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[LOGO APPEARS HERE]
FIXED INCOME AND
EQUITY PORTFOLIOS
DECEMBER 29, 1999
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Northern Institutional Funds
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FIXED INCOME . U.S. Government Securities Portfolio
AND EQUITY -------------------------------------------------------------
PORTFOLIOS . Short-Intermediate Bond Portfolio
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. Intermediate Bond Portfolio
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. U.S. Treasury Index Portfolio
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. Bond Portfolio
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. International Bond Portfolio
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. Balanced Portfolio
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. Equity Index Portfolio
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. Diversified Growth Portfolio
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. Focused Growth Portfolio
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. Market Command Portfolio
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. Mid Cap Growth Portfolio
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. Small Company Index Portfolio
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. Small Company Growth Portfolio
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. International Equity Index Portfolio
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. International Growth Portfolio
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Prospectus dated December 29, 1999
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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RISK/RETURN SUMMARY
Information about the objectives, principal strategies and risk
characteristics of each Portfolio
Fixed Income Portfolios
U.S. Government Securities Portfolio 5
Short-Intermediate Bond Portfolio 6
Intermediate Bond Portfolio 7
U.S. Treasury Index Portfolio 8
Bond Portfolio 9
International Bond Portfolio 10
Balanced Portfolio 12
Equity Portfolios
Equity Index Portfolio 14
Diversified Growth Portfolio 15
Focused Growth Portfolio 16
Market Command Portfolio 17
Mid Cap Growth Portfolio 18
Small Company Index Portfolio 19
Small Company Growth Portfolio 20
International Equity Index Portfolio 21
International Growth Portfolio 22
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Principal Investment Risks 23
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Portfolio Performance 26
U.S. Government Securities Portfolio 27
Short-Intermediate Bond Portfolio 28
Intermediate Bond Portfolio 29
U.S. Treasury Index Portfolio 30
Bond Portfolio 31
International Bond Portfolio 32
Balanced Portfolio 33
Equity Index Portfolio 34
Diversified Growth Portfolio 35
Focused Growth Portfolio 36
Small Company Index Portfolio 37
International Equity Index Portfolio 38
International Growth Portfolio 39
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Portfolio Fees and Expenses 42
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MANAGEMENT OF THE PORTFOLIOS
Details that apply to the Portfolios as a group
Investment Advisers 53
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Advisory Fees 54
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Portfolio Management 55
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Other Portfolio Management Information 57
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Other Portfolio Services 57
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ABOUT YOUR ACCOUNT
How to open, maintain and close an account
Purchasing and Selling Shares 58
Purchasing Shares 58
Opening an Account 58
Selling Shares 59
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Account Policies and Other Information 60
Purchase and Redemption Minimums 60
Calculating Share Price 60
Timing of Purchase Requests 60
Additional Transaction Fee 60
Tax Identification Number 61
In-Kind Purchases and Redemptions 61
Miscellaneous Purchase Information 61
Timing of Redemption and Exchange Requests 61
Miscellaneous Redemption Information 61
Exchange Privileges 62
Telephone Transactions 62
Making Changes to Your Account Information 62
Business Day 62
Early Closings 63
Authorized Intermediaries 63
Servicing Agents 63
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Dividends and Distributions 64
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Tax Considerations 65
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Year 2000 Issues 66
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RISKS, SECURITIES, TECHNIQUES AND FINANCIAL INFORMATION
Risk, Securities and Techniques 67
Additional Information on Investment Objectives, Principal
Investment Strategies and Related Risks 67
Additional Description of Securities and Common Investment Techniques 72
Disclaimers 81
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Financial Information 83
FOR MORE INFORMATION
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Annual/Semiannual Report 110
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Statement of Additional Information 110
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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's 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 67 and the
Statement of Additional Information. As used in this Prospectus the term "equity
securities" includes common stocks, preferred stocks, interests in real estate
investment trusts, convertible debt obligations, convertible preferred stocks,
equity interest in trusts, partnerships, joint ventures, limited liability
companies and similar enterprises, warrants and stock purchase rights.
4
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U.S. Government Securities Portfolio
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INVESTMENT OBJECTIVE
The Portfolio seeks to maximize total return with minimal reasonable risk.
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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 23 for these risks and
primary risks common to all Portfolios.
5
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Short-Intermediate Bond Portfolio
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INVESTMENT OBJECTIVE
The Portfolio seeks to maximize total return consistent with reasonable risk.
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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,
currency, country, foreign regulatory, high-yield and derivatives risks. See
page 23 for these risks and primary risks common to all Portfolios.
