the periods ended December 31, 1999):
Best Quarter Return: [Q4 '98 +27.64%]
Worst Quarter Return: [Q3 '98 -11.03%]
Average Annual Total Return (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Since
1 Year 5 Year Inception
Class A (Inception 7/1/93) ____% ____% ____%
S&P 500(R) Index* ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
Class C (Inception 6/14/96) ____% N/A ____%
S&P 500(R) Index* ____% N/A ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
Class D (Inception 12/8/94) ____% ____% ____%
S&P 500(R) Index* ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
</TABLE>
* The Index figures do not reflect any fees or expenses.
Small Company Index Portfolio
[Bar Chart]
Calendar Year Total Return (Class A)*
1994: -2.28%
1995: 27.68%
1996: 15.85%
1997: 22.16%
1998: -2.85%
1999: ____%
Best and Worst
Quarterly
Performance (for the periods ended December 31, 1999):
Best Quarter Return: [Q4 '98 +16.16%]
Worst Quarter Return: [Q3 '98 -20.10%]
* The returns in the bar chart do not reflect the special transaction fee
charged on the purchase of shares. If they did reflect such fee, returns would
be less than those shown.
Average Annual Total Return (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Since
1 Year 5 Year Inception
Class A (Inception 1/11/93) ____% ____% ____%
Russell 2000 Small Stock Index** ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
Class D (Inception 12/8/94) ____% ____% ____%
Russell 2000 Small Stock Index** ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
</TABLE>
** The Index figures do not reflect any fees or expenses.
International Equity Index Portfolio
[Bar Chart]
Calendar Year Total Return (Class A)*
1998: 18.94%
1999: ____%
Best and Worst
Quarterly
Performance (for the periods ended December 31, 1999):
Best Quarter Return: [Q4 '98 +19.82%]
Worst Quarter Return: [Q3 '98 -14.10%]
* The return in the bar chart does not reflect the special transaction fee
charged on the purchase of shares. If it did reflect such fee, the return would
be less than that shown.
Average Annual Total Return (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Since
1 Year 5 Year Inception
Class A (Inception 4/1/97) ____% N/A ____%
MSCI EAFE Index** ____% N/A ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
</TABLE>
** The MSCI EAFE 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
Index figures do not reflect any fees or expenses.
International Growth Portfolio
[Bar Chart]
Calendar Year Total Return (Class A)
1995: 2.53%
1996: 5.13%
1997: 6.46%
1998: 24.52%
1999: ____%
Best and Worst
Quarterly
Performance (for the periods ended December 31, 1999):
Best Quarter Return: [Q4 '98 +18.99%]
Worst Quarter Return: [Q3 '98 -13.76%]
Average Annual Total Return (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Since
1 Year 5 Year Inception
Class A (Inception 3/28/94) ____% ____% ____%
MSCI EAFE Index* ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
Class D (Inception 11/16/94) ____% ____% ____%
MSCI EAFE Index* ____% ____% ____%
- ------------------------------------------------- ------------------- ------------------ -------------------
</TABLE>
* The Index figures do not reflect any fees or expenses.
<PAGE>
Broad-Based Securities Market Indices Descriptions
<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 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. 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 Small Stock 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 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.
<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, its affiliates, correspondent banks and other
institutions on their customers. (For more information, please see "Account
Policies and Other Information" on page __.)
As indicated below, the Small Company Index and International Equity Index
Portfolios charge an additional transaction fee on the purchase of shares.
<TABLE>
<CAPTION>
<S> <C> <C>
U.S. Government Securities Short-Intermediate Bond
------------------------ -----------------------
Class A Class C Class D Class A Class C Class D
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases................. None None None None None None
Additional Transaction Fee (as a percentage of amount None None None None None None
invested).....................................................
Deferred Sales Charge (Load)............................. None None None None None None
Sales Charge (Load) Imposed on Reinvested Distributions.. None None None None None None
Redemption Fees.......................................... None None None None None None
Exchange Fees............................................ None None None None None None
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
Management Fees1......................................... .60% 0.60% 0.60% 0.60% 0.60% 0.60%
Distribution (12b-1) Fees................................ None None None None None None
Other Expenses
Servicing Fees....................................... None 0.15% 0.25% None 0.15% 0.25%
Transfer Agency Fees..................................... 0.01% 0.10% 0.15% 0.01% 0.10% 0.15%
Other Operating Expenses2............................ 0.16% 0.16% 0.16% 0.15% 0.15% 0.15%
Total Other Operating Expenses....................... 0.17% 0.41% 0.56% 0.16% 0.40% 0.55%
Total Annual Portfolio Operating Expenses3............... 0.77% 1.01% 1.16% 0.76% 1.00% 1.15%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Intermediate Bond U.S. Treasury Index
------------------------ ------------------------
Class A Class C Class D Class AClass C Class D
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases................. None None None None None None
Additional Transaction Fee (as a percentage of amount None None None None None None
invested).....................................................
Deferred Sales Charge (Load)............................. None None None None None None
Sales Charge (Load) Imposed on Reinvested Distributions.. None None None None None None
Redemption Fees.......................................... None None None None None None
Exchange Fees............................................ None None None None None None
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
Management Fees1......................................... 0.60% 0.60% 0.60% 0.40% 0.40% 0.40%
Distribution (12b-1) Fees................................ None None None None None None
Other Expenses
Servicing Fees....................................... None 0.15% 0.25% None 0.15% 0.25%
Transfer Agency Fees..................................... 0.01% 0.10% 0.15% 0.01% 0.10% 0.15%
Other Operating Expenses2............................ 0.19% 0.19% 0.19% 0.36% 0.36% 0.36%
Total Other Operating Expenses....................... 0.20% 0.44% 0.59% 0.37% 0.61% 0.76%
Total Annual Portfolio Operating Expenses3............... 0.80% 1.04% 1.19% 0.77% 1.01% 1.16%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Bond International Bond
------------------------ ------------------------
Class A Class C Class D Class A Class C Class D
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases................. None None None None None None
Additional Transaction Fee (as a percentage of amount None None None None None None
invested).....................................................
Deferred Sales Charge (Load)............................. None None None None None None
Sales Charge (Load) Imposed on Reinvested Distributions.. None None None None None None
Redemption Fees.......................................... None None None None None None
Exchange Fees............................................ None None None None None None
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
Management Fees1......................................... 0.60% 0.60% 0.60% 0.90% 0.90% 0.90%
Distribution (12b-1) Fees................................ None None None None None None
Other Expenses
Servicing Fees....................................... None 0.15% 0.25% None 0.15% 0.25%
Transfer Agency Fees................................. 0.01% 0.10% 0.15% 0.01% 0.10% 0.15%
Other Operating Expenses2............................ 0.13% 0.13% 0.13% 0.54% 0.54% 0.54%
Total Other Operating Expenses....................... 0.14% 0.38% 0.53% 0.55% 0.79% 0.94%
Total Annual Portfolio Operating Expenses3............... 0.74% 0.98% 1.13% 1.44% 1.68% 1.83%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Balanced Equity Index
----------------------- ------------------------
Class A Class C Class D Class A Class C Class D
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases................. None None None None None None
Additional Transaction Fee (as a percentage of amount None None None None None None
invested).....................................................
Deferred Sales Charge (Load)............................. None None None None None None
Sales Charge (Load) Imposed on Reinvested Distributions.. None None None None None None
Redemption Fees.......................................... None None None None None None
Exchange Fees............................................ None None None None None None
<PAGE>
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
Management Fees1......................................... 0.80% 0.80% 0.80% 0.30% 0.30% 0.30%
Distribution (12b-1) Fees................................ None None None None None None
Other Expenses
Servicing Fees....................................... None 0.15% 0.25% None 0.15% 0.25%
Transfer Agency Fees................................. 0.01% 0.10% 0.15% 0.01% 0.10% 0.15%
Other Operating Expenses2............................ 0.18% 0.18% 0.18% 0.13% 0.13% 0.13%
Total Other Operating Expenses....................... 0.19% 0.43% 0.58% 0.14% 0.38% 0.53%
Total Annual Portfolio Operating Expenses3............... 0.99% 1.23% 1.38% 0.44% 0.68% 0.83%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Diversified Growth Focused Growth
----------------------- ------------------------
Class A Class C Class D Class A Class C Class D
Shares Shares Shares Shares Shares Shares
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases................. None None None None None None
Additional Transaction Fee (as a percentage of amount None None None None None None
invested).....................................................
Deferred Sales Charge (Load)............................. None None None None None None
Sales Charge (Load) Imposed on Reinvested Distributions.. None None None None None None
Redemption Fees.......................................... None None None None None None
Exchange Fees............................................ None None None None None None
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
Management Fees1......................................... 0.80% 0.80% 0.80% 1.10% 1.10% 1.10%
Distribution (12b-1) Fees................................ None None None None None None
Other Expenses
Servicing Fees....................................... None 0.15% 0.25% None 0.15% 0.25%
Transfer Agency Fees................................. 0.01% 0.10% 0.15% 0.01% 0.10% 0.15%
Other Operating Expenses2............................ 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
Total Other Operating Expenses....................... 0.16% 0.40% 0.55% 0.16% 0.40% 0.55%
Total Annual Portfolio Operating Expenses3............... 0.96% 1.20% 1.35% 1.25% 1.50% 1.65%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
MarketCommand Mid Cap Growth
----------------------- -----------------------
Class A Class C Class D Class A Clas C Class D
Shares Shares Shares Shares Shares Shares
</TABLE>
<TABLE>
<CAPTION><S><C> <C> <C> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases................. None None None None None None
Additional Transaction Fee (as a percentage of amount 0.50% 0.50% 0.50% None None None
invested).....................................................
Deferred Sales Charge (Load)............................. None None None None None None
Sales Charge (Load) Imposed on Reinvested Distributions.. None None None None None None
Redemption Fees.......................................... None None None None None None
Exchange Fees............................................ None None None None None None
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
Management Fees1......................................... 1.10% 1.10% 1.10% 1.10% 1.10% 1.10%
Distribution (12b-1) Fees................................ None None None None None None
Other Expenses
Servicing Fees....................................... None 0.15% 0.25% None 0.15% 0.25%
Transfer Agency Fees................................. 0.01% 0.10% 0.15% 0.01% 0.10% 0.15%
Other Operating Expenses2............................ 0.57% 0.57% 0.57% 0.57% 0.57% 0.57%
Total Other Operating Expenses....................... 0.60% 0.84% 0.97% 0.60% 0.84% 0.97%
Total Annual Portfolio Operating Expenses3............... 1.68% 1.92% 2.07% 1.68% 1.92% 2.07%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Small Company Index Small Company Growth
----------------------- -------------------------
Class A Class C Class D Class A Class C Class D
Shares Shares Shares Shares Shares Shares
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases................. None None None None None None
Additional Transaction Fee (as a percentage of amount 0.50% 0.50% 0.50% None None None
invested).....................................................
Deferred Sales Charge (Load)............................. None None None None None None
Sales Charge (Load) Imposed on Reinvested Distributions.. None None None None None None
Redemption Fees.......................................... None None None None None None
Exchange Fees............................................ None None None None None None
<PAGE>
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
Management Fees1......................................... 0.40% 0.40% 0.40% 1.10% 1.10% 1.10%
Distribution (12b-1) Fees................................ None None None None None None
Other Expenses
Servicing Fees....................................... None 0.15% 0.25% None 0.15% 0.25%
Transfer Agency Fees................................. 0.01% 0.10% 0.15% 0.01% 0.10% 0.15%
Other Operating Expenses2............................ 0.40% 0.40% 0.40% 0.18% 0.18% 0.18%
Total Other Operating Expenses....................... 0.41% 0.65% 0.80% 0.19% 0.43% 0.58%
Total Annual Portfolio Operating Expenses3............... 0.81% 1.05% 1.20% 1.29% 1.53% 1.68%
</TABLE>
<TABLE>
<CAPTION><S> <C> <C>
International Equity Index International Growth
----------------------- -------------------------
Class A Class C Class D Class A Class C Class D
Shares Shares Shares Shares Shares Shares
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases................. None None None None None None
Additional Transaction Fee (as a percentage of amount 1.00% 1.00% 1.00% None None None
invested).....................................................
Deferred Sales Charge (Load)............................. None None None None None None
Sales Charge (Load) Imposed on Reinvested Distributions.. None None None None None None
Redemption Fees.......................................... None None None None None None
Exchange Fees............................................ None None None None None None
Annual Portfolio Operating Expenses
(expenses that are deducted from Portfolio assets)
Management Fees1......................................... 0.50% 0.50% 0.50% 1.00% 1.00% 1.00%
Distribution (12b-1) Fees................................ None None None None None None
Other Expenses
Servicing Fees....................................... None 0.15% 0.25% None 0.15% 0.25%
Transfer Agency Fees................................. 0.01% 0.10% 0.15% 0.01% 0.10% 0.15%
Other Operating Expenses2............................ 0.40% 0.40% 0.40% 0.30% 0.30% 0.30%
Total Other Operating Expenses....................... 0.41% 0.65% 0.80% 0.31% 0.55% 0.70%
Total Annual Portfolio Operating Expenses3............... 0.91% 1.15% 1.30% 1.31% 1.55% 1.70%
</TABLE>
.........
1 For the fiscal year ended November 30, 1999, The Northern Trust Company
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, The Northern Trust Company intends
to waive voluntarily a portion of its management fee for the
MarketCommand, Mid Cap Growth and Small Company Growth Portfolios so
that the actual management fees paid by these Portfolios will be 0.80%,
0.80% and 0.80% respectively, 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. For the period from December 1, 1998 through April 30,
1999, Goldman, Sachs & Co. ("Goldman Sachs") was entitled to an
administration fee 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 that had commenced operations. During
the same period, Goldman Sachs reimbursed expenses (including
administration fees, but excluding management and transfer agency fees,
servicing fees and certain extraordinary expenses) which exceeded 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. As a result
of the expense reimbursement, actual other operating expenses 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
0.10%, 0.10%, 0.10%, 0.10%, 0.10%, 0.25%, 0.10%, 0.10%, 0.10%, 0.11%,
0.10%, 0.29% and 0.25%, respectively, of the Portfolios' average daily
net assets. On May 1, 1999, The Northern Trust Company ("Northern") and
PFPC Inc., formerly First Data Investor Services Group, Inc. ("PFPC")
replaced Goldman Sachs as the Portfolios' co-administrators, and are
entitled to a co-administration fee from the Portfolios at the annual
rates set forth above. Under the Co-Administration Agreement with the
Trust, which may be amended without shareholder approval, the
co-administrators have agreed indefinitely 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 MarketCommand, 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.
<PAGE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C>
Portfolio Management Distribution Other Expenses Total Annual
Fees (12b-1) Fees 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%
<PAGE>
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%
</TABLE>
Set forth below are the estimated actual management fees, distribution (12b-1)
fees, other expenses and total annual operating expenses for the MarketCommand,
Mid Cap Growth and Small Company Growth Portfolios for the current fiscal year
as a result of fee waivers and expense reimbursements.
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C>
Portfolio Distribution Other Expenses Total Annual
Management (12b-1) Fees Operating Expenses
Fees
- --------------------------------------------- ---------------------------- --------------------------- ----------------------------
MarketCommand
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%
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%
</TABLE>
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.
<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:
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C>
Portfolio 1 Year 3 Years 5 Years 10 Years
U.S. Government Securities
Class A Shares....................................... $ 79 $246 $428 $ 954
Class C Shares....................................... $ 103 $322 $558 $1,236
Class D Shares....................................... $ 118 $368 $638 $1,409
Short-Intermediate Bond
Class A Shares....................................... $ 78 $243 $422 $ 942
Class C Shares....................................... $ 102 $318 $552 $1,225
Class D Shares....................................... $ 117 $365 $633 $1,398
Intermediate Bond
Class A Shares....................................... $ 82 $255 $444 $ 990
Class C Shares....................................... $ 106 $331 $574 $1,271
Class D Shares....................................... $ 121 $378 $654 $1,443
U.S. Treasury Index
Class A Shares....................................... $ 79 $246 $428 $ 954
Class C Shares....................................... $ 103 $322 $558 $1,236
Class D Shares....................................... $ 118 $368 $638 $1,409
Bond
Class A Shares....................................... $ 76 $237 $411 $ 918
Class C Shares....................................... $ 100 $312 $542 $1,201
Class D Shares....................................... $ 115 $359 $622 $1,375
International Bond
Class A Shares....................................... $ 147 $456 $787 $1,724
Class C Shares....................................... $ 171 $530 $913 $1,987
Class D Shares....................................... $ 186 $576 $990 $2,148
Balanced
Class A Shares....................................... $ 101 $315 $547 $1,213
Class C Shares....................................... $ 125 $390 $676 $1,489
Class D Shares....................................... $ 140 $437 $755 $1,657
Equity Index
Class A Shares....................................... $ 45 $141 $246 $ 555
Class C Shares....................................... $ 69 $218 $379 $ 847
Class D Shares....................................... $ 85 $265 $460 $1,025
<PAGE>
Diversified Growth
Class A Shares..................................... $ 98 $306 $ 531 $1,178
Class C Shares..................................... $ 122 $381 $ 660 $1,455
Class D Shares..................................... $ 137 $428 $ 739 $1,624
Focused Growth
Class A Shares..................................... $ 128 $400 $ 692 $1,523
Class C Shares..................................... $ 153 $474 $ 818 $1,791
Class D Shares..................................... $ 168 $520 $ 897 $1,955
MarketCommand
Class A Shares..................................... $ 171 $530 $ 913 $1,987
Class C Shares..................................... $ 195 $603 $ 1,037 $2,243
Class D Shares..................................... $ 210 $649 $ 1,114 $2,400
Mid Cap Growth
Class A Shares..................................... $ 171 $530 $ 913 $1,987
Class C Shares..................................... $ 195 $603 $ 1,037 $2,243
Class D Shares..................................... $ 210 $649 $ 1,114 $2,400
Small Company Index
Class A Shares..................................... $ 83 $259 $ 450 $1,002
Class C Shares..................................... $ 107 $334 $ 579 $1,283
Class D Shares..................................... $ 122 $381 $ 660 $1,455
Small Company Growth
Class A Shares..................................... $ 131 $409 $ 708 $1,556
Class C Shares..................................... $ 156 $483 $ 834 $1,824
Class D Shares..................................... $ 171 $530 $ 913 $1,987
International Equity Index
Class A Shares..................................... $ 93 $290 $ 504 $1,120
Class C Shares..................................... $ 117 $365 $ 633 $1,398
Class D Shares..................................... $ 132 $412 $ 713 $1,568
International Growth
Class A Shares..................................... $ 133 $415 $ 718 $1,579
Class C Shares..................................... $ 158 $490 $ 845 $1,845
Class D Shares..................................... $ 173 $536 $ 923 $2,009
</TABLE>
<PAGE>
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 $____ billion in assets, $____ billion in deposits and employed
over _____ 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 $____ trillion of assets
as of December 31, 1999, including approximately $_____ 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.
Prior to April 1, 1998, Northern served as investment adviser to the U.S.
Treasury Index, Equity Index, Small Company Index and International Equity Index
Portfolios pursuant to advisory agreements substantially identical to those
currently in effect for such Portfolios.
Advisory Fees
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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%
MarketCommand 1.10% N/A
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%
</TABLE>
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.
Portfolio Management
The Investment Advisers employ a team approach to the investment management of
the Portfolios, relying upon investment professionals under the leadership of
James M. Snyder, Chief Investment Officer and Executive Vice President of
Northern and Chairman and Chief Executive Officer of NTQA. 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.
Steven M. Schafer and Guy Williams, Vice Presidents of Northern, are the
management team leaders for the International Bond Portfolio. Mr. Schafer has
had such responsibility since July 1998. Mr. Williams has had such
responsibility for the Fund since September 1999. 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.
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. Mr.
Wirth has had such responsibility since 1998. Mr. Marchese has had such
responsibility since July 1999. 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. Mr. Wirth has had such responsibility since 1998
and Mr. Schafer has had such responsibility since 1997.
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. 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.
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 for the MarketCommand Portfolio is R. Randall Canent
and Robert G. Mitchell, Vice Presidents of Northern. Messrs. Canent and Mitchell
each has had such responsibility since the Portfolio commenced operations in
February 2000. Mr. Canent joined Northern in 1992 and during the past five years
has managed various equity portfolios. Mr. Mitchell joined Northern in 1988 and
during the past five years has managed various equity portfolios for
institutional clients.
The management team leader for the Mid Cap Growth Portfolio is Ken Turek,
Vice President of Northern. Mr. Turek has had such responsibility since the
Portfolio commenced operations in December 1999. Mr. Turek joined Northern in
1997 and has managed equity investment portfolios for institutional clients.
From 1994 to 1997, Mr. Turek was chief equity officer of National Investment
Services.
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 __
under "Portfolio Fees and Expenses" and in the Statement of Additional
Information. Northern and PFPC Inc., formerly First Data Investor Services
Group, 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 __ under "Portfolio Fees and Expenses."
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 __). 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.
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 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)
For more information about the purchase of shares, call the Transfer Agent at
1-800-637-1380.
<PAGE>
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.
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 ____.
Additional Transaction Fee. Purchases of, and exchanges for, shares of the
MarketCommand, Small Company Index and International Equity Index Portfolios
require the payment of an additional transaction fee. This fee equals 0.50%,
0.50% and 1.00%, respectively, of the dollar amount purchased. It does not apply
to reinvested dividends or capital gains distributions.
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.
<PAGE>
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 ____.
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.
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.
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 1999 these days are: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, 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. 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.
<PAGE>
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.
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:
<TABLE>
<CAPTION>
<S><C> <C> <C>
- --------------------------------------- -------------------------------------- --------------------------------------
Dividends, if any Capital gains, if any
Portfolio Declared and Paid Declared 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
- --------------------------------------- -------------------------------------- --------------------------------------
- --------------------------------------- -------------------------------------- --------------------------------------
MarketCommand 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
- --------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
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.
<PAGE>
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.
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.
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.
Year 2000 Issues
Like every other business dependent upon computerized information processing,
Northern Trust Corporation ("Northern Trust") must deal with "Year 2000" issues.
Many computer systems use two digits rather than four to identify the year.
Unless adapted, these systems may not be able to correctly distinguish the Year
2000 from the Year 1900. As the Year 2000 arrives, many systems may be unable to
accurately process certain date-based information, which could cause a variety
of operational problems for businesses. This could have a negative effect on the
companies in which the Portfolios invest, thus hurting the Portfolios'
investment returns.
Northern Trust has implemented steps to prepare its mission-critical
computer systems and processes for Year 2000 processing. It has established a
dedicated Year 2000 Project Team whose members have significant systems
development and maintenance experience. Northern Trust's Year 2000 project
included a comprehensive testing plan of its mission-critical systems. Northern
Trust has advised the Trust that it has completed work on its mission-critical
systems and testing with significant outside parties.
Northern Trust also instituted a program to monitor and assess the efforts of
other parties, such as other service providers to the Portfolios. However, it
cannot control the success of those other parties' efforts. Contingency plans
have been established where believed necessary to provide Northern Trust with
alternatives in case these entities experience significant Year 2000
difficulties that impact Northern Trust.
Furthermore, even if the actions taken by Northern Trust are successful,
the normal operations of the Portfolios may, in any event, be disrupted
significantly by the failure of communications and public utility companies,
governmental entities, financial processors or others to perform their services
as a result of Year 2000 problems.
Efforts in foreign countries to remediate potential Year 2000 problems are not
as extensive as those in the United States. As a result, the operations of
foreign markets, foreign issuers and foreign governments may be disrupted by the
Year 2000 problem and the investment portfolio of a Portfolio may be adversely
affected.
RISKS, SECURITIES, TECHNIQUES AND FINANCIAL INFORMATION
RISKS, SECURITIES AND TECHNIQUES
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. You should note
that a Portfolio's investment objective may be changed by Northern Institutional
Funds' Board of Trustees without shareholder approval. 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.
ADDITIONAL INFORMATION ON 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, MarketCommand 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
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.
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 and Focused Growth, Small Company Growth, the Mid Cap Growth and
MarketCommand 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 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 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 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 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 securities. 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 MarketCommand, Mid Cap Growth and Small Company Growth Portfolios
will generally not exceed 150%, 125% and 200%, respectively.
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.
Investment strategy. Under normal market conditions, the Investment Adviser
expects the quarterly performance of the Index Portfolios to be within a .95
correlation with their respective benchmarks, before expenses.
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").
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.
<PAGE>
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 the Investment Adviser 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 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, MarketCommand, 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 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, MarketCommand, 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.
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.
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. These would be in addition to
the advisory and other fees paid directly by the Portfolio.
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.
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.
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 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.
<PAGE>
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.
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.
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 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.
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,
MarketCommand, 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 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, 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, 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 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, any person or any entity from the use of the EAFE 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 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, 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.
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). The
information for the years or periods ended on or before November 30, 1999 has
been audited by _________________, whose report is included in the Portfolios'
annual report along with the Portfolios' financial statements.
<PAGE>
Financial Highlights [TO BE UPDATED]
U.S. Government Securities Portfolio
For the Years Ended November 30,
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
Class A
----------------------------------------------------------------------
For the
Six Months For the For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999 1998 1997 1996 1995 1994
Net asset value, beginning of period $20.27 $19.99 $20.07 $20.08 $19.05 $20.07
Income (loss) from investment operations:
Net investment income 0.49 1.17 1.21 1.02 1.05 0.91
Net realized and unrealized gain (loss) (0.34) 0.26 (0.07) (0.01) 1.02 (1.02)
Total income (loss) from investment operations 0.15 1.43 1.14 1.01 2.07 (0.11)
Distributions to shareholders from:
Net investment income (0.49) (1.15) (1.22) (1.02) (1.04) (0.91)
Net realized gain (0.29) -- -- -- -- --
Return of capital -- -- -- -- -- --
Total distributions to shareholders (0.78) (1.15) (1.22) (1.02) (1.04) (0.91)
Net increase (decrease) (0.63) 0.28 (0.08) (0.01) 1.03 (1.02)
Net asset value, end of period $19.64 $20.27 $19.99 $20.07 $20.08 $19.05
Total return (a) 0.68% 7.36% 5.93% 5.15% 11.18% (0.57)%
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 0.79% 0.86% 0.85% 0.94% 1.09% 1.12%
Expenses, net of waivers and reimbursements 0.36% 0.36% 0.36% 0.36% 0.36% 0.36%
Net investment income, before waivers and
reimbursements 4.79% 5.51% 5.37% 4.64% 4.70% 3.86%
Net investment income, net of waivers and
reimbursements 5.22% 6.01% 5.86% 5.22% 5.43% 4.62%
Portfolio turnover rate 26.31% 115.55% 95.73% 119.75% 141.14% 45.55%
Net assets at end of period (in thousands) $83,189 $48,317 $43,073 $92,351 $56,329 $25,293
</TABLE>
(a) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year.
(b) Annualized for periods less than a full year.
<PAGE>
Financial Highlights [TO BE UPDATED]
U.S. Government Securities Portfolio
For the Years Ended November 30,
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C>
Class C
---------------------------------------------
For the For the For the For the
Six Months Year Ended Year Ended Year Ended
Ended 1999 1998 1997 1996 (a)
Net asset value, beginning of period $20.26 $19.98 $20.06 $20.13
Income (loss) from investment operations:
Net investment income 0.03 1.12 1.14 0.91
Net realized and unrealized gain (loss) 0.01 0.26 (0.04) (0.12)
Total income (loss) from investment 0.04 1.38 1.10 0.79
operations
Distributions to shareholders from:
Net investment income (0.08) (1.10) (1.18) (0.86)
Net realized gain (0.29) -- -- --
Return of capital -- -- -- --
Total distributions to shareholders (0.37) (1.10) (1.18) (0.86)
Net increase (decrease) (0.33) 0.28 (0.08) (0.07)
Net asset value, end of period $19.93 (b) $20.26 $19.98 $20.06
Total return (c) 0.20% 7.10% 5.67% 4.05%
Ratio to average net assets of (d):
Expenses, before waivers and 1.03% 1.10% 1.09% 1.18%
reimbursements
Expenses, net of waivers and 0.60% 0.60% 0.60% 0.60%
reimbursements
Net investment income, before waivers and
reimbursements 1.09% 5.27% 5.14% 4.39%
Net investment income, net of waivers and
reimbursements 1.52% 5.77% 5.63% 4.97%
Portfolio turnover rate 26.31% 115.55% 95.73% 119.75%
Net assets at end of period (in thousands) $ ______ $3,942 $3,118 $3,535
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
Class D
-----------------------------------------------------------------------
For the
Six Months For the For the For the For the For the
Ended Year Ended Year Ended Year Year Ended Year Ended
May 31, 1999 1998 1997 Ended 1996 1995 1994 (e)
Net asset value, beginning of period $20.22 $19.94 $20.03 $20.04 $19.05 $19.43
Income (loss) from investment operations:
Net investment income 0.50 1.08 1.16 0.96 0.96 0.22
Net realized and unrealized gain (loss) (0.38) 0.28 (0.10) (0.03) 1.00 (0.38)
Total income (loss) from investment 0.12 1.36 1.06 0.93 1.96 (0.16)
operations
Distributions to shareholders from:
Net investment income (0.45) (1.08) (1.15) (0.94) (0.97) (0.22)
Net realized gain (0.29) -- -- -- -- --
Return of capital -- -- -- -- -- --
Total distributions to shareholders (0.74) (1.08) (1.15) (0.94) (0.97) (0.22)
Net increase (decrease) (0.62) 0.28 (0.09) (0.01) 0.99 (0.38)
Net asset value, end of period $19.60 $20.22 $19.94 $20.03 $20.04 $19.05
Total return (c) 0.53% 6.96% 5.52% 4.77% 10.66% (0.90)%
Ratio to average net assets of (d):
Expenses, before waivers and 1.18% 1.25% 1.24% 1.33% 1.48% 1.51%
reimbursements
Expenses, net of waivers and 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
reimbursements
Net investment income, before waivers and
reimbursements 4.40% 5.05% 5.01% 4.25% 4.35% 3.89%
Net investment income, net of waivers and
reimbursements 4.83% 5.55% 5.50% 4.83% 5.08% 4.65%
Portfolio turnover rate 26.31% 115.55% 95.73% 119.75% 141.14% 45.55%
Net assets at end of period (in thousands) $810 $1,224 $312 $225 $67 $13
</TABLE>
(a) For the period December 29, 1995 (Class C Shares issue date) through
November 30, 1996. (b) Class C shares were fully redeemed as of February 10,
1999.
(c) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year.
(d) Annualized for periods less than a full year.
(e) For the period September 15, 1994 (Class D Shares issue date) through
November 30, 1994.
<PAGE>
Financial Highlights [TO BE UPDATED]
Short-Intermediate Bond Portfolio
For the Years Ended November 30,
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
Class A
------------------------------------------------------------------------
For the
Six Months For the For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999 1998 1997 1996 1995 1994
Net asset value, beginning of period $20.03 $20.36 $20.70 $20.73 $19.53 $20.33
Income (loss) from investment operations:
Net investment income 0.91 1.84 1.46 1.14 1.02 0.97
Net realized and unrealized gain (loss) (0.52) (0.36) (0.29) (0.01) 1.19 (0.80)
Total income (loss) from investment operations 0.39 1.48 1.17 1.13 2.21 0.17
Distributions to shareholders from:
Net investment income (0.84) (1.78) (1.46) (1.16) (1.01) (0.97)
Net realized gain (0.27) (0.03) (0.05) -- -- --
Return of capital -- -- -- -- -- --
Total distributions to shareholders (1.11) (1.81) (1.51) (1.16) (1.01) (0.97)
Net increase (decrease) (0.72) (0.33) (0.34) (0.03) 1.20 (0.80)
Net asset value, end of period $19.31 $20.03 $20.36 $20.70 $20.73 $19.53
Total return (a) 1.88% 7.50% 5.95% 5.68% 11.58% 0.84%
Ratio to average net assets of (b):
Expenses, before waivers and
reimbursements 0.77% 0.76% 0.81% 0.88% 0.91% 0.95%
Expenses, net of waivers and
reimbursements 0.36% 0.36% 0.36% 0.36% 0.36% 0.36%
Net investment income, before
waivers and reimbursements 8.96% 9.21% 7.23% 5.31% 4.59% 4.25%
Net investment income, net of
waivers and reimbursements 9.37% 9.61% 7.68% 5.83% 5.14% 4.84%
Portfolio turnover rate 55.50% 89.97% 48.49% 47.68% 54.68% 48.67%
Net assets at end of period (in thousands) $178,733 $182,999 $201,457 $153,675 $158,678 $96,209
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
Class D
------------------------------------------------------------------------
For the
Six Months For the For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999(c) 1998 1997 1996 1995 1994 (d)
Net asset value, beginning of period $19.97 $20.31 $20.66 $20.71 $19.53 $19.82
Income (loss) from investment operations:
Net investment income 0.89 1.78 1.43 1.07 0.94 0.23
Net realized and unrealized gain (loss) (0.54) (0.40) (0.34) (0.02) 1.18 (0.29)
Total income (loss) from investment operations 0.35 1.38 1.09 1.05 2.12 (0.06)
Distributions to shareholders from:
Net investment income (0.79) (1.69) (1.39) (1.10) (0.94) (0.23)
Net realized gain (0.27) (0.03) (0.05) -- -- --
Return of capital -- -- -- -- -- --
Total distributions to shareholders (1.06) (1.72) (1.44) (1.10) (0.94) (0.23)
Net increase (decrease) (0.71) (0.34) (0.35) (0.05) 1.18 (0.29)
Net asset value, end of period $19.26 $19.97 $20.31 $20.66 $ 20.71 $19.53
Total return (a) 1.70% 7.08% 5.54% 5.22% 11.09% (0.30)%
Ratio to average net assets of (b):
Expenses, before waivers and
reimbursements 1.16% 1.15% 1.20% 1.27% 1.30% 1.34%
Expenses, net of waivers and reimbursements 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
Net investment income, before
waivers and reimbursements 8.57% 8.91% 7.03% 4.44% 4.30% 3.83%
Net investment income, net of
waivers and reimbursements 8.98% 9.31% 7.48% 4.96% 4.85% 4.42%
Portfolio turnover rate 55.50% 89.97% 48.49% 47.68% 54.68% 48.67%
Net assets at end of period (in thousands) $246 $824 $891 $343 $13 $1
</TABLE>
(a) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. 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 six months ended May 31, 1999 were calculated
using average shares outstanding for the period. (b) For the period September
14, 1994 (Class D Shares issue date) through November 30, 1994.
<PAGE>
Financial Highlights [TO BE UPDATED]
Intermediate Bond Portfolio
For the Years Ended November 30,
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C>
Class A Class D
-----------------------------------------------------------------------------
For the For the
Six Months For the For the Six Months For the
Ended Year Ended 1998 Year Ended Ended Year Ended
May 31, 1999 1997 (a) May 31, 1999 1998 (b)
Net asset value, beginning of period $20.15 $19.89 $20.00 $20.13 $20.46
Income (loss) from investment operations:
Net investment income 0.52 1.19 0.38 0.49 0.18
Net realized and unrealized gain (loss) (0.62) 0.27 (0.15) (0.63) (0.32)
Total income (loss) from investment (0.10) 1.46 0.23 (0.14) (0.14)
operations
Distributions to shareholders from:
Net investment income (0.50) (1.20) (0.34) (0.46) (0.19)
Net realized gain (0.12) -- -- (0.12) --
Return of capital -- -- -- -- --
Total distributions to shareholders (0.62) (1.20) (0.34) (0.58) (0.19)
Net increase (decrease) (0.72) 0.26 (0.11) (0.72) (0.33)
Net asset value, end of period $19.43 $20.15 $19.89 $19.41 $20.13
Total return (c) (0.59)% 7.55% 1.17% (0.79)% (0.70)%
Ratio to average net assets of (d):
Expenses, before waivers and 0.78% 1.09% 2.28% 1.17% 1.48%
reimbursements
Expenses, net of waivers and 0.36% 0.36% 0.36% 0.75% 0.75%
reimbursements
Net investment income, before waivers and
reimbursements 4.83% 5.46% 3.95% 4.44% 4.96%
Net investment income, net of waivers and
reimbursements 5.25% 6.19% 5.87% 4.86% 5.69%
Portfolio turnover rate 127.74% 93.40% 56.99% 127.74% 93.40%
Net assets at end of period (in thousands) $47,080 $30,439 $11,997 $41 $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 period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year.
(b) Annualized for periods less than a full year.
<PAGE>
Financial Highlights [TO BE UPDATED]
U.S. Treasury Index Portfolio
For the Years Ended November 30,
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Class C
------------------------------------------------------------------------------------------
For the For the
Six Six Months
Months For the For the For the For the For the Ended For the
Ended May Year Ended Year Ended Year Ended Year Ended Year Ended May 31, Year Ended
31, 1999 1998 1997 1996 1995 1994 1999 1998 (a)
Net asset value,
beginning of period $21.77 $20.81 $20.60 $20.78 $18.77 $21.05 $21.81 $22.28
Income (loss) from investment
operations:
Net investment income 0.54 1.23 1.26 1.19 1.11 1.15 0.45 0.21
Net realized and unrealized
gain (loss) (1.04) 0.97 0.20 (0.18) 2.01 (1.93) (1.02) (0.52)
Total income (loss) from
investment operations (0.50) 2.20 1.46 1.01 3.12 (0.78) (0.57) (0.31)
Distributions to shareholders
from:
Net investment income (0.55) (1.24) (1.25) (1.19) (1.11) (1.14) (0.52) (0.16)
Net realized gain -- -- -- -- -- (0.36) -- --
Return of capital -- -- -- -- -- -- -- --
Total distributions to (0.55) (1.24) (1.25) (1.19) (1.11) (1.50) (0.52) (0.16)
shareholders
Net increase (decrease) (1.05) 0.96 0.21 (0.18) 2.01 (2.28) (1.09) (0.47)
Net asset value, end of period $20.72 $21.77 $20.81 $20.60 $20.78 $18.77 $20.72 $21.81
Total return (b) (2.39)% 10.92% 7.44% 5.10% 16.95% (3.80)% (2.66)% (1.39)%
Ratio to average net assets of
(c):
Expenses, before waivers and
reimbursements 0.75% 0.77% 0.82% 1.04% 0.89% 0.79% 0.99% 1.01%
Expenses, net of waivers and
reimbursements 0.26% 0.26% 0.26% 0.26% 0.26% 0.26% 0.50% 0.50%
Net investment income,
before 4.75% 5.22% 5.80% 5.15% 4.46% 5.07% 4.51% 4.71%
waivers and reimbursements
Net investment income, net
of 5.24% 5.73% 6.36% 5.93% 5.09% 5.60% 5.00% 5.22%
waivers and reimbursements
Portfolio turnover rate 59.39% 69.84% 72.61% 42.49% 80.36% 52.80% 59.39% 69.84%
Net assets at end of period
(in thousands) $22,246 $22,085 $33,839 $26,273 $17,674 $37,305 $140 $17
</TABLE>
(a) For the period October 7, 1998 (Class C Shares issue date) through November
30, 1998.
(b) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at net asset value at the end of the period. Total return
is not annualized for periods less than one year.
(c) Annualized for periods less than a full year.
<PAGE>
Financial Highlights [TO BE UPDATED]
U.S. Treasury Index Portfolio
For the Years Ended November 30,
Class D
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------
For the
Six
Months For the For the For the For the For the
Ended May Year Ended Year Ended Year Ended Year Ended Year Ended
31, 1999 1998 1997 1996 1995 1994 (a)
Net asset value,
beginning of period $21.74 $20.77 $20.57 $20.75 $18.77 $18.80
Income (loss) from investment
operations:
Net investment income 0.61 1.13 1.20 1.17 1.00 0.09
Net realized and unrealized (1.16)
gain (loss) 1.00 0.18 (0.24) 2.03 (0.03)
Total income from (0.55)
investment operations 2.13 1.38 0.93 3.03 0.06
Distributions to shareholders
from:
Net investment income (0.50) (1.16) (1.18) (1.11) (1.05) (0.09)
Net realized gain -- -- -- -- -- --
Return of capital -- -- -- -- -- --
Total distributions to (0.50) (1.16) (1.18) (1.11) (1.05) (0.09)
shareholders
Net increase (decrease) (1.05) 0.97 0.20 (0.18) 1.98 (0.03)
Net asset value, end of period $20.69 $21.74 $20.77 $20.57 $20.75 $18.77
Total return (b) (2.58%) 10.50% 7.03% 4.72% 16.43% 0.37%
Ratio to average net assets of
(c):
Expenses, before waivers and 1.14%
reimbursements 1.16% 1.21% 1.43% 1.28% 1.18%
Expenses, net of waivers and 0.65%
reimbursements 0.65% 0.65% 0.65% 0.65% 0.65%
Net investment income, 4.36%
before 4.84% 5.51% 4.79% 4.78% 5.52%
waivers and reimbursements
Net investment income, net 4.85%
of 5.35% 6.07% 5.57% 5.41% 6.05%
waivers and reimbursements
Portfolio turnover rate 59.39% 69.84% 72.61% 42.49% 80.36% 52.80%
Net assets at end of period $508
(in thousands) $1,721 $1,707 $848 $286 --
</TABLE>
(a) For the period November 16, 1994 (Class D Shares issue date) through
November 30, 1994.
(b) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at net asset value at the end of the period. Total return
is not annualized for periods less than one year.
(c) Annualized for periods less than a full year.
<PAGE>
Financial Highlights [TO BE UPDATED]
Bond Portfolio
For the Years Ended November 30,
<TABLE>
<CAPTION><S> <C>
Class A
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------
For the
Six Months For the For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999 1998 1997 1996 1995 1994
Net asset value, beginning of period $21.61 $21.08 $20.77 $20.96 $18.29 $20.70
Income (loss) from investment operations:
Net investment income 0.67 1.47 1.34 1.29 1.17 1.42
Net realized and unrealized gain (loss) (0.94) 0.62 0.29 (0.19) 2.66 (2.21)
Total income (loss) from investment operations (0.27) 2.09 1.63 1.10 3.83 (0.79)
Distributions to shareholders from:
Net investment income (0.66) (1.44) (1.32) (1.26) (1.14) (1.46)
Net realized gain (0.68) (0.12) -- -- -- (0.15)
Return of capital -- -- -- (0.03) (0.02) (0.01)
Total distributions to shareholders (1.34) (1.56) (1.32) (1.29) (1.16) (1.62)
Net increase (decrease) (1.61) 0.53 0.31 (0.19) 2.67 (2.41)
Net asset value, end of period $20.00 $21.61 $21.08 $20.77 $20.96 $18.29
Total return (a) (1.34)% 10.31% 8.17% 5.57% 21.55% (4.04)%
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 0.76% 0.75% 0.77% 0.84% 0.84% 0.87%
Expenses, net of waivers and reimbursements 0.36% 0.36% 0.36% 0.36% 0.36% 0.36%
Net investment income, before waivers and 6.30%
reimbursements 6.68% 6.25% 5.91% 5.46% 6.80%
Net investment income, net of waivers and 6.70%
reimbursements 7.07% 6.66% 6.39% 5.94% 7.31%
Portfolio turnover rate 40.98% 84.80% 76.30% 101.38% 74.19% 103.09%
Net assets at end of period (in thousands) $715,176 $605,517 $460,514 $366,850 $286,301 $257,391
</TABLE>
(a) Assumes investment at net asset value at the beginning of the
period, reinvestment of all dividends and distributions, and a complete
redemption of the investment at the net asset value at the end of the
period. (b) Annualized for periods less than a full year.