6
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Intermediate Bond Portfolio
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INVESTMENT OBJECTIVE
The Portfolio seeks to maximize total return consistent with reasonable risk.
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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 23 for these risks and primary risks common to all Portfolios.
7
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U.S. Treasury Index Portfolio
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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.
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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 23 for these risks and primary risks common to all
Portfolios.
8
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Bond Portfolio
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INVESTMENT OBJECTIVE
The Portfolio seeks to maximize total return consistent with reasonable risk.
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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 23 for these risks and primary risks common to all Portfolios.
9
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International Bond Portfolio
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INVESTMENT OBJECTIVE
The Portfolio seeks to maximize total return consistent with reasonable risk.
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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 or 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.
10
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PRINCIPAL INVESTMENT STRATEGIES AND RISKS (CONTINUED)
The Portfolio is "non-diversified" under the Investment Company Act of 1940 (the
"1940 Act"), and may invest more of its assets in fewer issuers than
"diversified" mutual funds.
Risks. These primary investment risks apply to the Portfolio: interest
rate/maturity, credit (or default), prepayment (or call), debt extension,
derivatives, currency, country, foreign regulatory, emerging markets, high-yield
and non-diversification risks. See page 23 for these risks and primary risks
common to all Portfolios.
11
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Balanced Portfolio
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INVESTMENT OBJECTIVE
The Portfolio seeks to provide long-term capital appreciation and current
income.
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PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. In seeking long-term capital appreciation and current
income, the Portfolio will, under normal market conditions invest up to 75% of
the value of its total assets in equity securities and at least 25% in fixed
income securities. Within these limitations, the actual mix of assets will vary
depending on the investment management team's analysis of market and economic
conditions, including expected earnings, growth in earnings, long-term interest
rates and risk premiums. When, for example, this analysis indicates that the
equity market is overvalued relative to the fixed income market, the investment
management team would allocate a greater percentage of the Portfolio's assets to
fixed income securities.
When investing in equity securities, the Portfolio generally invests in the
equity securities of a broad mix of companies. Such companies generally will
have market capitalizations in excess of $750 million. Although the Portfolio
primarily invests in the common stocks of U.S. companies, it may invest to a
limited extent in the stocks of foreign issuers. Using fundamental research and
quantitative analysis, the investment management team buys equity securities it
believes have favorable growth characteristics relative to their peers.
Similarly, the investment management team sells securities it believes no longer
have these characteristics. The team may also sell securities in order to
maintain the desired equity securities composition of the Portfolio. In
determining whether a company has favorable growth characteristics, the
investment management team analyzes factors such as:
. Sales and earnings growth
. Return on equity
. Debt to equity ratio
. Market share and competitive leadership of the company's products
In buying and selling securities for the fixed income portion of the Portfolio,
the investment management team uses a relative value approach. This approach
involves an analysis of general economic and market conditions. It also involves
the use of models that analyze and compare expected returns and assumed risks.
Under the relative value approach, the investment management team will emphasize
particular securities and types of securities (such as treasury, agency,
mortgage-related and corporate securities) that the team believes will provide a
favorable return in light of these risks. In this regard, the management team
will consider not only the income the Portfolio will receive from its
investments, but also the likelihood that particular securities or types of
securities will have a more favorable or improving credit outlook.
The Portfolio invests in a broad range of fixed income securities, including:
. Obligations of the U.S. government, its agencies or instrumentalities and
repurchase agreements collateralized by such obligations
. Obligations of state, local and foreign governments
. Obligations of domestic and foreign banks and corporations
. Zero coupon bonds, debentures 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
12
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PRINCIPAL INVESTMENT STRATEGIES AND RISKS (CONTINUED)
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,
derivatives, currency, country, foreign regulatory, high-yield and stock risks.
See page 23 for these risks and primary risks common to all Portfolios.
13
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Equity Index Portfolio
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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.
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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 23 for these risks and primary risks common to all Portfolios.
14
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Diversified Growth Portfolio
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INVESTMENT OBJECTIVE
The Portfolio seeks to provide long-term capital appreciation with income a
secondary consideration.
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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
Any income received by the Portfolio is incidental to the goal of providing
long-term capital appreciation.
Risks. These primary investment risks apply to the Portfolio: stock, currency,
country and foreign regulatory risks. See page 23 for these risks and primary
risks common to all Portfolios.
15
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Focused Growth Portfolio
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INVESTMENT OBJECTIVE
The Portfolio seeks to provide long-term capital appreciation. Any income
received is incidental to this objective.
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PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. In seeking long-term capital appreciation, the Portfolio
will, under normal market conditions, invest at least 65% of its total assets in
the equity securities of a somewhat smaller number of companies (as compared to
the Diversified Growth Portfolio) that are selected by the investment management
team for their growth potential. Such companies generally will have market
capitalizations in excess of $750 million. Although the Portfolio primarily
invests in the common stocks of U.S. companies, it may invest to a limited
extent in the securities of foreign issuers.
Using fundamental research and quantitative analysis, the investment management
team buys securities it believes have favorable growth characteristics relative
to their peers. Similarly, the investment management team sells securities it
believes no longer have these characteristics. The team may also sell securities
in order to maintain the desired portfolio securities composition of the
Portfolio. In determining whether a company has favorable growth
characteristics, the investment management team analyzes factors such as:
. Sales and earnings growth
. Return on equity
. Debt to equity ratio
. Market share and competitive leadership of the company's products
The Portfolio may, from time to time, emphasize particular companies or market
segments, such as technology, in attempting to achieve its investment objective.
Many of the companies in which the Portfolio invests retain their earnings to
finance current and future growth. These companies generally pay little or no
dividends.
Risks. These primary investment risks apply to the Portfolio: stock, technology
stock, currency, country, and foreign regulatory risks. See page 23 for these
risks and primary risks common to all Portfolios.
16
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MarketCommand Portfolio
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INVESTMENT OBJECTIVE
The Portfolio seeks to provide long-term capital appreciation. Any income
received is incidental to this objective.
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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 "marketcommand," 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.
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 "marketcommand" 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 marketcommand 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 Fund.
Risks. These primary investment risks apply to the Portfolio: stock, small
company stock, portfolio turnover, currency, country and foreign regulatory,
technology and non-diversification risks. See page 23 for these risks and
primary risks common to all Portfolios.
17
<PAGE>
Mid Cap Growth Portfolio
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Portfolio seeks to provide long-term capital appreciation. Any income
received is incidental to this objective.
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. In seeking long-term capital appreciation, the Portfolio
will invest, under normal market conditions, at least 65% of its total assets in
the equity securities of companies with market capitalizations, at the time of
purchase, that are within the range of the Standard & Poor's 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 Fund.
Risks. These primary investment risks apply to the Portfolio: stock, mid cap
stock, currency, country, foreign regulatory and portfolio turnover risks. See
page 23 for these risks and primary risks common to all Portfolios.
18
<PAGE>
Small Company Index Portfolio
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Portfolio seeks to provide investment results approximating the aggregate
price and dividend performance of the securities included in the Russell 2000
Index.
The Russell 2000 Index is a market value-weighted index which includes stocks of
the smallest 2,000 companies in the Russell 3000 Index. The Russell 3000 Index
includes stocks of the 3,000 largest companies based in the 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.
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. Under normal market conditions, the Portfolio will invest
substantially all (at least 80%) of its total assets in the equity securities
included in the Russell 2000 Index, in weightings that approximate the relative
composition of securities contained in the Index.
The Portfolio is passively managed, which means it tries to duplicate the
investment composition and performance of the Russell 2000 Index by using
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 23 for these risks and primary risks
common to all Portfolios.
19
<PAGE>
Small Company Growth Portfolio
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Portfolio seeks to provide long-term capital appreciation. Any income
received is incidental to this objective.
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Strategies. In seeking long-term capital appreciation, the Portfolio
will invest, under normal market conditions, at least 65% of its total assets in
the equity securities of companies with market capitalizations that are, at the
time of purchase, within the range of the Russell 2000 Index.
Using fundamental research and quantitative analysis, the investment management
team buys securities of small companies that it believes have favorable
characteristics such as above average sales and earnings growth and competitive
returns on equity relative to their peers. Similarly, the investment management
team sells securities it believes no longer have these or other favorable
characteristics. The team may also sell securities in order to maintain the
desired portfolio securities composition of the Portfolio. In doing so, the
investment management team considers factors such as a company's:
. Financial condition (such as debt to equity ratio)
. Market share and competitive leadership of the company's products
. Earnings growth relative to relevant competitors
. Market valuation in comparison to securities of other small cap companies and
the stock's own historical norms
As of November 30, 1999, the approximate market capitalization range of the
companies included in the Russell 2000 Index was between $2.7 million and $6.0
billion. The Portfolio, however, is not limited to the stocks in the Russell
2000 Index, and may invest in other stocks that meet the Investment Adviser's
criteria discussed above.
Russell does not endorse any stock in the Index. It is not a sponsor of the
Small Company Growth Portfolio and is not affiliated with the Portfolio in any
way.