<PAGE>
Financial Highlights [TO BE UPDATED]
Bond Portfolio
For the Years Ended November 30,
Class C
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C>
----------------------------------------------------------------
For the
Six Months For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999 1998 1997 1996 1995 (a)
Net asset value, beginning of period $21.60 $21.07 $20.78 $20.96 $20.21
Income (loss) from investment operations:
Net investment income 0.67 1.42 1.29 1.25 0.47
Net realized and unrealized gain (0.95) 0.62 0.28 (0.18) 0.74
(loss)
Total income (loss) from investment (0.28)
Operations 2.04 1.57 1.07 1.21
Distributions to shareholders from:
Net investment income (0.64) (1.39) (1.28) (1.22) (0.45)
Net realized gain (0.68) (0.12) -- -- --
Return of capital -- -- -- (0.03) (0.01)
Total distributions to shareholders (1.32) (1.51) (1.28) (1.25) (0.46)
Net increase (decrease) (1.60) 0.53 0.29 (0.18) 0.75
Net asset value, end of period $20.00 $21.60 $21.07 $20.78 $20.96
Total return (b) (1.46)% 10.04% 7.88% 5.33% 6.08%
Ratio to average net assets of (c):
Expenses, before waivers and 1.00%
Reimbursements 0.99% 1.01% 1.08% 1.08%
Expenses, net of waivers and 0.60%
Reimbursements 0.60% 0.60% 0.60% 0.60%
Net investment income, before waivers 6.06%
And reimbursements 6.44% 5.98% 5.61% 5.11%
Net investment income, net of waivers 6.46%
And reimbursements 6.83% 6.39% 6.09% 5.59%
Portfolio turnover rate 40.98% 84.80% 76.30% 101.38% 74.19%
Net assets at end of period (in $60,696 $61,450 $50,554 $7,342 $3,704
thousands)
</TABLE>
Class D
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------
For the
Six Months For the For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999 1998 1997 1996 1995 1994(d)
Net asset value, beginning of period $21.58 $21.05 $20.76 $20.94 $18.29 $18.74
Income (loss) from investment
operations:
Net investment income 0.66 1.38 1.24 1.22 1.08 0.28
Net realized and unrealized gain (0.97) 0.63 0.30 (0.18) 2.66 (0.45)
(loss)
Total income (loss) from investment (0.31) (0.17)
Operations 2.01 1.54 1.04 3.74
Distributions to shareholders from:
Net investment income (0.62) (1.36) (1.25) (1.19) (1.09) (0.28)
Net realized gain (0.68) (0.12) -- -- -- --
Return of capital -- -- -- (0.03) -- --
Total distributions to shareholders (1.30) (1.48) (1.25) (1.22) (1.09) (0.28)
Net increase (decrease) (1.61) 0.53 0.29 (0.18) 2.65 (0.45)
Net asset value, end of period $19.97 $21.58 $21.05 $20.76 $20.94 $18.29
Total return (b) (1.53)% 9.89% 7.74% 5.17% 21.06% (0.94)%
Ratio to average net assets of (c):
Expenses, before waivers and 1.15% 1.26%
Reimbursements 1.14% 1.16% 1.23% 1.23%
Expenses, net of waivers and 0.75% 0.75%
Reimbursements 0.75% 0.75% 0.75% 0.75%
Net investment income, before waivers 5.91% 5.80%
And reimbursements 6.31% 5.86% 5.51% 5.00%
Net investment income, net of waivers 6.31% 6.31%
And reimbursements 6.70% 6.27% 5.99% 5.48%
Portfolio turnover rate 40.98% 84.80% 76.30% 101.38% 74.19% 103.09%
Net assets at end of period (in $1,625 $2,039 $601 $220 $120 $15
thousands)
</TABLE>
(a) For the period July 3, 1995 (Class C Shares issue date) through November 30,
1995.
(b) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption of
the investment at the net asset value at the end of the period. Total return is
not annualized for periods less than one year.
(c) Annualized for periods less
than a full year. (b) For the period September 14, 1994 (Class D Shares issue
date) through November 30, 1994.
<PAGE>
Financial Highlights [TO BE UPDATED]
International Bond Portfolio
For the Years Ended November 30,
Class C
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------
For the
Six Months For the For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999 1998 1997 1996 1995 1994(a)
Net asset value, beginning of period $21.35 $20.13 $22.16 $21.74 $19.93 $20.00
Income (loss) from investment operations:
Net investment income 1.02 0.98 1.02 1.54 1.26 0.79
Net realized and unrealized gain (loss) (1.88) 1.33 (1.70) 0.43 2.28 0.01
Total income (loss) from investment (0.86)
Operations 2.31 (0.68) 1.97 3.54 0.80
Distributions to shareholders from:
Net investment income (b) (0.73) (0.79) (1.01) (1.55) (1.73) (0.87)
Net realized gain (0.14) (0.30) (0.34) -- -- --
Return of capital -- -- -- -- -- --
Total distributions to shareholders (0.87) (1.09) (1.35) (1.55) (1.73) (0.87)
Net increase (decrease) (1.73) 1.22 (2.03) 0.42 1.81 (0.07)
Net asset value, end of period $19.62 $21.35 $20.13 $22.16 $21.74 $19.93
Total return (c) (4.53)% 11.85% (3.02)% 9.47% 18.20% 4.03%
Ratio to average net assets of (d):
Expenses, before waivers and 1.46%
Reimbursements 1.52% 1.52% 1.58% 1.47% 1.49%
Expenses, net of waivers and 0.96%
Reimbursements 0.96% 0.96% 0.96% 0.96% 0.96%
Net investment income, before waivers 4.50%
And reimbursements 4.71% 5.05% 5.29% 5.41% 5.40%
Net investment income, net of waivers 5.00%
And reimbursements 5.27% 5.61% 5.91% 5.92% 5.93%
Portfolio turnover rate 6.67% 23.76% 29.29% 33.89% 54.46% 88.65%
Net assets at end of period (in thousands) $27,720 $28,568 $26,383 $34,183 $32,673 $26,947
</TABLE>
Class D
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------
For the
Six Months For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999(e) 1998 1997 1996 1995(f)
Net asset value, beginning of period $21.26 $20.06 $22.14 $21.74 $22.17
Income (loss) from investment operations:
Net investment income 0.38 0.93 0.97 1.37 0.02
Net realized and unrealized gain (loss) (1.40) 1.29 (1.72) 0.51 (0.08)
Total income (loss) from investment (1.02)
Operations 2.22 (0.75) 1.88 (0.06)
Distributions to shareholders from:
Net investment income (b) (0.54) (0.72) (0.99) (1.48) (0.37)
Net realized gain (0.14) (0.30) (0.34) -- --
Return of capital -- -- -- -- --
Total distributions to shareholders (0.68) (1.02) (1.33) (1.48) (0.37)
Net increase (decrease) (1.70) 1.20 (2.08) 0.40 (0.43)
Net asset value, end of period $19.56 $21.26 $20.06 $22.14 $21.74
Total return (c) (5.00)% 11.43% (3.38)% 9.04% (0.30)%
Ratio to average net assets of (d):
Expenses, before waivers and 1.85%
Reimbursements 1.91% 1.91% 1.97% 1.86%
Expenses, net of waivers and 1.35%
Reimbursements 1.35% 1.35% 1.35% 1.35%
Net investment income, before waivers 4.11%
And reimbursements 4.34% 4.80% 5.05% 2.75%
Net investment income, net of waivers 4.61%
And reimbursements 4.90% 5.36% 5.67% 3.26%
Portfolio turnover rate 6.67% 23.76% 29.29% 33.89% 54.46%
Net assets at end of period (in thousands) $1 $132 $91 $52 $9
</TABLE>
(a) For the period March 28, 1994 (commencement of operations) through November
30, 1994.
(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 period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year.
(d) Annualized for periods less than a full year.
(e) Financial Highlights for the six months ended May 31, 1999 were calculated
using average shares outstanding for the period. (f) For the period November 20,
1995 (Class D Shares issue date) through November 30, 1995.
<PAGE>
Financial Highlights [TO BE UPDATED]
Balanced Portfolio
For the Years Ended November 30,
<TABLE>
<CAPTION><S> <C>
Class A
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------
For the
Six Months For the For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999 1998 1997 1996 1995 1994
Net asset value, beginning of period $14.95 $13.59 $12.24 $11.05 $9.50 $10.22
Income (loss) from investment operations:
Net investment income 0.19 0.38 0.38 0.34 0.34 0.24
Net realized and unrealized gain (loss) 0.03 1.81 1.66 1.19 1.55 (0.72)
Total income (loss) from investment operations 0.22 2.19 2.04 1.53 1.89 (0.48)
Distributions to shareholders from:
Net investment income (0.28) (0.32) (0.38) (0.34) (0.34) (0.22)
Net realized gain (0.51) (0.51) (0.31) -- -- (0.02)
Return of capital -- -- -- -- -- --
Total distributions to shareholders (0.79) (0.83) (0.69) (0.34) (0.34) (0.24)
Net increase (decrease) (0.57) 1.36 1.35 1.19 1.55 (0.72)
Net asset value, end of period $14.38 $14.95 $13.59 $12.24 $11.05 $9.50
Total return (a) 7.06% 16.90% 17.29% 14.07% 20.22% (4.76)%
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 1.00% 1.04% 1.11% 1.20% 1.28% 1.50%
Expenses, net of waivers and reimbursements 0.61% 0.61% 0.61% 0.61% 0.61% 0.61%
Net investment income, before waivers and 2.22%
reimbursements 2.40% 2.49% 2.44% 2.69% 1.68%
Net investment income, net of waivers and 2.61%
reimbursements 2.83% 2.99% 3.03% 3.36% 2.56%
Portfolio turnover rate 41.89% 67.16% 59.06% 104.76% 93.39% 75.69%
Net assets at end of period (in thousands) $73,013 $61,969 $51,475 $ 45,157 $38,897 $31,462
</TABLE>
(a) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption of
the investment at the net asset value at the end of the period. (b) Annualized
for periods less than a full year.
<PAGE>
Financial Highlights [TO BE UPDATED]
Balanced Portfolio
For the Years Ended November 30,
<TABLE>
<CAPTION>
<S> <C> <C>
Class C Class D
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------
For the
Six Months
Ended For the For the For the For the For the For the For the
May 31, Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
1999(a) 1998 1997 1996 (b) 1999 1998 1997 1996 (c)
Net asset value, beginning of period $14.91 $13.56 $12.24 $11.12 $14.88 $13.54 $12.23 $11.34
Income from investment operations:
Net investment income 0.20 0.37 0.36 0.29 0.15 0.40 0.34 0.22
Net realized and unrealized gain 0.03 1.78 1.64 1.12 0.09 1.72 1.64 0.96
Total income from investment operations 0.23 2.15 2.00 1.41 0.24 2.12 1.98 1.18
Distributions to shareholders from:
Net investment income (0.23) (0.29) (0.37) (0.29) (0.28) (0.27) (0.36) (0.29)
Net realized gain (0.51) (0.51) (0.31) -- (0.51) (0.51) (0.31) --
Return of capital -- -- -- -- -- -- -- --
Total distributions to shareholders (0.74) (0.80) (0.68) (0.29) (0.79) (0.78) (0.67) (0.29)
Net increase (0.51) 1.35 1.32 1.12 (0.55) 1.34 1.31 0.89
Net asset value, end of period $14.40 $14.91 $13.56 $12.24 $14.33 $14.88 $13.54 $12.23
Total return (d) 7.12% 16.61% 17.00% 12.72% 6.92% 16.45% 16.82% 10.55%
Ratio to average net assets of (e):
Expenses, before waivers and 1.24% 1.28% 1.35% 1.44% 1.39% 1.43% 1.50% 1.59%
reimbursements
Expenses, net of waivers and 0.85% 0.85% 0.85% 0.85% 1.00% 1.00% 1.00% 1.00%
reimbursements
Net investment income, before 1.98% 2.15% 2.25% 2.21% 1.83% 2.01% 2.10% 2.19%
waivers and reimbursements
Net investment income, net of 2.37% 2.58% 2.75% 2.80% 2.22% 2.44% 2.60% 2.78%
waivers and
Reimbursements
Portfolio turnover rate 41.89% 67.16% 59.06% 104.76% 41.89% 67.16% 59.06% 104.76%
Net assets at end of period (in $816 $5,459 $4,587 $5,997 $522 $752 $322 $232
thousands)
</TABLE>
(a) Financial Highlights for the six months ended May 31, 1999 were calculated
using average shares outstanding for the period. (b) For the period December 29,
1995 (Class C Shares issue date) through November 30, 1996. (c) For the period
February 20, 1996 (Class D Shares issue date) through November 30, 1996.
(d) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year.
(d) Annualized for periods less than a full year.
<PAGE>
Financial Highlights [TO BE UPDATED]
Equity Index Portfolio
For the Years Ended November 30,
Class A
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------
For the
Six Months For the For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999 1998 1997 1996 1995 1994
Net asset value, beginning of period $22.69 $20.09 $16.79 $13.86 $10.60 $10.78
Income (loss) from investment operations:
Net investment income 0.14 0.28 0.30 0.31 0.30 0.27
Net realized and unrealized gain (loss) 2.56 4.02 4.13 3.36 3.47 (0.18)
Total income from investment operations 2.70 4.30 4.43 3.67 3.77 0.09
Distributions to shareholders from:
Net investment income (0.19) (0.26) (0.30) (0.31) (0.30) (0.27)
Net realized gain (1.43) (1.44) (0.83) (0.43) (0.21) --
Return of capital -- -- -- -- -- --
Total distributions to shareholders (1.62) (1.70) (1.13) (0.74) (0.51) (0.27)
Net increase (decrease) 1.08 2.60 3.30 2.93 3.26 (0.18)
Net asset value, end of period $23.77 $22.69 $20.09 $16.79 $13.86 $10.60
Total return (a) 12.45% 23.39% 27.93% 27.53% 36.60% 0.87%
Ratio to average net assets of:
Expenses, before waivers and reimbursements 0.44% 0.46% 0.46% 0.50% 0.54% 0.59%
Expenses, net of waivers and reimbursements 0.21% 0.21% 0.22% 0.22% 0.22% 0.23%
Net investment income, before waivers and
Reimbursements 1.01% 1.11% 1.42% 1.84% 2.22% 2.25%
Net investment income, net of waivers and
Reimbursements 1.24% 1.36% 1.66% 2.12% 2.54% 2.62%
Portfolio turnover rate 4.77% 15.26% 18.96% 18.02% 15.27% 71.98%
Net assets at end of period (in thousands) $1,291,723 $1,175,112 $844,065 $675,804 $479,763 $281,817
</TABLE>
(a) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period.
<PAGE>
Financial Highlights [TO BE UPDATED]
Equity Index Portfolio
For the Years Ended November 30,
Class C
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------
For the
Six Months For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999 1998 1997 1996 1995 (a)
Net asset value, beginning of period $22.64 $20.05 $16.79 $13.86 $13.43
Income (loss) from investment
operations:
Net investment income 0.12 0.24 0.26 0.28 0.05
Net realized and unrealized gain 2.54 4.01 4.11 3.35 0.45
(loss)
Total income (loss) from investment
Operations 2.66 4.25 4.37 3.63 0.50
Distributions to shareholders from:
Net investment income (0.16) (0.22) (0.28) (0.27) (0.07)
Net realized gain (1.43) (1.44) (0.83) (0.43) --
Return of capital -- -- -- -- --
Total distributions to shareholders (1.59) (1.66) (1.11) (0.70) (0.07)
Net increase (decrease) 1.07 2.59 3.26 2.93 0.43
Net asset value, end of period $23.71 $22.64 $20.05 $16.79 $13.86
Total return (c) 12.28% 23.09% 27.64% 27.24% 3.94%
Ratio to average net assets of (d):
Expenses, before waivers and
Reimbursements 0.68% 0.70% 0.70% 0.74% 0.78%
Expenses, net of waivers and
Reimbursements 0.45% 0.45% 0.46% 0.46% 0.46%
Net investment income, before waivers
and reimbursements 0.77% 0.87% 1.18% 1.61% 1.97%
Net investment income, net of waivers
and reimbursements 1.00% 1.12% 1.42% 1.89% 2.29%
Portfolio turnover rate 4.77% 15.26% 18.96% 18.02% 15.27%
Net assets at end of period (in $113,100 $111,991 $82,982 $53,929 $18,390
thousands)
</TABLE>
Class D
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------
For the
Six Months
Ended For the For the For the For the For the
May 31, Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996 1995 1994 (b)
Net asset value, beginning of period $22.58 $20.00 $16.77 $13.83 $10.60 $10.96
Income (loss) from investment
operations:
Net investment income 0.08 0.21 0.26 0.27 0.25 0.02
Net realized and unrealized gain 2.55 4.00 4.07 3.36 3.47 (0.31)
(loss)
Total income (loss) from investment
Operations 2.63 4.21 4.33 3.63 3.72 (0.29)
Distributions to shareholders from:
Net investment income (0.12) (0.19) (0.27) (0.26) (0.28) (0.07)
Net realized gain (1.43) (1.44) (0.83) (0.43) (0.21) --
Return of capital -- -- -- -- -- --
Total distributions to shareholders (1.55) (1.63) (1.10) (0.69) (0.49) (0.07)
Net increase (decrease) 1.08 2.58 3.23 2.94 3.23 (0.36)
Net asset value, end of period $23.66 $22.58 $20.00 $16.77 $13.83 $10.60
Total return (c) 12.18% 22.90% 27.45% 27.20% 36.20% (2.68)%
Ratio to average net assets of (d):
Expenses, before waivers and
Reimbursements 0.83% 0.85% 0.85% 0.89% 0.93% 0.96%
Expenses, net of waivers and
Reimbursements 0.60% 0.60% 0.61% 0.61% 0.61% 0.60%
Net investment income, before waivers
and reimbursements 0.62% 0.71% 1.03% 1.50% 1.75% 2.31%
Net investment income, net of waivers
and reimbursements 0.85% 0.97% 1.27% 1.78% 2.07% 2.67%
Portfolio turnover rate 4.77% 15.26% 18.96% 18.02% 15.27% 71.98%
Net assets at end of period (in $16,645 $31,703 $30,650 $8,005 $810 $3
thousands)
</TABLE>
(a) For the period September 28, 1995 (Class C Shares issue date) through
November 30, 1995.
(b) For the period September 14, 1994 (Class D Shares issue
date) through November 30, 1994.
(c) Assumes investment at net asset value at the
beginning of the period, reinvestment of all dividends and distributions, and a
complete redemption of the investment at the net asset value at the end of the
period. Total return is not annualized for periods less than one year.
(d) Annualized for periods less than a full year.
<PAGE>
Financial Highlights [TO BE UPDATED]
Diversified Growth Portfolio
For the Years Ended November 30,
<TABLE>
<CAPTION>
<S> <C>
Class A
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------
For the
Six Months For the For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999 1998 1997 1996 1995 1994
Net asset value, beginning of period $17.76 $16.20 $14.36 $12.20 $9.88 $10.65
Income (loss) from investment operations:
Net investment income 0.04 0.07 0.11 0.14 0.15 0.09
Net realized and unrealized gain (loss) 1.94 3.46 3.33 2.33 2.26 (0.83)
Total income (loss) from investment operations 1.98 3.53 3.44 2.47 2.41 (0.74)
Distributions to shareholders from:
Net investment income (0.07) (0.11) (0.14) (0.15) (0.09) (0.01)
Net realized gain (1.92) (1.86) (1.46) (0.16) -- (0.02)
Return of capital -- -- -- -- -- --
Total distributions to shareholders (1.99) (1.97) (1.60) (0.31) (0.09) (0.03)
Net increase (decrease) (0.01) 1.56 1.84 2.16 2.32 (0.77)
Net asset value, end of period $17.75 $17.76 $16.20 $14.36 $12.20 $9.88
Total return (a) 11.81% 25.22% 27.06% 20.83% 24.55% (6.98)%
Ratio to average net assets of:
Expenses, before waivers and reimbursements 0.95% 0.96% 1.03% 1.10% 1.12% 1.08%
Expenses, net of waivers and reimbursements 0.66% 0.66% 0.67% 0.66% 0.69% 0.67%
Net investment income, before waivers and
Reimbursements 0.13% 0.15% 0.40% 0.54% 0.73% 0.35%
Net investment income, net of waivers and
Reimbursements 0.42% 0.45% 0.76% 0.98% 1.16% 0.77%
Portfolio turnover rate 30.62% 37.74% 45.53% 59.99% 81.65% 78.94%
Net assets at end of period (in thousands) $188,512 $177,947 $158,383 $142,055 $146,731 $164,963
</TABLE>
(a) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period.
<PAGE>
Financial Highlights [TO BE UPDATED]
Diversified Growth Portfolio
For the Years Ended November 30,
Class D
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------
For the
Six Months
Ended For the For the For the For the For the
May 31, Year Ended Year Ended Year Ended Year Ended Year Ended
1999(a) 1998 1997 1996 1995 1994 (b)
Net asset value, beginning of period $17.53 $16.03 $14.26 $12.16 $9.88 $10.41
Income (loss) from investment operations:
Net investment income 0.02 0.03 0.09 0.11 0.11 0.01
Net realized and unrealized gain (loss) 1.89 3.40 3.27 2.29 2.25 (0.54)
Total income (loss) from investment operations 1.91 3.43 3.36 2.40 2.36 (0.53)
Distributions to shareholders from:
Net investment income (0.01) (0.07) (0.13) (0.14) (0.08) --
Net realized gain (1.92) (1.86) (1.46) (0.16) -- --
Return of capital -- -- -- -- -- --
Total distributions to shareholders (1.93) (1.93) (1.59) (0.30) (0.08) --
Net increase (decrease) (0.02) 1.50 1.77 2.10 2.28 (0.53)
Net asset value, end of period $17.51 $17.53 $16.03 $14.26 $12.16 $9.88
Total return (c) 11.48% 24.73% 26.60% 20.39% 24.19% (5.14)%
Ratio to average net assets of (d):
Expenses, before waivers and reimbursements 1.34% 1.35% 1.42% 1.49% 1.51% 1.46%
Expenses, net of waivers and reimbursements 1.05% 1.05% 1.06% 1.05% 1.08% 1.05%
Net investment income, before waivers and
reimbursements (0.26)% (0.24)% 0.01% 0.15% 0.30% 0.53%
Net investment income, net of waivers and
reimbursements 0.03% 0.06% 0.37% 0.59% 0.73% 0.94%
Portfolio turnover rate 30.62% 37.74% 45.53% 59.99% 81.65% 78.94%
Net assets at end of period (in thousands) $327 $1,122 $696 $433 $221 $40
</TABLE>
(a) Financial highlights for the six months ended May 31, 1999 were calculated
using average shares outstanding for the period. (b) For the period September
14, 1994 (Class D Shares issue date) through November 30, 1994.
(c) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year.
(d) Annualized for periods less than a full year.
<PAGE>
Financial Highlights [TO BE UPDATED]
Focused Growth Portfolio
For the Years Ended November 30,
Class A
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------
For the
Six Months For the For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999 1998 1997 1996 1995 1994
Net asset value, beginning of period $16.39 $16.20 $14.48 $12.53 $9.79 $10.43
Income (loss) from investment operations:
Net investment income (0.01) (0.01) 0.05 0.02 0.05 0.02
Net realized and unrealized gain (loss) 2.80 3.10 3.37 2.17 2.71 (0.66)
Total income (loss) from investment operations 2.79 3.09 3.42 2.19 2.76 (0.64)
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) -- --
Return of capital -- -- -- -- -- --
Total distributions to shareholders (1.26) (2.90) (1.70) (0.24) (0.02) --
Net increase (decrease) 1.53 0.19 1.72 1.95 2.74 (0.64)
Net asset value, end of period $17.92 $16.39 $16.20 $14.48 $12.53 $9.79
Total return (a) 17.86% 24.03% 27.05% 17.82% 28.38% (6.15)%
Ratio to average net assets of:
Expenses, before waivers and reimbursements 1.26% 1.29% 1.34% 1.43% 1.47% 1.55%
Expenses, net of waivers and reimbursements 0.91% 0.92% 0.92% 0.91% 0.91% 0.91%
Net investment loss, before waivers and
reimbursements (0.54)% (0.41)% (0.12)% (0.40)% (0.10)% (0.39)%
Net investment income, net of waivers and
reimbursements (0.19)% (0.04)% 0.30% 0.12% 0.46% 0.24%
Portfolio turnover rate 48.67% 79.11% 108.29% 116.78% 85.93% 74.28%
Net assets at end of period (in thousands) $153,927 $123,380 $115,802 $106,250 $86,099 $57,801
</TABLE>
(a) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period.
<PAGE>
Financial Highlights [TO BE UPDATED]
Focused Growth Portfolio
For the Years Ended November 30,
<TABLE>
<CAPTION>
<S> <C> <C>
Class C Class D
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
For the
Six For the For the For the For the For the For the For the For the
Months Year Year Year Year Year Year Year Year
Ended May Ended 1998Ended Ended Ended Ended Ended 1997Ended 1996Ended
31, 1999 1997 1996 (a) 1999 1998 1995 (b)
Net asset value, beginning of period $16.34 $16.16 $14.47 $13.46 $16.14 $16.01 $14.37 $12.48 $9.55
Income (loss) from investment operations:
Net investment income (loss) (0.03) (0.05) 0.01 (0.01) (0.10) (0.05) 0.03 (0.03) 0.02
Net realized and unrealized gain 2.79 3.09 3.37 1.02 2.81 3.04 3.30 2.15 2.93
Total income from investment operations 2.76 3.04 3.38 1.01 2.71 2.99 3.33 2.12 2.95
Distributions to shareholders from:
Net investment income -- (0.01) (0.01) -- -- (0.01) (0.01) (0.04) (0.02)
Net realized gain (1.26) (2.85) (1.68) -- (1.26) (2.85) (1.68) (0.19) --
Return of capital -- -- -- -- -- -- -- -- --
Total distributions to shareholders (1.26) (2.86) (1.69) -- (1.26) (2.86) (1.69) (0.23) (0.02)
Net increase 1.50 0.18 1.69 1.01 1.45 0.13 1.64 1.89 2.93
Net asset value, end of period $17.84 $16.34 $16.16 $14.47 $17.59 $16.14 $16.01 $14.37 $12.48
Total return (c) 17.78% 23.73% 26.75% 7.51% 17.62% 23.60% 26.52% 17.42% 30.97%
Ratio to average net assets of (d):
Expenses, before waivers and 1.50% 1.53% 1.58% 1.67% 1.65% 1.68% 1.73% 1.82% 1.86%
reimbursements
Expenses, net of waivers and 1.15% 1.16% 1.16% 1.15% 1.30% 1.31% 1.31% 1.30% 1.30%
reimbursements
Net investment loss, before waivers
and (0.78)% (0.66)% (0.36)% (0.64)% (0.93)% (0.81)% (0.51)% (0.80)% (0.67)%
Reimbursements
Net investment income (loss), net
of waivers and (0.43)% (0.29)% 0.06% (0.12)% (0.58)% (0.44)% (0.09)% (0.28)% (0.11)%
reimbursements
Portfolio turnover rate 48.67% 79.11% 108.29% 116.78% 48.67% 79.11% 108.29% 116.78% 85.93%
Net assets at end of period (in $9,948 $8,719 $8,325 $6,993 $812 $1,779 $1,206 $656 $489
thousands)
</TABLE>
(a) For the period June 14, 1996 (Class C Shares issue date) through November
30, 1996. (b) For the period December 8, 1994 (Class D Shares issue date)
through November 30, 1995.
(c) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year.
(d) Annualized for periods less than a full year.
<PAGE>
Financial Highlights [TO BE UPDATED]
Small Company Index Portfolio
For Years Ended November 30,
Class A
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------
For the
Six Months For the For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999 1998 1997 1996 1995 1994
Net asset value, beginning of period $13.02 $15.05 $13.97 $12.98 $10.86 $11.29
Income (loss) from investment operations:
Net investment income 0.05 0.13 0.15 0.19 0.16 0.14
Net realized and unrealized gain (loss) 1.15 (1.13) 2.69 1.75 2.67 (0.30)
Total income (loss) from investment operations 1.19 (1.00) 2.84 1.94 2.83 (0.16)
Distributions to shareholders from:
Net investment income (0.10) (0.14) (0.17) (0.14) (0.15) (0.02)
Net realized gain (1.51) (0.89) (1.59) (0.81) (0.56) (0.25)
Return of capital -- -- -- -- -- --
Total distributions to shareholders (1.60) (1.03) (1.76) (0.95) (0.71) (0.27)
Net increase (decrease) (0.41) (2.03) 1.08 0.99 2.12 (0.43)
Net asset value, end of period $12.61 $13.02 $15.05 $13.97 $12.98 $10.86
Total return (a) 10.33% (7.02)% 23.06% 15.96% 27.76% (1.54)%
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 0.80% 0.74% 0.68% 0.79% 0.81% 0.86%
Expenses, net of waivers and reimbursements 0.36%(c) 0.31% 0.32% 0.32% 0.32% 0.33%
Net investment income, before waivers and
Reimbursements 0.85% 0.76% 0.86% 0.89% 0.82% 0.74%
Net investment income, net of waivers and
Reimbursements 1.29% 1.19% 1.22% 1.36% 1.31% 1.27%
Portfolio turnover rate 46.54% 59.21% 42.66% 46.26% 38.46% 98.43%
Net assets at end of period (in thousands) $170,920 $139,100 $147,887 $112,856 $94,899 $77,120
</TABLE>
(a) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return does not reflect the .75% additional transaction fee that was in
effect prior to April 1, 1998 which would reduce total return. Effective
April 1, 1998, the additional transaction fee has been reduced to .50%.
(b) Annualized for periods less than a full year.
(c) Expense ratio, net of waivers and reimbursement, for the six months ended
May 31, 1999 would have been 0.31% for Class A absent the effect of any interest
expenses incurred by the fund's temporary borrowing against a credit line
agreement.
<PAGE>
Financial Highlights [TO BE UPDATED]
Small Company Index Portfolio
For Years Ended November 30,
<TABLE>
<CAPTION>
<S> <C> <C>
Class C Class D
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
For the
Six Months For the For the For the For the For the For the
Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 1999 1998(a) 1999 1998 1997 1996 1995 (b)
Net asset value, beginning of period $12.98 $13.89 $12.94 $15.01 $13.96 $12.95 $10.51
Income from investment operations:
Net investment income 0.05 0.03 0.11 0.11 0.17 0.13 0.18
Net realized and unrealized gain 1.09 (0.94) 1.08 (1.19) 2.62 1.83 2.96
Total income from investment operations 1.14 (0.91) 1.19 (1.08) 2.79 1.96 3.14
Distributions to shareholders from:
Net investment income (0.03) -- (0.10) (0.10) (0.15) (0.14) (0.14)
Net realized gain (1.51) -- (1.51) (0.89) (1.59) (0.81) (0.56)
Return of capital -- -- -- -- -- -- --
Total distributions to shareholders (1.54) -- (1.61) (0.99) (1.74) (0.95) (0.70)
Net increase (0.40) (0.91) (0.42) (2.07) 1.05 1.01 2.44
Net asset value, end of period $12.58 $12.98 $12.52 $12.94 $15.01 $13.96 $12.95
Total return (c) 9.89% (6.54)% 9.83% (7.58)% 22.68% 16.20% 31.62%
Ratio to average net assets of (d):
Expenses, net of waivers and reimbursements 1.04% 0.55% 1.19% 0.70% 0.71% 0.71% 0.71%
Expenses, before waivers and reimbursements 0.60%(e) 0.98% 0.75%(e) 1.13% 1.07% 1.18% 1.20%
Net investment income, before waivers and
Reimbursements 0.61% 0.55% 0.46% 0.37% 0.40% 0.55% 0.41%
Net investment income, net of waivers and
Reimbursements 1.05% 0.98% 0.90% 0.80% 0.76% 1.02% 0.90%
Portfolio turnover rate 46.54% 59.21% 46.54% 59.21% 42.66% 46.26% 38.46%
Net assets at end of period (in thousands) $361 $870 $559 $855 $690 $269 $44
</TABLE>
(a) For the period January 8, 1998 (Class C Shares issue date) through November
30, 1998. (b) For the period December 8, 1994 (Class D Shares issue date)
through November 30, 1995.
(c) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year and does not
reflect the .75% additional transaction fee that was in effect prior to
April 1, 1998 which would reduce total return. Effective April 1, 1998, the
additional transaction fee has been reduced to .50%.
(d) Annualized for periods less than a full period.
(e) Expense ratio, net of waivers and reimbursement, for the six months ended
May 31, 1999 would have been 0.55% and 0.70% for Class C and D respectively
absent the effect of any interest expenses incurred by the fund's temporary
borrowing against a credit line agreement.
<PAGE>
Financial Highlights [TO BE UPDATED]
International Growth Portfolio
For the Years Ended November 30,
Class A
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------
For the
Six Months For the For the For the For the For the
Ended May 31, Year Year Ended Year Ended Year Ended Year Ended
1999 Ended 1998 1997 1996 1995 1994 (a)
Net asset value, beginning of period $11.78 $10.52 $10.63 $ 9.88 $10.21 $10.00
Income (loss) from investment operations:
Net investment income 0.11 0.09 0.11 0.10 0.12 0.05
Net realized and unrealized gain (loss) 0.93 1.90 0.31 0.87 (0.36) 0.16
Total income (loss) from investment operations 1.04 1.99 0.42 0.97 (0.24) 0.21
Distributions to shareholders from:
Net investment income (0.23) (0.16) (0.08) (0.22) (0.05) --
Net realized gain (0.76) (0.57) (0.45) -- (0.04) --
Return of capital -- -- -- -- -- --
Total distributions to shareholders (0.99) (0.73) (0.53) (0.22) (0.09) --
Net increase (decrease) 0.05 1.26 (0.11) 0.75 (0.33) 0.21
Net asset value, end of period $11.83 $11.78 $10.52 $10.63 $9.88 $10.21
Total return (b) 9.36% 20.44% 4.21% 9.96% (2.32)% 2.11%
Ratio to average net assets of (c):
Expenses, before waivers and reimbursements 1.31% 1.31% 1.37% 1.43% 1.38% 1.47%
Expenses, net of waivers and reimbursements 1.06% 1.06% 1.06% 1.06% 1.06% 1.04%
Net investment income, before waivers and
reimbursements 1.33% 0.64% 0.66% 0.36% 0.90% 0.33%
Net investment income, net of waivers and
reimbursements 1.58% 0.89% 0.97% 0.73% 1.22% 0.76%
Portfolio turnover rate 85.67% 160.13% 154.62% 202.47% 215.31% 77.79%
Net assets at end of period (in thousands) $114,123 $111,594 $106,774 $138,182 $148,704 $133,212
</TABLE>
(a) For the period March 28, 1994 (commencement of operations) through November
30, 1994.
(b) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year.
(c) Annualized for periods less than a full year.
<PAGE>
Financial Highlights [TO BE UPDATED]
International Growth Portfolio
For the Years Ended November 30,
Class D
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------
For the
Six Months For the For the For the For the For the
Ended May 31, Year Ended Year Ended Year Ended Year Ended Year Ended
1999(a) 1998 1997 1996 1995 1994 (b)
Net asset value, beginning of period $11.60 $10.39 $10.54 $ 9.83 $10.21 $10.47
Income (loss) from investment operations:
Net investment income (0.01) 0.09 0.09 0.01 0.19 --
Net realized and unrealized gain (loss) 1.00 1.83 0.29 0.92 (0.48) (0.26)
Total income (loss) from investment operations 0.99 1.92 0.38 0.93 (0.29) (0.26)
Distributions to shareholders from:
Net investment income (0.14) (0.14) (0.08) (0.22) (0.05) --
Net realized gain (0.76) (0.57) (0.45) -- (0.04) --
Return of capital -- -- -- -- -- --
Total distributions to shareholders (0.90) (0.71) (0.53) (0.22) (0.09) --
Net increase (decrease) 0.09 1.21 (0.15) 0.71 (0.38) (0.26)
Net asset value, end of period $11.69 $11.60 $10.39 $10.54 $9.83 $10.21
Total return (c) 9.18% 19.91% 3.79% 9.59% (2.78)% (2.56)%
Ratio to average net assets of (d):
Expenses, before waivers and reimbursements 1.70% 1.70% 1.76% 1.82% 1.77% 1.78%
Expenses, net of waivers and reimbursements 1.45% 1.45% 1.45% 1.45% 1.45% 1.35%
Net investment income (loss), before waivers and
Reimbursements (0.34)% 0.34% 0.27% 0.07% 1.69% (0.43)%
Net investment income, net of waivers and
Reimbursements (0.09)% 0.59% 0.58% 0.44% 2.01% --
Portfolio turnover rate 85.67% 160.13% 154.62% 202.47% 215.31% 77.79%
Net assets at end of period (in thousands) $10 $203 $234 $94 $20 --
</TABLE>
(a) Financial highlights for the six months ended May 31, 1999 were calculated
using average shares outstanding for the period. (b) For the period November 16,
1994 (Class D Shares issue date) through November 30, 1994.
(c) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. Total
return is not annualized for periods less than one year.
(d) Annualized for periods less than a full year.
<PAGE>
Financial Highlights [TO BE UPDATED]
International Equity Index Portfolio
For the Years Ended November 30,
<TABLE>
<CAPTION>
<S> <C> <C>
Class A Class D
</TABLE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C>
---------------------------- --------------------------------
For the
Six Months For the For the For the For the
Ended May 31, Year Ended Year Ended Year Ended Year Ended
1999 1998 1997(a)) 1999 1998 (b)
Net asset value, beginning of period $11.98 $10.55 $10.00 $11.97 $9.88
Income from investment operations:
Net investment income 0.10 0.14 0.10 0.08 --
Net realized and unrealized gain 0.35 1.46 0.45 0.34 2.09
Total income from investment operations 0.45 1.60 0.55 0.42 2.09
Distributions to shareholders from:
Net investment income (loss) (0.24) (0.17) -- (0.23) --
Net realized gain (0.54) -- -- (0.54) --
Return of capital -- -- -- -- --
Total distributions to shareholders (0.78) (0.17) -- (0.77) --
Net increase (0.33) 1.43 0.55 (0.35) 2.09
Net asset value, end of period $11.65 $11.98 $10.55 $11.62 $11.97
Total return (c) 3.84% 15.50% 5.45% 3.61% 21.15%
Ratio to average net assets of (d):
Expenses, before waivers and reimbursements 0.93% 1.00% 1.08% 1.32% 1.39%
Expenses, net of waivers and reimbursements 0.52% 0.55% 0.51% 0.91% 0.94%
Net investment income (loss), before waivers 1.13% 0.91% 1.18% 0.74% (0.80)%
and reimbursements
Net investment income (loss), net of waivers 1.54% 1.36% 1.75% 1.15% (0.11)%
and reimbursements
Portfolio turnover rate 8.71% 41.53% 8.16% 8.71% 41.53%
Net assets at end of period (in thousands) $45,315 $44,940 $34,244 $12 $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 period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period. 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.
<PAGE>
22
For More Information
ANNUAL/SEMIANNUAL REPORT
Additional information about the Portfolios' investments is available in the
Portfolios' annual and semi-annual 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 1-800-637-1380.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-637-1380
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.
[LOGO]
811-3605
<PAGE>
Northern Institutional Funds
Money Market Portfolios
Shares
Government Select Portfolio
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>
<CAPTION>
<S><C> <C> <C> <C>
Page
- ------------------------------------------------------ ------------------------------------------------------------------
Risk/Return Summary Portfolios
Information about the objectives, principal o Government Select Portfolio X
strategies and risk characteristics of each Portfolio o Government Portfolio X
o Diversified Assets Portfolio X
o Tax-Exempt Portfolio X
o Municipal Portfolio
X
Principal Investment
Strategies and Risks
Portfolio Performance X
o Government Select Portfolio X
o Government Portfolio X
o Diversified Assets Portfolio X
o Tax-Exempt Portfolio X
Management of the Portfolios o Municipal Portfolio
Details that apply to the Portfolios as a group X
Portfolio Fees and Expenses X
Investment Adviser X
Advisory Fees
X
Portfolio Management X
Other Portfolio Services X
About Your Account Purchasing and Selling Shares X
How to open, maintain and close an account o Investors X
o Share Classes X
o Opening an Account
X
o Selling Shares
X
Account Policies and Other Information X
o Automatic Investment Arrangements X
o Purchase and Redemption Minimums X
o Calculating Share Price X
o Timing of Purchase Requests X
o Tax Identification Number X
o In-Kind Purchases and Redemptions X
o Miscellaneous Purchase Information X
o Timing of Redemption and Exchange Requests X
o Miscellaneous Redemption Information X
o Exchange Privileges X
o Telephone Transactions X
o Advance Notification of Large Transactions X
o Making Changes to Your Account Information X
o Business Day X
o Early Closings X
o Authorized Intermediaries X
o Information About Institutions X
Distributions and Taxes X
o Distributions X
o Taxes X
o Other Tax Information X
Year
2000
X
Risks, Securities and Techniques Risks, Securities and
Techniques X
Appendix Portfolio Financial Highlights
X
For More Information Annual/Semiannual Reports X
Statement of Additional Information X
- ------------------------------------------------------ ------------------------------------------------------------------
</TABLE>
<PAGE>
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 separate
prospectuses.
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 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 [XX] of this
Prospectus and the Statement of Additional Information.
<PAGE>
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, liquidity risk,
and Year 2000 risk. These and other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<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 Government Portfolio seeks its objective by investing exclusively 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 also hold custodial receipts
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, liquidity risk, and
Year 2000 risk. These and other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<PAGE>
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 Diversified Assets 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;
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 Year 2000 risk. These and other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<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"). These may include:
Fixed and variable rate notes and similar debt instruments;
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.
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, tax risk and Year 2000 risk. These and
other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<PAGE>
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
market place. Municipal instruments are debt instruments, the interest on which
is exempt from regular Federal income tax. These may include:
Fixed, variable and floating rate notes and bonds;
Asset-backed securities;
Tax-exempt commercial paper;
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.
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 normally consist of U.S. dollar-denominated obligations
of U.S. banks, foreign commercial banks and securities issued or guaranteed by
foreign governments; high quality commercial paper; other obligations, high
quality corporate bonds and notes; 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, tax risk and Year 2000 risk. These and
other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<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.
Year 2000 risk is the risk that a Portfolio's operations or value will be
adversely affected by the "Year 2000 Problem." (For more information, please see
"Year 2000 Issues" on page [xx]).
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.
More information about the risks of investing in the Portfolios is provided in
"Risks, Securities and Techniques" beginning on page [XX]. You should carefully
consider the risks discussed in these sections before investing in a Portfolio.
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 [ ]) 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.
<PAGE>
Government Select Portfolio
[Bar Chart]
Calendar Year Total Return
<TABLE>
<CAPTION>
<S> <C> <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: [ XXX]%
</TABLE>
Best and Worst Quarterly Performance:
Best Quarter Return: Q[ ] `[XX] [ ]%
Worst Quarter Return: Q[ ] `[XX] [ ]%
Average Annual Total Return (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
1-Year 5-Year Since Inception (11/7/90)
Government Select Portfolio [ ]% [ ]% [ ]%
</TABLE>
The 7-day yield for Shares of the Portfolio as of December 31, 1999: [ ]%.
You may call 1-800-637-1380 to obtain the current 7-day yield.
<PAGE>
Government Portfolio
[Bar Chart]
Calendar Year Total Return
1989: 9.00%
1990: 8.13%
1991: 6.10%
1992: 3.84%
1993: 2.94%
1994: 3.93%
1995: 5.65%
1996: 5.17%
1997: 5.34%
1998: 5.30%
1999: [XXX]%
Best and Worst Quarterly Performance:
Best Quarter Return: Q[ ] `[ ] [XXX]%
Worst Quarter Return: Q[ ] `[ ] [XXX}%
Average Annual Total Return (for the periods ended December 31, 1999)
1-Year 5-Year 10-Year Since Inception (10/29/85)
Government Portfoli [ ]% [ ]% [ ]% [ ]%
The 7-day yield for Shares of the Portfolio as of December 31, 1999: [ ]%.
You may call 1-800-637-1380 to obtain the current 7-day yield.
<PAGE>
Diversified Assets Portfolio
[Bar Chart]
Calendar Year Total Return
1989: 9.35%
1990: 8.27%
1991: 6.14%
1992: 3.71%
1993: 3.02%
1994: 4.05%
1995: 5.79%
1996: 5.28%
1997: 5.45%
1998: 5.40%
1999: [XXX]%
Best and Worst Quarterly Performance:
Best Quarter Return: Q[ ] `[ ] [XXX]%
Worst Quarter Return: Q[ ] `[ ] [XXX]%
Average Annual Total Return (for the periods ended December 31, 1999)
1-Year 5-Year 10-Year Since Inception (7/27/82)
Diversified Assets Portfolio [ ]% [ ]% [ ]% [ ]%
The 7-day yield for Shares of the Portfolio as of December 31, 1999: [ ]%.
You may call 1-800-637-1380 to obtain the current 7-day yield.
<PAGE>
Tax-Exempt Portfolio
[Bar Chart]
Calendar Year Total Return
1989: 6.23%
1990: 5.86%
1991: 4.54%
1992: 2.91%
1993: 2.27%
1994: 2.61%
1995: 3.73%
1996: 3.33%
1997: 3.45%
1998: 3.29%
1999: [XXX]%
Best and Worst Quarterly Performance:
Best Quarter Return: Q[ ] `[ ] [XXX]%
Worst Quarter Return: Q[ ] `[ ] [XXX]%
Average Annual Total Return (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1-Year 5-Year 10-Year Since Inception (8/12/83)
Tax-Exempt Portfolio [ ]% [ ]% [ ]% [ ]%
</TABLE>
The 7-day yield for Shares of the Portfolio as of December 31, 1999: [ ]%.
You may call 1-800-637-1380 to obtain the current 7-day yield.
<PAGE>
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 The Northern Trust Company, its affiliates, correspondent
banks and other institutions on their Customers (as defined on page [ ]).
(For more information, please see "Account Policies and Other Information" on
page [ ].)
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C>
Government Select Government Diversified Assets Tax-Exempt Municipal
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases.............. None None None None None
Deferred Sales Charge (Load) None None None None None
Sales Charge (Load) Imposed on Reinvested None None None None None
Distributions.....................................
Redemption Fees....................................... None None None None None
Exchange Fees......................................... None None None None None
Annual Portfolio Operating Expenses (expenses that are
deducted
from Portfolio assets)1
Management Fees2.......................................0.25% 0.25% 0.25% 0.25% 0.25%
Distribution (12b-1) Fees............................. None None None None None
Other Expenses3....................................... 0.13% 0.13% 0.14% 0.14% 0.13%
Total Annual Portfolio Operating Expenses4............ 0.38% 0.38% 0.38% 0.39% 0.39%
</TABLE>
<PAGE>
- --------------------------------
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, The Northern Trust Company
voluntarily waived a portion of its management fees for the Government
Select and Municipal Portfolios. As a result of the fee waivers, actual
management fees paid by the Government Select and Municipal Portfolios
were 0.10% of each Portfolio's average daily net assets. Fee waivers
may be terminated at any time at the option of the Northern Trust
Company.
3 "Other Expenses" include administration or co-administration fees and
all other ordinary operating expenses of each Portfolio not listed
above. For the fiscal year ended November 30, 1999, Goldman, Sachs &
Co. ("Goldman Sachs") was entitled to an administration fee at an
annual rate of 0.10% of the average daily net assets of each Portfolio.
During the same period, Goldman Sachs reimbursed expenses (including
administration fees, but excluding management and transfer agency fees,
servicing fees and certain extraordinary expenses) which exceeded on an
annualized basis 0.10% of each Portfolio's average daily net assets. As
a result of the expense reimbursement, actual other operating expenses
paid by the Government, Government Select, Diversified Assets and
Tax-Exempt Portfolios were 0.10% of each Portfolio's average daily net
assets. On May 1, 1999, The Northern Trust Company ("Northern") and
PFPC Inc., formerly First Data Investor Services Group, Inc. ("PFPC")
replaced Goldman Sachs as the Portfolios' co-administrators, and are
entitled to a co-administration fee from the Portfolios at the annual
rates set forth above. Under their Co-Administration Agreement with the
Trust, which may be amended without shareholder approval, the
co-administrators have agreed indefinitely 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 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>
<S><C> <C> <C> <C> <C>
Shares Total Annual
Management Distribution Operating Expenses
Fees (12b-1) Fees Other Expenses
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%
Municipal 0.10% 0.00% 0.10% 0.20%
</TABLE>
<PAGE>
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>
<S><C> <C> <C> <C> <C>
Portfolio 1 Year 3 Years 5 Years 10 Years
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 $219 $493
</TABLE>
<PAGE>
39
MANAGEMENT OF THE PORTFOLIOS
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 $[ ] billion
in assets, $[ ] billion in deposits and employed over [ ] 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 $[ ] trillion of
assets as of December 31, 1999, including approximately $[ ] 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.
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>
<S><C> <C> <C>
Portfolio Advisory Fee Paid
For Fiscal Year
Contractual Rate Ended 11/30/99
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.
Portfolio Management
The Investment Adviser employs a team approach to the investment management
of the Portfolios, relying upon investment professionals under the leadership of
James M. Snyder, Chief Investment Officer and Executive Vice President of
Northern. Mr. Snyder oversees the management of all fixed income, equity and
money market assets managed by the Investment Adviser. Mr. Snyder joined
Northern Trust in 1980.
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 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 [ ] under "Portfolio Fees and
Expenses."
ABOUT YOUR ACCOUNT
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 Classes
Each Portfolio offers three classes of shares: Shares, Service Shares and
Premier Shares. Service Shares and Premier Shares are described in separate
prospectuses.
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.
Opening an Account
You may purchase Shares of 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 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. 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)
For more information about the purchase of Shares, call the Transfer Agent at
1-800-637-1380.
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:
<PAGE>
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.
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 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 [ ].
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 [ ].
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.
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 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.
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 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.
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.
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.
YEAR 2000 ISSUES
Like every other business dependent upon computerized information processing,
Northern Trust Corporation ("Northern Trust") must deal with "Year 2000" issues.
Many computer systems use two digits rather than four to identify the year.
Unless adapted, these systems may not be able to correctly distinguish the Year
2000 from the Year 1900. As the Year 2000 arrives, many systems may be unable to
accurately process certain date-based information, which could cause a variety
of operational problems for businesses. This could have a negative effect on the
companies in which the Portfolios invest, thus hurting the Portfolios'
investment returns.
Northern Trust has implemented steps to prepare its mission critical computer
systems and processes for Year 2000 processing. It has established a dedicated
Year 2000 Project Team whose members have significant systems development and
maintenance experience. Northern Trust's Year 2000 project included a
comprehensive testing plan of its mission critical systems. Northern Trust has
advised the Trust that it has completed work on its mission critical systems and
testing with significant outside parties.
Northern Trust instituted a program to monitor and assess the efforts of other
parties, such as other service providers to the Portfolio. However, it cannot
control the success of those other parties' efforts. Contingency plans have been
established where believed necessary to provide Northern Trust with alternatives
in case these entities experience significant Year 2000 difficulties that impact
Northern Trust.
Furthermore, even if the actions taken by Northern Trust are successful, the
normal operations of the Portfolios may, in any event, be disrupted
significantly by the failure of communications and public utility companies,
governmental entities, financial processors or others to perform their services
as a result of Year 2000 problems. Efforts in foreign countries to remediate
potential Year 2000 problems are not as extensive as those in the United States.
As a result, the operations of foreign markets, foreign issuers and foreign
governments may be disrupted by the Year 2000 problem and the investment
portfolio of a Portfolio may be adversely affected.
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.
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 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 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 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 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 the Government Select, Government, Diversified Assets and
Municipal Portfolios 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 in amounts not exceeding
one-third of its total assets. Each of the Government Select,
Government, Diversified Assets and Municipal Portfolios may
enter into reverse repurchase agreements in amounts not exceeding
one-third of its total assets (including the amount borrowed).
These transactions may be entered into as a temporary measure for
emergency purposes or to meet redemption requests. Reverse repurchase
agreements may also be entered into 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 and Tax-Exempt
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 or currency exchange
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 the
obligations of foreign governments, or any of their political subdivisions,
agencies or instrumentalities, foreign commercial banks and foreign branches of
U.S. banks. It may also invest in U.S. dollar-denominated commercial paper and
other obligations of foreign issuers. 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 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 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 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.
During extraordinary circumstances, the Tax-Exempt Portfolio may invest in AMT
obligations such as certain bonds issued to obtain funds to provide certain
water, sewage and solid waste facilities, qualified residential rental projects,
certain local electric, gas and other heating or cooling facilities, qualified
hazardous waste facilities, and government-owned airports, docks and wharves and
mass commuting facilities; certain qualified mortgage, student loan and
redevelopment bonds; and certain bonds issued as part of "small issues" for
industrial facilities.
The Municipal Portfolio 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. The
Municipal 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 each Portfolio's 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. The Tax-Exempt Portfolio may also
invest more than 25% of its total assets in industrial development
obligations or municipal instruments whose issuers are in the same
state. 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 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 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' 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 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.
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.
<PAGE>
40
APPENDIX
PORTFOLIO FINANCIAL HIGHLIGHTS
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 [ ], whose report is included in the Portfolios'
annual report along with the Portfolios' financial statements. The annual report
and semiannual report are available upon request and without charge. As of
November 30, 1999, shares of the Municipal Portfolio had not been issued to the
public.
Financial Highlights
<PAGE>
22
For More Information
Annual/Semiannual Report
Additional information about the Portfolios' investments is available in the
Portfolios' annual and semiannual reports to shareholders.
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 1-800-637-1380.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-637-1380
By mail - Northern Institutional Funds
P.O. Box 75943
Chicago, IL 60675
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.
[LOGO]
811-3605
<PAGE>
Northern Institutional Funds
Money Market Portfolios
Service Shares
Government Select Portfolio
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>
<CAPTION>
<S><C> <C> <C>
Page
- ------------------------------------------------------ ------------------------------------------------------------------
Risk/Return Summary Portfolios
Information about the objectives, principal o Government Select Portfolio X
strategies and risk characteristics of each Portfolio o Government Portfolio X
o Diversified Assets Portfolio X
o Tax-Exempt Portfolio X
o Municipal Portfolio X
Principal Investment Strategies and Risks X
Portfolio Performance X
o Government Select Portfolio X
o Government Portfolio X
o Diversified Assets Portfolio X
Management of the Portfolios o Tax-Exempt Portfolio X
Details that apply to the Portfolios as a group o Municipal Portfolio X
Portfolio Fees and Expenses X
Investment Adviser X
Advisory Fees
X
Portfolio Management X
Other Portfolio Services X
About Your Account Purchasing and Selling Service Shares X
How to open, maintain and close an account o Investors X
o Share Classes X
o Opening an Account X
o Selling Service Shares X
Account Policies and Other Information X
o Automatic Investment Arrangements X
o Purchase and Redemption Minimums X
o Calculating Share Price X
o Timing of Purchase Requests X
o Tax Identification Number X
o In-Kind Purchases and Redemptions X
o Miscellaneous Purchase Information X
o Timing of Redemption and Exchange Requests X
o Miscellaneous Redemption Information X
o Exchange Privileges X
o Telephone Transactions X
o Advance Notification of Large Transactions X
o Making Changes to Your Account Information X
o Business Day X
o Early Closings X
o Authorized Intermediaries X
o Servicing Agents X
Distributions and Taxes X
o Distributions X
o Taxes X
o Other Tax Information X
Year 2000
Issues X
Risks, Securities and Techniques Risks, Securities and
Techniques X
Appendix Portfolio Financial Highlights X
For More Information Annual/Semiannual Reports X
Statement of Additional Information X
- ------------------------------------------------------ ------------------------------------------------------------------
</TABLE>
<PAGE>
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 and Premier Shares are described in separate prospectuses.
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 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 [XX] of this
Prospectus and the Statement of Additional Information.
<PAGE>
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, liquidity risk,
and Year 2000 risk. These and other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<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 Government Portfolio seeks its objective by investing exclusively 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 also hold custodial receipts
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, liquidity risk, and
Year 2000 risk. These and other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<PAGE>
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 Diversified Assets 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;
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 Year 2000 risk. These and other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<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"). These may include:
Fixed and variable rate notes and similar debt instruments;
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.
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, tax risk and Year 2000 risk. These and
other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<PAGE>
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
market place. Municipal instruments are debt instruments, the interest on which
is exempt from regular Federal income tax. These may include:
Fixed, variable and floating rate notes and bonds;
Asset-backed securities;
Tax-exempt commercial paper;
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.
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 normally consist of U.S. dollar-denominated obligations
of U.S. banks, foreign commercial banks and securities issued or guaranteed by
foreign governments; high quality commercial paper; other obligations, high
quality corporate bonds and notes; 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, tax risk and Year
2000 risk. These and other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<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.
Year 2000 risk is the risk that a Portfolio's operations or value will be
adversely affected by the "Year 2000 Problem." (For more information, please see
"Year 2000 Issues" on page [xx]).
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.
More information about the risks of investing in the Portfolios is provided in
"Risks, Securities and Techniques" beginning on page [XX]. You should carefully
consider the risks discussed in these sections before investing in a Portfolio.
Portfolio Performance
Service Shares of the Government Select, Government and Tax-Exempt Portfolios
have less than one calendar year's performance. For this reason, the performance
information shown below is for another class of shares (Shares) that is not
offered in this Prospectus because both Service Shares and Shares will be
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, while
Shares have neither of these fees. If the expenses of the Service Shares were
reflected, performance would be substantially lower.
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 [ ]) 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.
<PAGE>
Government Select Portfolio
[Bar Chart]
Calendar Year Total Return (Shares)
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: [XXX]%
Best and Worst Quarterly Performance (shares):
Best Quarter Return: Q[ ] `[ ] +[ ]%
Worst Quarter Return: Q[ ] `[ ] +[ ]%
Average Annual Total Return (Shares) (for the periods ended December 31, 1999)
1-Year 5-Year Since Inception (11/17/90)
Government Select [ ]% [ ]% [ ]%
Portfolio
The 7-day yield for Service Shares of the Portfolio as of December 31, 1999: [
]%. You may call 1-800-637-1380 to obtain the current 7-day yield.
<PAGE>
Government Portfolio
[Bar Chart]
Calendar Year Total Return (Shares)
1989: 9.00%
1990: 8.13%
1991: 6.10%
1992: 3.84%
1993: 2.94%
1994: 3.93%
1995: 5.65%
1996: 5.17%
1997: 5.34%
1998: 5.30%
1999: [XXX]%
Best and Worst Quarterly Performance (shares):
Best Quarter Return: Q[ ] `[ ] +[ ]%
Worst Quarter Return: Q[ ] `[ ] +[ ]%
Average Annual Total Return (Shares) (for the periods ended December 31, 1999)
1-Year 5-Year 10-Year Since Inception (10/29/85)
Government [ ]% [ ]%
Portfolio [ ]% [ ]%
The 7-day yield for Service Shares of the Portfolio as of December 31, 1999: [
]%. You may call 1-800-637-1380 to obtain the current 7-day yield.
<PAGE>
Diversified Assets Portfolio
[Bar Chart]
Calendar Year Total Return
1999: [XXX]%
Best and Worst Quarterly Performance:
Best Quarter Return: Q[ ] `[ ] [XXX]%
Worst Quarter Return: Q[ ] `[ ] [XXX]%
Average Annual Total Return (for the periods ended December 31, 1999)
Diversified Assets Portfolio
1-Year Since Inception ([ ])
[ ]% [ ]%
The 7-day yield for Service Shares of the Portfolio as of December 31, 1999: [
]%. You may call 1-800-637-1380 to obtain the current 7-day yield.
<PAGE>
Tax-Exempt Portfolio
[Bar Chart]
Calendar Year Total Return (Shares)
1989: 6.23%
1990: 5.86%
1991: 4.54%
1992: 2.91%
1993: 2.27%
1994: 2.61%
1995: 3.73%
1996: 3.33%
1997: 3.45%
1998: 3.29%
1999: [XXX]%
Best and Worst Quarterly Performance (shares):
Best Quarter Return: Q[ ] `[ ] +[ ]%
Worst Quarter Return: Q[ ] `[ ] +[ ]%
Average Annual Total Return (Shares) (for the periods ended December 31, 1999)
1-Year 5-Year 10-Year Since Inception (8/12/83)
Tax-Exempt [ ]% [ ]% [ ]% [ ]%
Portfolio
The 7-day yield for Service Shares of the Portfolio as of December 31, 1999: [
]%. You may call 1-800-637-1380 to obtain the current 7-day yield.
<PAGE>
Portfolio Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Service Shares of the Portfolios. Please note that it does not reflect any
charges which may be imposed by The Northern Trust Company, its affiliates,
correspondent banks and other institutions on their Customers (as defined on
page [ ]). (For more information, please see "Account Policies and Other
Information" on page [ ].)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Government Select Government Diversified Assets Tax -Exempt Municipal
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases.................. None None None None None
Deferred Sales Charge (Load) None None None None None
Sales Charge (Load) Imposed on Reinvested
Distributions......................................... None None None None None
Redemption Fees........................................... None None None None None
Exchange Fees............................................. None None None None None
Annual Portfolio Operating Expenses (expenses that are
deducted
from Portfolio assets) 1
Management Fees2.......................................... 0.25% 0.25% 0.25% 0.25% 0.25%
Distribution (12b-1) Fees................................. None None None None None
Other Operating Expenses..................................
Servicing Agent Fees.................................... 0.25% 0.25% 0.25% 0.25% 0.25%
Transfer Agency Fees.................................. 0.01% 0.01% 0.01% 0.01% 0.01%
Other Expenses3......................................... 0.21% 0.21% 0.21% 0.22% 0.22%
Total Other Operating Expenses............................ 0.47% 0.47% 0.47% 0.48% 0.48%
Total Annual Portfolio Operating Expenses4................ 0.72% 0.72% 0.72% 0.73% 0.73%
</TABLE>
<PAGE>
- --------------------------------
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, The Northern Trust Company
voluntarily waived a portion of its management fees for the Government
Select and Municipal Portfolios. As a result of the fee waivers, actual
management fees paid by the Government Select and Municipal Portfolios
were 0.10% of each Portfolio's average daily net assets. Fee waivers
may be terminated at any time at the option of the Northern Trust
Company.
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 for systems support and related services.
For the fiscal year ended November 30, 1999, Goldman, Sachs & Co.
("Goldman Sachs") was entitled to an administration fee at an annual
rate of 0.10% of the average daily net assets of each Portfolio. During
the same period, Goldman Sachs reimbursed expenses (including
administration fees, but excluding management and transfer agency fees,
servicing fees and certain extraordinary expenses) which exceeded on an
annualized basis 0.10% of each Portfolio's average daily net assets. As
a result of the expense reimbursement, actual other operating expenses
paid by the Government, Government Select, Diversified Assets and
Tax-Exempt Portfolios were 0.10% of each Portfolio's average daily net
assets. On May 1, 1999, The Northern Trust Company ("Northern") and
PFPC Inc., formerly First Data Investor Services Group, Inc. ("PFPC")
replaced Goldman Sachs as the Portfolios' co-administrators, and are
entitled to a co-administration fee from the Portfolios at the annual
rates set forth above. Under their Co-Administration Agreement with the
Trust, which may be amended without shareholder approval, the
co-administrators have agreed indefinitely 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.
4 As a result of the fee waivers and expense reimbursements, the actual
management fees, distribution (12b-1) fees, other 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.
Service Shares
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total Annual
Management Distribution Operating Expenses
Fees (12b-1) Fees Other Expenses
Government Select 0.10% 0.00% 0.44% 0.54%
Government 0.25% 0.00% 0.44% 0.69%
Diversified Assets 0.25% 0.00% 0.44% 0.69%
Tax-Exempt 0.25% 0.00% 0.44% 0.69%
Municipal 0.10% 0.00% 0.44% 0.54%
</TABLE>
<PAGE>
Example
The following Example is intended to help you compare the cost of investing in
Service 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 Service 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>
<S> <C> <C> <C> <C>
Portfolio 1 Year 3 Years 5 Years 10 Years
Government Select
Service Shares..................................... $74 $230 $401 $894
Government
Service Shares..................................... $74 $230 $401 $894
Diversified Assets
Service Shares..................................... $74 $230 $401 $894
Tax-Exempt
Service Shares..................................... $75 $233 $406 $906
Municipal
Service Shares..................................... $75 $233 $406 $906
</TABLE>
<PAGE>
41
MANAGEMENT OF THE PORTFOLIOS
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 $[ ] billion
in assets, $[ ] billion in deposits and employed over [ ] 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 $[ ] trillion of
assets as of December 31, 1999, including approximately $[ ] 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.
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.
Portfolio Advisory Fee Paid
For Fiscal Year
Contractual Rate Ended 11/30/99
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
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.
Portfolio Management
The Investment Adviser employs a team approach to the investment management
of the Portfolios, relying upon investment professionals under the leadership of
James M. Snyder, Chief Investment Officer and Executive Vice President of
Northern. Mr. Snyder oversees the management of all fixed income, equity and
money market assets managed by the Investment Adviser. Mr. Snyder joined
Northern Trust in 1980.
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 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 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 [ ].
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
[ ] under "Portfolio Fees and Expenses."
ABOUT YOUR ACCOUNT
Purchasing and Selling Service 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 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 Classes
Each Portfolio offers three classes of shares: Shares, Service Shares and
Premier Shares. Shares and Premier Shares are described in separate
prospectuses.
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% of the average daily net asset value of Service Shares. 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.
Opening an Account
You may purchase Service Shares of 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
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 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 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 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. 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)
For more information about the purchase of Service Shares, call the Transfer
Agent at 1-800-637-1380.
<PAGE>
Selling Service Shares
Through an Institutional Account. Institutions may sell (redeem) Service Shares
through their institutional account by contacting their Northern account
representative.
Directly through the Trust. Institutions that purchase Service Shares directly
from the Trust may redeem their Service 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 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 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.
Account Policies and Other Information
Automatic Investment Arrangements. Institutions may purchase Service 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
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 Service Shares and redeems Service
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 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 by check, Federal 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 [ ].
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 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 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 [ ].
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, 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 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 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 of a Portfolio for
Service 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.
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 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)
administrative support services and personal and account maintenance services
for Customers who are the beneficial owners of Service Shares through Servicing
Agreements with the Trust ("Servicing Agents"). These Servicing Agreements are
permitted under the Trust's Service Plan ("Service Plan"). 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 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 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 Service Shares 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 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 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.
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 in an account that is
not subject to a standing order for the purchase of additional Service 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 Service 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.
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.
<PAGE>
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.
YEAR 2000 ISSUES
Like every other business dependent upon computerized information processing,
Northern Trust Corporation ("Northern Trust") must deal with "Year 2000" issues.
Many computer systems use two digits rather than four to identify the year.
Unless adapted, these systems may not be able to correctly distinguish the Year
2000 from the Year 1900. As the Year 2000 arrives, many systems may be unable to
accurately process certain date-based information, which could cause a variety
of operational problems for businesses. This could have a negative effect on the
companies in which the Portfolios invest, thus hurting the Portfolios'
investment returns.
Northern Trust has implemented steps to prepare its mission critical computer
systems and processes for Year 2000 processing. It has established a dedicated
Year 2000 Project Team whose members have significant systems development and
maintenance experience. Northern Trust's Year 2000 project included a
comprehensive testing plan of its mission critical systems. Northern Trust has
advised the Trust that it has completed work on its mission critical systems and
testing with significant outside parties.
Northern Trust instituted a program to monitor and assess the efforts of other
parties, such as other service providers to the Portfolio. However, it cannot
control the success of those other parties' efforts. Contingency plans have been
established where believed necessary to provide Northern Trust with alternatives
in case these entities experience significant Year 2000 difficulties that impact
Northern Trust.
Furthermore, even if the actions taken by Northern Trust are successful, the
normal operations of the Portfolios may, in any event, be disrupted
significantly by the failure of communications and public utility companies,
governmental entities, financial processors or others to perform their services
as a result of Year 2000 problems.
Efforts in foreign countries to remediate potential Year 2000 problems are not
as extensive as those in the United States. As a result, the operations of
foreign markets, foreign issuers and foreign governments may be disrupted by the
Year 2000 problem and the investment portfolio of a Portfolio may be adversely
affected.
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.
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 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 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 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 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 the Government Select, Government, Diversified Assets and
Municipal Portfolios 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 in amounts not exceeding
one-third of its total assets. Each of the Government Select,
Government, Diversified Assets and Municipal Portfolios may
enter into reverse repurchase agreements in amounts not exceeding
one-third of its total assets (including the amount borrowed).
These transactions may be entered into as a temporary measure for
emergency purposes or to meet redemption requests. Reverse repurchase
agreements may also be entered into 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 and Tax-Exempt
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 or currency exchange
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 the
obligations of foreign governments, or any of their political subdivisions,
agencies or instrumentalities, foreign commercial banks and foreign branches of
U.S. banks. It may also invest in U.S. dollar-denominated commercial paper and
other obligations of foreign issuers. 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 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 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 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.
During extraordinary circumstances, the Tax-Exempt Portfolio may invest in AMT
obligations such as certain bonds issued to obtain funds to provide certain
water, sewage and solid waste facilities, qualified residential rental projects,
certain local electric, gas and other heating or cooling facilities, qualified
hazardous waste facilities, and government-owned airports, docks and wharves and
mass commuting facilities; certain qualified mortgage, student loan and
redevelopment bonds; and certain bonds issued as part of "small issues" for
industrial facilities.
The Municipal Portfolio 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. The
Municipal 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 each Portfolio's 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. The Tax-Exempt Portfolio may also
invest more than 25% of its total assets in industrial development
obligations or municipal instruments whose issuers are in the same
state. 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 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 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' 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 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.
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.
<PAGE>
42
APPENDIX
PORTFOLIO FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand a
Portfolio's financial performance for the [period of each Portfolio's
operations]. Certain information reflects financial results for a single Service
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 [ ],
whose report is included in the Portfolios' annual report along with the
Portfolios' financial statements. The annual report and semiannual report are
available upon request and without charge. As of November 30, 1999, Service
Shares of the Municipal Portfolio had not been issued to the public.
Financial Highlights
<PAGE>
22
For More Information
Annual/Semiannual Report
Additional information about the Portfolios' investments is available in the
Portfolios' annual and semiannual reports to shareholders.
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 1-800-637-1380.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-637-1380
By mail - Northern Institutional Funds
P.O. Box 75943
Chicago, IL 60675
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.
[LOGO]
811-3605
<PAGE>
Northern Institutional Funds
Money Market Portfolios
Premier Shares
Government Select Portfolio
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>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Contents
Page
- ------------------------------------------------------ ------------------------------------------------------------------
Risk/Return Summary Portfolios
Information about the objectives, principal o Government Select Portfolio X
strategies and risk characteristics of each Portfolio o Government Portfolio X
o Diversified Assets Portfolio X
o Tax-Exempt Portfolio X
o Municipal Portfolio
X
Principal Investment Strategies and Risks X
Portfolio Performance X
o Government Select Portfolio X
o Government Portfolio X
o Diversified Assets Portfolio X
Management of the Portfolios o Tax-Exempt Portfolio X
Details that apply to the Portfolios as a group o Municipal Portfolio
X
Portfolio Fees and Expenses X
Investment Adviser X
Advisory Fees
X
Portfolio Management X
Other Portfolio Services X
About Your Account Purchasing and Selling Premier Shares X
How to open, maintain and close an account o Investors X
o Share Classes X
o Opening an Account
X
o Selling Premier Shares X
Account Policies and Other Information X
o Automatic Investment Arrangements X
o Purchase and Redemption Minimums X
o Calculating Share Price X
o Timing of Purchase Requests X
o Tax Identification Number X
o In-Kind Purchases and Redemptions X
o Miscellaneous Purchase Information X
o Timing of Redemption and Exchange Requests X
o Miscellaneous Redemption Information X
o Exchange Privileges X
o Telephone Transactions X
o Advance Notification of Large Transactions X
o Making Changes to Your Account Information X
o Business Day X
o Early Closings X
o Authorized Intermediaries X
o Servicing Agents X
Distributions and Taxes X
o Distributions X
o Taxes X
o Other Tax Information X
Year 2000
Issues
X
Risks, Securities and Techniques Risks, Securities and
Techniques X
Appendix Portfolio Financial Highlights
X
For More Information Annual/Semiannual Reports X
Statement of Additional Information X
- ------------------------------------------------------ ------------------------------------------------------------------
</TABLE>
<PAGE>
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 and Service Shares are described in separate prospectuses.
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 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 [XX] of this
Prospectus and the Statement of Additional Information.
<PAGE>
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, liquidity risk,
and Year 2000 risk. These and other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<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 Government Portfolio seeks its objective by investing exclusively 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 also hold custodial receipts
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, liquidity risk, and
Year 2000 risk. These and other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<PAGE>
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 Diversified Assets 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;
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 Year 2000 risk. These and other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<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"). These may include:
Fixed and variable rate notes and similar debt instruments;
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.
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, tax risk and Year 2000 risk. These and
other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<PAGE>
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
market place. Municipal instruments are debt instruments, the interest on which
is exempt from regular Federal income tax. These may include:
Fixed, variable and floating rate notes and bonds;
Asset-backed securities;
Tax-exempt commercial paper;
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.
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 normally consist of U.S. dollar-denominated obligations
of U.S. banks, foreign commercial banks and securities issued or guaranteed by
foreign governments; high quality commercial paper; other obligations, high
quality corporate bonds and notes; 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, tax risk and Year
2000 risk. These and other risks are summarized below.
More information on the Portfolio's investment strategies and techniques is
provided in "Risks, Securities and Techniques" beginning on page [XX] of this
Prospectus.
<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.
Year 2000 risk is the risk that a Portfolio's operations or value will be
adversely affected by the "Year 2000 Problem." (For more information, please see
"Year 2000 Issues" on page [xx]).
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.
More information about the risks of investing in the Portfolios is provided in
"Risks, Securities and Techniques" beginning on page [XX]. You should carefully
consider the risks discussed in these sections before investing in a Portfolio.
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 [ ]) 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.
Premier Shares of the Diversified Assets and Tax-Exempt Portfolios have less
than one calendar year's performance. For this reason, the performance
information shown below is for another class of shares (Shares) that is not
offered in this Prospectus because both Service Shares and Shares will be
invested in the same portfolio of securities. In reviewing this performance
information, however, you should be aware that Premier Shares have a 0.58%
(annualized) Service Fee and a 0.02% (annualized) Transfer Agency fee, while
Shares have neither of these fees. If the expenses of the Premier Shares were
reflected, performance would be substantially lower.
<PAGE>
Government Select Portfolio
[Bar Chart]
Calendar Year Total Return
1999:[ XXX]%
Best and Worst Quarterly Performance:
Best Quarter Return: Q[ ] `[XX] [ ]%
Worst Quarter Return: Q[ ] `[XX] [ ]%
Average Annual Total Return (for the periods ended December 31, 1999)
Government Select Portfolio
1-Year Since Inception ([ ])
[ ]% [ ]%
The 7-day yield for Premier Shares of the Portfolio as of December 31, 1999: [
]%. You may call 1-800-637-1380 to obtain the current 7-day yield.
<PAGE>
Government Portfolio
[Bar Chart]
Calendar Year Total Return
1999: [XXX]%
Best and Worst Quarterly Performance:
Best Quarter Return: Q[ ] `[ ] [XXX]%
Worst Quarter Return: Q[ ] `[ ] [XXX}%
Average Annual Total Return (for the periods ended December 31, 1999)
Government Portfolio
1-Year Since Inception ([ ])
[ ]% [ ]%
The 7-day yield for Premier Shares of the Portfolio as of December 31, 1999: [
]%. You may call 1-800-637-1380 to obtain the current 7-day yield.
<PAGE>
Diversified Assets Portfolio
[Bar Chart]
Calendar Year Total Return (Shares)
1989: 9.35%
1990: 8.27%
1991: 6.14%
1992: 3.71%
1993: 3.02%
1994: 4.05%
1995: 5.79%
1996: 5.28%
1997: 5.45%
1998: 5.40%
1999: [XXX]%
Best and Worst Quarterly Performance (Shares)
Best Quarter: Q[ ] `[ ] +[ ]%
Worst Quarter: Q[ ] `[ ] +[ ]%
Average Annual Total Return (Shares) (for the periods ended December 31, 1999)
Diversified Assets Portfolio
1-Year 5-Year 10-Year Since Inception (7/27/82)
[ ]% [ ]% [ ]% [ ]%
The 7-day yield for Premier Shares of the Portfolio as of December 31, 1999: [
]%. You may call 1-800-637-1380 to obtain the current 7-day yield.
<PAGE>
Tax-Exempt Portfolio
[Bar Chart]
Calendar Year Total Return (Shares)
1989: 6.23%
1990: 5.86%
1991: 4.54%
1992: 2.91%
1993: 2.27%
1994: 2.61%
1995: 3.73%
1996: 3.33%
1997: 3.45%
1998: 3.29%
1999: [XXX]%
Best and Worst Quarterly Performance (Shares):
Best Quarter: Q[ ] `[ ] +[ ]%
Worst Quarter: Q[ ] `[ ] +[ ]%
Average Annual Total Return (Shares) (for the periods ended December 31, 1999)
Government Portfolio
1-Year 5-Year 10-Year Since Inception (8/12/83)
[ ]% [ ]% [ ]% [ ]%
The 7-day yield for Premier Shares of the Portfolio as of December 31, 1999: [
]%. You may call 1-800-637-1380 to obtain the current 7-day yield.
<PAGE>
Portfolio Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Premier Shares of the Portfolios. Please note that it does not reflect any
charges which may be imposed by The Northern Trust Company, its affiliates,
correspondent banks and other institutions on their Customers (as defined on
page [ ]). (For more information, please see "Account Policies and Other
Information" on page [ ].)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Government Select Government Diversified Assets Tax -Exempt Municipal
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases.................. None None None None None
Deferred Sales Charge (Load) None None None None None
Sales Charge (Load) Imposed on Reinvested
Distributions......................................... None None None None None
Redemption Fees........................................... None None None None None
Exchange Fees............................................. None None None None None
Annual Portfolio Operating Expenses (expenses that are
deducted
from Portfolio assets) 1
Management Fees2.......................................... 0.25% 0.25% 0.25% 0.25% 0.25%
Distribution (12b-1) Fees................................. None None None None None
Other Operating Expenses..................................
Servicing Agent Fees....................................0.50% 0.50% 0.50% 0.50% 0.50%
Transfer Agency Fees....................................0.02% 0.02% 0.02% 0.02% 0.02%
Other Expenses3.........................................0.21% 0.21% 0.21% 0.22% 0.22%
Total Other Operating Expenses............................0.73% 0.73% 0.73% 0.74% 0.74%
Total Annual Portfolio Operating Expenses4................0.98% 0.98% 0.98% 0.99% 0.99%
</TABLE>
<PAGE>
- --------------------------------
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, The Northern Trust Company
voluntarily waived a portion of its management fees for the Government
Select and Municipal Portfolios. As a result of the fee waivers, actual
management fees paid by the Government Select and Municipal Portfolios
were 0.10% of each Portfolio's average daily net assets. Fee waivers
may be terminated at any time at the option of the Northern Trust
Company.
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 Premier shares for systems support and related services.
For the fiscal year ended November 30, 1999, Goldman, Sachs & Co.
("Goldman Sachs") was entitled to an administration fee at an annual
rate of 0.10% of the average daily net assets of each Portfolio. During
the same period, Goldman Sachs reimbursed expenses (including
administration fees, but excluding management and transfer agency fees,
servicing fees and certain extraordinary expenses) which exceeded on an
annualized basis 0.10% of each Portfolio's average daily net assets. As
a result of the expense reimbursement, actual other operating expenses
paid by the Government, Government Select, Diversified Assets and
Tax-Exempt Portfolios were 0.10% of each Portfolio's average daily net
assets. On May 1, 1999, The Northern Trust Company ("Northern") and
PFPC Inc., formerly First Data Investor Services Group, Inc. ("PFPC")
replaced Goldman Sachs as the Portfolios' co-administrators, and are
entitled to a co-administration fee from the Portfolios at the annual
rates set forth above. Under their Co-Administration Agreement with the
Trust, which may be amended without shareholder approval, the
co-administrators have agreed indefinitely 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.
4 As a result of the fee waivers and expense reimbursements, the actual
management fees, distribution (12b-1) fees, other 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>
<S> <C> <C> <C> <C>
Premier Shares Total Annual
Management Distribution Operating Expenses
Fees (12b-1) Fees Other Expenses
Government Select 0.10% 0.00% 0.70% 0.80%
Government 0.25% 0.00% 0.70% 0.95%
Diversified Assets 0.25% 0.00% 0.70% 0.95%
Tax-Exempt 0.25% 0.00% 0.70% 0.95%
Municipal 0.10% 0.00% 0.70% 0.80%
</TABLE>
<PAGE>
Example
The following Example is intended to help you compare the cost of investing in
Premier 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 Premier 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>
<S> <C> <C> <C> <C>
Portfolio 1 Year 3 Years 5 Years 10 Years
Government Select
Premier Shares..................................... $100 $312 $542 $1,201
Government
Premier Shares..................................... $100 $312 $542 $1,201
Diversified Assets
Premier Shares..................................... $100 $312 $542 $1,201
Tax-Exempt
Premier Shares..................................... $101 $315 $547 $1,213
Municipal
Premier Shares..................................... $101 $315 $547 $1,213
</TABLE>
<PAGE>
41
MANAGEMENT OF THE PORTFOLIOS
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 $[ ] billion
in assets, $[ ] billion in deposits and employed over [ ] 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 $[ ] trillion of
assets as of December 31, 1999, including approximately $[ ] 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.
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>
<S><C> <C> <C>
Portfolio Advisory Fee Paid
For Fiscal Year
Contractual Rate Ended 11/30/99
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.
Portfolio Management
The Investment Adviser employs a team approach to the investment management
of the Portfolios, relying upon investment professionals under the leadership of
James M. Snyder, Chief Investment Officer and Executive Vice President of
Northern. Mr. Snyder oversees the management of all fixed income, equity and
money market assets managed by the Investment Adviser. Mr. Snyder joined
Northern Trust in 1980.
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 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 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 [ ].
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 [ ] under "Portfolio Fees and Expenses."
ABOUT YOUR ACCOUNT
Purchasing and Selling 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 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 Classes
Each Portfolio offers three classes of shares: Shares, Service Shares and
Premier Shares. Shares and Service Shares are described in separate
prospectuses.
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
0.58% of the average daily net asset value of Premier Shares. 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.
<PAGE>
Opening an Account
You may purchase Premier Shares of 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 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 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 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 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. 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)
For more information about the purchase of Premier Shares, call the Transfer
Agent at 1-800-637-1380.
Selling Premier Shares
Through an Institutional Account. Institutions may sell (redeem) Premier Shares
through their institutional account by contacting their Northern account
representative.
Directly through the Trust. Institutions that purchase Premier Shares directly
from the Trust may redeem their 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 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 Premier 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.
Account Policies and Other Information
Automatic Investment Arrangements. Institutions may purchase 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 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 Premier Shares and redeems 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 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
Premier Shares by check, Federal 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 [ ].
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 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.
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 [ ].
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 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 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 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 Premier Shares of a Portfolio for
Premier 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.
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 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)
administrative support services and personal and account maintenance services
for Customers who are the beneficial owners of Premier Shares through Servicing
Agreements with the Trust ("Servicing Agents"). These Servicing Agreements are
permitted under the Trust's Service Plan ("Service Plan"). 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
Premier Shares beneficially owned by their Customers.
Personal and account maintenance services provided under the Service Plan may
include:
providing information to investors regarding the Portfolios or
relating to the status of their accounts; and
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 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
Premier Shares 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 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 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.
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 Premier Shares in an account that is
not subject to a standing order for the purchase of additional Premier 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 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 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 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 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.
YEAR 2000 ISSUES
Like every other business dependent upon computerized information processing,
Northern Trust Corporation ("Northern Trust") must deal with "Year 2000" issues.
Many computer systems use two digits rather than four to identify the year.
Unless adapted, these systems may not be able to correctly distinguish the Year
2000 from the Year 1900. As the Year 2000 arrives, many systems may be unable to
accurately process certain date-based information, which could cause a variety
of operational problems for businesses. This could have a negative effect on the
companies in which the Portfolios invest, thus hurting the Portfolios'
investment returns.
Northern Trust has implemented steps to prepare its mission critical computer
systems and processes for Year 2000 processing. It has established a dedicated
Year 2000 Project Team whose members have significant systems development and
maintenance experience. Northern Trust's Year 2000 project included a
comprehensive testing plan of its mission critical systems. Northern Trust has
advised the Trust that it has completed work on its mission critical systems and
testing with significant outside parties.
Northern Trust instituted a program to monitor and assess the efforts of other
parties, such as other service providers to the Portfolio. However, it cannot
control the success of those other parties' efforts. Contingency plans have been
established where believed necessary to provide Northern Trust with alternatives
in case these entities experience significant Year 2000 difficulties that impact
Northern Trust.
Furthermore, even if the actions taken by Northern Trust are successful, the
normal operations of the Portfolios may, in any event, be disrupted
significantly by the failure of communications and public utility companies,
governmental entities, financial processors or others to perform their services
as a result of Year 2000 problems.
Efforts in foreign countries to remediate potential Year 2000 problems are not
as extensive as those in the United States. As a result, the operations of
foreign markets, foreign issuers and foreign governments may be disrupted by the
Year 2000 problem and the investment portfolio of a Portfolio may be adversely
affected.
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.
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 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 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 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 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 the Government Select, Government, Diversified Assets and
Municipal Portfolios 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 in amounts not exceeding
one-third of its total assets. Each of the Government Select,
Government, Diversified Assets and Municipal Portfolios may
enter into reverse repurchase agreements in amounts not exceeding
one-third of its total assets (including the amount borrowed).
These transactions may be entered into as a temporary measure for
emergency purposes or to meet redemption requests. Reverse repurchase
agreements may also be entered into 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 and Tax-Exempt
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 or currency exchange
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 the
obligations of foreign governments, or any of their political subdivisions,
agencies or instrumentalities, foreign commercial banks and foreign branches of
U.S. banks. It may also invest in U.S. dollar-denominated commercial paper and
other obligations of foreign issuers. 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 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 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 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.
During extraordinary circumstances, the Tax-Exempt Portfolio may invest in AMT
obligations such as certain bonds issued to obtain funds to provide certain
water, sewage and solid waste facilities, qualified residential rental projects,
certain local electric, gas and other heating or cooling facilities, qualified
hazardous waste facilities, and government-owned airports, docks and wharves and
mass commuting facilities; certain qualified mortgage, student loan and
redevelopment bonds; and certain bonds issued as part of "small issues" for
industrial facilities.
The Municipal Portfolio 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. The
Municipal 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 each Portfolio's 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. The Tax-Exempt Portfolio may also
invest more than 25% of its total assets in industrial development
obligations or municipal instruments whose issuers are in the same
state. 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 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 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' 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 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.
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.
<PAGE>
42
APPENDIX
PORTFOLIO FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand a
Portfolio's financial performance for the [period of each Portfolio's
operations]. Certain information reflects financial results for a single Premier
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 [ ],
whose report is included in the Portfolios' annual report along with the
Portfolios' financial statements. The annual report and semiannual report are
available upon request and without charge. As of November 30, 1999, Premier
Shares of the Tax-Exempt and Municipal Portfolios had not been issued to the
public.
Financial Highlights
<PAGE>
For More Information
Annual/Semiannual Report
Additional information about the Portfolios' investments is available in the
Portfolios' annual and semiannual reports to shareholders.
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 1-800-637-1380.
To obtain other information and for shareholder inquiries:
By telephone - Call 1-800-637-1380
By mail - Northern Institutional Funds
P.O. Box 75943
Chicago, IL 60675
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.
[LOGO]
811-3605
<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
MARKETCOMMAND 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,
MarketCommand, 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 ___________,
independent auditors, contained in the Annual Report to the Portfolio's
shareholders for the fiscal year ended November 30, 1999 are incorporated herein
by reference in the section "Financial Statements." No other portions of the
Fund's Annual Reports are incorporated by reference.
<PAGE>
INDEX
<TABLE>
<CAPTION>
<S><C> <C>
Page
ADDITIONAL INVESTMENT INFORMATION................................................................................3
Classification and History..................................................................................3
Investment Objectives, Strategies and Risks.................................................................3
Investment Restrictions....................................................................................23
ADDITIONAL TRUST INFORMATION....................................................................................27
Trustees and Officers......................................................................................27
Investment Advisers, Transfer Agent and Custodian..........................................................32
Portfolio Transactions.....................................................................................39
Portfolio Valuation........................................................................................44
Co-Administrators and Distributor..........................................................................44
Shareholder Servicing Plan.................................................................................47
Counsel and Auditors.......................................................................................49
In-Kind Purchases and Redemptions..........................................................................49
PERFORMANCE INFORMATION.........................................................................................50
TAXES 62
Taxation of Certain Financial Instruments..................................................................63
Foreign Investors..........................................................................................64
DESCRIPTION OF SHARES...........................................................................................65
OTHER INFORMATION...............................................................................................70
FINANCIAL STATEMENTS............................................................................................71
APPENDIX A.......................................................................................................1
APPENDIX 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.
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
Classification and History
Northern Institutional Funds (the "Trust") is an open-end, management
investment company. Each Portfolio except the MarketCommand Portfolio is
classified as diversified under the Investment Company Act of 1940, as amended
(the "1940 Act"). The MarketCommand 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 Northern
Institutional Funds on July 15, 1998. The Trust also offers six fixed income,
one balanced, 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 MarketCommand, 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, MarketCommand,
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.
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
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.
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."
The Small Company Growth Portfolio may invest in foreign debt,
including the securities of foreign governments. Several risks exist concerning
such investments, including the risk that foreign governments may default on
their obligations, may not respect the integrity of such debt, may attempt to
renegotiate the debt at a lower rate, and may not honor investments by United
States entities or citizens.
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 International Growth Portfolio may invest
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, MarketCommand, 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 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, or foreign currencies 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.
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
"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 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.
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.
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 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 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 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. Although the securities subject to a repurchase agreement may bear
maturities exceeding one year, settlement for the repurchase agreement will
never be more than one year after the Portfolio's acquisition of the securities
and normally will be within a shorter period of time. Securities subject to
repurchase agreements are held either by the Trust's custodian or subcustodian
(if any), or in the Federal Reserve/Treasury Book-Entry System. The seller under
a repurchase agreement will be required to maintain the value of the securities
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.
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, the International Equity Index 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 the International Equity
Index Portfolio's shares could also be substantially and adversely affected, and
the 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, the 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 (a) a portfolio of securities
substantially similar to the component securities ("Index Securities") of the
S&P 500 Index, (b) 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 (c) 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, the 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,
the 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 the International Equity Index 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, 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 their 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.
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. 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: (1) brokerage costs; (2)
market impact costs--i.e., the increase in market prices which may result when
the Portfolios purchase thinly traded stocks; (3) sales charges relating to the
purchase of shares in certain unaffiliated investment companies; and, most
importantly (4) 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.
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 for (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. (This limitation does not apply to the MarketCommand
Portfolio.)
(7) Purchase securities (other than obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities and, in
the case of the International Equity Index Portfolios, securities
of other investment companies) 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) the 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) the Portfolio may borrow up to an
additional 5% of its total assets for temporary purposes, (c) the
Portfolio may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of portfolio securities,
and (d) the 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 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 each 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 fundamental restrictions as the Portfolio.
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). Securities held in escrow or
separate accounts in connection with a Portfolio's investment practices
described in this Additional Statement and in the Prospectus are not deemed to
be mortgaged, pledged or hypothecated for purposes of the foregoing Investment
Restrictions.