Although the Portfolio primarily invests in the stocks of U.S. companies, it may
invest to a limited extent in the securities of foreign issuers.
The investment management team may engage in active trading, and will not
consider portfolio turnover a limiting factor in making decisions for the Fund.
Risks. These primary investment risks apply to the Portfolio: stock, small
company stock, currency, country, foreign regulatory and portfolio turnover
risks. See page 23 for these risks and primary risks common to all Portfolios.
20
<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 weighting 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 23 for these risks and
primary risks common to all Portfolios.
21
<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
portfolios.
Risks. These primary investment risks apply to the Portfolio: stock, currency,
country, foreign regulatory, emerging markets and portfolio turnover risks. See
page 23 for these risks and primary risks common to all Portfolios.
22
<PAGE>
Principal Investment Risks
All investments carry some degree of risk which will affect the value of a
Portfolio's investments, its investment performance and the price of its shares.
As a result, loss of money is a risk of investing in each Portfolio.
An investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
The following summarizes the principal risks that apply to the Portfolios and
may result in a loss of your investment.
- --------------------------------------------------------------------------------
RISKS THAT APPLY TO ALL PORTFOLIOS
Market risk is the risk that the value of the securities in which a Portfolio
invests may go up or down in response to the prospects of individual companies
and/or general economic conditions. Price changes may be temporary or last for
extended periods.
Management risk is the risk that a strategy used by the investment management
team may fail to produce the intended results.
Liquidity risk is the risk that a Portfolio will not be able to pay redemption
proceeds within the time periods described in this Prospectus, because of
unusual market conditions, an unusually high volume of redemption requests or
other reasons.
Year 2000 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
66.)
- --------------------------------------------------------------------------------
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 securi-
23
<PAGE>
ties 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
Stock risk is the risk that stock prices have historically risen and fallen in
periodic cycles. As of the date of this Prospectus, U.S. stock markets and
certain foreign stock markets were trading at or close to record high levels.
There is no guarantee that such levels will continue.
- --------------------------------------------------------------------------------
RISK THAT APPLIES PRIMARILY TO THE SMALL COMPANY INDEX AND SMALL COMPANY
GROWTH PORTFOLIOS
Small company stock risk is the risk that stocks of smaller companies may be
subject to more abrupt or erratic market movements than stocks of larger, more
established companies. Small companies may have limited product lines or
financial resources, or may be dependent upon a small or inexperienced
management group. In addition, small cap stocks typically are traded in lower
volume, and their issuers typically are subject to greater degrees of changes in
their earnings and prospects.
- --------------------------------------------------------------------------------
RISKS THAT APPLIES PRIMARILY TO THE FOCUSED GROWTH PORTFOLIO
Technology stock risk is the risk that stocks of technology companies may be
subject 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.
24
<PAGE>
- --------------------------------------------------------------------------------
RISK THAT APPLIES PRIMARILY TO THE MARKETPOWER 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
- --------------------------------------------------------------------------------
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 acceptance price. These and
related risks mean that a portfolio may not achieve the expected income from
noninvestment grade securities and that its share price may be adverseley
affected by declines in the 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, MarketPower 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 67.
25
<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. For a description of each broad-based
securities market index please see page 40.
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
42) 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.
26
<PAGE>
U.S. Government Securities Portfolio
Calendar Year Total Return (Class A)*
<TABLE>
<S> <C>
1994 -0.71%
1995 11.84%
1996 4.14%
1997 6.76%
1998 6.93%
</TABLE>
* Year to date total return for the nine months ended September 30, 1999: 1.69%
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1998):
Best Quarter Return: Q2 '95 +3.51%
Worst Quarter Return: Q1 '94 -1.11%
Average Annual Total Return
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year 5 Year Inception
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (Inception 4/5/93) 6.93% 5.71% 5.56%
Merrill Lynch 1-5 Government Index** 7.68% 6.20% 6.07%
- --------------------------------------------------------------------------------
Class C (Inception 12/29/95) 6.65% N/A 5.66%
Merrill Lynch 1-5 Government Index** 7.68% N/A 6.41%
- --------------------------------------------------------------------------------
Class D (Inception 9/15/94) 6.53% N/A 6.29%
Merrill Lynch 1-5 Government Index** 7.68% N/A 7.25%
- --------------------------------------------------------------------------------