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.
As a non-fundamental investment restriction, the MarketCommand
Portfolio may not hold, at the end of any tax quarter, 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). Also, as a non-fundamental
investment restriction, the MarketCommand Portfolio will not hold any securities
(except U.S. government securities) that would cause, at the end of any tax
quarter, more than 5% of its total assets to be invested in the securities of
any one issuer, except that up to 50% of the Portfolio's total assets may be
invested without regard to this limitation so long as no more than 25% of the
Portfolio's total assets are invested in any one issuer (except the U.S.
government, its agencies and instrumentalities).
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.
<PAGE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
Stephen Timbers 55**** Chairman and President of Northern Trust Global
Trustee Investments, a division of Northern Trust
Corporation since 1998; President, Chief
Executive Officer and Director of Zurich
Kemper Investments from 1996 to 1998;
President and Chief Operating Officer of
Kemper Corporation from 1992 to 1996;
President and Director Kemper Funds from 1990
to 1998. Director: LTV Corporation. Trustee:
Northern Funds.
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
Mr. Wesley M. Dixon, Jr. 72 Trustee Director of Earl Kinship Capital Corporation
400 Skokie Blvd., Suite 300 since 1985, Vice Chairman and Director of G.D.
Northbrook, Illinois 60062 Searle & Co. (manufacture and sale of food
products and pharmaceuticals) from 1977 to
1983 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.
1534 Basswood Circle (accounting firm) from 1966 until his
Glenview, Illinois 60025 retirement in December 1989. Financial
Consultant, Ernst & Young from 1992 to 1993
and 1997. Director: Household Bank, First
Central National Life Insurance Company and
Director of First Central National Life
Insurance Company since July 1998. 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
Winnetka, Illinois 60093 1990 until his retirement in October 1993.
Trustee: Northern Funds.
Mr. Michael E. Murphy 63** Trustee President of Sara Lee Foundation since
Suite 2222 November 1997. Vice Chairman and Chief
20 South Clark Street Administrative Officer of Sara Lee Corporation
Chicago, Illinois 60603 (consumer products) 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.,
True North Communications, Inc., American
General Corporation, GATX Corporation and
Bassett Furniture Industries, Inc. Trustee:
Northern Funds.
Mary Jacobs Skinner, Esquire 42*** Trustee Partner in the law firm of Sidley & Austin.
One First National Plaza Trustee: Northern Funds.
Chicago, Illinois 06063
William H. Springer 71 Trustee Vice Chairman of Ameritech (a
701 Morningside Drive telecommunications holding company) from
Lake Forest, IL 60045 February 1987 until his retirement in August
1992; Vice Chairman, Chief Financial and
Administrative Officer of Ameritech prior
1987. Director of Walgreen Co. (a retail drug
store business); Baker, Fentress & Co. (a
closed-end, non-diversified management
investment company). Trustee of Goldman Sachs
Trust; Goldman Sachs Variable Insurance Trust.
Trustee: Northern Funds.
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 January 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.
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
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. (retail corporation) from February 1989 to
July 1993; Member of Advisory Board of
Real-Time USA, Inc. (a software 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. Director:
University Eldercare, Inc.; Financial Pacific
Company Trustee: Dominican University.
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.
Director: University of Iowa Foundation,
Blanton-Peale Institutes of Religion and
Health; Community Foundation of Sarasota
County; Duke Management Company (an investment
adviser); and John Ringling Centre Foundation.
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
Chicago, IL 60611 Transformation from 1992-1993, and Midwestern
Director of Marketing from 1988-1992, IBM (a
technology company); Director: MBIA Insurance
Corporation of Illinois (bank holding
company); MB Financial Corp. (a bank holding
company). Trustee: Northern Funds.
Richard P. Strubel 61 Trustee President and Chief Operating Officer,
737 N. Michigan Avenue Unext.com since 1999; Managing Director of
Suite 1405 Tandem Partners, Inc. (a privately held
Chicago, IL 60611 management services firm) since 1990 to 1999;
President and Chief Executive Officer,
Microdot, Inc. (a privately held manufacturing
firm) from 1984 to 1994; Director: Gildan
Activewear, Inc.; Children's Memorial Medical
Center. Trustee: University of Chicago;
Goldman Sachs Trust; Goldman Sachs Variable
Insurance Trust. Trustee: Northern Funds.
Jylanne M. Dunne 40 President Senior Vice President for Distribution
4400 Computer Drive Services at PFPC Inc. ("PFPC") (formerly First
Westborough, MA 01581 Data Investor Services Group, Inc. ("FDISG"))
(since 1988).
Richard H. Rose 44 Vice President Vice President and Division Manager of Mutual
4400 Computer Drive Fund Administration at PFPC (formerly FDISG)
Westborough, MA 01581 (since 1994).
Brian R. Curran 32 Treasurer Director of Fund Administration at PFPC
4400 Computer Drive (formerly FDISG) (since 1997); Director of
Westborough, MA 01581 Fund Administration at State Street Bank &
Trust
Company
(February
1997 to
October
1997);
Senior
Auditor at
Price
Waterhouse
L.L.P.
(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).
Linda J. Hoard 52 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).
Teresa M.R. Hamlin 35 Assistant Vice President at PFPC (formerly FDISG) (since
4400 Computer Drive Secretary 1994).
Westborough, MA 01581
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 Trust Corporation.
**** Mr. Timbers is deemed to be an "interested" Trustee because he is an
officer, director, employee and shareholder of Northern Trust Corporation.
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 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 provides services.
Additionally, 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.
Each Trustee 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 (1) 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; (2)
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 (3) 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 they are also officers, receives fees
from the Trust for co-administrative services.
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:
<PAGE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small Small Inter- Inter- Total
Equity Diversified Focused Company Company Mid Cap MarketCommand national national Compensation
Balanced Index Growth Growth Index Growth Growth Portfolio Equity Growth from Fund
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Index Portfolio Complex
Steven 0 0 0 0 0 n/a n/a n/a 0 0 0
Timbers**
William 530 5,300 19610 530 530 n/a n/a n/a 530 530 53,000
H.
Springer
Richard 395 3,950 395 395 395 n/a n/a n/a 395 395 39,500
G. Cline
Edward 445 4,450 450 450 450 n/a n/a n/a 450 450 44,500
J.
Condon,
Jr.
John W. 395 3,950 395 395 395 n/a n/a n/a 395 395 39,500
English
Sandra 395 3,950 395 395 395 n/a n/a n/a 395 395 39,500
Polk
Guthman
Frederick 445 4,450 445 445 445 n/a n/a n/a 445 445 44,500
T.
Kelsey*
Richard 505 5,050 505 505 505 n/a n/a n/a 505 505 50,500
P.
Strubel
Wesley 0 0 0 0 0 n/a n/a n/a 0 0 22,500
M.
Dixon,
Jr.**
William 0 0 0 0 0 n/a n/a n/a 0 0 22,500
J.
Dolan,
Jr.**
Raymond 0 0 0 0 0 n/a n/a n/a 0 0 21,250
E.
George,
Jr.**
Michael 0 0 0 0 0 n/a n/a n/a 0 0 22,500
E.
Murphy**
Mary 0 0 0 0 0 n/a n/a n/a 0 0 22,500
Jacobs
Skinner**
</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. Small Company Growth, Mid Cap and MarkerCommand Portfolios
did not commence operations during the period.
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.
Subject to the general supervision of the Board of Trustees, 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 (a) on common and preferred stocks, the Investment
Advisers shall use their best judgment to obtain the best overall terms
available, and (b) 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 the Investment Advisers act 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 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 (1) delegate their
duties to sub-advisers, (2) implement a manager-of-managers structure and (3)
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: (1) establish and maintain an omnibus account in the
name of each Institution; (2) process purchase orders and redemption requests
from an Institution, and furnish confirmations and disburse redemption proceeds;
(3) act as the income disbursing agent of the Trust; (4) answer inquiries from
Institutions; (5) provide periodic statements of account to each Institution;
(6) process and record the issuance and redemption of shares in accordance with
instructions from the Trust or its administrator; (7) 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); (8) preserve all records; and (9)
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: (1) establish and
maintain separate accounts in the name of the investors; (2) process purchase
orders and redemption requests, and furnish confirmations in accordance with
applicable law; (3) disburse redemption proceeds; (4) process and record the
issuance and redemption of shares in accordance with instructions from the Trust
or its administrator; (5) act as income disbursing agent of the Trust in
accordance with the terms of the Prospectus and instructions from the Trust or
its administrator; (6) provide periodic statements of account; (7) 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);
(8) respond to and seek to resolve all complaints of investors with respect to
the Trust or their accounts; (9) furnish proxy statements and proxies, annual
and semi-annual financial statements, and dividend, distribution and tax notices
to investors; (10) furnish the Trust with all pertinent Blue Sky information;
(11) perform all required tax withholding; (12) preserve records; and (13)
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
Growth Portfolio and International Equity Index Portfolio, its Foreign Custody
Agreement) with the Trust, Northern (1) holds each Portfolio's cash and
securities, (2) maintains such cash and securities in separate accounts in the
name of the Portfolio, (3) makes receipts and disbursements of funds on behalf
of the Portfolio, (4) receives, delivers and releases securities on behalf of
the Portfolio, (5) collects and receives all income, principal and other
payments in respect of the Portfolio's investments held by Northern under the
Agreement, and (6) 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
Portfolio's 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, 1999 and thereafter for successive 12-month periods,
provided that the continuance is approved at least annually (1) 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 (2)
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.
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, MarketCommand and Small Company Growth, which did not
commence operations during the fiscal year ended November 30, 1999) was as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
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 985,305 869,641993,121
International Equity Index Portfolio1 126,053 117,326 44,662
- ------------------
1 Commenced investment operations on April 1, 1997.
</TABLE>
<PAGE>
For the fiscal years or periods ended November 30 as indicated, the
Investment Advisers waived advisory fees as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
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>
<S> <C> <C> <C>
1999 1998 1997
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 Portfolio1 5,061 4,696 1,780
- ------------------
1 Commenced investment operations on April 1, 1997.
</TABLE>
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>
<S> <C> <C> <C>
1999 1998 1997
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 Portfolio1 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 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 MarketCommand, Mid
Cap Growth and Small Company Growth Portfolios had not yet commenced operations.
<PAGE>
For the fiscal years ended November 30 as indicated, each Portfolio
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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 Brokers1 Paid Research4
Balanced
Portfolio
Equity
Index
Portfolio
Focused
Growth
Portfolio
Diversified
Growth
Portfolio
Small Company
Index
Portfolio
International
Growth
Portfolio
International
Equity Index
Portfolio
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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 Brokers1 Paid Research4
Balanced $33,693 $2,794 $24,707,706 $25,032
Portfolio (8.24%)2 (1.91%)3
Equity
Index 148,670 0 590,431,860 125,498
Portfolio
Focused 12,648 178,606,124 208,872
Growth 257,630 (4.91%)2 (0.12) 3
Portfolio
Diversified 19,748 116,674,485
Growth 148,788 (13.27%)2 (2.23%)3 122,744
Portfolio
Small Company
Index 98,346 0 139,815,827 97,942
Portfolio
International 23,687 325,994,274
Growth 933,041 (2.54%)2 (3.32%)3 581,629
Portfolio
International
Equity Index 72,801 0 43,852,342 61,732
Portfolio
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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 Brokers1 Paid Research
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
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.
</TABLE>
<PAGE>
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 Adviser
has determined, pursuant to Board authorization, approximates market value.
Securities may be valued on the basis of prices provided by independent pricing
services when such prices are believed to reflect the fair market value of such
securities.
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: (a) maintaining
office facilities and furnishing corporate officers for the Trust; (b)
furnishing data processing services, clerical services, and executive and
administrative services and standard stationery and office supplies; (c)
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; (d) preparing and submitting reports to the
Trust's shareholders and the SEC; (e) preparing and printing financial
statements; (f) preparing monthly Portfolio profile reports; (g) 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; (h) assisting in marketing
strategy and product development; (i) performing oversight/management
responsibilities, such as the supervision and coordination of certain of the
Trust's service providers; (j) effecting and maintaining, as the case may be,
the registration of shares of the Trust for sale under the securities laws of
various jurisdictions; (k) assisting in maintaining corporate records and good
standing status of the Trust in its state of organization; and (l) 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 fiscal year ended November 30, 1999, the Co-Administrators
received fees under the Co-Administration Agreement with the Trust (after fee
waivers) (except for the Mid Cap Growth, MarketCommand and Small Company Growth
Portfolios, which did not commence operations during the period) in the amount
of:
1999
Balanced Portfolio $ 13,090
Equity Index Portfolio 1,025,613
Diversified Growth Portfolio 108,740
Focused Growth Portfolio 91,436
Small Company Index Portfolio (344,810)
International Equity index Portfolio 7,197
International Growth Portfolio 127,839
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 substantially 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 (after fee waivers) in the amount of:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 1, 1998
through
April 30, 1999 1998 1997
Balanced Portfolio $ $ 59,575 $ 54,096
Equity Index Portfolio 1,136,850 830,785
Diversified Growth Portfolio 164,560 144,576
Focused Growth Portfolio 130,709 116,431
Small Company Index Portfolio 124,365 121,184
International Growth Portfolio 163,058 159,139
International Equity Index Portfolio1 70,396 26,233
- ------------------
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>
<S> <C> <C> <C>
December 1, 1998
through April
30, 1999 1998 1997
Balanced Portfolio $0 $ 32,260
Equity Index Portfolio 0 52,050
Diversified Growth Portfolio 0 68,234
Focused Growth Portfolio 0 63,979
Small Company Index Portfolio 0 65,061
International Growth Portfolio 0 68,541
International Equity Index Portfolio1 0 1,460
- ------------------
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 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 the current 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 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 were to reduce the expenses of each Portfolio by:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 1, 1998 through
April 30, 1999 1998 1997
Balanced Portfolio $ 78,916 $ 74,341
Equity Index Portfolio 504,482 304,060
Diversified Growth Portfolio 82,995 89,069
Focused Growth Portfolio 83,616 79,410
Small Company Index Portfolio 282,541 128,881
International Growth Portfolio 49,890 67,398
International Equity Index Portfolio1 98,328 56,393
- ------------------
1 Commenced investment operations on April 1, 1997.
</TABLE>
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
(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.
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 substantially 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 substantially 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'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>
<S> <C> <C> <C>
1999 1998 1997
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 C1 284 338 N/A
Class D 1,427 2,173 993
International Growth Portfolio
Class D 128 825 379
International Equity Index Portfolio
Class D2 32 5 N/A
- -----------------------------
1 Class C Shares were issued on January 8, 1998.
2 Class D Shares were issued on October 5, 1998.
</TABLE>
Services provided by or arranged to be provided by Servicing Agents
under their servicing agreements may include: (1) establishing and maintaining
separate account records of Customers or other investors; (2) 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; (3) 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; (4) issuing confirmations to Customers or other investors in accordance
with applicable law; (5) arranging for the timely transmission of funds
representing the net purchase price or redemption proceeds; (6) processing
dividend payments on behalf of Customers or other investors; (7) providing
information periodically to Customers or other investors showing their positions
in shares; (8) responding to Customer or other investor inquiries (including
requests for prospectuses), and complaints relating to the services performed by
the Servicing Agents; (9) 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; (10)
providing or arranging for another person to provide subaccounting with respect
to shares of certain classes beneficially owned by Customers or other investors;
(11) 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; (12) providing such office space, facilities and
personnel as may be required to perform their services under the servicing
agreements; (13) maintaining appropriate management reporting and statistical
information; (14) paying expenses related to the preparation of educational and
other explanatory materials in connection with the development of investor
services; (15) developing and monitoring investment programs; and (16) 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.
_____________, independent auditors, 233 S. Wacker Drive, Chicago,
Illinois 60606, have been selected as auditors of the Trust. In addition to
audit services, ______________ 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 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
1
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 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
2
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
reflect the fee will, of course, be higher than quotations which do.
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, (2) all
recurring fees charged to all shareholder accounts are included, and (3) 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,
International Growth, MarketCommand, and Mid Cap 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, prior to May 1,
1999, Goldman Sachs reimbursed expenses to the Portfolios and voluntarily agreed
to reduce a portion of its administration fee 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.
<PAGE>
For Periods Ended November 30, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average Annual
Total Returns (%) Aggregate Total Returns (%)
Since Inception 1 Year 5 Year 10 Year Since Inception 1 Year 5 Year 10 Year
Diversified Growth1
Class A
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class D
With fee waivers and
Expense reimbursements
Without fee waivers and -
Expense reimbursements
Focused Growth2
Class A
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class C
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class D
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Equity Index3
Class A
With fee waivers and -
Expense reimbursements
Without fee waivers and -
Expense reimbursements
Class C
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class D
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Small Company Index4
Class A
With fee waivers and Expense reimbursements And portfolio transaction fee With
fee waivers and Expense reimbursements But without portfolio Transaction fee
Without fee waivers and Expense reimbursements But with portfolio Transaction
fee Without fee waivers and Expense reimbursements And portfolio transaction
fee
</TABLE>
Small Company Index4
Class C
With fee waivers and Expense reimbursements and portfolio transaction fee With
fee waivers and expense reimbursements but without portfolio transaction fee
Without fee waivers and expense reimbursements but with portfolio transaction
fee Without fee waivers and expense reimbursements and portfolio transaction
fee
Class D
With fee waivers and Expense reimbursements and portfolio transaction fee With
fee waivers and expense reimbursements but without portfolio transaction fee
Without fee waivers and expense reimbursements but with portfolio transaction
fee Without fee waivers and expense reimbursements and portfolio transaction
fee
MarketCommand5
Class A
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class C
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class D
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Mid Cap Growth6
Class A
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class C
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class D
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
<PAGE>
International Growth7
Class A
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class D
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Balanced8
Class A
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class C
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class D
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
International Equity Index9
Class A
With fee waivers and Expense reimbursements And portfolio transaction fee With
fee waivers and expense Reimbursements but without Portfolio transaction fee
Without fee waivers and
Expense reimbursements but with Portfolio transaction fee Without fee waivers
and Expense reimbursements And portfolio transaction fee
Class D
With fee waivers and
Expense reimbursements
And portfolio transaction fee
With fee waivers and expense
Reimbursements but without
Portfolio transaction fee
Without fee waivers and
Expense reimbursements but with
Portfolio transaction fee
Without fee waivers and
Expense reimbursements
And portfolio transaction fee
<PAGE>
- ----------------------
[This will be updated when the numbers are updated]
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, 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 January
8, 1998 (commencement of Class C Shares) and December 8, 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 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, C and D Shares performance information is that of a predecessor
collective fund. 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, C and D Shares at
the time of their inception.
6. For Class A, C and D Shares performance information is that of a predecessor
collective fund. 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, C and D Shares at
the time of their inception.
7. For Class A and Class D Shares, performance information prior to March 28,
1994 (commencement of Portfolio) is that of a predecessor collective fund. For
Class D Shares, performance information from March 28, 1994 to November 16, 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 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.
8. 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.
9. 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.
<PAGE>
B-115
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}to the power of 6 ] - 1
3
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 was ____%,
____% and ____%, respectively. During such period, [the Co-Administrators
reimbursed expenses to the Portfolio and voluntarily agreed to reduce 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 and expense limitations, the 30-day
yield for Class A, Class C and Class D Shares would have been ____%, ____% and
____%, 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 tax situations.
The discussions of tax consequences in the Prospectus and this
Additional Statement are based on 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 Internal Revenue
Code of 1986, as amended (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, MarketCommand, 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.
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 (a) 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, (b) 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 (c) 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.
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: (1) a court refuses to apply Delaware
law; (2) the liability arises under tort law or, if not, no contractual
limitation of liability is in effect; and (3) 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: (a) 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 (b) 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
(a) may, but are not required to, serve as Trustees of the Trust or any other
series or class of the Trust; (b) 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 (c) 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 December 31, 1999, 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 [__%] 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
December 31, 1999:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Number Percentage
of Shares of Shares
BALANCED PORTFOLIO
Class A
The Northern Trust Thrift Plan 1,783,705.79 37.9%
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. 981,398.92 20.8%
Class C
Kitch Drutchas Wagner Kenney PC 59,926.13 100.0%
Class D
First National Bank of LaGrange 30,548.93 100.0%
DIVERSIFIED GROWTH PORTFOLIO
Class A
The Northern Trust Co. Pension Plan 5,420,278.59 45.2%
U.S. Can Co. Pension Plan 639,765.10 5.3%
Seiko Corp. 664,930 5.5%
Class D
First National Bank of LaGrange 31,714.74 100.0%
EQUITY INDEX PORTFOLIO
Class A
The Northern Trust Thrift Plan 8,827,558.40 15.0%
Libbey-Owens-Ford Co. 3,356,107.48 5.7%
Army Air Force 3,067,384.16 5.2%
Meadows Foundation 4,792,344.63 8.2%
Class C
Wilson Sports Goods 401K Plan 1,199,572.72 24.1%
American Dental Association 1,650,657.37 33.2%
Clark Schwebel, Inc. 403,297.22 8.1%
U.S. Silica Co. 629,772.56 12.6%
Sierra Technologies, Inc. 357,988.02 7.2%
Children's Hospital San Diego 589,637.26 11.8%
Class D
Marquette Trust Co. 554,988.57 76.4%
St. Francis Hospital Foundation 48,748.23 6.7%
Great Plains Trust Co. 59,220.91 8.2%
<PAGE>
Number Percentage
of Shares of Shares
FOCUSED GROWTH PORTFOLIO
Class A
The Northern Trust Thrift Plan 5,804,096.52 52.0%
Doe Run Resources Corp. 711,681.78 6.4%
Woodmen Home Office Employees 656,904.64 5.9%
Class C
Kitch Drutchas Wagner Kenney PC 644,979.00 100.0%
Class D
First National Bank of LaGrange 29,624.36 97.0%
SMALL COMPANY GROWTH PORTFOLIO
Class A
Spertus Institute 22,193.48 5.0%
Bearid Industries, Inc. Pension Plan 29,600.00 6.7%
NalCo Foundation 32,700.00 7.4%
Schulze & Burch Employee Pension Plan 48,169.56 10.9%
Schulze & Burch Biscuit Co. 28,901.73 6.5%
Illinois Masonic 36,162.01 8.2%
NiSource - Bay State VEBA 109,680.28 24.8%
SMALL COMPANY INDEX PORTFOLIO
Class A
Saxon & Co. 1,503,407.81 8.2%
Lifepoint Hospitals, Inc. 1,161,132.31 6.3%
General Dynamics 1,818,979.55 9.9%
Pfizer 1,088,879.80 5.9%
PWC Group Investment Savings Plan 1,082,491.40 5.9%
Masco 1,898,431.09 10.3%
Class D
BankIllinois Trust Co. 30,004.41 76.6%
Great Plains Trust Co. 9,182.76 23.4%
<PAGE>
Number Percentage
of Shares of Shares
INTERNATIONAL EQUITY INDEX PORTFOLIO
Class A
The Northern Trust Co. Pension Plan 1,343,092.99 28.9%
The Northern Trust Thrift Plan 1,005,229.65 21.7%
Sisters of the Precious Blood 229,792.35 5.0%
NI-Gas Savings & Thrift Trust 894,805.16 19.3%
Lifepoint Hospitals, Inc. 586,478.59 12.6%
Class D
People's National Bank 1,137.92 100.0%
INTERNATIONAL GROWTH PORTFOLIO
Class A
The Northern Trust Co. Pension Plan 1,361,678.71 10.3%
White Cap, Inc. 889,379.88 6.7%
Tuthill Corp. Supplement Investment 779,117.86 5.9%
Retirement Plan
Indresco 768,860.77 5.8%
Doe Run Resources Corp. 873,139.83 6.6%
</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.
FINANCIAL STATEMENTS
The audited financial statements and related report of _____________,
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, MarketCommand and Small Cap Growth
Portfolios because they did not commence operations during the period ended
November 30, 1999.
<PAGE>
A- 10
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.
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.
"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 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 (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) 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.
"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.
Thomson BankWatch 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 Thomson BankWatch for long-term debt
ratings:
"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.
Fitch and D&P use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
<PAGE>
B-65
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.
I. 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.
I. 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.
I. 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, 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.
I. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures
by a Portfolio. 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 the 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. 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.
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.
I. 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). 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 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.
I. Other Matters
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
<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, U.S.
Treasury Index, Bond, Intermediate 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
_________________, 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).
<PAGE>
INDEX
Page
ADDITIONAL INVESTMENT INFORMATION........................................B-3
CLASSIFICATION AND HISTORY......................................B-3
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS.....................B-3
INVESTMENT RESTRICTIONS.........................................B-17
ADDITIONAL TRUST INFORMATION.............................................B-20
TRUSTEES AND OFFICERS...........................................B-20
INVESTMENT ADVISERS, TRANSFER AGENT AND CUSTODIAN...............B-25
PORTFOLIO TRANSACTIONS..........................................B-31
PORTFOLIO VALUATION............................................ B-32
CO-ADMINISTRATORS AND DISTRIBUTOR...............................B-32
SHAREHOLDER SERVICING PLAN......................................B-35
COUNSEL AND AUDITORS............................................B-37
IN-KIND PURCHASES AND REDEMPTIONS...............................B-37
PERFORMANCE INFORMATION..................................................B-38
TAXES B-47
GENERAL B-47
FOREIGN INVESTORS......................................... .....B-48
CONCLUSION......................................................B-49
DESCRIPTION OF SHARES....................................................B-49
OTHER INFORMATION........................................................B-54
FINANCIAL STATEMENTS.....................................................B-55
APPENDIX A...............................................................1-A
APPENDIX B...............................................................1-B
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.
<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 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
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 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 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. Unanticipated political, economic or
social developments may affect the value of a Portfolio's investments in
emerging market countries and the availability to the 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.
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 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.
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 (in the case of the International Bond Portfolio)
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 the International Bond 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 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 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 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 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.
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 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 does 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 their 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 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 which
enable the Portfolios to receive favorable tax treatment.
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 for (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 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) the 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) the Portfolio may borrow up to an
additional 5% of its total assets for temporary purposes, (c) the
Portfolio may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of portfolio securities,
and (d) the 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.
In addition, with respect to the U.S. Government Securities,
Short-Intermediate, U.S. Treasury Index, Bond and Intermediate Bond Portfolios:
(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.
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 Standard
Industrial Classification Manual (except that the International Bond Portfolio
will use the Morgan Stanley Capital International industry classification
titles). Securities held in escrow or separate accounts in connection with a
Portfolio's investment practices described in this Additional Statement and in
the Prospectus are not deemed to be mortgaged, pledged or hypothecated for
purposes of the foregoing Investment Restrictions.
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). In
addition, the International Bond Portfolio may not, at the end of any tax
quarter, invest 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 U.S.
Government securities).
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.
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.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
Stephen Timbers 55**** Chairman and President of Northern Trust Global
Trustee Investments, a division of Northern Trust
Corporation since 1998; President, Chief
Executive Officer and Director of Zurich
Kemper Investments from 1996 to 1998;
President and Chief Operating Officer of
Kemper Corporation from 1992 to 1996;
President and Director Kemper Funds from 1990
to 1998. Director: LTV Corporation. Trustee:
Northern Funds.
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
Mr. Wesley M. Dixon, Jr. 72 Trustee Director of Earl Kinship Capital Corporation
400 Skokie Blvd., Suite 300 since 1985, Vice Chairman and Director of G.D.
Northbrook, Illinois 60062 Searle & Co. (manufacture and sale of food
products and pharmaceuticals) from 1977 to
1983 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.
1534 Basswood Circle (accounting firm) from 1966 until his
Glenview, Illinois 60025 retirement in December 1989. Financial
Consultant, Ernst & Young from 1992 to 1993
and 1997. Director: Household Bank, First
Central National Life Insurance Company and
Director of First Central National Life
Insurance Company since July 1998. 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
Winnetka, Illinois 60093 1990 until his retirement in October 1993.
Trustee: Northern Funds.
Mr. Michael E. Murphy 63** Trustee President of Sara Lee Foundation since
Suite 2222 November 1997. Vice Chairman and Chief
20 South Clark Street Administrative Officer of Sara Lee Corporation
Chicago, Illinois 60603 (consumer products) 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.,
True North Communications, Inc., American
General Corporation, GATX Corporation and
Bassett Furniture Industries, Inc. Trustee:
Northern Funds.
Mary Jacobs Skinner, Esquire 42*** Trustee Partner in the law firm of Sidley & Austin.
One First National Plaza Trustee: Northern Funds.
Chicago, Illinois 06063
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
William H. Springer 71 Trustee Vice Chairman of Ameritech (a
701 Morningside Drive telecommunications holding company) from
Lake Forest, IL 60045 February 1987 until his retirement in August
1992; Vice Chairman, Chief Financial and
Administrative Officer of Ameritech prior
1987. Director of Walgreen Co. (a retail drug
store business); Baker, Fentress & Co. (a
closed-end, non-diversified management
investment company). Trustee of Goldman Sachs
Trust; Goldman Sachs Variable Insurance Trust.
Trustee: Northern Funds.
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 January 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.
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
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. (retail corporation) from February 1989 to
July 1993; Member of Advisory Board of
Real-Time USA, Inc. (a software 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. Director:
University Eldercare, Inc.; Financial Pacific
Company Trustee: Dominican University.
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.
Director: University of Iowa Foundation,
Blanton-Peale Institutes of Religion and
Health; Community Foundation of Sarasota
County; Duke Management Company (an investment
adviser); and John Ringling Centre Foundation.
Trustee: Northern Funds.
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
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
Chicago, IL 60611 Transformation from 1992-1993, and Midwestern
Director of Marketing from 1988-1992, IBM (a
technology company); Director: MBIA Insurance
Corporation of Illinois (bank holding
company); MB Financial Corp. (a stock savings
and loan holding company). Trustee: Northern
Funds.
Richard P. Strubel 61 Trustee President and Chief Operating Officer,
737 N. Michigan Avenue Unext.com since 1999; Managing Director of
Suite 1405 Tandem Partners, Inc. (a privately held
Chicago, IL 60611 management services firm) since 1990 to 1999;
President and Chief Executive Officer,
Microdot, Inc. (a privately held manufacturing
firm) from 1984 to 1994; Director: Gildan
Activewear, Inc.; Children's Memorial Medical
Center. Trustee: University of Chicago;
Goldman Sachs Trust; Goldman Sachs Variable
Insurance Trust. Trustee: Northern Funds.
Jylanne M. Dunne 40 President Senior Vice President for Distribution
4400 Computer Drive Services at PFPC Inc. ("PFPC") (formerly First
Westborough, MA 01581 Data Investor Services Group, Inc. ("FDISG"))
(since 1988).
Richard H. Rose 44 Vice President Vice President and Division Manager of Mutual
4400 Computer Drive Fund Administration at PFPC (formerly FDISG)
Westborough, MA 01581 (since 1994).
Brian R. Curran 32 Treasurer Director of Fund Administration at PFPC
4400 Computer Drive (formerly FDISG) (since 1997); Director of
Westborough, MA 01581 Fund Administration at State Street Bank &
Trust
Company
(February
1997 to
October
1997);
Senior
Auditor at
Price
Waterhouse
L.L.P.
(February
1994 to
February
1997).
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
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).
Linda J. Hoard 52 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).
Teresa M.R. Hamlin 35 Assistant Vice President at PFPC (formerly FDISG) (since
4400 Computer Drive Secretary 1994).
Westborough, MA 01581
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 Trust Corporation. **** Mr. Timbers is deemed to be an
"interested" Trustee because he is an officer, director, employee and
shareholder of Northern Trust Corporation.
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 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.
Additionally, 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.
Each Trustee 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 (1) 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; (2)
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 (3) 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 they are also officers, receives fees
from the Trust for administrative services.
<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>
<S> <C> <C> <C> <C> <C> <C> <C>
Total
U.S. Short-Intermediate U.S. Compensation
Government Bond Treasury Intermediate International from Fund
Securities Portfolio Index Bond Bond Bond Complex
Portfolio Portfolio Portfolio Portfolio Portfolio
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, 0 0 0 0 0 0 21,250
Jr.**
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.
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.
<PAGE>
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.
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 the Investment Advisers act 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: (1) establish and maintain an omnibus account in the
name of each Institution; (2) process purchase orders and redemption requests
from an Institution, and furnish confirmations and disburse redemption proceeds;
(3) act as the income disbursing agent of the Trust; (4) answer inquiries from
Institutions; (5) provide periodic statements of account to each Institution;
(6) process and record the issuance and redemption of shares in accordance with
instructions from the Trust or its administrator; (7) 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); (8) preserve all records; and (9)
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: (1) establish and
maintain separate accounts in the name of the investors; (2) process purchase
orders and redemption requests, and furnish confirmations in accordance with
applicable law; (3) disburse redemption proceeds; (4) process and record the
issuance and redemption of shares in accordance with instructions from the Trust
or its administrator; (5) act as income disbursing agent of the Trust in
accordance with the terms of the Prospectus and instructions from the Trust or
its administrator; (6) provide periodic statements of account; (7) 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);
(8) respond to and seek to resolve all complaints of investors with respect to
the Trust or their accounts; (9) furnish proxy statements and proxies, annual
and semi-annual financial statements, and dividend, distribution and tax notices
to investors; (10) furnish the Trust with all pertinent Blue Sky information;
(11) perform all required tax withholding; (12) preserve records; and (13)
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 (1)
holds each Portfolio's cash and securities, (2) maintains such cash and
securities in separate accounts in the name of the Portfolio, (3) makes receipts
and disbursements of funds on behalf of the Portfolio, (4) receives, delivers
and releases securities on behalf of the Portfolio, (5) collects and receives
all income, principal and other payments in respect of the Portfolio's
investments held by Northern under the Agreement, and (6) 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 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, 1999 and thereafter for
successive 12-month periods, provided that the continuance is approved at least
annually (1) 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 (2) 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>
<S> <C> <C> <C>
1999 1998 1997
U.S. Government Securities Portfolio $ 171,000 $ 123,385 $ 214,637
Short-Intermediate Bond Portfolio 426,000 498,090 428,876
U.S. Treasury Index Portfolio (4,000) 37,969 43,880
Bond Portfolio 2,000,000 1,454,684 1,086,221
Intermediate Bond Portfolio (1) 139,000 55,413 8,743
International Bond Portfolio 143,000 185,420 200,976
- --------------
(1) Commenced investment operations on July 31, 1997.
For the fiscal years or periods ended November 30 as indicated, the
Investment Advisers waived advisory fees as follows:
1999 1998 1997
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
- --------------
(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:
1999 1998 1997
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 138,510 112,476 74,971
Intermediate Bond Portfolio (1) 7,181 2,226 347
International Bond Portfolio 2,865 2,837 2,957
- --------------
(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:
1999 1998 1997
U.S. Government Securities Portfolio $21,756 $21,569
Short-Intermediate Bond Portfolio 28,255 29,972
U.S. Treasury Index Portfolio 21,321 21,465
Bond Portfolio 76,339 48,245
Intermediate Bond Portfolio (1) 17,589 7,200
International Bond Portfolio 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 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/dealers. 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 Adviser
has determined, pursuant to Board authorization, approximates market value.
Securities may be valued on the basis of prices provided by independent pricing
services when such prices are believed to reflect the fair market value of such
securities.
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
(formerly FDISG) (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: (a)
maintaining office facilities and furnishing corporate officers for the Trust;
(b) furnishing data processing services, clerical services, and executive and
administrative services and standard stationery and office supplies; (c)
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; (d) preparing and submitting reports to the
Trust's shareholders and the SEC; (e) preparing and printing financial
statements; (f) preparing monthly Portfolio profile reports; (g) 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; (h) assisting in marketing
strategy and product development; (i) performing oversight/management
responsibilities, such as the supervision and coordination of certain of the
Trust's service providers; (j) effecting and maintaining, as the case may be,
the registration of shares of the Trust for sale under the securities laws of
various jurisdictions; (k) assisting in maintaining corporate records and good
standing status of the Trust in its state of organization; and (l) 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 fiscal year ended November 30, 1999, the Co-Administrators
received fees under the Co-Administration Agreement with the Trust (after
waivers) in the amount of:
U.S. Government Securities Portfolio $ 20,533
Short-Intermediate Bond Portfolio $ 89,280
U.S. Treasury Index Portfolio $ (37,426)
Bond Portfolio $ 537,430
Intermediate Bond Portfolio $ 7,380
International Bond Portfolio $ (36,059)
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 substantially similar to the Co-Administration
Agreement currently in effect with Northern and PFPC (formerly FDISG). For the
fiscal years or periods ended November 30 as indicated, Goldman Sachs received
fees under its administration agreement with the Trust (after fee waivers) in
the amount of:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 1, 1998
through April 30, 1999 1998 1997
U.S. Government Securities Portfolio $ 4,942 $ 49,354 $ 85,432
Short-Intermediate Bond Portfolio 26,176 199,235 171,514
U.S. Treasury Index Portfolio (13,756) 25,313 29,247
Bond Portfolio 174,149 581,869 434,500
Intermediate Bond Portfolio (1) 11,043 22,165 3,470
International Bond Portfolio (17,685) 39,733 36,801
- --------------
(1) Commenced investment operations on July 31, 1997.
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:
December 1, 1998 through
April 30, 1999 1998 1997
U.S. Government Securities Portfolio $0 $52,820
Short-Intermediate Bond Portfolio 0 72,454
U.S. Treasury Index Portfolio 0 17,382
Bond Portfolio 0 94,064
Intermediate Bond Portfolio (1) 0 N/A
International Bond Portfolio 0 18,779
- --------------
(1) Commenced investment operations on July 31, 1997.
</TABLE>
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) exceed a specified amount ($1 million for the
Trust's first twelve investment portfolios plus $50,000 for each additional
portfolio) during the current fiscal year, Goldman Sachs would waive a portion
of its administration fees during the following fiscal year. There have been no
waivers pursuant to this agreement during the last three fiscal years.
Goldman Sachs had 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 were to
reduce the expenses of each Portfolio by:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
U.S. Government Securities Portfolio $ 72,267 $ 70,879
Short-Intermediate Bond Portfolio 103,011 102,005
U.S. Treasury Index Portfolio 66,821 71,652
Bond Portfolio 222,213 165,969
Intermediate Bond Portfolio (1) 83,211 54,096
International Bond Portfolio 95,507 82,249
- --------------
(1) Commenced investment operations on July 31, 1997.
</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 (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.
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 substantially
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 substantially 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.
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>
<S> <C> <C> <C> <C>
1999 1998 1997
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: (1) establishing and maintaining
separate account records of Customers or other investors; (2) 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; (3) 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; (4) issuing confirmations to Customers or other investors in accordance
with applicable law; (5) arranging for the timely transmission of funds
representing the net purchase price or redemption proceeds; (6) processing
dividend payments on behalf of Customers or other investors; (7) providing
information periodically to Customers or other investors showing their positions
in shares; (8) responding to Customer or other investor inquiries (including
requests for prospectuses), and complaints relating to the services performed by
the Servicing Agents; (9) 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; (10)
providing or arranging for another person to provide subaccounting with respect
to shares of certain classes beneficially owned by Customers or other investors;
(11) 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; (12) providing such office space, facilities and
personnel as may be required to perform their services under the servicing
agreements; (13) maintaining appropriate management reporting and statistical
information; (14) paying expenses related to the preparation of educational and
other explanatory materials in connection with the development of investor
services; (15) developing and monitoring investment programs; and (16) 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.
______________, independent auditors, 233 S. Wacker Drive, Chicago,
Illinois 60606, have been selected as auditors of the Trust. In addition to
audit services, _____________ 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 "average 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 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)to the power of n = ERV
1
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, prior to May 1,
1999, Goldman Sachs reimbursed expenses to the Portfolios and voluntarily agreed
to reduce a portion of its administration fee 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.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Bond1
Class A
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class C
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class D
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Intermediate Bond2
Class A
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class D
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Short-Intermediate Bond3
Class A
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class D
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
U.S. Treasury Index4
Class A
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class C
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class D
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
U.S. Government Securities5
Class A
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class C
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class D
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
International Bond6
Class A
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
Class D
With fee waivers and
Expense reimbursements
Without fee waivers and
Expense reimbursements
</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.
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 C and D Shares, performance information prior to December 29,
1995 (commencement of Class C Shares), and September 15, 1994
(commencement of Class D Shares), respectively, is that of Class A
Shares. Class A Shares commenced operations April 5, 1993. Because fees
and expenses of Class C and 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.
6. For Class D Shares, performance information prior to November 20, 1995
(commencement of Class D Shares) is that of Class A Shares. Class A
Shares commenced operations on March 28, 1994. 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.
<PAGE>
B-77
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/c-d) + 1}to the power of 6 - 1
2
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.
For the 30-day period ended November 30, 1999, the annualized yields for
the Class A, Class C and Class D Shares of the Portfolios were as follows:
30-Day Yield
U.S. Government Securities
Portfolio
Class A
Class C
Class D
Short-Intermediate Bond
Portfolio
Class A
Class C
Class D
U.S. Treasury Index Portfolio
Class A
Class C
Class D
Bond Portfolio
Class A
Class C
Class D
Intermediate Bond Portfolio
Class A
Class C
Class D
International Bond Portfolio
Class A
Class C
Class D
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
Class C
Class D
Short-Intermediate Bond Portfolio
Class A
Class C
Class D
U.S. Treasury Index Portfolio
Class A
Class C
Class D
Bond Portfolio
Class A
Class C
Class D
Intermediate Bond Portfolio
Class A
Class C
Class D
International Bond Portfolio
Class A
Class C
Class D
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 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.
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 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 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 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 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. 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 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.
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.
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 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 (a) 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, (b) 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 (c) 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.
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: (1) a court refuses to apply Delaware
law; (2) the liability arises under tort law or, if not, no contractual
limitation of liability is in effect; and (3) 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: (a) 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 (b) 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
(a) may, but are not required to, serve as Trustees of the Trust or any other
series or class of the Trust; (b) 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 (c) 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 December 31, 1999, 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
December 31, 1999:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Number Percentage
of Shares of Shares
BOND PORTFOLIO
Class A
Lannan Foundation 2,636,731.19 5.5%
PWC Group Investment Savings Plan 3,454,473.59 7.2%
Class C
Phycor, Inc. 2,681,747.18 83.3%
Tuthill Corp. Supplement Investment 193,132.22 6.0%
Retirement Plan
Kitch Drutchas Wagner Kenney PC 216,179.46 6.7%
Class D
Bank of Illinois Trust Company 70,678.38 90.9%
First National Bank of La Grange 7,105.53 9.1%
INTERMEDIATE BOND PORTFOLIO
Class A
Illinois Masonic 723,272.81 26.7%
HEB Savings & Retirement Trust 203,646.35 7.5%
Marshfield ERP 940,049.84 34.7%
Cavalcade Pension Trust 156,756.52 5.8%
Class D
Peoples National Bank & Trust 1357.25 100%
INTERNATIONAL BOND PORTFOLIO
Class A
Northern Trust Pension Plan 947,008.94 57.3%
Doe Run Resources Corp. 248,757.97 15.1%
SHORT-INTERMEDIATE BOND PORTFOLIO
Class A
Emerson Electric Co. Savings Plans Trust 914,137.59 8.8%
Northern Illinois Medical Center 523,700.16 5.0%
Class D
BankIllinois Trust Co. 5,271.26 78.8%
Dacotah Co. 1,414.84 21.2%
<PAGE>
Number Percentage
of Shares of Shares
U.S. TREASURY INDEX PORTFOLIO
Class A
Belvediere National Bank & Trust 75,855.20 6.8%
Herget National Bank of Pekin 101,552.72 9.1%
Hubbell Defined Contribution Trust 117,373.12 10.6%
Old Second National Bank
The Accreditation Council for Graduate 84,166.73 7.6%
Medical Education
The Old Second National Bank 176,596.54 15.9%
Henkel Rabbi Trust 214,903.02 19.4%
Class C
Wilson Sporting Goods 401K Plan 15,338.60 100.0%
Class D
First National Bank of LaGrange 8,860.82 100.0%
U.S. GOVERNMENT SECURITIES PORTFOLIO
Class A
Electrical Insurance Trust 611,704.96 12.7%
Sheet Metal Workers' Health & Welfare Plan 669,486.86 13.9%
Schlumberger Ltd. Master Health Care Trust 433,104.70 9.0%
Illinois State Parnters Welfare Fund 309,162.25 6.4%
Mafco 417,079.54 8.7%
CTA 1,440,981.74 30.0%
Lifeway Christian Resources Master Retirement 258,397.93 5.4%
Fund
Class D
First Bankers Trust Co. 39,747.67 87.4%
Enjayco Company 3,997.87 8.8%
</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.
FINANCIAL STATEMENTS
The audited financial statements and related report of ______________,
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).
<PAGE>
5-A
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.
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.
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.
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.
<PAGE>
B-55
B-6
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.
<PAGE>
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.
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 (International Bond Portfolio)
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.
The International Bond 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. In connection with the use of futures for hedging 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 the 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. 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 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 pool operator." Accounting for
futures contracts will be in accordance with generally accepted accounting
principles.
<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 _______________,
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........................... B-3
Classification and History......................... B-3
Investment Objectives, Strategies and Risks....... B-3
Investment Restrictions............................ B-12
ADDITIONAL TRUST INFORMATION................................ B-15
Trustees and Officers.............................. B-15
Investment Adviser, Transfer Agent and Custodian... B-20
Portfolio Transactions............................. B-25
Co-Administrators and Distributor................. B-25
Counsel and Auditors.............................. B-28
In-Kind Purchases and Redemptions................. B-28
Third-Party Fees and Requirements................. B-29
PERFORMANCE INFORMATION.................................... B-29
AMORTIZED COST VALUATION................................... B-32
DESCRIPTION OF SHARES...................................... B-33
ADDITIONAL INFORMATION CONCERNING TAXES.................... B-37
General ...........................................B-37
Special Tax Considerations Pertaining to the
Tax-Exempt Portfolio B-38
Foreign Investors.............................. B-39
Conclusion..................................... B-39
OTHER INFORMATION ..........................................B-40
FINANCIAL STATEMENTS.................................... B-40
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 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.
<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 and Municipal
Portfolios may each 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.
Zero Coupon Bonds
To the extent consistent with Municipal Portfolio's investment
objective, the Portfolio 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, the Municipal 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, the
Municipal 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, the Municipal
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
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 (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 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
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 and Municipal Portfolios 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 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 (except the Tax-Exempt 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 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 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, 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 certain risks in addition to those of domestic
obligations.
The Tax-Exempt 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 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
Portfolio.
The Tax-Exempt 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 Portfolio 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
Portfolio's investment objective and policies and consider changes in its
structure or possible dissolution.
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 investment in taxable
securities, except under extraordinary circumstances. 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.
Interest earned by the Tax-Exempt Portfolio on private activity bonds
(if any) that is treated as a specific tax preference item under the Federal
alternative minimum tax will not be deemed to have been derived from municipal
instruments for purposes of determining whether that Portfolio meets its
fundamental policy that at least 80% of its net assets be derived from municipal
instruments.
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: (1) the frequency of trades and quotes for the
obligation; (2) the number of dealers willing to purchase or sell the security
and the number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) 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 either Portfolio will not exceed 1/2 of 1% of the value 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.
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 for (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) Purchase or sell 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 the same investment objective, policies and
fundamental restrictions as the Portfolio.
* * *
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 by the Tax-Exempt and Municipal
Portfolios on "private activity bonds" that is treated as an item of tax
preference under Federal alternative minimum tax will be deemed to be exempt
from regular Federal income tax for purposes of determining whether the
Tax-Exempt and Municipal Portfolios meet this fundamental policy.
Securities held in escrow or separate accounts in connection with the
Municipal Portfolio's investment practices described in this Additional
Statement and in the Prospectus are not deemed to be mortgaged, pledged or
hypothecated for purposes of the foregoing Investment Restrictions.
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
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.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
Stephen Timbers 55**** Chairman and President of Northern Trust Global
Trustee Investments, a division of Northern Trust
Corporation since 1998; President, Chief
Executive Officer and Director of Zurich
Kemper Investments from 1996 to 1998;
President and Chief Operating Officer of
Kemper Corporation from 1992 to 1996;
President and Director Kemper Funds from 1990
to 1998. Director: LTV Corporation. Trustee:
Northern Funds.
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
Mr. Wesley M. Dixon, Jr. 72 Trustee Director of Earl Kinship Capital Corporation
400 Skokie Blvd., Suite 300 since 1985, Vice Chairman and Director of G.D.
Northbrook, Illinois 60062 Searle & Co. (manufacture and sale of food
products and pharmaceuticals) from 1977 to
1983 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.
1534 Basswood Circle (accounting firm) from 1966 until his
Glenview, Illinois 60025 retirement in December 1989. Financial
Consultant, Ernst & Young from 1992 to 1993
and 1997. Director: Household Bank, First
Central National Life Insurance Company and
Director of First Central National Life
Insurance Company since July 1998. 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
Winnetka, Illinois 60093 1990 until his retirement in October 1993.
Trustee: Northern Funds.
Mr. Michael E. Murphy 63** Trustee President of Sara Lee Foundation since
Suite 2222 November 1997. Vice Chairman and Chief
20 South Clark Street Administrative Officer of Sara Lee Corporation
Chicago, Illinois 60603 (consumer products) 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.,
True North Communications, Inc., American
General Corporation, GATX Corporation and
Bassett Furniture Industries, Inc. Trustee:
Northern Funds.
Mary Jacobs Skinner, Esquire 42*** Trustee Partner in the law firm of Sidley & Austin.
One First National Plaza Trustee: Northern Funds.
Chicago, Illinois 06063
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
William H. Springer 71 Trustee Vice Chairman of Ameritech (a
701 Morningside Drive telecommunications holding company) from
Lake Forest, IL 60045 February 1987 until his retirement in August
1992; Vice Chairman, Chief Financial and
Administrative Officer of Ameritech prior
1987. Director of Walgreen Co. (a retail drug
store business); Baker, Fentress & Co. (a
closed-end, non-diversified management
investment company). Trustee of Goldman Sachs
Trust; Goldman Sachs Variable Insurance Trust.
Trustee: Northern Funds.
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 January 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.
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
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. (retail corporation) from February 1989 to
July 1993; Member of Advisory Board of
Real-Time USA, Inc. (a software 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. Director:
University Eldercare, Inc.; Financial Pacific
Company Trustee: Dominican University.
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.
Director: University of Iowa Foundation,
Blanton-Peale Institutes of Religion and
Health; Community Foundation of Sarasota
County; Duke Management Company (an investment
adviser); and John Ringling Centre Foundation.
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
Chicago, IL 60611 Transformation from 1992-1993, and Midwestern
Director of Marketing from 1988-1992, IBM (a
technology company); Director: MBIA Insurance
Corporation of Illinois (bank holding
company); MB Financial Corp. (a bank holding
company). Trustee: Northern Funds.
Richard P. Strubel 61 Trustee President and Chief Operating Officer,
737 N. Michigan Avenue Unext.com since 1999; Managing Director of
Suite 1405 Tandem Partners, Inc. (a privately held
Chicago, IL 60611 management services firm) since 1990 to 1999;
President and Chief Executive Officer,
Microdot, Inc. (a privately held manufacturing
firm) from 1984 to 1994; Director: Gildan
Activewear, Inc.; Children's Memorial Medical
Center. Trustee: University of Chicago;
Goldman Sachs Trust; Goldman Sachs Variable
Insurance Trust. Trustee: Northern Funds.
Jylanne M. Dunne 40 President Senior Vice President for Distribution
4400 Computer Drive Services at PFPC Inc. ("PFPC") (formerly First
Westborough, MA 01581 Data Investor Services Group, Inc. ("FDISG"))
(since 1988).
Richard H. Rose 44 Vice President Vice President and Division Manager of Mutual
4400 Computer Drive Fund Administration at PFPC (formerly FDISG)
Westborough, MA 01581 (since 1994).
Brian R. Curran 32 Treasurer Director of Fund Administration at PFPC
4400 Computer Drive (formerly FDISG) (since 1997); Director of
Westborough, MA 01581 Fund Administration at State Street Bank &
Trust
Company
(February
1997 to
October
1997);
Senior
Auditor at
Price
Waterhouse
L.L.P.
(February
1994 to
February
1997).
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
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).
Linda J. Hoard 52 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).
Teresa M.R. Hamlin 35 Assistant Vice President at PFPC (formerly FDISG) (since
4400 Computer Drive Secretary 1994).
Westborough, MA 01581
Therese Hogan 37 Assistant Director of the State Regulation Department at
4400 Computer Drive Secretary PFPC (formerly FDISG) (since 1994).
Westborough, MA 01581
* 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 Trust Corporation. **** Mr. Timbers is deemed to be an
"interested" Trustee because he is an officer, director, employee and
shareholder of Northern Trust Corporation.
</TABLE>
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 (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
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.
Additionally, 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.
Each Trustee 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
(1) 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; (2)
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 (3) 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 they are also officers, receives fees
from the Trust for administrative services.
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:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Total
Government Diversified Compensation
Select Government Assets Municipal Tax-Exempt from Fund
Portfolio Portfolio Portfolio Portfolio*** Portfolio Complex
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 44,500
Edward J. Condon, Jr. 6,675 5,785 16,465 n/a 2,670 39,500
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.
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.
Northern employs a team approach to the investment management of the
Portfolios, relying upon investment professionals under the leadership of James
M. Snyder, Chief Investment Officer and Executive Vice President of Northern.
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 (1) answer customer inquiries regarding the current yield of, and
certain other matters (e.g. account status information) pertaining to, the
Trust, (2) 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, (3) 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, (4) provide periodic statements
showing account balances, (5) mail reports and proxy materials to shareholders,
(6) provide information in connection with the preparation by the Trust of
various regulatory reports and prepare reports to the Trustees and management,
(7) 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), (8) respond to and seek to resolve all complaints
of investors with respect to the Trust or their accounts, (9) furnish proxy
statements and proxies, annual and semi-annual financial statements, and
dividend, distribution and tax notices to investors, (10) furnish the Trust all
pertinent Blue Sky information, (11) perform all required tax withholding, (12)
preserve records, and (13) 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 (1) holds each
Portfolio's cash and securities, (2) maintains such cash and securities in
separate accounts in the name of the Portfolio, (3) makes receipts and
disbursements of funds on behalf of the Portfolio, (4) receives, delivers and
releases securities on behalf of the Portfolio, (5) collects and receives all
income, principal and other payments in respect of the Portfolio's securities
held by Northern under the Custodian Agreement, and (6) 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, 2000, and
thereafter for successive 12-month periods, provided that the continuance is
approved at least annually (1) 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 (2) 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>
<S> <C> <C> <C>
1999 1998 1997
Government Select Portfolio $ 1,551,000 $1,460,037 $ 1,018,270
Government Portfolio 3,589,000 3,337,292 3,243,435
Diversified Assets Portfolio 13,142,000 10,271,332 8,945,126
Tax-Exempt Portfolio 1,502,000 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.
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
</TABLE>
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.
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
(formerly FDISG) (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: (a)
maintaining office facilities and furnishing corporate officers for the Trust;
(b) furnishing data processing services, clerical services, and executive and
administrative services and standard stationery and office supplies; (c)
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; (d) preparing and submitting reports to the
Trust's shareholders and the SEC; (e) preparing and printing financial
statements; (f) preparing monthly Portfolio profile reports; (g) 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; (h) assisting in marketing
strategy and product development; (i) performing oversight/management
responsibilities, such as the supervision and coordination of certain of the
Trust's service providers; (j) effecting and maintaining, as the case may be,
the registration of shares of the Trust for sale under the securities laws of
various jurisdictions; (k) assisting in maintaining corporate records and good
standing status of the Trust in its state of organization; and (l) 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, PFPC (formerly FDISG) and Northern received fees under their
co-administration agreement with the Trust (after fee waivers) (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 $ 786,966
Government Portfolio 670,580
Diversified Assets Portfolio 2,747,512
Tax-Exempt Portfolio 193,364
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 substantially similar to the Co-Administration
Agreement currently in effect with Northern and PFPC (formerly FDISG). For the
fiscal years ended November 30 as indicated, Goldman Sachs received fees under
its administration agreement with the Trust (after fee waivers) in the amount
of:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 1, 1998
through April 30, 1999 1998 1997
Government Select Portfolio $ 524,613 $1,460,037 $1,048,482
Government Portfolio 390,578 1,334,907 1,208,401
Diversified Assets Portfolio 1,317,956 4,108,503 3,082,370
Tax-Exempt Portfolio 195,956 685,084 749,232
</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) exceed a specified amount ($1 million for the
Trust's first twelve investment portfolios plus $50,000 for each additional
portfolio) during the current 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.
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>
<S> <C> <C> <C>
December 1,
1998 through
April 30, 1999 1998 1997
Government Select Portfolio $544,124 $360,250
Government Portfolio 606,764 262,895
Diversified Assets Portfolio 1,328,789 477,791
Tax-Exempt Portfolio 279,774 305,530
</TABLE>
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 exceed on an annualized basis .10% of each Portfolio's average
daily net assets.
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.
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 substantially
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 substantially 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
Drinker Biddle & Reath LLP, with offices at One Logan Square, 18th and
Cherry Streets, Philadelphia, Pennsylvania 19103-6996, serve as counsel to the
Trust.
_________________, independent auditors, 233 S. Wacker Drive, Chicago,
Illinois 60606, have been selected as auditors of the Trust. In addition to
audit services, _______________ 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 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>
<S> <C> <C> <C> <C>
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
Government Select Portfolio
Government Portfolio
Diversified Assets Portfolio
Tax-Exempt Portfolio
</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 Shares for the same
seven-day period would have been as follows 2:
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C>
Effective Tax-Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
Government Select Portfolio
Government Portfolio
Diversified Assets Portfolio
Tax-Exempt Portfolio
</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 value used by the Trust consist of actual market
quotations or appropriate substitutes which reflect current market conditions
and include (a) quotations or estimates of market value for individual portfolio
instruments and/or (b) 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 (a) 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, (b) 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 (c) 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 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.
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: (1) a court refuses to apply Delaware
law; (2) the liability arises under tort law or, if not, no contractual
limitation of liability is in effect; and (3) 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: (a) 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 (b) 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
(a) may, but are not required to, serve as Trustees of the Trust or any other
series or class of the Trust; (b) 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 (c) 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 December 31, 1999, 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 December 31, 1999:
<TABLE>
<CAPTION>
<S><C> <C> <C>
Number Percentage
of Shares of Shares
DIVERSIFIED ASSETS PORTFOLIO
Shares
TNT-London FB 652,242,086.83 10.1%
MCCA-Western Asset Management 338,063,609.18 5.2%
Service Shares
Cole Taylor Bank 7,762,828.00 18.3%
First Mid-Illinois Bank & Trust 5,414,728.00 12.8%
Merchants National Bank 15,275,235.00 36.1%
Premier Shares
Riverview Community Bank 6,116,140.00 100.0%
Number Percentage
of Shares of Shares
GOVERNMENT PORTFOLIO
Service Shares
Cole Taylor Bank 21,629,429.00 81.4%
Secured Trust 2,762,285.00 10.4%
Premier Shares
Chitenden Bank 46,914,429.00 100.0%
Number Percentage
of Shares of Shares
GOVERNMENT SELECT PORTFOLIO
Shares
TNT-London FBO Food & Agricultural 168,749,428.00 8.4%
Organization
Service Shares
Richfield Bank & Trust Co. 5,294,331.00 45.6%
Premier Shares
Richfield Bank & Trust Co. 5,522,453.99 96.1%
Number Percentage
of Shares of Shares
TAX-EXEMPT PORTFOLIO
Shares
Tisch 47,260,209.28 9.3%
Service Shares
Chitenden Bank. 27,742,350.00 75.3%
Merchants National Bank 8,694,855.00 23.6%
Premier Shares
Richfield Bank & Trust Co. 5,522,453.99 96.1%
</TABLE>
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 (if any) (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 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
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 _______________,
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.
B-112
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 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."
<PAGE>
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.
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 (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) 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
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.
<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 ______________,
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>
<S><C> <C>
Page
ADDITIONAL INVESTMENT INFORMATION...............................................................................B-3
Classification and History.............................................................................B-3
Investment Objectives, Strategies and Risks............................................................B-3
Investment Restrictions...............................................................................B-12
ADDITIONAL TRUST INFORMATION...................................................................................B-15
Trustees and Officers.................................................................................B-15
Investment Adviser, Transfer Agent and Custodian......................................................B-20
Portfolio Transactions................................................................................B-25
Co-Administrators and Distributor.....................................................................B-26
Counsel and Auditors..................................................................................B-28
In-Kind Purchases and Redemptions.....................................................................B-28
Third-Party Fees and Requirements.....................................................................B-29
PERFORMANCE INFORMATION........................................................................................B-29
AMORTIZED COST VALUATION.......................................................................................B-33
DESCRIPTION OF SERVICE SHARES AND PREMIER SHARES...............................................................B-34
ADDITIONAL INFORMATION CONCERNING TAXES........................................................................B-38
General B-38
Special Tax Considerations Pertaining to the Tax-Exempt Portfolio.....................................B-39
Foreign Investors.....................................................................................B-40
Conclusion............................................................................................B-40
SERVICE PLAN B-41
OTHER INFORMATION..............................................................................................B-42
FINANCIAL STATEMENTS...........................................................................................B-43
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 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.
<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 and Municipal
Portfolios may each 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.
Zero Coupon Bonds
To the extent consistent with Municipal Portfolio's investment
objective, the Portfolio 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, the Municipal 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, the
Municipal 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, the Municipal
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
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 (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 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
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 and Municipal Portfolios 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 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 (except the Tax-Exempt 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 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 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, 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 certain risks in addition to those of domestic
obligations.
The Tax-Exempt 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 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
Portfolio.
The Tax-Exempt 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 Portfolio 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
Portfolio's investment objective and policies and consider changes in its
structure or possible dissolution.
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 investment in taxable
securities, except under extraordinary circumstances. 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.
Interest earned by the Tax-Exempt Portfolio on private activity bonds
(if any) that is treated as a specific tax preference item under the Federal
alternative minimum tax will not be deemed to have been derived from municipal
instruments for purposes of determining whether that Portfolio meets its
fundamental policy that at least 80% of its net assets be derived from municipal
instruments.
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: (1) the frequency of trades and quotes for the
obligation; (2) the number of dealers willing to purchase or sell the security
and the number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) 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 either Portfolio will not exceed 1/2 of 1% of the value 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.
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 for (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) Purchase or sell 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.
(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.
* * *
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 by the Tax-Exempt and Municipal Portfolios
on "private activity bonds" that is treated as an item of tax preference under
Federal alternative minimum tax will be deemed to be exempt from regular Federal
income tax for purposes of determining whether the Tax-Exempt and Municipal
Portfolios meet this fundamental policy.
Securities held in escrow or separate accounts in connection with the
Municipal Portfolio's investment practices described in this Additional
Statement and in the Prospectus are not deemed to be mortgaged, pledged or
hypothecated for purposes of the foregoing Investment Restrictions.
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
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.
<PAGE>
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
Stephen Timbers 55**** Chairman and President of Northern Trust Global
Trustee Investments, a division of Northern Trust
Corporation since 1998; President, Chief
Executive Officer and Director of Zurich
Kemper Investments from 1996 to 1998;
President and Chief Operating Officer of
Kemper Corporation from 1992 to 1996;
President and Director Kemper Funds from 1990
to 1998. Director: LTV Corporation. Trustee:
Northern Funds.
Mr. Wesley M. Dixon, Jr. 72 Trustee Director of Earl Kinship Capital Corporation
400 Skokie Blvd., Suite 300 since 1985, Vice Chairman and Director of G.D.
Northbrook, Illinois 60062 Searle & Co. (manufacture and sale of food
products and pharmaceuticals) from 1977 to
1983 and President of G.D. Searle & Co. prior
thereto. Trustee: Northern Funds.
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
Mr. William J. Dolan, Jr. 67 Trustee Partner of Arthur Andersen & Co. S.C.
1534 Basswood Circle (accounting firm) from 1966 until his
Glenview, Illinois 60025 retirement in December 1989. Financial
Consultant, Ernst & Young from 1992 to 1993
and 1997. Director: Household Bank, First
Central National Life Insurance Company and
Director of First Central National Life
Insurance Company since July 1998. 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
Winnetka, Illinois 60093 1990 until his retirement in October 1993.
Trustee: Northern Funds.
Mr. Michael E. Murphy 63** Trustee President of Sara Lee Foundation since
Suite 2222 November 1997. Vice Chairman and Chief
20 South Clark Street Administrative Officer of Sara Lee Corporation
Chicago, Illinois 60603 (consumer products) 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.,
True North Communications, Inc., American
General Corporation, GATX Corporation and
Bassett Furniture Industries, Inc. Trustee:
Northern Funds.
Mary Jacobs Skinner, Esquire 42*** Trustee Partner in the law firm of Sidley & Austin.
One First National Plaza Trustee: Northern Funds.
Chicago, Illinois 06063
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
William H. Springer 71 Trustee Vice Chairman of Ameritech (a
701 Morningside Drive telecommunications holding company) from
Lake Forest, IL 60045 February 1987 until his retirement in August
1992; Vice Chairman, Chief Financial and
Administrative Officer of Ameritech prior
1987. Director of Walgreen Co. (a retail drug
store business); Baker, Fentress & Co. (a
closed-end, non-diversified management
investment company). Trustee of Goldman Sachs
Trust; Goldman Sachs Variable Insurance Trust.
Trustee: Northern Funds.
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 January 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.
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
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. (retail corporation) from February 1989 to
July 1993; Member of Advisory Board of
Real-Time USA, Inc. (a software 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. Director:
University Eldercare, Inc.; Financial Pacific
Company Trustee: Dominican University.
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.
Director: University of Iowa Foundation,
Blanton-Peale Institutes of Religion and
Health; Community Foundation of Sarasota
County; Duke Management Company (an investment
adviser); and John Ringling Centre Foundation.
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
Chicago, IL 60611 Transformation from 1992-1993, and Midwestern
Director of Marketing from 1988-1992, IBM (a
technology company); Director: MBIA Insurance
Corporation of Illinois (bank holding
company); MB Financial Corp. (a bank holding
company). Trustee: Northern Funds.
Richard P. Strubel 61 Trustee President and Chief Operating Officer,
737 N. Michigan Avenue Unext.com since 1999; Managing Director of
Suite 1405 Tandem Partners, Inc. (a privately held
Chicago, IL 60611 management services firm) since 1990 to 1999;
President and Chief Executive Officer,
Microdot, Inc. (a privately held manufacturing
firm) from 1984 to 1994; Director: Gildan
Activewear, Inc.; Children's Memorial Medical
Center. Trustee: University of Chicago;
Goldman Sachs Trust; Goldman Sachs Variable
Insurance Trust. Trustee: Northern Funds.
Jylanne M. Dunne 40 President Senior Vice President for Distribution
4400 Computer Drive Services at PFPC Inc. ("PFPC") (formerly First
Westborough, MA 01581 Data Investor Services Group, Inc. ("FDISG"))
(since 1988).
Richard H. Rose 44 Vice President Vice President and Division Manager of Mutual
4400 Computer Drive Fund Administration at PFPC (formerly FDISG)
Westborough, MA 01581 (since 1994).
<PAGE>
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
Brian R. Curran 32 Treasurer Director of Fund Administration at PFPC
4400 Computer Drive (formerly FDISG) (since 1997); Director of
Westborough, MA 01581 Fund Administration at State Street Bank &
Trust Company ( February 1997 to
October 1997); Senior Auditor at
Price Waterhouse L.L.P. (February
1994 to February
1997).
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).
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.
Linda J. Hoard 52 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).
Teresa M.R. Hamlin 35 Assistant Vice President at PFPC (formerly FDISG) (since
4400 Computer Drive Secretary 1994).
Westborough, MA 01581
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 Trust Corporation.
**** Mr. Timbers is deemed to be an "interested" Trustee because he is an
officer, director, employee and shareholder of Northern Trust Corporation.
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 (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
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.
Additionally, 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.
Each Trustee 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 (1) 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; (2)
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 (3) 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 they are also officers, receives fees
from the Trust for administrative services.
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>
<S><C> <C> <C> <C> <C> <C> <C>
Total
Government Diversified Compensation
Select Government Assets Municipal Tax-Exempt from Fund
Portfolio Portfolio Portfolio Portfolio1*** Portfolio Complex
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 44,500
Edward J. Condon, Jr. 6,675 5,785 16,465 n/a 2,670 39,500
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.
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.
Northern employs a team approach to the investment management of the
Portfolios, relying upon investment professionals under the leadership of James
M. Snyder, Chief Investment Officer and Executive Vice President of Northern.
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 (1) answer customer inquiries regarding the current yield of, and
certain other matters (e.g. account status information) pertaining to, the
Trust, (2) 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, (3) 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, (4) provide periodic statements
showing account balances, (5) mail reports and proxy materials to shareholders,
(6) provide information in connection with the preparation by the Trust of
various regulatory reports and prepare reports to the Trustees and management,
(7) 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), (8) respond to and seek to resolve all complaints
of investors with respect to the Trust or their accounts, (9) furnish proxy
statements and proxies, annual and semi-annual financial statements, and
dividend, distribution and tax notices to investors, (10) furnish the Trust all
pertinent Blue Sky information, (11) perform all required tax withholding, (12)
preserve records, and (13) 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 (1) holds each
Portfolio's cash and securities, (2) maintains such cash and securities in
separate accounts in the name of the Portfolio, (3) makes receipts and
disbursements of funds on behalf of the Portfolio, (4) receives, delivers and
releases securities on behalf of the Portfolio, (5) collects and receives all
income, principal and other payments in respect of the Portfolio's securities
held by Northern under the Custodian Agreement, and (6) 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, 2000,
and thereafter for successive 12-month periods, provided that the continuance is
approved at least annually (1) 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 (2) 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>
<S><C> <C> <C> <C>
1999 1998 1997
Government Select Portfolio $ 1,551,000 $1,460,037 $ 1,018,270
Government Portfolio 3,589,000 3,337,292 3,243,435
Diversified Assets Portfolio 13,142,000 10,271,332 8,945,126
Tax-Exempt Portfolio 1,502,000 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.
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:
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
</TABLE>
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.
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
(formerly FDISG) (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: (a)
maintaining office facilities and furnishing corporate officers for the Trust;
(b) furnishing data processing services, clerical services, and executive and
administrative services and standard stationery and office supplies; (c)
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; (d) preparing and submitting reports to the
Trust's shareholders and the SEC; (e) preparing and printing financial
statements; (f) preparing monthly Portfolio profile reports; (g) 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; (h) assisting in marketing
strategy and product development; (i) performing oversight/management
responsibilities, such as the supervision and coordination of certain of the
Trust's service providers; (j) effecting and maintaining, as the case may be,
the registration of shares of the Trust for sale under the securities laws of
various jurisdictions; (k) assisting in maintaining corporate records and good
standing status of the Trust in its state of organization; and (l) 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, PFPC (formerly FDISG) and Northern received fees under their
co-administration agreement with the Trust (after fee waivers) (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 $ 786,966
Government Portfolio 670,580
Diversified Assets Portfolio 2,747,512
Tax-Exempt Portfolio 193,364
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 substantially similar to the Co-Administration
Agreement currently in effect with Northern and PFPC (formerly FDISG). For the
fiscal years ended November 30 as indicated, Goldman Sachs received fees under
its administration agreement with the Trust (after fee waivers) in the amount
of:
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
December 1, 1998
through April 30, 1999 1998 1997
Government Select Portfolio $ 524,613 $1,460,037 $1,048,482
Government Portfolio 390,578 1,334,907 1,208,401
Diversified Assets Portfolio 1,317,956 4,108,503 3,082,370
Tax-Exempt Portfolio 195,956 685,084 749,232
</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) exceed a specified amount ($1 million for the
Trust's first twelve investment portfolios plus $50,000 for each additional
portfolio) during the current 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.
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>
<S> <C> <C> <C>
December 1,
1998 through
April 30, 1999 1998 1997
Government Select Portfolio $544,124 $360,250
Government Portfolio 606,764 262,895
Diversified Assets Portfolio 1,328,789 477,791
Tax-Exempt Portfolio 279,774 305,530
</TABLE>
<PAGE>
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 exceed on an annualized basis .10% of each
Portfolio's average daily net assets.
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.
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 substantially
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 substantially 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
Drinker Biddle & Reath LLP, with offices at One Logan Square, 18th and
Cherry Streets, Philadelphia, Pennsylvania 19103-6996, serve as counsel to the
Trust.
__________________, independent auditors, 233 S. Wacker Drive, Chicago,
Illinois 60606, have been selected as auditors of the Trust. In addition to
audit services, _____________ 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, 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 3:
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C>
Effective Tax Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
Government Select Portfolio
Government Portfolio
Diversified Assets Portfolio
Tax-Exempt Portfolio
</TABLE>
<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 4:
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C>
Effective Tax Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
Government Select Portfolio
Government Portfolio
Diversified Assets Portfolio
Tax-Exempt Portfolio
</TABLE>
The annualized yield of each Portfolio (except Municipal 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 5:
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C>
Effective Tax Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
Government Select Portfolio
Government Portfolio
Diversified Assets Portfolio
Tax-Exempt Portfolio
</TABLE>
<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 Premier Shares for
the same seven-day period would have been as follows 6:
<TABLE>
<CAPTION>
<S><C> <C> <C> <C> <C>
Effective Tax Equivalent Tax-Equivalent
Yield Yield Yield Effective Yield
Government Select Portfolio
Government Portfolio
Diversified Assets Portfolio
Tax-Exempt Portfolio
</TABLE>
- --------
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. 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 of tax-equivalent current yield and tax-equivalent
effective yield. 5 An income tax rate of 39% is used in the calculation of
tax-equivalent current yield and tax-equivalent effective yield. 6 An income tax
rate of 39% is used in the calculation tax-equivalent current yield and
tax-equivalent effective yield. 7. Services may be modified or omitted in a
particular case and items relettered or renumbered.
8. Services may be modified or omitted in a particular case and items relettered
or renumbered.
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.
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 (a) quotations or estimates of market value for individual portfolio
instruments and/or (b) 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 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 (a) 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, (b) 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 (c) 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 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: (1) a court refuses to apply Delaware
law; (2) the liability arises under tort law or, if not, no contractual
limitation of liability is in effect; and (3) 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: (a) 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 (b) 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
(a) may, but are not required to, serve as Trustees of the Trust or any other
series or class of the Trust; (b) 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 (c) 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 December 31, 1999, 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 no persons beneficially owned five percent or more of the outstanding
Service Shares or Premier Shares of the Portfolios' classes as of December 31,
1999.
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 December 31, 1999:
<TABLE>
<CAPTION>
<S><C> <C> <C>
Number Percentage
of Shares of Shares
DIVERSIFIED ASSETS PORTFOLIO
Shares
TNT-London FB 652,242,086.83 10.1%
MCCA-Western Asset Management 338,063,609.18 5.2%
Service Shares
Cole Taylor Bank 7,762,828.00 18.3%
First Mid-Illinois Bank & Trust 5,414,728.00 12.8%
Merchants National Bank 15,275,235.00 36.1%
Premier Shares
Riverview Community Bank 6,116,140.00 100.0%
Number Percentage
of Shares of Shares
GOVERNMENT PORTFOLIO
Service Shares
Cole Taylor Bank 21,629,429.00 81.4%
Secured Trust 2,762,285.00 10.4%
Premier Shares
Chitenden Bank 46,914,429.00 100.0%
Number Percentage
of Shares of Shares
GOVERNMENT SELECT PORTFOLIO
Shares
TNT-London FBO Food & Agricultural 168,749,428.00 8.4%
Organization
Service Shares
Richfield Bank & Trust Co. 5,294,331.00 45.6%
Premier Shares
Richfield Bank & Trust Co. 5,522,453.99 96.1%
Number Percentage
of Shares of Shares
TAX-EXEMPT PORTFOLIO
Shares
Tisch 47,260,209.28 9.3%
Service Shares
Chitenden Bank. 27,742,350.00 75.3%
Merchants National Bank 8,694,855.00 23.6%
Premier Shares
Richfield Bank & Trust Co. 5,522,453.99 96.1%
</TABLE>
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 (if any) (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 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
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 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, approved the
Plan and related agreement for each Portfolio at a meeting called for the
purpose of voting on such Plan and related agreement on January 27, 1999 (except
for the Municipal Portfolio, which was approved on October 5, 1999). The Plan
and related agreement will remain in effect until April 30, 2000 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
The audited financial statements and related report of ______________,
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.
<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 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."
<PAGE>
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.
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 (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) 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
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.
<PAGE>
PART C.
OTHER INFORMATION
ITEM 23. EXHIBITS
The following exhibits are incorporated herein by reference to
Post-Effective Amendment No. 31 to Registrant's Registration Statement on Form
N-1A (the "Registration Statement") (Accession No. 0000950130-96-001086),
Post-Effective Amendment No. 32 to such Registration Statement (Accession No.
0000950130-97-000170), Post-Effective Amendment No. 33 to such Registration
Statement (Accession No. 0000950130-97-001306), Post-Effective Amendment No. 34
to such Registration Statement (Accession No. 0000950130-97-002471),
Post-Effective Amendment No. 35 to such Registration Statement (Accession No.
0000950131-97-005862), Post-Effective Amendment No. 36 to such Registration
Statement (Accession No. 0000950131-98-00216), Post-Effective Amendment No. 37
to such Registration Statement (Accession No. 0000950131-98-00512),
Post-Effective Amendment No. 38 to such Registration Statement (Accession No.
0000950131-98-002030), Post-Effective Amendment No. 39 to such Registration
Statement (Accession No. 00009150131-99-000461), Post-Effective Amendment No. 40
to such Registration Statement (Accession No. 0000927405-99-000282) and
Post-Effective Amendment No. 41 to such Registration Statement (Accession No.
0000927405-99-000333) :
(a) (1) Agreement and Declaration of Trust dated July 1, 1997 (Accession
No. 0000950131-98-00216).
(2) Amendment No. 1 dated January 27, 1998 to the Agreement and Declaration
of Trust (Accession No. 0000950131-99-000461).
(3) Amendment No. 2 dated May 15, 1998 to the Agreement and Declaration of
Trust (Accession No. 0000950131-99-000461).
(4) Amendment No. 3 dated October 5, 1999 to the Agreement and Declaration
of Trust (Accession No. 0000927405-99-000333).
(5) Amendment No. 4 dated January 24, 2000 to the Agreement and Declaration
of Trust is filed herewith.
(b) By-Laws dated July 8, 1997 (Accession No. 0000950131-98-00216).
(c) Articles IV, V and VII of the Agreement and Declaration of Trust dated
July 1, 1997 (Accession No. 0000950131-98-00216).
(d) (1) Investment Advisory Agreement dated March 31, 1998 between the
Registrant and The Northern Trust Company (the "Investment Advisory Agreement")
(Accession No. 0000950131-99-000461).
(2) Addendum No. 1 dated March 31, 1998 to the Investment Advisory
Agreement (Accession No. 0000950131-99-000461).
(3) Addendum No. 2 dated March 31, 1998 to the Investment Advisory
Agreement (Accession No. 0000950131-99-000461).
(4) Addendum No. 3 dated March 31, 1998 to the Investment Advisory
Agreement (Accession No. 0000950131-99-000461).
(5) Addendum No. 4 dated March 31, 1998 to the Investment Advisory
Agreement (Accession No. 0000950131-99-000461).
(6) Addendum No. 5 dated March 31, 1998 to the Investment Advisory
Agreement (Accession No. 0000950131-99-000461).
(7) Addendum No. 6 dated March 31, 1998 to the Investment Advisory
Agreement (Accession No. 0000950131-99-000461).
(8) Assumption Agreement dated April 1, 1998 between The Northern Trust
Company and Northern Trust Quantitative Advisors, Inc. (Accession No.
0000950131-99-000461).
(9) Form of Addendum No. 7 to Investment Advisory Agreement (Accession No.
0000927405-99-000333).
(e)
(1) Distribution Agreement between the Registrant and Northern Funds
Distributors, LLC is filed herewith.
(f) Not Applicable.
(g) (1) Custodian Agreement dated June 8, 1992 between the Registrant and
The Northern Trust Company (Accession No. 0000950131-98-002030).
(2) Addendum No. 1 to the Custodian Agreement between the Registrant and
The Northern Trust Company (Accession No. 0000950130-96-001086).
(3) Addendum No. 2 to the Custodian Agreement between the Registrant and
The Northern Trust Company (Accession No. 0000950130-96-001086).
(4) Addendum No. 3 to the Custodian Agreement between the Registrant and
The Northern Trust Company (Accession No. 0000950130-97-002471).
(5) Addendum No. 4 to the Custodian Agreement between the Registrant and
The Northern Trust Company (Accession No. 0000950131-97-005862).
(6) Addendum No. 5 to the Custodian Agreement between the Registrant and
The Northern Trust Company (Accession No. 0000950131-98-002030).
(7) Addendum No. 6 to the Custodian Agreement between the Registrant and
The Northern Trust Company (Accession No. 0000950131-98-002030).
(8) Addendum No. 7 to the Custodian Agreement between the Registrant and
The Northern Trust Company (Accession No. 0000950131-99-000461).
(9) Foreign Custody Agreement between the Registrant and The Northern Trust
Company (Accession No. 0000950131-98-002030).
(10) Addendum No. 1 to the Foreign Custody Agreement between the Registrant
and The Northern Trust Company (Accession No. 0000950130-97-002471).
(11) Addendum No. 2 to the Foreign Custody Agreement between the Registrant
and The Northern Trust Company (Accession No. 0000950131-98-002030).
(12) Addendum No. 3 to the Foreign Custody Agreement between the Registrant
and The Northern Trust Company (Accession No. 0000950131-99-000461).
(13) Foreign Custody Monitoring Agreement dated March 31, 1998 between the
Registrant and The Northern Trust Company (Accession No. 0000950131-99-000461).
(14) Form of Addendum No. 8 to Custodian Agreement (Accession No.
0000927405-99-000333).
(h) (1) Agreement and Plan of Reorganization between the Registrant and The
Benchmark Tax-Exempt Fund (Accession No. 0000950131-98-002030).
(2) Revised and Restated Transfer Agency Agreement dated January 8, 1993
between the Registrant and The Northern Trust Company (Accession No.
0000950131-98-002030).
(3) Addendum No. 1 to the Revised and Restated Transfer Agency Agreement
between the Registrant and The Northern Trust Company (Accession No.
0000950130-96-001086).
(4) Addendum No. 2 to the Revised and Restated Transfer Agency Agreement
between the Registrant and The Northern Trust Company (Accession No.
0000950130-96-001086).
(5) Addendum No. 3 to the Revised and Restated Transfer Agency Agreement
between the Registrant and The Northern Trust Company (Accession No.
0000950130-97-002471).
(6) Addendum No. 4 to the Revised and Restated Transfer Agency Agreement
between the Registrant and The Northern Trust Company (Accession No.
0000950131-97-005862).
(7) Addendum No. 5 to the Revised and Restated Transfer Agency Agreement
between the Registrant and The Northern Trust Company (Accession No.
0000950131-98-002030).
(8) Addendum No. 6 to the Revised and Restated Transfer Agency Agreement
between the Registrant and The Northern Trust Company (Accession No.
0000950131-99-000461).
(9) Shareholder Servicing Plan for Class C and D Shares and Related Forms
of Servicing Agreement is filed herewith.
(10) Service Plan for the Service and Premier Classes of Shares and Related
Forms of Servicing Agreement is filed herewith.
(11) Amended and Restated Co-Administration Agreement dated October 5, 1999
among the Registrant, Northern Trust Company and First Data Investor Services
Group, Inc. (now known as PFPC Inc.) is filed herewith.
(12) Form of Addendum No. 7 to Revised and Restated Transfer Agency
Agreement (Accession No. 0000927405-99-000333).
(i) Opinion of Drinker Biddle & Reath LLP (Accession No.
0000927405-99-000333).
(j)(1) Consent of Drinker Biddle & Reath LLP is filed herewith.
(2) Consent of Independent Auditors to be filed by subsequent amendment.
(k) None.
(l) (1) Subscription Agreement with Goldman, Sachs & Co. (Accession No.
0000950131-98-002030).
(2) Amendment No. 1 to Subscription Agreement with Goldman, Sachs & Co.
(Accession No. 0000950131-98-002030).
(3) Amendment No. 2 to Subscription Agreement with Goldman, Sachs & Co.
(Accession No. 0000950131-98-002030).
(4) Amendment No. 3 to Subscription Agreement with Goldman, Sachs & Co.
(Accession No. 0000950131-98-002030).
(m) None.
(n) Amended and Restated Plan pursuant to Rule 18f-3 for Operation of a
Multi-Class System (Accession No. 0000927405-99-000333).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Trustees.
ITEM 25. INDEMNIFICATION
Section 3 of Article IV of the Registrant's Agreement and Declaration of
Trust provides for indemnification of the Registrant's Trustees and officers
under certain circumstances. A copy of such Agreement and Declaration of Trust
was filed as Exhibit 1 to Post-Effective Amendment No. 36 to Registrant's
Registration Statement on Form N-1A.
Paragraph 7 of the Investment Advisory Agreement between the Registrant and
The Northern Trust Company provides for indemnification of The Northern Trust
Company or, in lieu thereof, contribution by the Registrant, under certain
circumstances. A copy of the Investment Advisory Agreement was filed as Exhibit
(d)(1) to Post-Effective Amendment No. 39 to Registrant's Registration Statement
on Form N-1A.
Article 10 of the Amended and Restated Co-Administration Agreement dated
October 5, 1999 among the Registrant, Northern Trust Company and First Data
Investor Services Group, Inc. (now known as PFPC Inc.) provides that the
Registrant will indemnify Northern Trust Company and First Data Investor
Services Group, Inc. (now known as PFPC Inc.) (each a "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. A copy of the Amended and Restated Co-Administration
Agreement is filed herewith.
Paragraph 3 of the Distribution Agreement dated December 1, 1999 between
the Registrant and Northern Funds Distributors, LLC ("NFD") provides that the
Registrant 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 Registrant by NFD, or those resulting
from the willful misfeasance, bad faith or negligence of NFD, or NFD's breach of
confidentiality. A copy of the Distribution Agreement is filed herewith.
A mutual fund trustee and officer liability policy purchased by the
Registrant insures the Registrant and its Trustees and officers, subject to the
policy's coverage limits and exclusions and varying deductibles, against loss
resulting from claims by reason of any act, error, omission, misstatement,
misleading statement, neglect or breach of duty.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The Northern Trust Company, the Registrant's investment adviser, is a full
service commercial bank and also provides a full range of trust and fiduciary
services. Set forth below is a list of all of the directors, senior officers and
those officers primarily responsible for Registrant's affairs of The Northern
Trust Company and, with respect to each such person, the name and business
address of the company (if any) with which such person has been connected at any
time since November 30, 1997, as well as the capacity in which such person was
connected.
Northern Trust Quantitative Advisors, Inc. ("NTQA") is an indirect
wholly-owned subsidiary of Northern Trust Corporation. The list required by this
Item 26 of officers and directors of NTQA, together with information as to any
other business, profession, vocation or employment of a substantial nature
engaged in by such officers and directors during the past two years, is
incorporated by reference to Schedules A and D of Form ADV, filed by NTQA
pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-333580).