</TABLE>
** The Index figures do not reflect any fees or expenses.
27
<PAGE>
Short-Intermediate Bond Portfolio
Calendar Year Total Return (Class A)*
<TABLE>
<S> <C>
1994 0.91%
1995 12.06%
1996 4.55%
1997 6.76%
1998 7.69%
</TABLE>
* Year to date total return for the nine months ended September 30, 1999: 1.41%
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1998):
Best Quarter Return Q2 '95 +3.84%
Worst Quarter Return Q1 '96 -0.17%
Average Annual Total Return
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year 5 Year Inception
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (Inception 1/11/93) 7.69% 6.33% 6.35%
Merrill Lynch 1-5 Corporate/Government Bond Index** 7.65% 6.27% 6.39%
- ---------------------------------------------------------------------------------------
Class D (Inception 9/14/94) 7.27% N/A 6.80%
Merrill Lynch 1-5 Corporate/Government Bond Index** 7.65% N/A 7.35%
- ---------------------------------------------------------------------------------------
</TABLE>
** The Index figures do not reflect any fees or expenses.
28
<PAGE>
Intermediate Bond Portfolio
Calendar Year Total Return (Class A)*
<TABLE>
<S> <C>
1998 7.11%
</TABLE>
*Year to date total return for the nine months ended September 30, 1999: -0.38%
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1998):
Best Quarter Return: Q3 `98 +2.94%
Worst Quarter Return: Q4 `98 +0.26%
Average Annual Total Return
(for the periods ended December 31, 1998)
Since
1 Year 5 Year Inception
- --------------------------------------------------------------------------------
Class A (Inception 8/1/97) 7.11% N/A 6.39%
Lehman Brothers Intermediate
Government/Corporate Bond Index** 8.42% N/A 7.95%
- --------------------------------------------------------------------------------
** The Index figures do not reflect any fees or expenses.
29
<PAGE>
U.S. Treasury Index Portfolio
Calendar Year Total Return (Class A)*
<TABLE>
<S> <C>
1994 -3.41%
1995 17.83%
1996 2.57%
1997 9.64%
1998 9.89%
</TABLE>
* Year to date total return for the nine months ended September 30, 1999: -
2.21%
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1998):
Best Quarter Return: Q2 `95 +6.20%
Worst Quarter Return: Q1 `96 -2.37%
Average Annual Total Return
(for the periods ended December 31, 1998)
Since
1 Year 5 Year Inception
- --------------------------------------------------------------------------------
Class A (Inception 1/11/93) 9.89% 7.06% 7.62%
Lehman Brothers Treasury Bond Index** 10.04% 7.21% 7.80%
- --------------------------------------------------------------------------------
Class D (Inception 11/16/94) 9.46% N/A 9.40%
Lehman Brothers Treasury Bond Index** 10.04% N/A 10.05%
- --------------------------------------------------------------------------------
** The Index figures do not reflect any fees or expenses.
30
<PAGE>
Bond Portfolio
Calendar Year Total Return (Class A)*
<TABLE>
<S> <C>
1994 -3.84%
1995 22.70%
1996 3.39%
1997 10.00%
1998 9.29%
</TABLE>
*Year to date total return for the nine months ended September 30, 1999: -1.90%
Best and Worst
Quarterly Performance
(for the periods ended December 31, 1998):
Best Quarter Return: Q2 `95 +7.66%
Worst Quarter Return: Q1 `96 -2.00%
Average Annual Total Return
(for the periods ended December 31, 1998)
Since
1 Year 5 Year Inception
- --------------------------------------------------------------------------------
Class A (Inception 1/11/93) 9.29% 7.96% 8.53%
Lehman Brothers Government/Corporate Bond Index** 9.46% 7.80% 7.94%
- --------------------------------------------------------------------------------
Class C (Inception 7/3/95) 9.03% N/A 8.52%
Lehman Brothers Government/Corporate Bond Index** 9.46% N/A 8.18%
- --------------------------------------------------------------------------------
Class D (Inception 9/14/94) 8.88% N/A 9.86%
Lehman Brothers Government/Corporate Bond Index** 9.46% N/A 9.34%
- --------------------------------------------------------------------------------
** The Index figures do not reflect any fees or expenses.
31
<PAGE>
Portfolio Performance continued
International Bond Portfolio
Calendar Year Total Return (Class A)*
<TABLE>
<S> <C>
1995 20.58%
1996 7.18%
1997 -3.42%
1998 15.45%
</TABLE>
*Year to date total return for the nine months ended September 30, 1999: -5.95%.