<TABLE>
<CAPTION>
<S><C> <C> <C>
NAME AND POSITION NAME AND PRINCIPAL BUSINESS CONNECTION WITH
WITH INVESTMENT ADVISER ADDRESS OF OTHER COMPANY OTHER COMPANY
Duane L. Burnham Northern Trust Corporation Director
Director 50 S. LaSalle Street
Chicago, IL 60675
Abbott Laboratories Retired Chairman,
150 Field Drive, Suite 160 Chief Executive Officer and Former
Lake Forest, IL Director
Sara Lee Corporation Director
3 First National Plaza
Chicago, IL 60602
Dr. Dolores E. Cross Northern Trust Corporation Director
Director 50 S. LaSalle Street
Chicago, IL 60675
Chicago State University Former President
95th Street at King Drive
Chicago, IL 60643
General Electric Company Former President
3135 Easton Turnpike GE Fund
Fairfield, CT 06432
The Graduate School and University Center Former President of Leadership
The City University of NY and Diversity
33 W. 42nd Street - Room 1400N
New York, NY 10036
Morris Brown College President (6/99)
Administration Building, 2nd Floor
643 Martin Luther King Jr. Drive
Atlanta, GA 30314
<PAGE>
NAME AND POSITION NAME AND PRINCIPAL BUSINESS CONNECTION WITH
WITH INVESTMENT ADVISER ADDRESS OF OTHER COMPANY OTHER COMPANY
Susan Crown Northern Trust Corporation Director
Director 50 S. LaSalle Street
Chicago, IL 60675
Henry Crown and Company Vice President
222 N. LaSalle Street, Suite 2000
Chicago, IL 60601
Baxter International, Inc. Director
One Baxter Parkway
Deerfield, IL 60015
Illinois Tool Works Inc. Director
3600 W. Lake Avenue
Glenview, IL 60025
John R. Goodwin NTQA Director, Managing Director
Senior Vice President 50 S. LaSalle Street and Chief Investment Officer
Chicago, IL 60675
Robert S. Hamada Northern Trust Corporation Director
Director 50 S. LaSalle Street
Chicago, IL 60675
The University of Chicago Dean and Edward Eagle Brown
Graduate School of Business Distinguished Service Professor of
1101 East 58th Street Finance
Chicago, IL 60637
A.M. Castle & Co. Director
3400 North Wolf Road
Franklin, IL 60131
Chicago Board of Trade Director
141 West Jackson Boulevard
Chicago, IL 60674
Barry G. Hastings Northern Trust Corporation President,
President, 50 S. LaSalle Street Chief Operating Officer and Director
Chief Operating Officer and Chicago, IL 60675
Director
Northern Trust of California Corporation Director
355 S. Grand Avenue
Los Angeles, CA 90017
Northern Trust of Florida Corporation Vice Chairman of the Board
700 Brickell Avenue and Director
Miami, FL 33131
Nortrust Realty Mgmt., Inc. Director
50 S. LaSalle Street, 38th Floor
Chicago, IL 60675
<PAGE>
NAME AND POSITION NAME AND PRINCIPAL BUSINESS CONNECTION WITH
WITH INVESTMENT ADVISER ADDRESS OF OTHER COMPANY OTHER COMPANY
Robert A. Helman Northern Trust Corporation Director
Director 50 S. LaSalle Street
Chicago, IL 60675
Mayer, Brown & Platt Partner
190 S. LaSalle Street, 38th Floor
Chicago, IL 60603
Chicago Stock Exchange Governor
One Financial Plaza
440 S. LaSalle Street
Chicago, IL 60605
Dreyer's Grand Ice Cream, Inc. Director
5929 College Avenue
Oakland, CA 94618
TC PipeLines GP, Inc. Director
Four Greenspoint Plaza
16945 Northchase Drive
Houston, TX 77060
Brambles USA, Inc. Director
400 N. Michigan Avenue
Chicago, IL 60611
Zenith Electronics Director
1000 Milwaukee Avenue
Glenview, IL 60025
Arthur L. Kelly Northern Trust Corporation Director
Director 50 S. LaSalle Street
Chicago, IL 60675
KEL Enterprises L.P. Managing Partner
Two First National Plaza
20 S. Clark Street, Suite 2222
Chicago, IL 60603
Bayerische Motoren Director
Werke (BMW) A.G. BMW Haus
Petuelring 130
Postfach 40 02 40
D-8000
Munich 40 Germany
A.G. Deere & Company Director
John Deere Road
Moline, IL 61265
Nalco Chemical Company Former Director
One Nalco Center
Naperville, IL 60563-1198
Snap-on Incorporated Director
2801 80th Street
Kenosha, WI 53140
<PAGE>
NAME AND POSITION NAME AND PRINCIPAL BUSINESS CONNECTION WITH
WITH INVESTMENT ADVISER ADDRESS OF OTHER COMPANY OTHER COMPANY
Tejas Gas Corporation Former Director
1301 McKinney Street
Houston, TX 77010
Thyssen-Krupp Industries AG Director
Am Thyssenhaus 1
45128 Essen Germany
Frederick A. Krehbiel Northern Trust Corporation Director
Director 50 S. LaSalle Street
Chicago, IL 60675
DeVry, Inc. Director
One Tower Lane
Suite 1000
Oak Brook Terrace, IL 60181
Molex Incorporated Co-Chairman, Co-CEO
2222 Wellington Court and Director
Lisle, IL 60532-1682
Nalco Chemical Company Former Director
One Nalco Center
Naperville, IL 60563-1198
Tellabs, Inc. Director
4951 Indiana Avenue
Lisle, IL 60532
Robert A. LaFleur None
Senior Vice President
James J. Mitchell, III The Northern Trust Company of New York Director
President - Worldwide Operations 40 Broad Street, 8th Floor
and Technology and Executive New York, NY 10004
Vice President
William G. Mitchell Northern Trust Corporation Director
Director 50 S. LaSalle Street
Chicago, IL 60675
Peoples Energy Corporation Director
122 South Michigan Avenue
Chicago, IL 60603
The Sherwin-Williams Company Director
101 Prospect Avenue, N.W.
Cleveland, OH 44115-1075
Edward J. Mooney Northern Trust Corporation Director
Director 50 S. LaSalle Street
Chicago, IL 60675
Nalco Chemical Company Chairman, Chief Executive Officer,
One Nalco Center President and Director
Naperville, IL 60563-1198
Morton International, Inc. Former Director
100 North Riverside Plaza
Chicago, IL 60605
FMC Corporation Director
200 E. Randolph Drive
Chicago, IL 60601
<PAGE>
NAME AND POSITION NAME AND PRINCIPAL BUSINESS CONNECTION WITH
WITH INVESTMENT ADVISER ADDRESS OF OTHER COMPANY OTHER COMPANY
William A. Osborn Northern Trust Corporation Director
Chairman and 50 S. LaSalle Street
Chief Executive Officer Chicago, IL 60675
Nortrust Realty Management Inc. Director
50 S. LaSalle Street
Chicago, IL 60675
Northern Futures Corporation Director
50 S. LaSalle Street
Chicago, IL 60675
Sheila A. Penrose Northern Trust Global Advisors, Inc. Director
President - 29 Federal Street
Corporate and Institutional Stamford, CT 06901
Services and Executive
Vice President
Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198
Northern Trust Retirement Consulting, LLC Manager
400 Perimeter Center Terrace, Suite 850
Atlanta, GA 30346
NTQA Director
50 S. LaSalle Street
Chicago, IL 60675
Perry R. Pero Northern Futures Corporation Director
Senior Executive Vice President 50 S. LaSalle Street
and Chief Financial Officer Chicago, IL 60675
Northern Investment Corporation Former Chairman, President and
50 S. LaSalle Street Director,
Chicago, IL 60675 Former Treasurer
Northern Trust Global Advisors, Inc. Director
29 Federal Street
Stamford, CT 06901
Northern Trust Securities, Inc. Director
50 S. LaSalle Street
Chicago, IL 60675
Nortrust Realty Management, Inc. Director
50 S. LaSalle Street
Chicago, IL 60675
NTQA Director
50 S. LaSalle Street
Chicago, IL 60675
Stephen N. Potter NTQA Director and Managing Director
Vice President 50 S. LaSalle Street
Chicago, IL 60675
Peter L. Rossiter None
Executive Vice President
and General Counsel
<PAGE>
NAME AND POSITION NAME AND PRINCIPAL BUSINESS CONNECTION WITH
WITH INVESTMENT ADVISER ADDRESS OF OTHER COMPANY OTHER COMPANY
Harold B. Smith Northern Trust Corporation Director
Director 50 S. LaSalle Street
Chicago, IL 60675
Illinois Tool Works Inc. Chairman of the Executive Committee
3600 West Lake Avenue
Glenview, IL 60025-5811
W.W. Grainger, Inc. Director
5500 West Howard Street
Skokie, IL 60077
Northwestern Mutual Life Insurance Co. Trustee
720 East Wisconsin Avenue
Milwaukee, WI 53202
William D. Smithburg Northern Trust Corporation Director
Director 50 S. LaSalle Street
Chicago, IL 60675
The Quaker Oats Company Retired Chairman,
321 North Clark Street President and Chief Executive Officer
Chicago, IL 60610
Abbott Laboratories Director
One Abbott Park Road
Abbott Park, IL 60675
Corning Incorporated Director
Corning, NY 14831
Prime Capital Corporation Director
10275 W. Higgins Road, Suite 200
Rosemont, IL 60018
James M. Snyder NTQA Chairman,
Executive Vice President 50 S. LaSalle Street Chief Executive Officer and Director
Chicago, IL 60675
Northern Trust Global Advisors, Inc. Director
29 Federal Street
Stamford, CT 06901
Bide L. Thomas Northern Trust Corporation Director
Director 50 S. LaSalle Street
Chicago, IL 60675
MYR Group Inc. Director
(formerly L.E. Myers Company)
2550 W. Golf Road
Rolling Meadows, IL 60008
R.R. Donnelley & Sons Company Director
77 West Wacker Drive
Chicago, IL 60601
<PAGE>
NAME AND POSITION NAME AND PRINCIPAL BUSINESS CONNECTION WITH
WITH INVESTMENT ADVISER ADDRESS OF OTHER COMPANY OTHER COMPANY
Stephen B. Timbers Northern Trust Global Advisors, Inc. Director
President - NTGI 29 Federal Street
and Executive Vice President Stamford, CT 06901
LTV Steel Co. Director
200 Public Square
Cleveland, OH 44114-2308
Zurich-Kemper Investments Former President and
222 S. Riverside Plaza Chief Executive Officer
Chicago, IL 60606
Jeffrey H. Wessel NTQA President and Director
Executive Vice President 50 S. LaSalle Street
Chicago, IL 60675
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Northern Funds Distributors, LLC (the "Distributor"), acts as
distributor for Northern Institutional Funds pursuant to a
distribution agreement dated December 1, 1999. The Distributor
also acts as underwriter for Northern Funds.
(b) The information required by this Item 27(b) with respect to
each director, officer, or partner of Northern Funds
Distributors, LLC is incorporated by reference to Schedule A
of Form BD filed by Northern Funds Distributors, LLC with the
Securities and Exchange Commission pursuant to the Securities
Act of 1934 (File No. 8-51242).
(c) Not Applicable.
<PAGE>
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The Agreement and Declaration of Trust, By-laws and minute books of the
Registrant are in the physical possession of PFPC Inc. (formerly First Data
Investor Services Group, Inc.), 101 Federal Street, Boston, Massachusetts 02110.
Records for Northern Funds Distributors, LLC, the distributor, are located
at Four Falls Corporate Center, 6th Floor, West Conshohocken, Pennsylvania
19428-2961. All other accounts, books and other documents required to be
maintained under Section 31(a) of the Investment Company Act of 1940 and the
Rules promulgated thereunder are in the physical possession of The Northern
Trust Company, 50 S. LaSalle Street, Chicago, Illinois 60675 and NTQA, 50 S.
LaSalle Street, Chicago Illinois 60690.
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
Not Applicable.
<PAGE>
NORTHERN INSTITUTIONAL FUNDS
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a
Trustee of Northern Institutional Funds, a business trust organized under the
laws of The State of Delaware (the "Trust"), does hereby make, constitute and
appoint Richard Rose, Brian Curran, Linda Hoard and Teresa Hamlin, and each of
them, attorneys-in-fact and agents of the undersigned with full power and
authority of substitution and resubstitution, in any and all capacities, to
execute for and on behalf of the undersigned any and all filings and amendments
to the Registration Statement on Form N-1A relating to the shares of the Trust
and any other documents and instruments incidental thereto, and to deliver and
file the same, with all exhibits thereto, and all documents and instruments in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing that said attorneys-in-fact and
agents, and each of them, deem advisable or necessary to enable the Trust to
effectuate the intents and purposes hereof, and the undersigned hereby fully
ratifies and confirms all that said attorneys-in-fact and agents, or any of
them, or their or his or her substitute or substitutes, shall do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed his name this 21st
day of April, 1999.
<TABLE>
<CAPTION>
<S> <C>
/s/ Edward J. Condon, Jr.
Edward J. Condon, Jr.
/s/ Richard Gordon Cline
Richard Gordon Cline
/s/ John W. English
John W. English
/s/ Sandra Polk Guthman
Sandra Polk Guthman
/s/ Frederick T. Kelsey
Frederick T. Kelsey
/s/ William H. Springer
William H. Springer
/s/ Richard P. Strubel
Richard P. Strubel
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S><C> <C>
Exhibit No. Description
(a)(5) Amendment No. 4 dated January 24, 2000 to the Agreement and
Declaration of Trust
(e)(1) Distribution Agreement between the Registrant and Northern Funds
Distributors, LLC
(j)(1) Consent of Drinker Biddle & Reath LLP
(9) Shareholder Servicing Plan for Class C and D Shares and Related Forms
of Servicing Agreement
(10) Service Plan for the Service and Premier Classes of Shares and Related
Forms of Servicing Agreement
(11) Amended and Restated Co-Administration Agreement dated October 5,
1999 among the Registrant, Northern Trust Company and First Data
Investor Services Group, Inc. (now known as PFPC Inc.)
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Boston and Commonwealth of Massachusetts on the 28th day of January,
2000.
NORTHERN INSTITUTIONAL FUNDS
By: /s/Linda J. Hoard
Linda J. Hoard
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
<S><C> <C> <C>
Name Title Date
/s/Jylanne Dunne President January 28, 2000
Jylanne Dunne
/s/Brian R. Curran Treasurer January 28, 2000
Brian R. Curran
WILLIAM H. SPRINGER* Trustee January 28, 2000
William H. Springer
RICHARD G. CLINE* Trustee January 28, 2000
Richard G. Cline
EDWARD J. CONDON* Trustee January 28, 2000
Edward J. Condon
JOHN W. ENGLISH* Trustee January 28, 2000
John W. English
SANDRA P. GUTHMAN* Trustee January 28, 2000
Sandra P. Guthman
RICHARD P. STRUBEL * Trustee January 28, 2000
Richard P. Strubel
*By: /s/Linda J. Hoard January 28, 2000
Linda J. Hoard
Attorney-in-fact
</TABLE>
<PAGE>
Exhibit a(5)
NORTHERN INSTITUTIONAL FUNDS
(a Delaware business trust)
AMENDMENT NO. 4 TO THE AGREEMENT AND DECLARATION OF TRUST
The undersigned hereby certifies that the following resolutions were
duly adopted by the Board of Trustees of Northern Institutional Funds (the
"Trust") on January 24, 2000:
RESOLVED, that the Agreement and Declaration of Trust of the Trust be
amended to change the designation and name of the A, C and D Classes of the
"MarketPower Portfolio" to the A, C and D Classes of the "MarketCommand
Portfolio";
FURTHER RESOLVED, that the officers of the Trust be, and each hereby
is, authorized and empowered to execute and deliver any and all documents,
instruments, papers and writings, including, but not limited to, any instrument
to be filed with the Secretary of State of the State of Delaware, and to do any
and all other acts, in the name of the Trust and on its behalf, as he, she or
they may deem necessary or desirable in connection with or in furtherance of the
foregoing resolution.
Date: January 24, 2000 /s/Linda J. Hoard
Linda J. Hoard
Secretary
Exhibit 3(1)
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made as of this 1st day of December, 1999 (the
"Agreement") by and between Northern Institutional Funds (the "Fund"), a
Massachusetts business trust, and Northern Funds Distributors, LLC, a Wisconsin
limited liability company.
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"'),
and is currently offering shares of beneficial interest (the "Shares"),
representing interests in investment portfolios of the Fund identified on
Schedule A hereto (the "Portfolios") which are registered with the Securities
and Exchange Commission (the "SEC") pursuant to the Fund's Registration
Statement on Form N-1A (the "Registration Statement"); and
WHEREAS, the Fund desires to retain the Distributor as distributor for
the Portfolios to provide for the sale and distribution of the Shares of the
Portfolios identified on Schedule A and for such additional classes or series as
the Fund may issue, and the Distributor is prepared to provide such services
commencing on the date first written above.
NOW THEREFORE, in consideration of the premises and mutual covenants
set forth herein and intending to be legally bound hereby the parties hereto
agree as follows:
1. Service as Distributor
1.1 The Fund hereby appoints the Distributor as exclusive distributor of
the Shares covered by the Registration Statement then in effect under the
Securities Act of 1933, as amended (the "1933 Act"), on the terms and for the
periods set forth in this Agreement. The Distributor hereby accepts such
appointment and agrees to render the services and perform the duties set forth
in this Agreement without compensation. The Distributor will have no liability
for payment for the purchase of Shares by unaffiliated investors sold pursuant
to this Agreement or with respect to redemptions or repurchases of Shares.
1.2 The Distributor agrees to sell Shares of each of the Portfolios, as
agent, from time to time during the term of this Agreement at the Shares' then
current net asset value (with any purchase price adjustments, as applicable).
The net asset value of the Shares shall be determined in the manner provided in
the then current prospectus and statement of additional information relating to
the Shares (collectively, the "Prospectus" and "Statement of Additional
Information"), and when determined shall be applicable to all transactions as
provided in the Prospectus. The net asset value of the Shares shall be
calculated by the Fund or by another entity on behalf of the Fund. The
Distributor shall have no duty to inquire into, or liability for, the accuracy
of the net asset value per Share as calculated.
1.3 The Distributor agrees to use appropriate efforts to solicit orders for
the sale of the Shares. The Distributor shall, at its own expense, finance
appropriate activities which are primarily intended to result in the sale of
Shares, including, but not limited to, the distribution services set forth in
Schedule B to this Agreement. It is contemplated that the Distributor will enter
into selling agreements with securities dealers, financial institutions and
other industry professionals, such as investment advisers, accountants and
estate planning firms to the extent permitted by SEC and NASD regulations or
other governing law, with respect to the offering of Shares to the public. The
Distributor will require each dealer with whom the Distributor has a selling
agreement to conform to the applicable provisions of the Registration Statement,
with respect to the public offering price of the Shares, and the Distributor
shall not cause the Fund to withhold the placing of purchase orders so as to
make a profit thereby.
1.4 The Fund understands that the Distributor is now, and may in the future
be, the distributor of the shares of several investment companies or series
(collectively, the "Investment Entites"), including Investment Entities having
investment objectives similar to those of the Portfolios. The Fund further
understands that investors and potential investors in the Portfolios may invest
in shares of such other Investment Entities. The Fund agrees that the
Distributor's duties to such Investment Entities shall not be deemed in conflict
with its duties to the Fund under this Section 1.4.
1.5 The Distributor shall not utilize any materials in connection with the
sale or offering of Shares except the Fund's then current Prospectus and
Statement of Additional Information and such other materials as the Fund shall
provide or approve. The Fund agrees to furnish the Distributor with sufficient
copies of any and all communications with the public or other materials which
the Fund intends to use in connection any sales of Shares, in adequate time for
the Distributor to file and clear such materials with the proper authorities
before they are put in use. The Distributor and the Fund may agree that any such
material does not need to be filed subsequent to distribution. In addition, the
Fund agrees not to use any such materials until so filed and cleared for use, if
required, by appropriate authorities as well as by the Distributor.
1.6 All activities by the Distributor and its agents and employees, as
distributor of the Shares, shall comply with all applicable laws, rules and
regulations, including, without limitation, all rules and regulations made or
adopted by the SEC or the National Association of Securities Dealers.
1.7 Distributor will transmit any orders received by it for purchase or
redemption of the Shares to the transfer agent for the Fund.
1.8 ever in its judgment such action is warranted, the Fund may decline to
accept any orders for, or make any sales of, the Shares until such time as the
Fund deems it advisable to accept such orders and to make such sales, and the
Fund shall notify the Distributor promptly of any such determination.
1.9 Fund agrees to execute any and all documents and to furnish any and all
information and otherwise to take all actions that may be reasonably necessary
in connection with the qualification of the Shares for sale in such states where
Shares are offered for sale. The Fund shall notify the Distributor in writing of
the states in which the Shares are to be sold and shall notify the Distributor
in writing of any changes to the information contained in the previous
notification.
1.10 Fund shall furnish from time to time, for use in connection with the
sale of the Shares, such information with respect to the Fund and the Shares as
the Distributor may reasonably request; and the Fund warrants that the
statements contained in any such information shall fairly show or represent what
they purport to show or represent. The Fund shall also furnish the Distributor
upon request with: (a) audited annual statements and unaudited semi-annual
statements of a Portfolio's books and accounts prepared by the Fund, (b)
quarterly earnings statements of a Portfolio prepared by the Fund, (c) a monthly
itemized list of the securities in a Portfolio, (d) monthly balance sheets as
soon as practicable after the end of each month, and (c) from time to time such
additional information regarding the financial condition of a Portfolio as the
Distributor may reasonably request.
1.11 Fund represents to the Distributor that all Registration Statements
and Prospectuses filed by the Fund with the SEC under the 1933 Act with respect
to the Shares have been prepared in conformity with the requirements of the 1933
Act and the rules and regulations of the SEC thereunder. As used in this
Agreement, the term "Registration Statement" shall mean any Registration
Statement and any Prospectus and any Statement of Additional Information
relating to the Fund filed with the SEC and any amendments or supplements
thereto at any time filed with the SEC. Except as to information included in the
Registration Statement in reliance upon information provided to the Fund by the
Distributor or any affiliate of the Distributor expressly for use in the
Registration Statement, the Fund represents and warrants to the Distributor that
any Registration Statement, when such Registration Statement becomes effective,
will contain statements required to be stated therein in conformity with the
1933 Act and the rules and regulations of the SEC; that all statements of fact
contained in any such Registration Statement will be true and correct when such
Registration Statement becomes effective; and that no Registration Statement
when such Registration Statement becomes effective will include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading to a
purchaser of the Shares. The Distributor may but shall not be obligated to
propose from time to time such amendment or amendments to any Registration
Statement and such supplement or supplements to any Prospectus as, in the light
of future developments, may, in the opinion of the Distributor's counsel, be
necessary or advisable. The Distributor shall promptly notify the Fund of any
advice given to it by its counsel regarding the necessity or advisability of
amending or supplementing such Registration Statement. If the Fund shall not
propose such amendment or amendments and/or supplement or supplements within
fifteen days after receipt by the Fund of a written request from the Distributor
to do so, the Distributor may, at its option, terminate this Agreement. The Fund
shall not file any amendment to any Registration Statement or supplement to any
Prospectus without giving the Distributor reasonable notice thereof in advance;
provided, however, that nothing contained in this Agreement shall in any way
limit the Fund's right to file at any time such amendments to any Registration
Statement and/or supplements to any Prospectus, of whatever character, as the
Fund may deem advisable, such right being in all respects absolute and
unconditional. The Fund authorizes the Distributor to use any Prospectus or
Statement of Additional Information in the form furnished by the Fund from time
to time in connection with the sale of the Shares.
1.12 Shares shall be offered by either the Distributor or the Fund under
any of the provisions of this Agreement and no orders for the purchase or sale
of Shares hereunder shall be accepted by the Fund if and so long as
effectiveness of the Registration Statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the 1933
Act, or if and so long as a current Prospectus as required by Section 5(b)(2) of
the 1933 Act is not on file with the SEC; provided, however, that nothing
contained in this Section 1.12 shall in any way restrict or have any application
to or bearing upon the Fund's obligation to redeem Shares tendered for
redemption by any shareholder in accordance with the provisions of the Fund's
Registration Statement or Agreement and Declaration of Trust.
1.13 The Fund agrees to advise the Distributor as soon as reasonably
practical by a notice in writing delivered to the Distributor:
(a) of any request by the SEC for amendments to the Registration
Statement, Prospectus or Statement of Additional Information
then in effect or for additional information;
(b) in the event of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement,
Prospectus or Statement of Additional Information then in
effect or the initiation by service of process on the Fund
of any proceeding for that purpose;
(c) of the happening of any event that makes untrue any
statement of a material fact made in the Registration
Statement, Prospectus or Statement of Additional Information
then in effect or that requires the making of a change in
such Registration Statement, Prospectus or Statement of
Additional Information in order to make the statements
therein not misleading; and
(d) of all actions of the SEC with respect to any amendments to
any Registration Statement, Prospectus or Statement of
Additional Information which may from time to time be filed
with the SEC.
For purposes of this Section 1.13, informal requests by or acts of the
staff of the SEC shall not be deemed actions of or requests by the SEC.
1.14 The Fund represents and warrants to the Distributor that the Fund is
an investment company registered under the 1940 Act and the Shares sold by each
Portfolio are, and will be, registered under the 1933 Act.
1.15 The Distributor agrees to maintain, and preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act, such records as are required to be
maintained by Rule 31a-1(d) under the 1940 Act.
2. Compensation and Expenses
The Fund will bear the following expenses:
(a) preparation, printing and distribution of sufficient copies
of the Prospectus and Statement of Additional Information to
existing shareholders;
(b) preparation, printing and distribution of reports and other
communications (not prepared by the Distributor) to existing
shareholders;
(c) registration of the Shares under the federal and state
securities laws;
(d) maintaining facilities for the issue and transfer of Shares;
(e) supplying information, prices and other data to be furnished
by the Fund under this Agreement;
(f) any original issue taxes or other transfer taxes applicable
to the sale or delivery of the Shares or certificates
therefor; and
(g) any payments made in accordance with any plan hereafter
adopted pursuant to Rule 12b-1 under the 1940 Act.
3. Indemnification
3.1 The Fund agrees to indemnify and hold the Distributor, its officers,
directors, and employees, and any person who controls the Distributor within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, costs, expenses (including reasonable attorneys' fees), losses,
damages, charges, payments and liabilities of any sort or kind which the
Distributor, its officers, directors, employees or any such controlling person
may incur under the 1933 Act, under any other statute, or under common law or
otherwise, arising out of or based upon (i) any untrue statement, or alleged
untrue statement, of a material fact contained in the Fund's Registration
Statement, Prospectus or Statement of Additional Information (including
amendments and supplements thereto), or (ii) any omission, or alleged omission,
to state a material fact required to be stated in the Fund's Registration
Statement, Prospectus or Statement of Additional Information (including
amendments or supplements thereto) or necessary to make the statements therein
not misleading; provided, however, that insofar as any losses, claims, damages,
costs, charges, payments, liabilities or expenses arise out of or are based upon
any such untrue statement or omission or alleged untrue statement or omission
made in reliance on and in conformity with information furnished to the Fund by
the Distributor or its affiliated persons for use in the Fund's Registration
Statement, Prospectus or Statement of Additional Information (including
amendments or supplements thereto), such indemnification is not applicable; and
further provided that the Fund's agreement to indemnify the Distributor and the
Fund's representations and warranties hereinbefore set forth in Section 1.11
shall not be deemed to cover any liability to the Fund, its officers, trustees
or shareholders to which the Distributor would otherwise be subject by reason
of: (a) the Distributor's willful misfeasance, bad faith or negligence in the
performance of its duties and obligations, or by reason of the Distributor's
reckless disregard of its duties and obligations under this Agreement; or (b)
the Distributor's breach of Section 12 of this Agreement. The Fund agrees and
acknowledges that the Distributor has not prior to the date hereof assumed, and
will not assume, any obligations or liabilities arising out of the conduct of
the Fund or its distributor prior to the date hereof of those duties which the
Distributor has agreed to perform pursuant to this Agreement. The Fund further
agrees to indemnify the Distributor against any losses, claims, damages or
liabilities to which the Distributor may become subject in connection with the
conduct by the Fund or its distributor of such duties prior to the date hereof;
provided that the Fund's agreement to indemnify the Distributor shall not be
deemed to cover any liability to the Fund, its officers, trustees or
shareholders to which the Distributor would otherwise be subject by reason of
willful misfeasance, bad faith or negligence in the performance of its duties
and obligations, or by reason of the Distributor's reckless disregard of its
duties and obligations under this Agreement.
3.2 The Distributor agrees to indemnify and hold harmless the Fund, its
several officers and trustees and each person, if any, who controls a Portfolio
within the meaning of Section 15 of the 1933 Act, from and against any and all
claims, costs, expenses (including reasonable attorneys' fees), losses, damages,
charges, payments and liabilities of any sort or kind which the Fund, its
officers or trustees, or any such controlling person, may incur under the 1933
Act, under any other statute, or under common law or otherwise, but only to the
extent that such liability or expense incurred by the Fund, its officers or
trustees, or any controlling person, resulting from such claims or demands,
shall arise out of or be based upon any untrue statement, or alleged untrue
statement, of a material fact contained in the Fund's Registration Statement,
Prospectus or Statement of Additional Information (including amendments and
supplements thereto), or any omission, or alleged omission, to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, if such statement or omission was made in reliance upon
information furnished or confirmed to the Fund by the Distributor or its
affiliated persons (as defined in the 1940 Act). The Distributor also agrees to
indemnify and hold harmless the Fund, its officers or trustees, or any
controlling person in connection with any claim or in connection with any
action, suit or proceeding which arises out of or is alleged to arise out of:
(a) the Distributor's willful misfeasance, bad faith or negligence in the
performance of its duties and obligations or by reason of the Distributor's
reckless disregard of its duties and obligations under this Agreement; or (b)
the Distributor's breach of Section 12 of this Agreement. The foregoing rights
of indemnification shall be in addition to any other rights to which the Fund,
its officers or trustees, or any controlling person shall be entitled to as a
matter of law.
3.3 In any case in which one party hereto (the "Indemnifying Party") may be
asked to indemnify or hold the other party hereto (the "Indemnified Party")
harmless, the Indemnified Party will notify the Indemnifying Party in writing
promptly after identifying any situation which it believes presents or appears
likely to present a claim for indemnification (an "Indemnification Claim")
against the Indemnifying Party, although the failure to do so shall not relieve
the Indemnifying Party from any liability which it may otherwise have to the
Indemnified Party, and the Indemnified Party shall keep the Indemnifying Party
advised with respect to all developments concerning such situation. The
Indemnifying Party shall be entitled to participate at its own expense in the
defense, or if it so elects, to assume the defense of, any Indemnification Claim
which may be the subject of this indemnification, and, in the event that the
Indemnifying Party so elects, such defense shall be conducted by counsel of good
standing chosen by the Indemnifying Party and approved by the Indemnified Party,
which approval shall not be unreasonably withheld. In the event the Indemnifying
Party elects to assume the defense of any such Indemnification Claim and retain
such counsel, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by the Indemnified Party. In the event that the
Indemnifying Party does not elect to assume the defense of any such
Indemnification Claim, or in case the Indemnified Party reasonably does not
approve of counsel chosen by the Indemnifying Party, or in case there is a
conflict of interest between the Indemnifying Party or the Indemnified Party,
the Indemnifying Party will reimburse the Indemnified Party for the fees and
expenses of any counsel retained by the Indemnified Party. The Fund agrees
promptly to notify the Distributor of the commencement of any litigation or
proceedings against the Fund or any of its officers or trustees in connection
with the issue and sale of any of the Shares, and the Distributor agrees
promptly to notify the Fund of the commencement of any litigation or proceedings
against the Distributor or any of its officers, directors, employees or
controlling persons in connection with the issuance and sale of any of the
Shares. The Indemnified Party will not confess any Indemnification Claim or make
any compromise in any case in which the Indemnifying Party will be asked to
provide indemnification, except with the Indemnifying Party's prior written
consent.
3.4 The obligations of the parties hereto under this Section 3 shall
survive the termination of this Agreement.
3.5 The Fund's indemnification agreement contained in this Section 3 and
the Fund's representations and warranties in this Agreement shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Distributor, its officers, directors and employees, or any
controlling person, and shall survive the delivery of any Shares. This agreement
of indemnity will inure exclusively to the Distributor's benefit, to the benefit
of its several officers, directors and employees, and their respective estates
and to the benefit of its controlling persons and their successors.
3.6 The Distributor's indemnification agreement contained in this Section 3
and the Distributor's representations and warranties in this Agreement shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of the Fund or its officers and trustees, or any
controlling person, and shall survive the delivery of any Shares.
4. Standard of Care; Limitation of Liability
4.1 The Distributor shall not be liable to the Fund for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of its obligations and duties under this Agreement, except
a loss resulting from: (a) the Distributor's willful misfeasance, bad faith or
negligence in the performance of such obligations and duties, or by reason of
its reckless disregard thereof, or (b) the Distributor's breach of Section 12 of
this Agreement.
4.2 Each party shall have the duty to mitigate damages for which the other
party may become responsible.
4.3 NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT
SHALL EITHER PARTY, ITS AFFILIATES OR ANY OF ITS OR THEIR DIRECTORS, TRUSTEES,
OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE TO THE OTHER PARTY FOR
CONSEQUENTIAL DAMAGES, PROVIDED, HOWEVER, THAT NOTHING CONTAINED IN THIS SECTION
4.3 SHALL BE CONSTRUED SO AS TO LIMIT THE RIGHTS OF ANY SHAREHOLDER OF THE FUND,
WHETHER SUING ON HIS, HER OR ITS OWN BEHALF OR DERIVATIVELY THROUGH THE FUND, TO
CONSEQUENTIAL DAMAGES.
5. Term
5.1 This Agreement shall become effective on the date first written above
and, unless sooner terminated as provided herein, shall continue until April 30,
2000 and thereafter shall continue automatically for successive one-year terms,
provided such continuance is specifically approved at least annually by (i) the
Fund's Board of Trustees or (ii) by a vote of a majority (as defined in the 1940
Act and Rule l8f-2 thereunder) of the outstanding voting securities of the Fund,
provided that in either event the continuance is also approved by a majority of
the trustees who are not parties to this Agreement and who are not interested
persons (as defined in the 1940 Act) of any party to this Agreement, by vote
cast in person at a meeting called for the purpose of voting on such approval.
This Agreement is terminable without penalty, on at least sixty days' written
notice, by the Fund's Board of Trustees, by vote of a majority (as defined in
the 1940 Act and Rule 18f-2 thereunder) of the outstanding voting securities of
the Fund, or by the Distributor. This Agreement will also terminate
automatically in the event of its assignment (as defined in the 1940 Act and the
rules thereunder).
5.2 In the event a termination notice is given by the Fund and provided
that the Distributor is not in default under this Agreement at the time of such
termination notice, all expenses associated with movement of records and
materials and conversion thereof to a successor distributor will be borne by the
Fund.
6. Modifications and Waivers
No change, termination, modification, or waiver of any term or
condition of the Agreement shall be valid unless in writing signed by
each party. No such writing shall be effective as against the
Distributor unless said writing is executed by a Senior Vice President,
Executive Vice President or President of the Distributor. No such
writing shall be effective as against the Fund unless said writing is
executed by the Chairman of the Fund's Board of Trustees. A party's
waiver of a breach of any term or condition in the Agreement shall not
be deemed a waiver of any subsequent breach of the same or another term
or condition.
7. No Presumption Against Drafter
The Distributor and the Fund have jointly participated in the
negotiation and drafting of this Agreement. The Agreement shall be
construed as if drafted jointly by the Fund and the Distributor, and no
presumptions arise favoring any party by virtue of the authorship of
any provision of this Agreement.
8. Publicity
Neither the Distributor nor the Fund shall release or publish news
releases, public announcements, advertising or other publicity relating
to this Agreement or to the transactions contemplated by it without
prior review and written approval of the other party; provided,
however, that either party may make such disclosures as are required by
legal, accounting or regulatory requirements after making reasonable
efforts in the circumstances to consult in advance with the other
party.
9. Severability
The parties intend every provision of this Agreement to be severable.
If a court of competent jurisdiction determines that any term or
provision is illegal or invalid for any reason, the illegality or
invalidity shall not affect the validity of the remainder of this
Agreement. In such case, the parties shall in good faith modify or
substitute such provision consistent with the original intent of the
parties. Without limiting the generality of this paragraph, if a court
determines that any remedy stated in this Agreement has failed of its
essential purpose, then all other provisions of this Agreement shall
remain fully effective.
10. Force Majeure
No party shall be liable for any default or delay in the performance of
its obligations under this Agreement if and to the extent such default
or delay is caused, directly or indirectly, by circumstances beyond
such party's reasonable control. In any such event, the non-performing
party shall be excused from any further performance and observance of
the obligations so affected only for so long as such circumstances
prevail and such party continues to use commercially reasonable efforts
to recommence performance or observance as soon as practicable.
11. Miscellaneous
11.1 Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or the Distributor shall be
sufficiently given if addressed to the party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Fund:
James D. Grassi, Esq.
The Northern Trust Company
50 South LaSalle Street - M-9
Chicago, IL 60675
with a copy to:
W. Bruce McConnel, III Esq.
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
To the Distributor:
Philip Rinnander
c/o Provident Distributors, Inc.
Four Falls Corporate Center
6th Floor
West Conshohocken, PA 19428-2961
11.2 The laws of the Commonwealth of Massachusetts, excluding the
applicable provisions of the 1940 Act, shall govern the interpretation,
validity, and enforcement of this Agreement. To the extent the provisions of
Massachusetts law or the provisions hereof conflict with the 1940 Act, the 1940
Act shall control. All actions arising from or related to this Agreement shall
be brought in the state and federal courts sitting in the City of Boston, and
the Distributor and the Fund hereby submit themselves to the exclusive
jurisdiction of those courts.
11.3 This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original and which collectively shall be deemed
to constitute only one instrument.
11.4 The captions of this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
11.5 This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and is not intended to confer
upon any other person any rights or remedies hereunder.
12. Confidential
12.1 The parties agree that the Proprietary Information (defined below) is
confidential information of the parties and their respective licensers. The Fund
and the Distributor shall exercise at least the same degree of care, but not
less than reasonable care, to safeguard the confidentiality of the Proprietary
Information of the other as it would protect its own Proprietary Information.
The Fund and the Distributor may use the Proprietary Information only to
exercise their respective rights or perform their respective duties under this
Agreement. Except as otherwise required by law, the Fund and the Distributor
shall not duplicate, sell or disclose to others the Proprietary Information of
the other, in whole or in part, without the prior written permission of the
other party. The Fund and the Distributor may, however, disclose Proprietary
Information to their respective employees who have a need to know the
Proprietary Information to perform work for the other, provided that the Fund
and the Distributor shall use reasonable efforts to ensure that the Proprietary
Information is not duplicated or disclosed by their respective employees in
breach of this Agreement. The Fund and the Distributor may also disclose the
Proprietary Information to independent contractors, auditors and professional
advisors, provided they first agree in writing to be bound by confidentiality
obligations substantially similar to this Section 12. Notwithstanding the
previous sentence, in no event shall either the Fund or the Distributor disclose
the Proprietary Information to any competitor of the other without specific,
prior written consent.
12.2 Proprietary Information means:
(a) any data or information that is completely sensitive material, and
not generally known to the public, including, but not limited to,
information about product plans, marketing strategies, finance,
operations, customer relationships, customer profiles, sales
estimates, business plans, and internal performance results relating
to the past, present or future business activities of the Fund or the
Distributor, their respective subsidiaries and affiliated companies
and the customers, clients and suppliers of any of them;
(b) any scientific or technical information, design, process,
procedure, formula, or improvement that is commercially valuable and
secret in the sense that its confidentiality affords the Fund or the
Distributor a competitive advantage over its competitors;
(c) all confidential or proprietary concepts, documentation, reports,
data, specifications, computer software, source code, object code,
flow charts, databases, inventions, know-how, show-how and trade
secrets, whether or not patentable or copyrightable;
(d) all documents, inventions, substances, engineering and laboratory
notebooks, drawings, diagrams, specifications, bills of material,
equipment, prototypes and models, and any other tangible manifestation
of the foregoing of either party which now exist or come into the
control or possession of the other; and
(e) with respect to the Fund, all records and other information
relative to the Fund and its prior, present or potential shareholders
(and clients of such shareholders).
12.3 Notwithstanding the foregoing, it is hereby understood and agreed by
the parties hereto that any marketing strategies, financing plans, customer
profiles, sales estimates, business plans or similar items prepared or developed
by the Distributor for the benefit of the Fund shall be considered the
Proprietary Information of the Fund and nothing in this Agreement shall be
construed to prevent or prohibit the Fund from disclosing such Proprietary
Information to a successor distributor.
12.4 The obligations of the parties hereto under this Section 12 shall
survive the termination of this Agreement.
13. Trustee and Shareholder Liability
This Agreement is executed by or on behalf of the Fund with respect to
each of the Portfolios and the obligations hereunder are not binding
upon any of the trustees, officers or shareholders of the Fund
individually but are binding only upon the Portfolio to which such
obligations pertain and the assets and property of such Portfolio. All
obligations of the Fund under this Agreement shall apply only on a
Portfolio-by-Portfolio basis, and the assets of one Portfolio shall not
be liable for the obligations of another Portfolio. The Fund's
Declaration of Trust is on file with the Secretary of the Commonwealth
of Massachusetts.
14. Entire Agreement
This Agreement, including all Schedules hereto, constitutes the entire
agreement between the parties with respect to the subject matter hereof
and supersedes all prior and contemporaneous proposals, agreements,
contracts, representations, and understandings, whether written or
oral, between the parties with respect to the subject matter hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
NORTHERN INSTITUTIONAL FUNDS
By: /s/Jylanne Dunne
Name: Jylanne Dunne
Title: President
NORTHERN FUNDS DISTRIBUTORS, LLC
By: /s/Philip H. Rinnander
Name: Philip H. Rinnander
Title: President
<PAGE>
SCHEDULE A
LIST OF PORTFOLIOS
Non-International Portfolios:
Government Select Portfolio
Government Portfolio
Diversified Assets Portfolio
Tax-Exempt Portfolio
Municipal Portfolio
U.S. Government Securities Portfolio
Short-Intermediate Bond Portfolio
U.S. Treasury Index Portfolio
Bond Portfolio
Intermediate Bond Portfolio
Balanced Portfolio
Equity Index Portfolio
Diversified Growth Portfolio
Focused Growth Portfolio
Small Company Index Portfolio
Small Company Growth Portfolio
MidCap Growth Portfolio
MarketPower Portfolio
International Portfolios:
International Bond Portfolio
International Equity Index Portfolio
International Growth Portfolio
<PAGE>
SCHEDULE B
DISTRIBUTION SERVICES
The Distributor shall, at its own expense, finance appropriate activities
which are primarily intended to result in the sale of the Shares. Such services
shall include, but are not limited to:
1. Preparation and execution of selling agreements
monitoring accruals
monitoring expenses
making disbursements for expenses and fees
2. Advertising and sales literature submission to the NASD
3. Investor qualification calls, as necessary
4. Printing and mailing of Prospectuses to other than existing shareholders
Exhibit h(9)
NORTHERN INSTITUTIONAL FUNDS
(formerly, "The Benchmark Funds")
SHAREHOLDER SERVICING PLAN
FOR CLASS C AND D SHARES
Section 1. Upon the recommendation of The Northern Trust
Company, the Trust's investment adviser ("Northern"), any officer of Northern
Institutional Funds (the "Trust") is authorized to execute and deliver, in the
name and on behalf of the Trust, written agreements in substantially the forms
attached hereto or in any other forms previously or hereafter approved by the
Board of Trustees of the Trust or, after the Trust's reorganization as a
Delaware business trust, the Trust's successor ("Servicing Agreements") with
various financial institutions and other organizations ("Servicing Agents") of
Class C and/or D Shares of the Equity Index, Small Company Index, Diversified
Growth, Focused Growth, U.S. Treasury Index, U.S. Government Securities,
Short-Intermediate Bond, Bond, Intermediate Bond, Balanced, International
Growth, International Bond, International Equity Index, Global Asset, Small
Company Growth, Mid Cap Growth and MarketPower Portfolios (collectively the
"Funds" or individually, a "Fund"). Such Servicing Agreements shall require the
Servicing Agents to provide, or to arrange to provide, support services as set
forth therein to their customers, clients, employees and others ("Clients") who
beneficially own Shares of beneficial interest in Class C and/or D of one or
more of the Funds ("Fund Shares") in consideration for a fee, computed daily and
paid monthly in the manner set forth in the Servicing Agreements, at the annual
rate of up to .15% and .25% of the average daily net asset value of Class C
and/or D Shares of a Fund, respectively, held by the Servicing Agents on behalf
of their Clients. All expenses incurred by the Trust in connection with
Servicing Agreements for Class C and/or D Shares of a particular Fund shall be
allocated entirely to such Class C and/or D Shares of that particular Fund. The
fee allocated to the Class C and/or D Shares of a particular Fund shall be the
several (and not joint or joint and several) obligation of each such Class of
such Fund.
Section 2. Northern shall monitor the arrangements pertaining to the
Trust's Servicing Agreements with Servicing Agents. Northern shall not, however,
be obliged by this Plan to recommend, and the Trust shall not be obliged to
execute, any Servicing Agreement with any qualifying Servicing Agent.
Section 3. So long as this Plan is in effect, Northern shall provide to
the Trust's Board of Trustees, and the Trustees shall review, at least
quarterly, a written report of the amounts expended pursuant to this Plan and
the purposes for which such expenditures were made.
Section 4. This Plan shall become effective with respect to Class C
and/or D Shares of a particular Fund upon the approval of the Plan (and the
relevant form of Servicing Agreement attached hereto) by a majority of the Board
of Trustees, including a majority of the Trustees who are not "interested
persons" as defined in the Investment Company Act of 1940 (the "Act") of the
Trust and have no direct or indirect financial interest in the operation of this
Plan or in any Servicing Agreements or other agreements related to this Plan
(the "Disinterested Trustees"), pursuant to a vote cast in person at a meeting
called for the purpose of voting on the approval of this Plan (and relevant form
of Servicing Agreement) with respect to such Class C and/or D Shares,
respectively.
Section 5. Unless sooner terminated, this Plan shall continue until
April 30, 1999 and thereafter shall continue automatically for successive annual
periods ending on April 30, provided such continuance is approved at least
annually in the manner set forth in Section 4.
Section 6. This Plan may be amended at any time by the Board of
Trustees, provided that any material amendments of the terms of this Plan shall
become effective only upon the approval set forth in Section 4.
Section 7. This Plan is terminable at any time by vote of a majority of
the Disinterested Trustees.
Section 8. While this Plan is in effect, the selection and nomination
of those Trustees who are not "interested persons" (as defined in the Act) of
the Trust shall be committed to the discretion of the Disinterested Trustees.
Section 9. The Trust has adopted this Shareholder Services Plan as of
April 27, 1993 and last revised this Plan as of October 5, 1999.
Section 10. All persons dealing with the Trust must look solely to the
Trust's property for the enforcement of any claims against the Trust, as neither
the Trustees, officers, agents nor shareholders of the Trust assume any personal
liability for obligation entered into on the Trust's behalf.
<PAGE>
FORM
Northern Institutional Funds
(formerly, "The Benchmark Funds")
4900 Sears Tower
Chicago, Illinois 60606
SERVICING AGREEMENT
For Class C Shares
Gentlemen:
We wish to enter into this Servicing Agreement with you concerning the
provision of administrative support services to your customers, clients,
employees and others ("Customers") and other investors ("Investors")
(collectively "Clients") who may from time to time beneficially own shares of
beneficial interest in Class C of one or more of the portfolios which are listed
on Appendix A hereto (collectively the "Funds," and individually a "Fund")
offered by Northern Institutional Funds ("Fund Shares").