Best and Worst Quarterly Performance (for the periods ended December 31, 1998):
Best Quarter Return: Q1 `95 +10.89%
Worst Quarter Return: Q1 `97 -5.89%
Average Annual Total Return
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
1 Year 5 Year Since
Inception
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (Inception 3/28/94) 15.45% N/A 8.79%
J.P. Morgan Non-U.S. Government Bond Index** 18.28% N/A 9.27%
- ----------------------------------------------------------------------------
Class D (Inception 11/20/95) 15.36% N/A 6.05%
J.P. Morgan Non-U.S. Government Bond Index** 18.28% N/A 6.08%
- ----------------------------------------------------------------------------
</TABLE>
** The Index figures do not reflect any fees or expenses.
32
<PAGE>
Balanced Portfolio
Calendar Year Total Return (Class A)*
<TABLE>
<S> <C>
1994 -6.01%
1995 20.59%
1996 11.23%
1997 20.21%
1998 22.37%
</TABLE>
*Year to date total return for the nine months ended September 30, 1999: 2.13%.
Best and Worst
Quarterly Performance (for the periods ended December 31, 1998):
Best Quarter Return: Q4 `98 +13.42%
Worst Quarter Return: Q3 `98 -4.69%
Average Annual Total Return
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
1 Year 5 Year Since
Inception
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (Inception 7/1/93) 22.37% 13.15% 12.90%
Lehman Bros. Intermediate
Government/Corporate Bond Index** 8.42% 6.59% 6.43%
S&P 500(R) Index** 28.61% 24.09% 22.72%
- ------------------------------------------------------------------------
Class C (Inception 12/29/95) 22.07% N/A 17.49%
Lehman Bros. Intermediate
Government/Corporate Bond Index** 8.42% N/A 7.13%
S&P 500(R) Index** 28.61% N/A 28.22%
- ------------------------------------------------------------------------
Class D (Inception 2/20/96) 21.88% N/A 17.53%
Lehman Bros. Intermediate
Government/Corporate Bond Index** 8.42% N/A 7.03%
S&P 500(R) Index** 28.61% N/A 27.88%
- ------------------------------------------------------------------------
</TABLE>
** 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 Index figures do not reflect
any fees or expenses.
33
<PAGE>
Portfolio Performance continued
Equity Index Portfolio
Calendar Year Total Return (Class A)*
<TABLE>
<S> <C>
1994: 1.15%
1995: 37.18%
1996: 22.65%
1997: 32.74%
1998: 28.31%
</TABLE>
*Year to date total return for the nine months ended September 30, 1999: 5.16%.
Best and Worst
Quarterly Performance (for the periods ended December 31, 1998):
Best Quarter Return: Q4 `98 +21.22%
Worst Quarter Return: Q3 `98 -9.98%
Average Annual Total Return
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
1 Year 5 Year Since
Inception
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (Inception 1/11/93) 28.31% 23.72% 21.67%
S&P 500(R) Index** 28.61% 24.09% 22.04%
- ---------------------------------------------------------------------------
Class C (Inception 9/28/95) 28.00% N/A 27.30%
S&P 500(R) Index** 28.61% N/A 28.05%
- ---------------------------------------------------------------------------
Class D (Inception 9/14/94) 27.79% N/A 26.97%
S&P 500(R) Index** 28.61% N/A 27.78%
- ---------------------------------------------------------------------------
</TABLE>
** The Index figures do not reflect any fees or expenses.
34
<PAGE>
Diversified Growth Portfolio
Calendar Year Total Return (Class A)*
<TABLE>
<S> <C>
1994 -9.37%
1995 24.54%
1996 17.46%
1997 31.36%
1998 34.96%
</TABLE>
* Year to date total return for the nine months ended September 30, 1999: 3.41%
Best and Worst
Quarterly Performance (for the periods ended December 31, 1998):
Best Quarter Return: Q4 `98 +24.51%
Worst Quarter Return: Q3 `98 -9.77%
Average Annual Total Return
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year 5 Year Inception
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (Inception 1/11/93) 34.96% 18.64% 17.40%