The terms and conditions of this Servicing Agreement are as follows:
Section 1. You agree to provide or arrange for the provision
of one or more of the following services to Clients who may from time to time
beneficially own Fund Shares: (1) establishing and maintaining separate account
records of Customers or other Investors; (2) providing Customers or other
Investors with a service that invests their assets in Fund Shares pursuant to
specific or pre-authorized instructions, and assistance with new account
applications; (3) aggregating and processing purchase and redemption requests
for Fund Shares from Customers or other Investors, and placing purchase and
redemption orders with the Transfer Agent; (4) issuing confirmations to
Customers or other Investors in accordance with applicable law; (5) arranging
for the timely transmission of funds representing the net purchase price or
redemption proceeds; (6) processing dividend payments on behalf of Customers or
other Investors; (7) providing information periodically to Customers or other
Investors showing their positions in Fund Shares; (8) responding to Customer or
other Investor inquiries (including requests for prospectuses), and complaints
relating to the services performed by the institutions; (9) 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; (10) providing or arranging for another person to
provide subaccounting with respect to Fund Shares beneficially owned by
Customers or other Investors; (11) 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; (12) providing such office
space, facilities and personnel as may be required to answer questions and
respond to inquiries; (13) maintaining appropriate management reporting and
statistical information; (14) paying expenses related to the preparation of
educational and other explanatory materials in connection with the development
of investor services; (15) developing and monitoring investment programs; or
(16) providing such other similar services as the Trust may reasonably request
to the extent the Institutions are permitted to do so under applicable law,
rules and regulations.
Section 2. We recognize that you may be subject to the
provisions of the Glass-Steagall Act and other laws governing, among other
things, the conduct of activities by Federally chartered and supervised banks
and other banking organizations. As such, you are restricted in the activities
you may undertake and for which you may be paid and, therefore, you will perform
only those activities which are consistent with your statutory and regulatory
obligations. You will act solely as agent for, upon the order of, and for the
account of, your Clients.
Section 3. In performing your duties hereunder, you shall act
in conformity with the then effective prospectus and statement of additional
information applicable to the Fund Shares, the Investment Company Act of 1940
and all other applicable Federal and State banking, securities and other laws,
regulations and rulings. You will assume sole responsibility for your compliance
with applicable Federal and State laws and regulations, and shall rely
exclusively upon your own determination, or that of your legal advisers, that
the performance of your duties hereunder complies with such laws and
regulations. You shall perform your duties hereunder in a manner consistent with
the customs and practices of other financial institutions that provide similar
services.
Section 4. You will provide such office space and equipment,
telephone facilities and personnel (which may be any part of the space,
equipment and facilities currently used in your business, or any personnel
employed by you) as may be reasonably necessary or beneficial in order to
provide such services to Clients.
Section 5. Neither you nor any of your officers, employees or
agents are authorized to make any representations concerning us or Fund Shares
except those contained in our then current prospectuses for such Shares, copies
of which will be supplied by us to you, or in such supplemental literature or
advertising as may be authorized by us in writing.
Section 6. For all purposes of this Agreement you will be
deemed to be an independent contractor, and will have no authority to act as
agent for us in any matter, or in any respect. By your written acceptance of
this Agreement, you agree to and do release, indemnify and hold us harmless from
and against any and all direct or indirect liabilities or losses resulting from
requests, directions, actions or inactions of or by you or your officers,
employees or agents regarding your responsibilities hereunder or the purchase,
redemption, transfer or registration of Fund Shares by or on behalf of Clients.
You and your employees will upon request, be available during normal business
hours to consult with us or our designees concerning the performance of your
responsibilities under this Agreement.
Section 7. In consideration of the services and facilities
provided by you or arranged by you to be provided hereunder, we will pay to you,
and you will accept as full payment therefor, a fee at the annual rate of .15%
of the average daily net asset value of the Fund Shares beneficially owned by
your Clients for whom you are the dealer of record or holder of record or with
whom you have a servicing relationship (the "Clients' Fund Shares"), which fee
will be computed daily and payable monthly. For purposes of determining the fees
payable under this Section 7, the average daily net asset value of the Clients'
Fund Shares will be computed in the manner specified in our registration
statement (as the same is in effect from time to time) in connection with the
computation of the net asset value of Fund Shares for purposes of purchases and
redemptions. The fee rate stated above may be prospectively increased or
decreased by us, in our sole discretion, at any time upon notice to you.
Further, we may, in our discretion, and without notice, suspend or withdraw the
sale of Fund Shares, including the sale of such Shares to you for the account of
any Client or Clients.
Section 8. Any person authorized to direct the disposition of
monies paid or payable by us pursuant to this Agreement will provide to our
Board of Trustees, and our Trustees will review, at least quarterly, a written
report of the amounts so expended and the purposes for which such expenditures
were made. In addition, you will furnish us or our designees with such
information as we or they may reasonably request (including, without limitation,
periodic certifications confirming the provision to Clients of the services
described herein), and will otherwise cooperate with us and our designees
(including, without limitation, any auditors designated by us), in connection
with the preparation of reports to our Board of Trustees concerning this
Agreement and the monies paid or payable by us pursuant hereto, as well as any
other reports or filings that may be required by law. You will be responsible
for promptly reporting to us and our Board of Trustees any potential or existing
conflicts with respect to the investments of your Clients in the Funds.
Section 9. We may enter into other similar Servicing
Agreements with any other person or persons without your consent.
Section 10. By your written acceptance of the Agreement, you
represent, warrant and agree that: (i) in no event will any of the services
provided by you hereunder be primarily intended to result in the sale of any
Fund Shares issued by us; (ii) the compensation payable to you hereunder,
together with any other compensation payable to you by Clients in connection
with the investment of their assets in the Funds, will be disclosed by you to
your Clients, will be authorized by your Clients and will not result in an
excessive or unreasonable fee to you; (iii) in the event an issue pertaining to
this Agreement or our Shareholder Servicing Plan related hereto is submitted for
approval, you will vote any Fund Shares held for your own account in the same
proportion as the vote of the Fund Shares held for your Clients benefits; and
(iv) you will not engage in activities pursuant to the Agreement which
constitute acting as a broker or dealer under state law unless you have obtained
the licenses required by such law.
Section 11. This Agreement will become effective on the date a
fully executed copy of this Agreement is received by us or our designee. Unless
sooner terminated, this Agreement will continue until the next April 30, and
thereafter will continue automatically for successive annual periods ending on
April 30, provided such continuance is specifically approved at least annually
by us in the manner described in Section 15 hereof. This Agreement is
terminable, without penalty, at any time by us (which termination may be by vote
of a majority of our Disinterested Trustees as defined in Section 15 hereof) or
by you upon notice to the other party hereto.
Section 12. All notices and other communications to either you
or us will be duly given if mailed, telegraphed, telexed or transmitted by
similar telecommunications device to the appropriate address shown herein.
Section 13. This Agreement will be construed in accordance
with the laws of the State of Illinois and is non-assignable by the parties
hereto.
Section 14. All persons dealing with us must look solely to
our property for the enforcement of any claims against us, as neither our
Trustees, officers, agents nor shareholders assume any personal liability for
obligations entered into on our behalf.
Section 15. This Agreement has been approved by vote of a
majority of (i) our Board of Trustees and (ii) those Trustees who are not
"interested persons" (as defined in the Investment Company Act of 1940) of us
and have no direct or indirect financial interest in the operation of the
Shareholder Servicing Plan adopted by us regarding the provision of support
services to the beneficial owners of Fund Shares or in any agreements related
thereto ("Disinterested Trustees"), cast in person at a meeting called for the
purpose of voting on such approval.
Section 16. The Declaration of Trust establishing Northern
Institutional Funds, dated July 1, 1997, a copy of which, together with all
amendments thereto (the "Declaration"), is on file with the Trust. The name
"Northern Institutional Funds" refers to the Trustees under the Declaration
collectively as Trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of Northern Institutional Funds, shall
be held to any personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or claim or otherwise in
connection with the affairs of said Northern Institutional Funds, but the Trust
Estate only shall be liable.
If you agree to be legally bound by the provisions of this
Agreement, please sign a copy of this letter where indicated below and promptly
return it to [insert name and address].
Very truly yours,
NORTHERN INSTITUTIONAL FUNDS
Date: By:
Authorized Officer
Accepted and Agreed to:
Date: By:
Authorized Officer
<PAGE>
APPENDIX A
Please check the appropriate boxes to indicate the Class C
Shares of Northern Institutional Funds for which you wish to act as Servicing
Agent:
[GRAPHIC OMITTED]15 Equity Index Portfolio
[GRAPHIC OMITTED]16 Small Company Index Portfolio
[GRAPHIC OMITTED]17 Diversified Growth Portfolio
[GRAPHIC OMITTED]18 Focused Growth Portfolio
[GRAPHIC OMITTED]19 U.S. Treasury Index Portfolio
[GRAPHIC OMITTED]20 U.S. Government Securities Portfolio
[GRAPHIC OMITTED]21 Short-Intermediate Bond Portfolio
[GRAPHIC OMITTED]22 Bond Portfolio
[GRAPHIC OMITTED]23 Intermediate Bond Portfolio
[GRAPHIC OMITTED]24 Balanced Portfolio
[GRAPHIC OMITTED]25 International Growth Portfolio
[GRAPHIC OMITTED]26 International Bond Portfolio
[GRAPHIC OMITTED]27 International Equity Index Portfolio
[GRAPHIC OMITTED]28 Global Asset Portfolio
[GRAPHIC OMITTED]29 Small Company Growth Portfolio
[GRAPHIC OMITTED]30 Mid Cap Growth Portfolio
[GRAPHIC OMITTED]31 MarketPower Portfolio
<PAGE>
FORM
Northern Institutional Funds
(formerly, "The Benchmark Funds")
4900 Sears Tower
Chicago, Illinois 60606
SERVICING AGREEMENT
For Class D Shares
Gentlemen:
We wish to enter into this Servicing Agreement with you concerning the
provision of administrative support services to your customers, clients,
employees and others ("Customers") and other investors ("Investors")
(collectively "Clients") who may from time to time beneficially own shares of
beneficial interest in Class D of one or more of the portfolios which are listed
on Appendix A hereto (collectively the "Funds," and individually a "Fund")
offered by Northern Institutional Funds ("Fund Shares").
The terms and conditions of this Servicing Agreement are as follows:
Section 1. You agree to provide or arrange for the provision
of one or more of the following services to Clients who may from time to time
beneficially own Fund Shares: (1) establishing and maintaining separate account
records of Customers or other Investors; (2) providing Customers or other
Investors with a service that invests their assets in Fund Shares pursuant to
specific or pre-authorized instructions, and assistance with new account
applications; (3) aggregating and processing purchase and redemption requests
for Fund Shares from Customers or other Investors, and placing purchase and
redemption orders with the Transfer Agent; (4) issuing confirmations to
Customers or other Investors in accordance with applicable law; (5) arranging
for the timely transmission of funds representing the net purchase price or
redemption proceeds; (6) processing dividend payments on behalf of Customers or
other Investors; (7) providing information periodically to Customers or other
Investors showing their positions in Fund Shares; (8) responding to Customer or
other Investor inquiries (including requests for prospectuses), and complaints
relating to the services performed by the institutions; (9) 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; (10) providing or arranging for another person to
provide subaccounting with respect to Fund Shares beneficially owned by
Customers or other Investors; (11) 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; (12) displaying and making
prospectuses available on an institution's premises; (13) providing such office
space, facilities and personnel as may be required to answer questions of
potential investors and respond to inquiries of Customers and other Investors;
(14) maintaining appropriate management reporting and statistical information;
(15) paying expenses related to the preparation of educational and other
explanatory materials in connection with the development of investor services;
(16) developing and monitoring investment programs; or (17) providing such other
similar services as the Trust may reasonably request to the extent the
Institutions are permitted to do so under applicable law, rules and regulations.
Section 2. We recognize that you may be subject to the
provisions of the Glass-Steagall Act and other laws governing, among other
things, the conduct of activities by Federally chartered and supervised banks
and other banking organizations. As such, you are restricted in the activities
you may undertake and for which you may be paid and, therefore, you will perform
only those activities which are consistent with your statutory and regulatory
obligations. You will act solely as agent for, upon the order of, and for the
account of, your Clients.
Section 3. In performing your duties hereunder, you shall act
in conformity with the then effective prospectus and statement of additional
information applicable to the Fund Shares, the Investment Company Act of 1940
and all other applicable Federal and State banking, securities and other laws,
regulations and rulings. You will assume sole responsibility for your compliance
with applicable Federal and State laws and regulations, and shall rely
exclusively upon your own determination, or that of your legal advisers, that
the performance of your duties hereunder complies with such laws and
regulations. You shall perform your duties hereunder in a manner consistent with
the customs and practices of other financial institutions that provide similar
services.
Section 4. You will provide such office space and equipment,
telephone facilities and personnel (which may be any part of the space,
equipment and facilities currently used in your business, or any personnel
employed by you) as may be reasonably necessary or beneficial in order to
provide such services to Clients.
Section 5. Neither you nor any of your officers, employees or
agents are authorized to make any representations concerning us or Fund Shares
except those contained in our then current prospectuses for such Shares, copies
of which will be supplied by us to you, or in such supplemental literature or
advertising as may be authorized by us in writing.
Section 6. For all purposes of this Agreement you will be
deemed to be an independent contractor, and will have no authority to act as
agent for us in any matter, or in any respect. By your written acceptance of
this Agreement, you agree to and do release, indemnify and hold us harmless from
and against any and all direct or indirect liabilities or losses resulting from
requests, directions, actions or inactions of or by you or your officers,
employees or agents regarding your responsibilities hereunder or the purchase,
redemption, transfer or registration of Fund Shares by or on behalf of Clients.
You and your employees will upon request, be available during normal business
hours to consult with us or our designees concerning the performance of your
responsibilities under this Agreement.
Section 7. In consideration of the services and facilities
provided by you or arranged by you to be provided hereunder, we will pay to you,
and you will accept as full payment therefor, a fee at the annual rate of .25%
of the average daily net asset value of the Fund Shares beneficially owned by
your Clients for whom you are the dealer of record or holder of record or with
whom you have a servicing relationship (the "Clients' Fund Shares"), which fee
will be computed daily and payable monthly. For purposes of determining the fees
payable under this Section 7, the average daily net asset value of the Clients'
Fund Shares will be computed in the manner specified in our registration
statement (as the same is in effect from time to time) in connection with the
computation of the net asset value of Fund Shares for purposes of purchases and
redemptions. The fee rate stated above may be prospectively increased or
decreased by us, in our sole discretion, at any time upon notice to you.
Further, we may, in our discretion, and without notice, suspend or withdraw the
sale of Fund Shares, including the sale of such Shares to you for the account of
any Client or Clients.
Section 8. Any person authorized to direct the disposition of
monies paid or payable by us pursuant to this Agreement will provide to our
Board of Trustees, and our Trustees will review, at least quarterly, a written
report of the amounts so expended and the purposes for which such expenditures
were made. In addition, you will furnish us or our designees with such
information as we or they may reasonably request (including, without limitation,
periodic certifications confirming the provision to Clients of the services
described herein), and will otherwise cooperate with us and our designees
(including, without limitation, any auditors designated by us), in connection
with the preparation of reports to our Board of Trustees concerning this
Agreement and the monies paid or payable by us pursuant hereto, as well as any
other reports or filings that may be required by law. You will be responsible
for promptly reporting to us and our Board of Trustees any potential or existing
conflicts with respect to the investments of your Clients in the Funds.
Section 9. We may enter into other similar Servicing
Agreements with any other person or persons without your consent.
Section 10. By your written acceptance of this Agreement, you
represent, warrant and agree that: (i) in no event will any of the services
provided by you hereunder be primarily intended to result in the sale of any
Fund Shares issued by us; (ii) the compensation payable to you hereunder,
together with any other compensation payable to you by Clients in connection
with the investment of their assets in the Funds, will be disclosed by you to
your Clients, will be authorized by your Clients and will not result in an
excessive or unreasonable fee to you; (iii) in the event an issue pertaining to
this Agreement or our Shareholder Servicing Plan related hereto is submitted for
approval, you will vote any Fund Shares held for your own account in the same
proportion as the vote of the Fund Shares held for your Clients' benefit; and
(iv) you will not engage in activities pursuant to this Agreement which
constitute acting as a broker or dealer under state law unless you have obtained
the licenses required by such law.
Section 11. This Agreement will become effective on the date a
fully executed copy of this Agreement is received by us or our designee. Unless
sooner terminated, this Agreement will continue until April 30, 1999, and
thereafter will continue automatically for successive annual periods ending on
April 30, provided such continuance is specifically approved at least annually
by us in the manner described in Section 15 hereof. This Agreement is
terminable, without penalty, at any time by us (which termination may be by vote
of a majority of our Disinterested Trustees as defined in Section 15 hereof) or
by you upon notice to the other party hereto.
Section 12. All notices and other communications to either you
or us will be duly given if mailed, telegraphed, telexed or transmitted by
similar telecommunications device to the appropriate address shown herein.
Section 13. This Agreement will be construed in accordance
with the laws of the State of Illinois and is non-assignable by the parties
hereto.
Section 14. All persons dealing with us must look solely to
our property for the enforcement of any claims against us, as neither our
Trustees, officers, agents nor shareholders assume any personal liability for
obligations entered into on our behalf.
Section 15. This Agreement has been approved by vote of a
majority of (i) our Board of Trustees and (ii) those Trustees who are not
"interested persons" (as defined in the Investment Company Act of 1940) of us
and have no direct or indirect financial interest in the operation of the
Shareholder Servicing Plan adopted by us regarding the provision of support
services to the beneficial owners of Fund Shares or in any agreements related
thereto ("Disinterested Trustees"), cast in person at a meeting called for the
purpose of voting on such approval.
Section 16. The Declaration of Trust establishing Northern
Institutional Funds, dated July 1, 1997, a copy of which, together with all
amendments thereto (the "Declaration"), is on file with the Trust. The name
"Northern Institutional Funds" refers to the Trustees under the Declaration
collectively as Trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of Northern Institutional Funds, shall
be held to any personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or claim or otherwise in
connection with the affairs of said Northern Institutional Funds, but the Trust
Estate only shall be liable.
If you agree to be legally bound by the provisions of this
Agreement, please sign a copy of this letter where indicated below and promptly
return it to [insert name and address].
Very truly yours,
NORTHERN INSTITUTIONAL FUNDS
Date: By:
Authorized Officer
Accepted and Agreed to:
Date: By:
Authorized Officer
<PAGE>
APPENDIX A
Please check the appropriate boxes to indicate the Class D
Shares of Northern Institutional Funds for which you wish to act as Servicing
Agent:
[GRAPHIC OMITTED]29 Equity Index Portfolio
[GRAPHIC OMITTED]30 Small Company Index Portfolio
[GRAPHIC OMITTED]31 Diversified Growth Portfolio
[GRAPHIC OMITTED]32 Focused Growth Portfolio
[GRAPHIC OMITTED]33 U.S. Treasury Index Portfolio
[GRAPHIC OMITTED]34 U.S. Government Securities Portfolio
[GRAPHIC OMITTED]35 Short-Intermediate Bond Portfolio
[GRAPHIC OMITTED]36 Bond Portfolio
[GRAPHIC OMITTED]37 Intermediate Bond Portfolio
[GRAPHIC OMITTED]38 Balanced Portfolio
[GRAPHIC OMITTED]39 International Growth Portfolio
[GRAPHIC OMITTED]40 International Bond Portfolio
[GRAPHIC OMITTED]41 International Equity Index Portfolio
[GRAPHIC OMITTED]42 Global Asset Portfolio
[GRAPHIC OMITTED]43 Small Company Growth Portfolio
[GRAPHIC OMITTED]44 Mid Cap Growth Portfolio
[GRAPHIC OMITTED]45 MarketPower Portfolio
<PAGE>
Exhibit h(10)
NORTHERN INSTITUTIONAL FUNDS
(formerly, "The Benchmark Funds")
SERVICE PLAN FOR THE SERVICE CLASS
AND THE PREMIER CLASS
January 27, 1998
WHEREAS, Northern Institutional Funds (the "Trust") engages in business as
an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, each of the Trust's money market investment portfolios (the
"Portfolios") are divided into three separate classes of shares: the Shares, the
Service Shares and the Premier Shares;
WHEREAS, the Trust, on behalf of the Service Shares and the Premier Shares
of each Portfolio, desires to adopt a Service Plan and the Board of Trustees of
the Trust has determined that there is a reasonable likelihood that adoption of
this Service Plan (the "Plan") will benefit the Trust and its shareholders; and
WHEREAS, institutions (including The Northern Trust Company ("Northern"))
may act directly or indirectly as nominees and recordholders of the Service
Shares and the Premier Shares of the Portfolios for their respective customers
who are or may become beneficial owners of such shares (the "Customers"),
provide service to other institutions intended to facilitate or improve such
other institutions' services to their Customers and/or perform certain account
administration and shareholder liaison services with respect to their Customers
pursuant to agreements under the Plan (the "Agreements").
NOW, THEREFORE, the Trust, on behalf of the Service Shares and the Premier
Shares of each Portfolio, hereby adopts this Plan on the following terms and
conditions:
1. (a) 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 such Shares of such Portfolio for such period. Northern shall determine the
amount of the Service Fee to be paid to one or more brokers, dealers, other
financial institutions or other industry professionals (collectively, "Service
Agents") and the basis on which such payments will be made. Payments to a
Service Agent will be subject to compliance by the Service Agent with the terms
of the related Plan agreement entered into by the Service Agent. The Service
Fees payable pursuant to this Plan shall not pertain to services or expenses
which are primarily intended to result in the sale of Service Shares and Premier
Shares.
(b) Payments of the Service Fee with respect to Service Shares
and Premier Shares shall be used to compensate or reimburse Northern and the
Service 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 Service
Agents; (ix) facilitating electronic or computer trading and/or processing in a
Portfolio to their Customers or to Customers of other Service Agents; and (x)
performing any other similar administrative support services.
(c) Payments of the Service Fee with respect to the Premier
Shares shall also be used to compensate or reimburse Northern and the Service
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 Service 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.
2. This Plan shall not take effect as to any Portfolio until the Plan,
together with any related agreements, has been approved for such Portfolio by
votes of a majority of both (a) the Board of Trustees of the Trust and (b) those
Trustees of the Trust who are not "interested persons" of the Trust and who have
no direct or indirect financial interest in the operation of the Plan or any
agreements related to it (the "non-interested Trustees") cast in person at a
meeting (or meetings) called for the purpose of voting on the Plan and such
related agreements.
3. This Plan shall remain in effect until April 30, 1999 and shall
continue in effect thereafter so long as such continuance is specifically
approved at least annually in the manner provided for approval of this Plan in
paragraph 2.
4. The Trust's Board of Trustees shall receive, and the Trustees shall
review, at least quarterly, a written report on the Service Fees paid by the
Service Shares and Premier Shares of the Portfolios and the purposes for which
those expenditures were made.
5. This Plan may be terminated as to the Service Shares and
the Premier Shares of any Portfolio at any time by vote of a majority of the
non-interested Trustees.
6. This Plan may not be amended to increase materially the amount of
compensation payable pursuant to paragraph 1 hereof unless such amendment is
approved in the manner provided for initial approval in paragraph 2 hereof. No
material amendment to the Plan shall be made unless approved in the manner
provided in paragraph 2 hereof.
7. While this Plan is in effect, the selection and nomination of the
non-interested Trustees of the Trust shall be committed to the discretion of the
non-interested Trustees.
8. The Trust shall preserve copies of this Plan, and any related
agreements and all reports made pursuant to paragraph 4 hereof, for a period of
not less than six years from the date of the Plan, any such agreement or any
such report, as the case may be, the first two years in an easily accessible
place.
IN WITNESS WHEREOF, the Trust, on behalf of the Service Shares and
Premier Shares of each Portfolio, has executed this Service Plan as of the day
and year first written above.
NORTHERN INSTITUTIONAL FUNDS
By: /s/Michael J. Richman
Michael J. Richman
Secretary of the Trust
<PAGE>
The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60675
Date
Service Agent
Address
RE: Northern Institutional Funds (formerly, "The Benchmark Funds") (the
"Trust")/ Service Shares
Gentlemen:
The Trust is an open-end management investment company that includes the money
market investment portfolios (the "Portfolios") identified on Schedule A hereto.
Shares of each Portfolio are divided into three separate classes, including the
Service Shares.
You are a bank, a trust company or other financial institution (the "Service
Agent") with customers who are or may become the beneficial owners of Service
Shares of the Portfolios (the "Customers"). You are willing to perform certain
services with respect to the Customers investing in Service Shares of the
Portfolios that you have selected on Schedule A attached hereto. In addition,
you may wish to offer to your Customers an automated cash management sweep
program (hereinafter the "Program") under which funds in the Customers' accounts
over a specified minimum amount will be "swept" (i.e., automatically
transmitted) on a daily basis into Service Shares of one or more Portfolios.
Accordingly, the Service Agent and The Northern Trust Company ("Northern") agree
as follows:
1. With respect to Customers who beneficially own Service Shares, the
Service Agent hereby agrees to perform the following administrative support
services7: (a) establish and maintain individual accounts and records with
respect to Service Shares owned by each Customer; (b) process and issue
confirmations concerning Customer orders to purchase, redeem and exchange shares
promptly and in accordance with the then-effective prospectus for Service
Shares; (c) receive and transmit funds representing the purchase price or
redemption proceeds of Service Shares; (d) process dividend payments on behalf
of Customers; (e) forward to Customers 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);
and (f) provide 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 laws.
2.1 The Service Agent may establish a Program for its Customers upon
such terms and conditions (including the types of accounts eligible to
participate in such a Program; the minimum account balances over which funds in
such accounts will be swept into Service Shares; the minimum excess balances in
such accounts, if any, which will be swept; and the frequency of sweeps of
excess account balances) as the Service Agent shall determine. No Customer
account shall be permitted to participate in the Program except upon the
execution by the Customer of (a) an account opening agreement, (b) authorization
for the Service Agent to effect the sweep of funds in such accounts in
accordance with the terms of the Program, and (c) all necessary Trust account
application forms.
2.2 The Service Agent will be responsible for providing all electronic
data processing facilities as shall be necessary to establish and operate the
Program, and for the proper transmission of funds and appropriate instructions
to the Trust. The procedures for the purchase and redemption of Service Shares,
including all relevant time and notification requirements, specified in the
then-effective prospectus of the Service Shares, shall govern the purchase and
redemption of Service Shares for the accounts of Service Agent Customers under
this Agreement, including the purchase and redemption of Service Shares pursuant
to the Program.
2.3 The Service Agent will have exclusive responsibility for
establishing and operating the Program for its Customers. The Trust's
responsibilities with respect to the Program shall be limited to the proper
handling of "swept" funds properly transmitted by the Service Agent, and the
proper implementation of Customer and Service Agent share purchase and
redemption instructions. The Service Agent agrees that the Trust and its agents
shall have no responsibility or liability to review any purchase or redemption
request which is presented by the Service Agent to determine whether such
request is genuine or authorized by the Customer of the Service Agent. The Trust
and its agents shall be entitled to rely conclusively on any purchase or
redemption request communicated by the Service Agent, and shall have no
liability whatsoever for any losses, claims or damages to or against the Service
Agent or any Customer resulting from a failure of the Service Agent to transmit
any such request, or from any errors contained in any request.
3. The Service Agent shall furnish such office space, equipment,
facilities, computer hardware and software, and personnel as is necessary to
perform its duties hereunder. The Service Agent shall bear all costs incurred by
it in performing such duties.
4. For the services provided and the expenses incurred by the Service
Agent hereunder, Northern on behalf of each Portfolio will pay to the Service
Agent a monthly fee equal on an annual basis to .25% of the average daily net
asset value of the Service Shares of such Portfolio which are owned beneficially
by Customers through the Service Agent during such period. If the total fees to
be accrued by a Portfolio on any day with respect to Service Shares of such
Portfolio exceed the net income, exclusive of such fees, to be accrued by such
Portfolio on Service Shares, the fee payable to the Service Agent with respect
to such Portfolio on such day will be reduced by an amount equal to the Service
Agent's proportionate share of such excess with respect to Service Shares, in
order to avoid adversely affecting the net asset value per share of such class.
5.1 In effecting the purchase or redemption of Service Shares in
accordance with the provisions of the Program or otherwise, the Service Agent
represents as follows: (a) it shall act solely as agent or fiduciary for the
account of its Customer; (b) each purchase or redemption of Service Shares on
behalf of its Customer shall be initiated solely upon the instruction and order
of the Customer or pursuant to the Service Agent's proper exercise of investment
discretion; and (c) the Customer will have full beneficial ownership of any
Service Shares purchased upon its authorization and order. Under no
circumstances will the Service Agent make any oral or written representations to
the contrary.
5.2 In performing its duties hereunder, the Service Agent will act in
conformity with the then-effective prospectuses and statements of additional
information of the Service Shares for the Portfolios selected on Schedule A, the
Investment Company Act of 1940 (the "1940 Act") and all other applicable federal
and state banking, securities and other laws, regulations and rulings and the
constitution, by-laws, and rules of any applicable self-regulatory organization.
The Service Agent will assume sole responsibility for its compliance with
applicable federal and state laws and regulations, and shall rely exclusively
upon its own determination, or that of its legal advisers, that the performance
of its duties hereunder complies with such laws and regulations. Under no
circumstances shall the Trust, Northern or any of their affiliates be held
responsible or liable in any respect for any statements or representations made
by them or their legal advisers to the Service Agent or any Customer of the
Service Agent concerning the applicability of any federal or state laws or
regulations to the activities described herein. The Service Agent shall perform
its duties hereunder in a manner consistent with the customs and practices of
other financial institutions that provide similar services.
5.3 Representations and Warranties. The Service Agent represents and
warrants that:
(a) it is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization, and
that its execution of this Agreement and provision of services
hereunder has been duly authorized and will not violate (i)
its charter documents or by-laws, (ii) any laws, rules or
regulations, or (iii) any other agreement to which it is a
party;
(b) it will not engage in activities pursuant to this Agreement which
constitute acting as a broker or dealer under state law unless it
has obtained the licenses required by such law; and
(c) it will keep confidential any information acquired as a result
of this Agreement regarding the business and affairs of the
Trust and Northern, which requirements shall survive the term
of this Agreement.
5.4 In addition to the foregoing, with respect to the purchase,
redemption or exchange of Service Shares for Customer accounts with respect to
which the Service Agent is a fiduciary under state or federal trust or
comparable fiduciary requirements, or, in the case of any such accounts which
are subject to the Employee Retirement Income Security Act of 1974, as amended,
the Service Agent is a fiduciary or party in interest, the Service Agent
represents that the purchase, redemption or exchange of Service Shares, and the
Service Agent's receipt of the relevant fee described in paragraph 4 hereof, is
permissible under all such applicable requirements and complies with any
restrictions, limitations or procedures under such requirements.
6.1 This Agreement shall become effective on the date hereof and,
unless sooner terminated, shall continue in effect until the April 30 of the
next year following the year in which this Agreement becomes effective, and
thereafter shall continue automatically for successive annual periods ending on
April 30, provided that it is approved annually by a vote of a majority of the
Trustees of the Trust, including a majority of those Trustees who are not
"interested persons" of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the operation of the Service Plan for
the Service Class and the Premier Class, this Agreement or any related
agreements (the "Independent Trustees") cast in person at a meeting called for
the purpose of voting on this Agreement. This Agreement may be terminated at any
time, on not less than 60 days' notice to the Service Agent and without the
payment of any penalty by Northern or by vote of a majority of the Independent
Trustees. This Agreement may also be terminated by the Service Agent at any time
on 60 days' notice to Northern and will terminate automatically in the event of
its assignment. All material amendments to this Agreement must be in writing and
must be approved by the Independent Trustees in the manner described above for
continuing this Agreement. The term "assignment" shall have the meaning given to
it in the 1940 Act. Any notice furnished hereunder shall be in writing and shall
be mailed or delivered to the other party at its address set forth above.
6.2 The Service Agent agrees to indemnify Northern and the Trust and
each person who controls (as defined in Section 2(a)(9) of the 1940 Act) the
Trust from and against any losses, claims, damages, expenses (including fees and
expenses of counsel) or liabilities ("Damages") to which Northern, the Trust or
such person may become subject in so far as such Damages arise out of the
failure of the Service Agent or its employees, agents or Customers to comply
with the Service Agent's obligations under this Agreement. Notwithstanding the
foregoing, neither Northern nor the Trust shall be entitled to be indemnified
for Damages arising out of its or its agent's or employee's gross negligence.
The foregoing indemnity agreement shall be in addition to any liability the
Service Agent may otherwise have.
7. The Service Agent shall be deemed to be an independent contractor
and not an agent of Northern or the Trust for all purposes hereunder and shall
have no authority to act for or represent Northern or the Trust. In addition, no
officer or employee of the Service Agent shall be deemed to be an employee or
agent of the Trust or Northern, nor will be subject, in any respect, to the
supervision of Northern or any affiliate thereof. Neither the Service Agent nor
any of its officers, employees or agents are authorized to make any
representations concerning the Trust or Service Shares except those contained in
the Trust's then-current prospectuses and statements of additional information
for Service Shares or in such supplemental literature or advertising as may be
authorized by the Trust. The fees payable to the Service Agent pursuant to this
Agreement shall not pertain to services or expenses which are primarily intended
to result in the sale of Service Shares.
8. This Agreement has been approved by vote of a majority of
(i) the Board of Trustees and (ii) the Independent Trustees cast in person at
a meeting called for
the purpose of voting on such approval.
9. The Declaration of Trust establishing Northern Institutional Funds,
dated July 1, 1997, together with all amendments thereto (the "Declaration"), is
on file with the Trust. The name "Northern Institutional Funds" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and the obligations of the Trust or a Portfolio or class thereof
are not binding upon any of the Trustees, officers or shareholders individually,
but bind only the Trust Property of the applicable Portfolio or class thereof.
Only the Service Shares of a particular Portfolio shall be responsible for the
fees payable hereunder with respect to such Shares.
10. If any provision of this Agreement shall be held or made invalid by
a decision in a judicial or administrative proceeding, statute, rule or
otherwise, the enforceability of the remainder of this Agreement will not be
impaired thereby. This Agreement shall be governed by the laws of Illinois
(except with respect to paragraph 9, which will be governed by the laws of
Delaware) and shall be binding upon and inure to the benefit of the parties
hereto and their respective successors.
Very truly yours,
THE NORTHERN TRUST COMPANY
By:_________________________
[Authorized Officer]
Accepted and agreed to as of the date first above written:
SERVICE AGENT
By:_________________________
[Authorized Officer]
<PAGE>
SCHEDULE A
Please indicate (_) the appropriate Portfolios to which this Agreement applies:
Service
Portfolio Shares
Government Select
Government
Diversified Assets
Tax-Exempt
Municipal
<PAGE>
The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60675
Date
Service Agent
Address
RE: Northern Institutional Funds (formerly, "The Benchmark Funds") (the
"Trust")/ Premier Shares
Gentlemen:
The Trust is an open-end management investment company that includes the money
market investment portfolios (the "Portfolios") identified on Schedule A hereto.
Shares of each Portfolio are divided into three separate classes, including the
Premier Shares.
You are a bank, a trust company or other financial institution (the "Service
Agent") with customers who are or may become the beneficial owners of Premier
Shares of the Portfolios (the "Customers"). You are willing to perform certain
services with respect to the Customers investing in the Premier Shares of the
Portfolios that you have selected on Schedule A attached hereto. In addition,
you may wish to offer to your Customers an automated cash management sweep
program (hereinafter the "Program") under which funds in the Customers' accounts
over a specified minimum amount will be "swept" (i.e., automatically
transmitted) on a daily basis into shares of one or more Portfolios.
Accordingly, the Service Agent and The Northern Trust Company ("Northern") agree
as follows:
1. With respect to Customers who beneficially own Premier Shares, the
Service Agent hereby agrees to perform the following administrative support
services8: (a) establish and maintain individual accounts and records with
respect to Premier Shares owned by each Customer; (b) process and issue
confirmations concerning Customer orders to purchase, redeem and exchange shares
promptly and in accordance with the then-effective prospectus for Premier
Shares; (c) receive and transmit funds representing the purchase price or
redemption proceeds of Premier Shares; (d) process dividend payments on behalf
of Customers; (e) forward to Customers 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);
and (f) provide 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 laws. With respect to Customers who beneficially own Premier
Shares, the Service Agent hereby agrees to perform the following personal and
account maintenance services: (a) provide 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;
(b) assist Customers in completing application forms, selecting dividend and
other account options and opening custody accounts with the Service Agents; (c)
provide 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; (d) act as liaison between
Customers and the Trust, including obtaining information from the Trust and
assisting the Trust in correcting errors and resolving problems; and (e) perform
any similar personal and account maintenance services.
2.1 The Service Agent may establish a Program for its Customers upon
such terms and conditions (including the types of accounts eligible to
participate in such a Program; the minimum account balances over which funds in
such accounts will be swept into Premier Shares; the minimum excess balances in
such accounts, if any, which will be swept; and the frequency of sweeps of
excess account balances) as the Service Agent shall determine. No Customer
account shall be permitted to participate in the Program except upon the
execution by the Customer of (a) an account opening agreement, (b) authorization
for the Service Agent to effect the sweep of funds in such accounts in
accordance with the terms of the Program, and (c) all necessary Trust account
application forms.
2.2 The Service Agent will be responsible for providing all electronic
data processing facilities as shall be necessary to establish and operate the
Program, and for the proper transmission of funds and appropriate instructions
to the Trust. The procedures for the purchase and redemption of Premier Shares,
including all relevant time and notification requirements, specified in the
then-effective prospectus of the Premier Shares, shall govern the purchase and
redemption of Premier Shares for the accounts of Service Agent Customers under
this Agreement, including the purchase and redemption of Premier Shares pursuant
to the Program.
2.3 The Service Agent will have exclusive responsibility for
establishing and operating the Program for its Customers. The Trust's
responsibilities with respect to the Program shall be limited to the proper
handling of "swept" funds properly transmitted by the Service Agent, and the
proper implementation of Customer and Service Agent share purchase and
redemption instructions. The Service Agent agrees that the Trust and its agents
shall have no responsibility or liability to review any purchase or redemption
request which is presented by the Service Agent to determine whether such
request is genuine or authorized by the Customer of the Service Agent. The Trust
and its agents shall be entitled to rely conclusively on any purchase or
redemption request communicated by the Service Agent, and shall have no
liability whatsoever for any losses, claims or damages to or against the Service
Agent or any Customer resulting from a failure of the Service Agent to transmit
any such request, or from any errors contained in any request.
3. The Service Agent shall furnish such office space, equipment,
facilities, computer hardware and software, and personnel as is necessary to
perform its duties hereunder. The Service Agent shall bear all costs incurred by
it in performing such duties.
4. For the services provided and the expenses incurred by the Service
Agent hereunder, Northern on behalf of each Portfolio will pay to the Service
Agent a monthly fee equal on an annual basis to .50% of the average daily net
asset value of the Premier Shares of such Portfolio which are owned beneficially
by Customers through the Service Agent during such period. Of these fees, no
more than half of the fee payable with respect to Premier Shares will be for
personal and account maintenance services and expenses. If the total fees to be
accrued by a Portfolio on any day with respect to Premier Shares of such
Portfolio exceed the net income, exclusive of such fees, to be accrued by such
Portfolio on Premier Shares, the fee payable to the Service Agent with respect
to such Portfolio on such day will be reduced by an amount equal to the Service
Agent's proportionate share of such excess with respect to Premier Shares, in
order to avoid adversely affecting the net asset value per share of such class.
5.1 In effecting the purchase or redemption of Premier Shares in
accordance with the provisions of the Program or otherwise, the Service Agent
represents as follows: (a) it shall act solely as agent or fiduciary for the
account of its Customer; (b) each purchase or redemption of Premier Shares on
behalf of its Customer shall be initiated solely upon the instruction and order
of the Customer or pursuant to the Service Agent's proper exercise of investment
discretion; and (c) the Customer will have full beneficial ownership of any
Premier Shares purchased upon its authorization and order. Under no
circumstances will the Service Agent make any oral or written representations to
the contrary.
5.2 In performing its duties hereunder, the Service Agent will act in
conformity with the then-effective prospectuses and statements of additional
information of the Premier Shares for the Portfolios selected on Schedule A, the
Investment Company Act of 1940 (the "1940 Act") and all other applicable federal
and state banking, securities and other laws, regulations and rulings and the
constitution, by-laws, and rules of any applicable self-regulatory organization.
The Service Agent will assume sole responsibility for its compliance with
applicable federal and state laws and regulations, and shall rely exclusively
upon its own determination, or that of its legal advisers, that the performance
of its duties hereunder complies with such laws and regulations. Under no
circumstances shall the Trust, Northern or any of their affiliates be held
responsible or liable in any respect for any statements or representations made
by them or their legal advisers to the Service Agent or any Customer of the
Service Agent concerning the applicability of any federal or state laws or
regulations to the activities described herein. The Service Agent shall perform
its duties hereunder in a manner consistent with the customs and practices of
other financial institutions that provide similar services.
5.3 Representations and Warranties. The Service Agent represents and
warrants that:
(a) it is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization, and
that its execution of this Agreement and provision of services
hereunder has been duly authorized and will not violate (i)
its charter documents or by-laws, (ii) any laws, rules or
regulations, or (iii) any other agreement to which it is a
party;
(b) it will not engage in activities pursuant to this Agreement
which constitute acting as a broker or dealer under state
law unless it has obtained the licenses required by such
law; and
(c) it will keep confidential any information acquired as a result
of this Agreement regarding the business and affairs of the
Trust and Northern, which requirements shall survive the term
of this Agreement.
5.4 In addition to the foregoing, with respect to the purchase,
redemption or exchange of Premier Shares for Customer accounts with respect to
which the Service Agent is a fiduciary under state or federal trust or
comparable fiduciary requirements, or, in the case of any such accounts which
are subject to the Employee Retirement Income Security Act of 1974, as amended,
the Service Agent is a fiduciary or party in interest, the Service Agent
represents that the purchase, redemption or exchange of Premier Shares, and the
Service Agent's receipt of the relevant fee described in paragraph 4 hereof, is
permissible under all such applicable requirements and complies with any
restrictions, limitations or procedures under such requirements.
6.1 This Agreement shall become effective on the date hereof and,
unless sooner terminated, shall continue in effect until the April 30 of the
next year following the year in which this Agreement becomes effective, and
thereafter shall continue automatically for successive annual periods ending on
April 30, provided that it is approved annually by a vote of a majority of the
Trustees of the Trust, including a majority of those Trustees who are not
"interested persons" of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the operation of the Service Plan for
the Service Class and the Premier Class, this Agreement or any related
agreements (the "Independent Trustees") cast in person at a meeting called for
the purpose of voting on this Agreement. This Agreement may be terminated at any
time, on not less than 60 days' notice to the Service Agent and without the
payment of any penalty by Northern or by vote of a majority of the Independent
Trustees. This Agreement may also be terminated by the Service Agent at any time
on 60 days' notice to Northern and will terminate automatically in the event of
its assignment. All material amendments to this Agreement must be in writing and
must be approved by the Independent Trustees in the manner described above for
continuing this Agreement. The term "assignment" shall have the meaning given to
it in the 1940 Act. Any notice furnished hereunder shall be in writing and shall
be mailed or delivered to the other party at its address set forth above.
6.2 The Service Agent agrees to indemnify Northern and the Trust and
each person who controls (as defined in Section 2(a)(9) of the 1940 Act) the
Trust from and against any losses, claims, damages, expenses (including fees and
expenses of counsel) or liabilities ("Damages") to which Northern, the Trust or
such person may become subject in so far as such Damages arise out of the
failure of the Service Agent or its employees, agents or Customers to comply
with the Service Agent's obligations under this Agreement. Notwithstanding the
foregoing, neither Northern nor the Trust shall be entitled to be indemnified
for Damages arising out of its or its agent's or employee's gross negligence.
The foregoing indemnity agreement shall be in addition to any liability the
Service Agent may otherwise have.
7. The Service Agent shall be deemed to be an independent contractor
and not an agent of Northern or the Trust for all purposes hereunder and shall
have no authority to act for or represent Northern or the Trust. In addition, no
officer or employee of the Service Agent shall be deemed to be an employee or
agent of the Trust or Northern, nor will be subject, in any respect, to the
supervision of Northern or any affiliate thereof. Neither the Service Agent nor
any of its officers, employees or agents are authorized to make any
representations concerning the Trust or Premier Shares except those contained in
the Trust's then-current prospectuses and statements of additional information
for Premier Shares or in such supplemental literature or advertising as may be
authorized by the Trust. The fees payable to the Service Agent pursuant to this
Agreement shall not pertain to services or expenses which are primarily intended
to result in the sale of Premier Shares.
8. This Agreement has been approved by vote of a majority of (i)
the Board of Trustees and (ii) the Independent Trustees cast in person at a
meeting called for the purpose of voting on such approval.
9. The Declaration of Trust establishing Northern Institutional Funds,
dated July 1, 1997, together with all amendments thereto (the "Declaration"), is
on file with the Trust. The name "Northern Institutional Funds" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and the obligations of the Trust or a Portfolio or class thereof
are not binding upon any of the Trustees, officers or shareholders individually,
but bind only the Trust Property of the applicable Portfolio or class thereof.
Only the Premier Shares of a particular Portfolio shall be responsible for the
fees payable hereunder with respect to such Shares.
10. If any provision of this Agreement shall be held or made invalid by
a decision in a judicial or administrative proceeding, statute, rule or
otherwise, the enforceability of the remainder of this Agreement will not be
impaired thereby. This Agreement shall be governed by the laws of Illinois
(except with respect to paragraph 9, which will be governed by the laws of
Delaware) and shall be binding upon and inure to the benefit of the parties
hereto and their respective successors.
Very truly yours,
THE NORTHERN TRUST COMPANY
By:_________________________
[Authorized Officer]
Accepted and agreed to as of the date first above written:
SERVICE AGENT
By:_________________________
[Authorized Officer]
<PAGE>
SCHEDULE A
Please indicate (_) the appropriate Portfolios to which this Agreement applies:
Premier
Portfolio Shares
Government Select
Government
Diversified Assets
Tax-Exempt
Municipal
Exhibit h(11)
AMENDED AND RESTATED
CO-ADMINISTRATION AGREEMENT
THIS AMENDED AND RESTATED CO-ADMINISTRATION AGREEMENT (the
"Agreement"), dated as of this fifth day of October, 1999 (the "Effective
Date"), by and among FIRST DATA INVESTOR SERVICES GROUP, INC. ("Investor
Services Group"), a Massachusetts corporation, THE NORTHERN TRUST COMPANY
("Northern"), an Illinois state bank (each a "Co-Administrator" and
collectively, the "Co-Administrators"), and NORTHERN INSTITUTIONAL FUNDS (the
"Fund"), a Delaware business trust.
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the " 1940 Act");
and
WHEREAS, the Fund desires to retain the Co-Administrators to render
certain administrative services with respect to each investment portfolio listed
in Schedule A hereto, as the same may be amended from time to time by the
parties hereto (collectively, the "Portfolios"), and the Co-Administrators are
willing to render such services.
WITNESSETH:
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein and intending to be legally bound hereby, the parties hereto
agree as follows:
Article 1 Definitions.
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
(a) "Advisory Agreement" shall mean the Investment Advisory Agreement
between the Fund and Northern dated March 31, 1998, as currently in effect and
as amended and/or superseded from time to time.
(b) "Articles of Incorporation" shall mean the Articles of Incorporation,
Declaration of Trust, or other similar organizational document as the case may
be, of a party as the same may be amended from time to time.
(c) "Assign" and "Assignment" shall have the same meaning herein as the
term "assignment" has in the 1940 Act.
(d) "Authorized Person" shall be deemed to include (i) any Board Member or
officer of the Fund; or (ii) any person, whether or not such person is an
officer or employee of the Fund, duly authorized to give Oral Instructions or
Written Instructions on behalf of the Fund as indicated in writing to a
Co-Administrator from time to time.
(e) "Board Members" shall mean the Directors or Trustees of the governing
body of the Fund, as the case may be.
(f) "Board of Directors" shall mean the Board of Directors or Board of
Trustees of the Fund, as the case may be.
(g) "By-Laws" shall mean the By-Laws of a party as the same may be amended
from time to time.
(h) "Commission" shall mean the Securities and Exchange Commission.
(i) "Custodian" refers to any custodian or subcustodian of securities and
other property, which the Fund may from time to time deposit, or cause to be
deposited or held under the name or account of such a custodian pursuant to a
custody agreement.
(j) "1933 Act" shall mean the Securities Act of 1933 and the rules and
regulations promulgated thereunder, all as amended from time to time.
(k) "1940 Act" shall mean the Investment Company Act of 1940 and the rules
and regulations promulgated thereunder, all as amended from time to time.
(l) "Oral Instructions" shall mean instructions, other than Written
Instructions, actually received by a Co-Administrator from a person reasonably
believed by a Co-Administrator to be an Authorized Person.
(m) "Prospectus" shall mean the most recently dated Fund Prospectuses and
Statements of Additional Information, including any supplements thereto if any,
which has become effective under the 1933 Act and the 1940 Act.
(n) "Shares" refers collectively to such shares of capital stock or
beneficial interest, as the case may be, or class thereof, of each respective
Portfolio of the Fund as may be issued from time to time.
(o) "Written Instructions" shall mean a written communication signed by a
person reasonably believed by a Co-Administrator to be an Authorized Person and
actually received by a Co-Administrator. Written Instructions shall include
manually executed originals and authorized electronic transmissions, including
telefacsimile of a manually executed original or other process.
Article 2 Appointment of the Co-Administrators.
The Fund hereby appoints Northern and Investor Services Group to act as
Co-Administrators of the Fund for the period and on the terms set forth in this
Agreement. Northern and Investor Services Group accept such appointment and
agree to render the services herein set forth for the compensation herein
provided. This Agreement shall be effective and binding on the parties hereto as
of the Effective Date.
Article 3 Duties of the Co-Administrators.
3.1 Subject to the general supervision of the Board of Directors, the
Co-Administrators shall provide supervision of all aspects of the Fund's
operations (other than those referred to in paragraph 3(a) of the Advisory
Agreement) and perform the customary services of an administrator, including but
not limited to the corporate secretarial, treasury and blue sky services set
forth in Schedule B to this Agreement.
3.2 In performing their duties under this Agreement, the Co-Administrators:
(a) will act in accordance with the Articles of Incorporation, By-Laws,
Prospectus and with the Oral Instructions and Written Instructions of the Fund
and will conform to and comply with the requirements of the 1940 Act and all
other applicable federal or state laws and regulations; and (b) will consult
with legal counsel to the Fund, as necessary and appropriate. Furthermore, the
Co-Administrators shall not have or be required to have any authority to
supervise the investment or reinvestment of the securities or other properties
which comprise the assets of the Fund or any of its Portfolios and shall not
provide any investment advisory services to the Fund or any of its Portfolios
under this Agreement.
3.3 In addition to the duties set forth herein, the Co-Administrators shall
perform such other duties and functions, and shall be paid such amounts
therefor, as may from time to time be agreed upon in writing between the Fund
and the Co-Administrators.
3.4 The Co-Administrators agree to provide the services described herein in
accordance with the performance standards annexed hereto as Exhibit 1 of
Schedule B and incorporated herein (the "Performance Standards"). Such
Performance Standards may be amended from time to time upon written agreement by
the parties.
3.5 The services of the Co-Administrators hereunder are not deemed
exclusive and the Co-Administrators shall be free to render similar services to
others so long as their services under this Agreement are not impaired thereby.
Article 4 Recordkeeping and Other Information.
4.1 The Co-Administrators shall create and maintain all records required of
them pursuant to their duties hereunder and as set forth in Schedule B in
accordance with all applicable laws, rules and regulations, including records
required by Section 3l(a) of the 1940 Act. Where applicable, such records shall
be maintained by the Co-Administrators for the periods and in the places
required by Rule 31a-2 under the 1940 Act.
4.2 To the extent required by Section 31 of the 1940 Act, the
Co-Administrators agree that all such records prepared or maintained by the
Co-Administrators relating to the services to be performed by the
Co-Administrators hereunder are the property of the Fund and will be preserved,
maintained and made available in accordance with such section, and will be
surrendered promptly to the Fund on and in accordance with the Fund's request.
Article 5 Fund Instructions.
5.1 A Co-Administrator will have no liability when acting upon Written or
Oral Instructions reasonably believed to have been executed or orally
communicated by an Authorized Person and will not be held to have any notice of
any change of authority of any person until receipt of a Written Instruction
thereof from the Fund.
5.2 At any time, a Co-Administrator may request Written Instructions from
the Fund and may seek advice from legal counsel for the Fund, or its own legal
counsel, with respect to any matter arising in connection with this Agreement,
and it shall not be liable for any action taken or not taken in good faith in
accordance with such Written Instructions or in accordance with the opinion of
counsel for the Fund or for the Co-Administrator. Written Instructions requested
by a Co-Administrator will be provided by the Fund within a reasonable period of
time.
5.3 Each Co-Administrator, its officers, agents or employees, shall accept
Oral Instructions or Written Instructions given to them by any person
representing or acting on behalf of the Fund only if said representative is an
Authorized Person. The Fund agrees that all Oral Instructions shall be followed
within one business day by confirming Written Instructions, and that the Fund's
failure to so confirm shall not impair in any respect a Co-Administrator's right
to rely on Oral Instructions.
Article 6 Compensation.
6.1 Each Co-Administrator will from time to time employ or associate with
itself such person or persons as the Co-Administrator may believe to be
particularly suited to assist it in performing services under this Agreement.
Such person or persons include officers and employees who are employed by both
the Co-Administrator and the Fund. The Co-Administrator shall pay the
compensation of such person or persons and no obligation shall be incurred on
behalf of the Fund in such respect.
6.2 The Co-Administrators shall not be required to pay any of the following
expenses incurred by the Fund: membership dues in the Investment Company
Institute or any similar organization; investment advisory fees; custody and
transfer agency fees; fees paid under any service or distribution plan adopted
by the Fund; costs of printing and mailing stock certificates; costs of
typesetting and printing of the Prospectus for regulatory purposes and for
distribution to existing shareholders of the Portfolios; costs of shareholders'
reports and notices; interest on borrowed money; brokerage commissions; stock
exchange listing fees; taxes and fees payable to federal, state and other
governmental agencies; fees of Board Members of the Fund who are not affiliated
with the Co-Administrators; outside auditing expenses; outside legal expenses;
blue sky registration or filing fees; or other expenses not specified in this
Section 6.2 which may be properly payable by the Fund. The Co-Administrators
shall not be required to pay any blue sky registration or filing fees unless and
until they have received the amount of such fees from the Fund.
6.3 The Fund on behalf of each of the Portfolios will compensate the
Co-Administrators for the performance of their obligations hereunder in
accordance with the fees and charges set forth in the written Fee Schedule
annexed hereto as Schedule C and incorporated herein.
6.4 During the term of this Agreement, the Co-Administrators will pay all
expenses incurred by them in connection with the performance of their duties
under Article 3 and Article 4 hereof, other than those items listed in Section
6.2 and those out-of-pocket costs of the preparations, submissions, updatings
and filings of the Fund's Prospectus.
6.5 If in any fiscal year, the sum of a Portfolio's expenses (including the
fee payable pursuant to Section 6.3 hereof, but excluding the investment
advisory fee and transfer agency fee payable to Northern pursuant to its
agreements with the Fund, servicing fees, and extraordinary expenses such as
taxes, interest, and indemnification expenses) exceeds on an annualized basis
.10% of a Portfolio's average net assets (.25% for each International Portfolio
as defined in Schedule A to this Agreement) for such fiscal year, the
Co-Administrators will reimburse each Portfolio for the amount of such excess in
accordance with the following timetable. Expense reimbursements, if any, will be
calculated and paid monthly. The amount of the reimbursement paid by the
Co-Administrators to each Portfolio will be computed as of the end of each month
by (a) determining the difference between the Portfolio's accrued annualized
expense ratio and the above percentage limitation; (b) multiplying this
percentage by the Portfolio's year to date average net asset value for such
month to obtain the cumulative dollar amount of such excess; and (c) subtracting
from the cumulative dollar amount of such excess the cumulative amount of
reimbursements made to such Portfolio by the Co-Administrators since the
beginning of the fiscal year. A positive remainder represents the amount to be
paid by the Co-Administrators to the Portfolio; a negative remainder represents
the amount to be paid by the Portfolio to the Co-Administrators.
6.6 Any compensation agreed to hereunder may be adjusted from time to time
by the unanimous consent of the parties.
Article 7 Documents.
In connection with the appointment of the Co-Administrators, the Fund
shall, on or before the Effective Date, but in any case within a reasonable
period of time for the Co-Administrators to prepare to perform their duties
hereunder, deliver or caused to be delivered to the Co-Administrators the
documents set forth in the written schedule of fund documents annexed hereto as
Schedule D.
Article 8 Fund Accounting System.
8.1 Each Co-Administrator shall retain title to and ownership of any and
all data bases, computer programs, screen formats, report formats, interactive
design techniques, derivative works, inventions, discoveries, patentable or
copyrightable matters, concepts, expertise, patents, copyrights, trade secrets,
and other related legal rights owned and/or developed by it in connection with
the services provided by such Co-Administrator to the Fund pursuant to this
Agreement (the "Co-Administrator System").
8.2 Each Co-Administrator hereby grants to the Fund a limited license to
the Co-Administrator System for the sole and limited purpose of having such
Co-Administrator provide the services contemplated hereunder and nothing
contained in this Agreement shall be construed or interpreted otherwise and such
license shall immediately terminate with the termination of this Agreement.
8.3 In the event that the Fund, including any affiliate or agent of the
Fund or any third party acting on behalf of the Fund, is provided with direct
access to the Co-Administrator System, such direct access capability shall be
limited to direct entry to the Co-Administrator System by means of on-line
mainframe terminal entry or PC emulation of such mainframe terminal entry, and
any other non-conforming method of transmission of information to the
Co-Administrator System is strictly prohibited without the prior written consent
of the particular Co-Administrator.
Article 9 Representations and Warranties.
9.1 Investor Services Group represents and warrants to the Fund that:
(a) it is a corporation duly organized, existing and in good standing
under the laws of the jurisdiction in which it is organized;
(b) it is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform the services
contemplated by this Agreement;
(c) all requisite corporate proceedings have been taken to authorize
it to enter into this Agreement; and
(d) it has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
9.2 Northern represents and warrants to the Fund that:
(a) it is duly organized, existing and in good standing under the
laws of the jurisdiction in which it is organized;
(b) it is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform the services
contemplated by this Agreement;
(c) all requisite corporate proceedings have been taken to authorize
it to enter into this Agreement; and
(d) it has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
9.3 The Fund represents and warrants to each Co-Administrator that:
(a) it is duly organized, existing and in good standing under the
laws of the jurisdiction in which it is organized;
(b) it is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into this Agreement;
(c) all corporate proceedings required by said Articles of
Incorporation, By-Laws and applicable laws have been taken to
authorize it to enter into this Agreement;
(d) a registration statement under the 1933 Act and the 1940 Act on
behalf of each of the Portfolios is currently effective; and
(e) as of the date hereof, each Portfolio is duly registered and
lawfully eligible for sale in each jurisdiction indicated for
such Portfolio on the list furnished to the Co-Administrators
pursuant to Article 7 of this Agreement and that it will notify
the Co-Administrators immediately of any changes to the
aforementioned list.
Article 10 Indemnification.
10.1 The Fund shall indemnify and hold each Co-Administrator harmless from
and against any and all claims, costs, expenses (including reasonable attorneys'
fees), losses, damages, charges, payments and liabilities of any sort or kind
which may be asserted against a Co-Administrator or for which a Co-Administrator
may be held to be liable in connection with this Agreement or a
Co-Administrator's performance hereunder (a "Claim"), unless such Claim resulted
from: (a) the willful misfeasance, bad faith or negligence of such
Co-Administrator in the performance of its duties hereunder, or by reason of its
reckless disregard thereof; or (b) such Co-Administrator's breach of Article 14
of this Agreement.
10.2 The Fund agrees and acknowledges that the Co-Administrators have not
prior to the Effective Date assumed, and will not assume, any obligations or
liabilities arising out of the conduct by the Fund or its administrator prior to
the Effective Date of those duties which the Co-Administrators have agreed to
perform pursuant to this Agreement. The Fund further agrees to indemnify each
Co-Administrator against any losses, claims, damages or liabilities to which a
Co-Administrator may become subject in connection with the conduct by the Fund
or its administrator of such duties prior to the Effective Date.
10.3 Each Co-Administrator jointly and severally shall indemnify and hold
the Fund harmless from and against any and all claims, costs, expenses
(including reasonable attorneys' fees), losses, damages, charges, payments and
liabilities of any sort or kind which may be asserted against the Fund or for
which the Fund may be held to be liable in connection with this Agreement or the
Fund's performance hereunder (a "Claim"), provided that such Claim resulted
from: (a) the willful misfeasance, bad faith or negligence of such
Co-Administrator in the performance of its duties hereunder, or by reason of its
reckless disregard thereof; or (b) such Co-Administrator's breach of Article 14
of this Agreement.
10.4 In any case in which one party (the "Indemnifying Party") may be asked
to indemnify or hold another party (the "Indemnified Party") harmless, the
Indemnified Party will notify the Indemnifying Party in writing promptly after
identifying any situation which it believes presents or appears likely to
present a claim for indemnification (an "Indemnification Claim") against the
Indemnifying Party, although the failure to do so shall not relieve the
Indemnifying Party from any liability which it may otherwise have to the
Indemnified Party, and the Indemnified Party shall keep the Indemnifying Party
advised with respect to all developments concerning such situation. The
Indemnifying Party shall be entitled to participate at its own expense in the
defense, or if it so elects, to assume the defense of, any Indemnification Claim
which may be the subject of this indemnification, and, in the event that the
Indemnifying Party so elects, such defense shall be conducted by counsel of good
standing chosen by the Indemnifying Party and approved by the Indemnified Party,
which approval shall not be unreasonably withheld. In the event the Indemnifying
Party elects to assume the defense of any such Indemnification Claim and retain
such counsel, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by the Indemnified Party. In the event that the
Indemnifying Party does not elect to assume the defense of any such
Indemnification Claim, or in case the Indemnified Party reasonably does not
approve of counsel chosen by the Indemnifying Party, or in case there is a
conflict of interest between the Indemnifying Party or the Indemnified Party,
the Indemnifying Party will reimburse the Indemnified Party for the fees and
expenses of any counsel retained by the Indemnified Party. The Indemnified Party
will not confess any Indemnification Claim or make any compromise in any case in
which the Indemnifying Party will be asked to provide indemnification, except
with the Indemnifying Party's prior written consent. The obligations of the
parties hereto under this Article 10 shall survive the termination of this
Agreement.
Article 11 Standard of Care.
11.1 The Co-Administrators shall at all times act in good faith and agree
to use their best efforts within commercially reasonable limits to ensure the
accuracy of all services performed under this Agreement, but assume no
responsibility for loss or damage to the Fund unless said errors are caused by
the Co-Administrators' willful misfeasance, bad faith or negligence in the
performance of their duties hereunder, or by reason of their reckless disregard
thereof.
11.2 Each party shall have the duty to mitigate damages for which another
party may become responsible.
11.3 Without in any way limiting the foregoing, in the event the
Co-Administrators shall provide blue sky services to the Fund, the
Co-Administrators shall have no liability for failing to file on a timely basis
any material to be provided by the Fund or its designee that the
Co-Administrators have not received on a timely basis from the Fund or its
designee, nor shall the Co-Administrators have any responsibility to review the
accuracy or adequacy of materials they receive from the Fund or its designee for
filing; nor shall the Co-Administrators have any liability for monetary damages
for the sale of securities in jurisdictions where Shares are not properly
registered, or in jurisdictions where Shares are sold in excess of the lawfully
registered amount, unless such failure of proper registration or excess sales is
due to the willful misfeasance, bad faith or negligence of the
Co-Administrators, or the reckless disregard of their duties hereunder. The
Co-Administrators shall not be liable for any errors which result from
inaccurate or inadequate information reported to the Co-Administrators directly
or indirectly from the Fund's transfer agent. The Co-Administrators shall be
under no obligation to investigate or confirm the accuracy or adequacy of any
information provided to the Co-Administrators by the Fund's transfer agent.
11.4 NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO
EVENT SHALL ANY PARTY, ITS AFFILIATES OR ANY OF ITS OR THEIR DIRECTORS,
TRUSTEES, OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE TO ANY OTHER
PARTY FOR CONSEQUENTIAL DAMAGES.
Article 12 Term and Termination.
12.1 This Agreement shall be effective on the Effective Date and, unless
sooner terminated as provided herein, shall continue until April 30, 2001 (the
"Initial Term").
12.2 Upon the expiration of the Initial Term, this Agreement shall continue
automatically for successive one-year terms ("Renewal Terms") with respect to
each Portfolio, provided such continuance is specifically approved at least
annually by (i) the Board of Directors or (ii) by a vote of a majority (as
defined in the 1940 Act and Rule 18f-2 thereunder) of the outstanding voting
securities of the particular Portfolio, provided that in either event the
continuance is also approved by a majority of the Board Members who are not
parties to this Agreement and who are not interested persons (as defined in the
1940 Act) of any party to this Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval.
12.3 The Fund may terminate this Agreement at any time after the Initial
Term, with or without cause, and without penalty, on at least sixty (60) days
written notice to the Co-Administrators.
12.4 Each Co-Administrator may terminate this Agreement with respect to
itself at any time after the Initial Term, with or without cause, and without
penalty, on at least sixty (60) days written notice to the Fund and the other
Co-Administrator.
12.5 The Fund may terminate this Agreement at any time during the Initial
Term in the event that the Fund or its shareholders incur damages in excess of
one hundred thousand dollars ($100,000) as a result of the willful misfeasance,
bad faith or negligence of the Co-Administrators, or the reckless disregard of
their duties hereunder. For this purpose, "damages" is defined as damages caused
by a single event, or cumulative series of events related to the same matter,
which generates a monetary loss to the Fund or its shareholders. The Fund's
right to terminate this Agreement pursuant to this Section 12.5 shall remain
effective even if the Co-Administrators have made the Fund or its shareholders
whole with respect to the damages caused.
12.6 The Fund may also terminate this Agreement at any time during the
Initial Term, regardless of the amount of damages to the Fund or its
shareholders, in the event that the Co-Administrators have failed to meet one of
the performance standards set forth in Exhibit 1 to Schedule B (a "Triggering
Event"). The Fund will provide the Co-Administrators with sixty (60) days
written notice if the Fund intends to exercise its option to terminate this
Agreement under this Section 12.6; provided, however, that such notice must be
given within sixty (60) days following the end of the month in which the
Triggering Event occurs. Notwithstanding the foregoing, the Fund's rights under
this Section 12.6 shall not become effective until ninety (90) days following
the Effective Date.
12.7 In the event this Agreement: (a) is terminated by the Fund pursuant to
Section 12.5, Section 12.6 or Section 12.9 hereof; or (b) is not continued after
the expiration of the Initial Term or any Renewal Term, all reasonable expenses
associated with the movement of records and materials and conversion thereof to
a successor administrator shall be borne by the Co-Administrators, and the Fund
shall not be responsible for the Co-Administrators' costs associated with such
termination; provided, however, that such expenses shall not exceed $25,000 in
the event this Agreement is not continued after the expiration of the Initial
Term or any Renewal Term. In the event this Agreement is terminated by the Fund
pursuant to any other provision of this Agreement, all reasonable expenses
associated with conversion to a successor administrator shall be borne by the
Fund.
12.8 Notwithstanding anything contained in this Agreement to the contrary,
unless this Agreement is terminated pursuant to Section 12.5, Section 12.6 or
Section 12.9 hereof, should the Fund move any of the services provided by the
Co-Administrators hereunder to a successor service provider during the Initial
Term, or should, during the Initial Term, all or substantially all of the Fund's
assets be merged with or purchased by another entity which does not utilize the
services of the Co-Administrators, the Co-Administrators shall be entitled to
receive fees from the Fund for the period from the date of such movement, merger
or purchase until the end of the Initial Term (the "Unexpired Term"). The fees
payable for the Unexpired Term shall be accelerated to the date of such
movement, merger or purchase and shall be calculated in accordance with Section
6.3 herein at the asset levels on such date. The expense reimbursements set
forth in Section 6.5 hereof shall not apply to the Unexpired Term.
12.9 The Fund may terminate this Agreement upon its Assignment by a
Co-Administrator unless the conditions to an Assignment as set forth in Article
16 hereof have been satisfied.
Article 13 Additional Portfolios.
In the event that the Fund establishes one or more Portfolios in
addition to those identified in Schedule A with respect to which the Fund
desires to have the Co-Administrators render services as administrator under the
terms hereof, the Fund shall so notify the Co-Administrators in writing, and if
the Co-Administrators agree in writing to provide such services, Schedule A
shall be deemed amended to include such additional Portfolios.
Article 14 Confidentiality.
14.1 The parties agree that the Proprietary Information (defined below) is
confidential information of the parties and their respective licensers. The Fund
and the Co-Administrators shall exercise at least the same degree of care, but
not less than reasonable care, to safeguard the confidentiality of the
Proprietary Information of each other as they would exercise to protect their
own Proprietary Information. The Fund and the Co-Administrators may use the
Proprietary Information only to exercise their respective rights or perform
their respective duties under this Agreement. Except as otherwise required by
law, the Fund and the Co-Administrators shall not duplicate, sell or disclose to
others the Proprietary Information of the other, in whole or in part, without
the prior written permission of the affected party. The Fund and the
Co-Administrators may, however, disclose Proprietary Information to their
respective employees who have a need to know the Proprietary Information to
perform work for the other, provided that the Fund and the Co-Administrators
shall use reasonable efforts to ensure that the Proprietary Information is not
duplicated or disclosed by their respective employees in breach of this
Agreement. The Fund and the Co-Administrators may also disclose the Proprietary
Information to independent contractors, auditors and professional advisors,
provided they first agree in writing to be bound by confidentiality obligations
substantially similar to this Section 14.1. Notwithstanding the previous
sentence, in no event shall either the Fund or the Co-Administrators disclose
the Proprietary Information to any competitor of the other without specific,
prior written consent.
14.2 Proprietary Information means:
(a) any data or information that is competitively sensitive material,
and not generally known to the public, including, but not limited
to, information about product plans, marketing strategies,
finance, operations, customer relationships, customer profiles,
sales estimates, business plans, and internal performance results
relating to the past, present or future business activities of
the Fund or the Co-Administrators, their respective subsidiaries
and affiliated companies and the customers, clients and suppliers
of any of them;
(b) any scientific or technical information, design, process,
procedure, formula or improvement that is commercially valuable
and secret in the sense that its confidentiality affords the Fund
or the Co-Administrators a competitive advantage over their
competitors;
(c) all confidential or proprietary concepts, documentation, reports,
data, specifications, computer software, source code, object
code, flow charts, databases, inventions, know-how, show-how and
trade secrets, whether or not patentable or copyrightable;
(d) all documents, inventions, substances, engineering and laboratory
notebooks, drawings, diagrams, specifications, bills of material,
equipment, prototypes and models, and any other tangible
manifestation of the foregoing of any party hereto which now
exist or come into the control or possession of the other; and
(e) with respect to the Fund, all records and other information
relative to the Fund and its prior, present or potential
shareholders (and clients of such shareholders).
14.3 The obligations of confidentiality and restriction on use herein shall
not apply to any Proprietary Information that a party proves:
(a) Was in the public domain prior to the date of this Agreement or
subsequently came into the public domain through no fault of such
party; or
(b) Was lawfully received by the party from a third party free of any
obligation of confidence to such third party; or
(c) Was already in the possession of the party prior to receipt
thereof, directly or indirectly, from the other party; or
(c) Is required to be disclosed in a judicial or administrative
proceeding after all reasonable legal remedies for maintaining
such information in confidence have been exhausted including, but
not limited to, giving the other party as much advance notice of
the possibility of such disclosure as practical so the other
party may attempt to stop such disclosure or obtain a protective
order concerning such disclosure; or
(d) Is subsequently and independently developed by employees,
consultants or agents of the party without reference to the
Proprietary Information disclosed under this Agreement.
14.4 Notwithstanding the foregoing, it is hereby understood and agreed by
the parties hereto that any marketing strategies, customer profiles or
administrative, business or shareholder servicing plans or similar items
prepared or developed by the Co-Administrators for the benefit of the Fund shall
be considered the Proprietary Information of the Fund and nothing in this
Agreement shall be construed to prevent or prohibit the Fund from disclosing
such Proprietary Information to a successor administrator.
14.5 The obligations of the parties hereto under this Article 14 shall
survive the termination of this Agreement.
Article 15 Force Majeure.
No party shall be liable for any default or delay in the performance of its
obligations under this Agreement if and to the extent such default or delay is
caused, directly or indirectly, by circumstances beyond such party's reasonable
control. In any such event, the non-performing party shall be excused from any
further performance and observance of the obligations so affected only for as
long as such circumstances prevail and such party continues to use commercially
reasonable efforts to recommence performance or observance as soon as
practicable.
Article 16 Assignment and Subcontracting.
This Agreement, its benefits and obligations shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. Except for the pending acquisition of Investor Services Group
by PNC Bank Corp, this Agreement may not be Assigned or otherwise transferred by
any party hereto without the prior written consent of the other parties;
provided, however, that each party may, in its sole discretion, Assign all its
right, title and interest in this Agreement to an entity controlling, controlled
by, or under common control with, such party, provided that, in the reasonable
judgment of the Board of Directors determine in its sole discretion within
ninety (90) days of receiving written notice of such Assignment: (i) the
financial capacity of a Co-Administrator's assignee is not materially less than
that of the Co-Administrator; (ii) the nature and quality of the services to be
provided hereunder are not materially adversely affected by such Assignment; and
(iii) the quality and capability of the personnel and facilities of a
Co-Administrator's assignee are not materially less than those of the
Co-Administrator. The Co-Administrators may, in their sole discretion, engage
subcontractors to perform any non-material or non-substantive obligations
contained in this Agreement that they are otherwise required to perform
hereunder, provided that the Co-Administrators shall be responsible for all
compensation payable to such subcontractors and shall remain responsible for the
acts and omissions of such subcontractors to the same extent that the
Co-Administrators are hereunder.
Article 17 Notice.
Any notice or other instrument authorized or required by this Agreement to
be given in writing to the Fund or a Co-Administrator shall be sufficiently
given if addressed to a party and received by it at its office set forth below
or at such other place as it may from time to time designate in writing.
To the Fund:
<TABLE>
<CAPTION>
<S> <C>
James D. Grassi, Esq.
The Northern Trust Company
50 South LaSalle Street - M-9
Chicago, IL 60675
with a copy to:
W. Bruce McConnel, III, Esq.
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
To Northern:
James D. Grassi, Esq.
The Northern Trust Company
50 South LaSalle Street - M-9
Chicago, IL 60675
To Investor Services Group:
First Data Investor Services Group, Inc.
4400 Computer Drive
Westboro, Massachusetts 01581
Attention: President
</TABLE>
with a copy to Investor Services Group's General Counsel
Article 18 Governing Law/Venue.
The laws of the Commonwealth of Massachusetts, excluding the laws on
conflicts of laws, shall govern the interpretation, validity, and enforcement of
this Agreement (except as to Article 24 hereof which shall be construed in
accordance with the laws of the State of Delaware). All actions arising from or
related to this Agreement shall be brought in the state and federal courts
sitting in the City of Boston, and the parties hereby submit themselves to the
exclusive jurisdiction of those courts.
Article 19 Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original; but such counterparts shall, together,
constitute only one instrument.
Article 20 Captions.
The captions of this Agreement are included for convenience of reference
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
Article 21 Publicity.
No party shall release or publish news releases, public announcements,
advertising or other publicity relating to this Agreement or to the transactions
contemplated by it without the prior review and written approval of the other
parties; provided, however, that a party may make such disclosures as are
required by legal, accounting or regulatory requirements after making reasonable
efforts in the circumstances to consult in advance with the other parties.
Article 21 Relationship of Parties.
The Co-Administrators agree that they are independent contractors and not
partners or co-venturers and nothing contained herein shall be interpreted or
construed otherwise.
Article 22 Entire Agreement; Severability.
23.1 This Agreement, including all Schedules and Exhibits hereto, constitutes
the entire Agreement between the parties with respect to the subject matter
hereof and supersedes all prior and contemporaneous proposals, agreements,
contracts, representations and understandings, whether written or oral, between
the parties with respect to the subject matter hereof. No change, termination,
modification or waiver of any term or condition of the Agreement shall be valid
unless in writing signed by each party. No such writing shall be effective as
against Investor Services Group unless said writing is executed by a Senior Vice
President, Executive Vice President or President of Investor Services Group. No
such writing shall be effective as against the Fund unless said writing is
executed by the Chairman of the Board of Directors or another person
specifically designated by the Board of Directors. No such writing shall be
effective as against Northern unless said writing is executed by the Vice
President, Senior Vice President, Executive Vice President or President of
Northern. A party's waiver of a breach of any term or condition in the Agreement
shall not be deemed a waiver of any subsequent breach of the same or another
term or condition.
23.2 The parties intend every provision of this Agreement to be severable.
If a court of competent jurisdiction determines that any term or provision is
illegal or invalid for any reason, the illegality or invalidity shall not affect
the validity of the remainder of this Agreement. In such case, the parties shall
in good faith modify or substitute such provision consistent with the original
intent of the parties. Without limiting the generality of this paragraph, if a
court determines that any remedy stated in this Agreement has failed of its
essential purpose, then all other provisions of this Agreement shall remain
fully effective.
Article 24 Board Member and Shareholder Liability.
This Agreement is executed by or on behalf of the Fund with respect to each
of the Portfolios and the obligations hereunder are not binding upon any of the
Board Members, officers or shareholders of the Fund individually but are binding
only upon the Portfolio to which such obligations pertain and the assets and
property of such Portfolio. All obligations of the Fund under this Agreement
shall apply only on a Portfolio-by-Portfolio basis, and the assets of one
Portfolio shall not be liable for the obligations of another Portfolio.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the Effective Date.
NORTHERN INSTITUTIONAL FUNDS
By: /s/ Jylanne Dunne
Name: Jylanne Dunne
Title: President
THE NORTHERN TRUST COMPANY
By: /s/ Archibald E. King
Name: Archibald E. King
Title: Vice President
FIRST DATA INVESTOR SERVICES GROUP, INC,
By: /s/James L. Fox
Name: James L. Fox
Title: President
<PAGE>
SCHEDULE A
LIST OF PORTFOLIOS
Non-International Portfolios:
Government Select Portfolio
Government Portfolio
Diversified Assets Portfolio
Tax-Exempt Portfolio
Municipal Portfolio
U.S. Government Securities Portfolio
Short-Intermediate Bond Portfolio
U.S. Treasury Index Portfolio
Bond Portfolio
Intermediate Bond Portfolio
Balanced Portfolio
Equity Index Portfolio
Diversified Growth Portfolio
Focused Growth Portfolio
Small Company Index Portfolio
Small Company Growth Portfolio
MidCap Growth Portfolio
MarketPower Portfolio
International Portfolios:
International Bond Portfolio
International Equity Index Portfolio
International Growth Portfolio
<PAGE>
SCHEDULE B
DUTIES OF THE CO-ADMINISTRATORS
(a) Maintaining office facilities (which may be in the offices of a
Co-Administrator or a corporate affiliate) and furnishing
corporate officers for the Fund;
(b) Furnishing data processing services, clerical services, and
executive and administrative services and standard stationery and
office supplies;
(c) Performing all functions ordinarily performed by the office of a
corporate treasurer, and furnishing the services and facilities
ordinarily incident thereto, as follows:
Expense accrual monitoring and payment of the Fund's bills,
preparing monthly reconciliation of the Fund's expense
records and updating projections of annual expenses
Determining dividends
Calculating yields and total returns
Preparing materials for review by the Board of Directors,
e.g., written reports pursuant to Rules 2a-7, 10f-3,
17a-7, 17e-1 and 144A and the Fund's applicable
procedures
Tax and financial counsel
Creating expense pro formas for new Portfolios/classes
Reporting Fund statistical information to investment company
reporting agencies and associations (e.g., Lipper
Analytical Services, Inc. and the Investment Company
Institute)
Compliance testing (e.g., to test compliance with applicable
provisions of the Prospectus, 1940 Act and Internal
Revenue Code)
(d) Preparing and submitting reports to the Fund's shareholders and
the Commission including, but not necessarily limited to, Annual
Reports and Semi-Annual Reports on Form N-SAR;
(e) Preparing and printing financial statements;
(f) Preparing monthly Portfolio profile reports;
(g) Preparing and filing the Fund's federal and state tax returns
(other than those required to be filed by the Fund's custodian
and transfer agent) and providing shareholder tax information to
the Fund's transfer agent;
(h) Assisting the Fund's investment adviser, at the adviser's
request, in monitoring and developing compliance procedures for
the Fund which will include, among other matters, procedures to
assist the adviser in monitoring compliance with each Portfolio's
investment objective, policies, restrictions, tax matters and
applicable laws and regulations;
(i) Assisting in marketing strategy and product development;
(j) Performing oversight/management responsibilities, including the
following:
Supervision and coordination of transfer agent
Supervision and coordination of IRA custodian
Supervision and coordination of Fund custodian
Vendor management and invoicing
Daily report coordination
Media relations
Sales literature forms and development
Fund operations coordination
Management of auditor relationship
Oversight of Portfolio compliance and tax function
(k) Performing "blue sky" compliance functions, as follows:
Effecting and maintaining, as the case may be, the
registration of Shares of the Fund for sale under the
securities laws of the jurisdictions listed in the
Written Instructions of the Fund, which instructions
will include the amount of Shares to be registered as
well as the warning threshold to be maintained.
Filing with each appropriate jurisdiction the appropriate
materials relating to the Fund.
Providing to the Fund quarterly reports of sales activity in
each jurisdiction in accordance with the Written
Instructions of the Fund. Sales will be reported by
shareholder residence. NSCC trades and order clearance
will be reported by the state provided by the dealer at
the point of sale. Trades by omnibus accounts will be
reported by trustee state of residence in accordance
with the Written Instructions of the Fund outlining the
entities which are permitted to maintain omnibus
positions with the Fund.
In the event sales of Shares in a particular jurisdiction
reach or exceed the warning levels provided in the
Written Instructions of the Fund, the Co-Administrators
will promptly notify the Fund with a recommendation of
the amount of Shares to be registered in such
jurisdiction and the fee for such registration. The
Co-Administrators will not register additional Shares
in such jurisdiction unless and until the
Co-Administrators shall have received Written
Instructions to do so.
If the Co-Administrators are instructed by the Fund not to
register Shares in a particular jurisdiction, the
Co-Administrators will use their best efforts to cause
any sales in such jurisdictions to be blocked, and such
sales will not be reported to the Co-Administrators as
sales of Shares of the Fund.
(i) Performing corporate secretarial services including the
following:
Assist in maintaining corporate records and good standing
status of Fund in its state of organization
Develop and maintain calendar of annual and quarterly board
approvals and regulatory filings
Prepare notice, agenda, memoranda, resolutions and
background materials for legal approvals at quarterly
and special board meetings and committee meetings;
assemble and distribute board materials for board
meetings and committee meetings; attend meetings; make
presentations where appropriate; prepare minutes;
follow up on issues; prepare such periodic and special
reports as the Board Members may reasonably request
Provide support for written consent votes where needed
(m) Monitoring the Fund's arrangements with respect to services
provided by institutions ("Servicing Agents") to their customers
who are the beneficial owners of Shares, pursuant to agreements
("Servicing Agreements") between the Fund and such Servicing
Agents including:
Review the qualifications of Servicing Agents wishing to
enter into Servicing Agreements
Assist in the execution and delivery of Servicing Agreements
Report to the Board of Directors with respect to the amounts
paid or payable by the Fund from time to time under the
Servicing Agreements and the nature of the services
provided by Servicing Agents.
Maintain appropriate records in connection with their
monitoring duties
(n) Performing the following legal services:
Prepare and file annual Post-Effective Amendments to the
Fund's Registration Statement
Prepare and file Rule 24f-2 Notices
Prepare and file Forms N-SAR
Prepare and file Annual and Semi-Annual Financial Reports
Communicate significant regulatory or legislative
developments to Fund management and Board Members and
provide related planning assistance where needed.
Consult with Fund management regarding portfolio compliance
and Fund corporate and regulatory issues as needed
Maintain effective communication with outside counsel
Arrange D&O/E&O insurance and fidelity bond coverage for
Fund
Assist in monitoring Fund Code of Ethics reporting and
provide such reports to the person designated under the
Fund's Code
Monitor handling of litigation by outside counsel and
non-routine regulatory matters
Assist in managing Commission audits of the Fund at the
investment adviser's principal place of business
Review sales material and advertising for Fund Prospectus
compliance
Assist in developing compliance guidelines and procedures to
improve overall compliance by Fund and service
providers
Prepare compliance manuals
(o) Performing, in accordance with the Written Instructions of the
Fund, Special Legal Services in accordance with the pricing
structure listed on the Fee Schedule attached to this Agreement
as Schedule C. Examples of such Special Legal Services are:
Assist in new Portfolio start-up (to the extent requested):
Coordinate time and responsibility schedules
Prepare Fund corporate documents
Draft/file registration statement (including investment
objectives/policies and prospectuses)
Respond to and negotiate Commission comments
Draftnotice, agenda and resolutions for organizational
meeting; attend board meeting; make presentations where
appropriate; prepare minutes and follow up on issues
Prepare proxy materials for special meetings of shareholders
(including fund merger documents)
Prepare Post-Effective Amendments for special purposes
(e.g., new funds or classes, changes in advisory
relationships, mergers, restructurings)
Assist in extraordinary non-recurring projects, including
providing consultative legal services, such as: Arrange
CDSC financial programs Prospectus simplification
Profile prospectuses Exemptive order applications
Requests for no-action letters
<PAGE>
EXHIBIT 1 TO SCHEDULE B
PERFORMANCE STANDARDS
The Co-Administrators' obligation to meet the following Performance Standards
shall be measured in the aggregate with respect to all Portfolios of the Fund.
The Co-Administrators will report to the Fund on a monthly basis the percent of
items completed within standard as well as a quality rating. Reporting will be
detailed to the transaction type level. A pass/fail determination for
contractual penalties will be based on the categories listed below. Note that
completion standards are measured in business days.
Fund Administration (Treasury and Reporting)Tax/Compliance
The following standards will be met 100% of the time:
All Commission and Internal Revenue Service ("IRS") regulatory
requirements will be met according to the deadlines set forth by the
Commission and the IRS
Notification to the Fund's investment adviser within two (2) business days
with compliance violations based on procedures established by and
among the Co-Administrators and the Fund.
Directors & Officers Errors & Omissions Insurance Coverage will be reviewed
annually
Rule 17g-1 Fidelity Bond filings will be made as required by the
regulations of the Commission
The following standard will be met 98% of the time:
Code of Ethics reporting forms will be circulated at least seven (7)
business
days before each quarter end
Blue Sky
The following standard will be met 98% of the time:
Annual renewal filings will be submitted at least thirty (30) business days
prior to expiration
Filings of Prospectus and Annual Reports will be submitted within fifteen
(15) business days of printing/release
Legal Administration
The following standards will be met 98% of the time as measured on a
quarterly basis:
Board materials will be sent to the Fund for review at least fourteen
(14) business days prior to the Board meeting, provided that all
requested information has been received by the Co-Administrators
within agreed-upon time frames Board materials will be sent to the
Board Members at least seven (7) business days prior to the Board
meeting, provided that all requested information has been received by
the Co-Administrators within agreed-upon time frames
Timely submission of sales literature to NASD, provided that copies of
such materials are provided to the Co-Administrators or their affiliates on
a timely basis
<PAGE>
SCHEDULE C
FEE SCHEDULE
For the services rendered, expenses assumed, facilities furnished and
payments made by the Co-Administrators, as provided for in this Agreement, the
Fund, on behalf of each Portfolio, on the first business day of each month, will
pay to Northern, as agent for itself and Investor Services Group, a fee for the
previous month at the annualized rates listed below.
<TABLE>
<CAPTION>
<S><C> <C>
1. Standard Annual Fees: Non-International Portfolios:
.10% of each Portfolio's average daily net assets
International Portfolios:
.15% of each Portfolio's average daily net assets
The foregoing fee will be computed based on net assets on each day.
2. Fees for Special Legal Services: The Co-Administrators shall be entitled to
the following fee for the performance of any Special Legal Services as described
in Schedule B in accordance with the Written Instructions of the Fund: $185 per
hour subject to certain project caps as may be agreed to by the
Co-Administrators and the Fund.
Services and charges may vary based on volume.
</TABLE>
<PAGE>
SCHEDULE D
FUND DOCUMENTS
Certified copy of the Articles of Incorporation of the Fund
Certified copy of the By-Laws of the Fund
Copy of the resolution of the Board of Directors authorizing the
execution and delivery of this Agreement
Copies of all agreements between the Fund and its service providers
A listing of all jurisdictions in which each Portfolio is registered
and lawfully available for sale as of the date of this Agreement and all
information relative to the monitoring of sales and registrations of the
Shares in such jurisdictions
The Fund's most recent post-effective amendment to its registration
statement
The Fund's Prospectus
Exhibit (j)(1)
Consent of Counsel
We hereby consent to the use of our name and to the references to our Firm
under the caption "Additional Trust Information - Counsel and Auditors" in the
Statement of Additional Information included in Post-Effective Amendment No. 43
to the Registration Statement on Form N-1A under the Securities Act of 1933, as
amended (the "1933 Act"), of Northern Institutional Funds (File Nos. 2-80543 and
811-3605). This consent does not constitute a consent under section 7 of the
1933 Act, and in consenting to the use of our name and the references to our
Firm under such caption we have not certified any part of the Registration
Statement and do not otherwise come within the categories of persons whose
consent is required under said section 7 or the rules and regulations of the
Securities and Exchange Commission thereunder.
/s/Drinker Biddle & Reath LLP
Drinker Biddle & Reath LLP
Philadelphia, Pennsylvania
January 28, 2000