S&P 500(R) Index** 28.61% 24.09% 22.04%
- -----------------------------------------------------------------------------
Class D (Inception 9/14/94) 34.44% N/A 23.07%
S&P 500(R) Index** 28.61% N/A 27.87%
- -----------------------------------------------------------------------------
</TABLE>
** The Index figures do not reflect any fees or expenses.
35
<PAGE>
Focused Growth Portfolio
Calendar Year Total Return (Class A)*
<TABLE>
<S> <C>
1994 -6.62%
1995 23.67%
1996 14.26%
1997 33.68%
1998 36.50%
</TABLE>
* Year to date total return for the nine months ended September 30, 1999: 9.18%
Best and Worst
Quarterly Performance (for the periods ended December 31, 1998):
Best Quarter Return: Q4 `98 +27.64%
Worst Quarter Return: Q3 `98 -11.03%
Average Annual Total Return
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year 5 Year Inception
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (Inception 7/1/93) 36.50% 19.21% 18.88%
S&P 500(R) Index** 28.61% 24.09% 22.72%
- -------------------------------------------------------------------------------
Class C (Inception 6/14/96) 36.18% N/A 27.96%
S&P 500(R) Index** 28.61% N/A 29.41%
- -------------------------------------------------------------------------------
Class D (Inception 12/8/94) 36.02% N/A 27.33%
S&P 500(R) Index** 28.61% N/A 30.59%
- -------------------------------------------------------------------------------
</TABLE>
** The Index figures do not reflect any fees or expenses.
36
<PAGE>
Small Company Index Portfolio
Calendar Year Total Return (Class A)*
<TABLE>
<S> <C>
1994 -2.28%
1995 27.68%
1996 15.85%
1997 22.16%
1998 -2.85%
</TABLE>
* Year to date total return for the nine months ended September 30, 1999: 1.67%.
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.
Best and Worst
Quarterly Performance (for the periods ended December 31, 1998):
Best Quarter Return: Q4 `98 +16.16%
Worst Quarter Return: Q3 `98 -20.10%
Average Annual Total Return
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year 5 Year Inception
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (Inception 1/11/93) -3.33% 11.29% 11.23%
Russell 2000 Small Stock Index** -2.44% 11.76% 13.01%
- ------------------------------------------------------------------------------
Class D (Inception 12/8/94) -4.07% N/A 16.02%
Russell 2000 Small Stock Index** -2.44% N/A 16.94%
- ------------------------------------------------------------------------------
</TABLE>
** The Index figures do not reflect any fees or expenses.
37
<PAGE>
International Equity Index Portfolio
Calendar Year Total Return (Class A)*
<TABLE>
<S> <C>
1998 18.94%
</TABLE>
* Year to date total return for the nine months ended September 30, 1999: 8.58%.
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.
Best and Worst
Quarterly Performance (for the periods ended December 31, 1998):
Best Quarter Return: Q4 `98 +19.82%
Worst Quarter Return: Q3 `98 -14.10%
Average Annual Total Return (for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year 5 Year Inception
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (Inception 4/1/97) 18.94% N/A 14.35%
MSCI EAFE Index** 20.00% N/A 14.30%
- -------------------------------------------------------------------------------
</TABLE>
** The Index figures do not reflect any fees or expenses.
38
<PAGE>
International Growth Portfolio
Calendar Year Total Return (Class A)*
<TABLE>
<S> <C>
1995 2.53%
1996 5.13%
1997 6.46%
1998 24.52%
</TABLE>
* Year to date total return for the nine months ended September 30, 1999:
19.01.%
Best and Worst
Quarterly Performance (for the periods ended December 31, 1998):
Best Quarter Return: Q4 `98 +18.99%
Worst Quarter Return: Q3 `98 -13.76%
Average Annual Total Return
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
Since
1 Year 5 Year Inception
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (Inception 3/28/94) 24.52% N/A 7.94%
MSCI EAFE Index** 20.00% N/A 8.55%
- --------------------------------------------------------------------------------
Class D (Inception 11/16/94) 23.95% N/A 7.55%
MSCI EAFE Index** 20.00% N/A 8.94%
- --------------------------------------------------------------------------------
</TABLE>
** The Index figures do not reflect any fees or expenses.
39
<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.
40
<PAGE>
This Page Intentionally Left Blank
41
<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 60.)
As indicated below, the Small Company Index and International Equity Index
Portfolios charge an additional transaction fee on the purchase of shares.
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
-----------------------------------------------------------------------------------------
Additional
Transaction Sales Charge
Sales Charge Fee(as a (Load)
(Load) percentage imposed on
Imposed on of amount Deferred Sales Reinvested Redemption Exchange
Portfolio Purchases invested) Charge (Load) Distribution Fees Fees
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Securities
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Short-Intermediate Bond
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Index
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Bond
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses (expenses that are deducted from portfolio assets)
-------------------------------------------------------------------------------------------------
Other Expenses Total Annual
------------------------------------------------
Other Total Other Portfolio
Management Distribution Servicing Transfer Operating Operating Operating
Fees/1/ (12b-1)Fees Fees Agency Fees Expenses/2/ Expenses Expenses/2/
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
0.60% None None 0.01% 0.25% 0.26% 0.86%
0.60% None 0.15% 0.10% 0.25% 0.50% 1.10%
0.60% None 0.25% 0.15% 0.25% 0.65% 1.25%
- --------------------------------------------------------------------------------------------------------
0.60% None None 0.01% 0.15% 0.16% 0.76%
0.60% None 0.15% 0.10% 0.15% 0.40% 1.00%
0.60% None 0.25% 0.15% 0.15% 0.55% 1.15%
- --------------------------------------------------------------------------------------------------------
0.60% None None 0.01% 0.48% 0.49% 1.09%
0.60% None 0.15% 0.10% 0.48% 0.73% 1.33%
0.60% None 0.25% 0.15% 0.48% 0.88% 1.48%
- --------------------------------------------------------------------------------------------------------
0.40% None None 0.01% 0.36% 0.37% 0.77%
0.40% None 0.15% 0.10% 0.36% 0.61% 1.01%
0.40% None 0.25% 0.15% 0.36% 0.76% 1.16%
- --------------------------------------------------------------------------------------------------------
0.60% None None 0.01% 0.14% 0.15% 0.75%
0.60% None 0.15% 0.10% 0.14% 0.39% 0.99%
0.60% None 0.25% 0.15% 0.14% 0.54% 1.14%
- --------------------------------------------------------------------------------------------------------
0.90% None None 0.01% 0.61% 0.62% 1.52%
0.90% None 0.15% 0.10% 0.61% 0.86% 1.76%
0.90% None 0.25% 0.15% 0.61% 1.01% 1.91%
- --------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
Portfolio Fees and Expenses continued
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
-----------------------------------------------------------------------------------------------
Additional
Transaction Sales Charge
Sales Charge Fee (as a (Load)
(Load) percentage Imposed on
Imposed on of amount Deferred Sales Reinvested Redemption Exchange
Portfolio Purchases invested) Charge (Load) Distributions Fees Fees
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
- --------------------------------------------------------------------------------------------------------------------------------
Equity Index
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
- --------------------------------------------------------------------------------------------------------------------------------
Diversified Growth
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
- --------------------------------------------------------------------------------------------------------------------------------
Focused Growth
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
- --------------------------------------------------------------------------------------------------------------------------------
MarketCommand
Class A None 0.50% None None None None
Class C None 0.50% None None None None
Class D None 0.50% None None None None
- --------------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
- --------------------------------------------------------------------------------------------------------------------------------
Small Company Index
Class A None 0.50% None None None None
Class C None 0.50% None None None None
Class D None 0.50% None None None None
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets)
------------------------------------------------------------------------------------------------------
Other Expenses
------------------------------------------------------
Total Annual
Other Total Other Portfolio
Management Distribution Servicing Transfer Operating Operating Operating
Fees/1/ (12b-1) Fees Fees Agency Fees Expenses/2/ Expenses Expenses/3/
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
0.80% None None 0.01% 0.23% 0.24% 1.04%
0.80% None 0.15% 0.10% 0.23% 0.48% 1.28%
0.80% None 0.25% 0.15% 0.23% 0.63% 1.43%
- --------------------------------------------------------------------------------------------------------------
0.30% None None 0.01% 0.15% 0.16% 0.46%
0.30% None 0.15% 0.10% 0.15% 0.40% 0.70%
0.30% None 0.25% 0.15% 0.15% 0.55% 0.85%
- --------------------------------------------------------------------------------------------------------------
0.80% None None 0.01% 0.15% 0.16% 0.96%
0.80% None 0.15% 0.10% 0.15% 0.40% 1.20%
0.80% None 0.25% 0.15% 0.15% 0.55% 1.35%
- --------------------------------------------------------------------------------------------------------------
1.10% None None 0.01% 0.18% 0.19% 1.29%
1.10% None 0.15% 0.10% 0.18% 0.43% 1.53%
1.10% None 0.25% 0.15% 0.18% 0.58% 1.68%
- --------------------------------------------------------------------------------------------------------------
1.10% None None 0.01% 0.57% 0.60% 1.68%
1.10% None 0.15% 0.10% 0.57% 0.84% 1.92%
1.10% None 0.25% 0.15% 0.57% 0.97% 2.07%
- --------------------------------------------------------------------------------------------------------------
1.10% None None 0.01% 0.57% 0.60% 1.68%
1.10% None 0.15% 0.10% 0.57% 0.84% 1.92%
1.10% None 0.25% 0.15% 0.57% 0.97% 2.07%
- --------------------------------------------------------------------------------------------------------------
0.40% None None 0.01% 0.33% 0.34% 0.74%
0.40% None 0.15% 0.10% 0.33% 0.58% 0.98%
0.40% None 0.25% 0.15% 0.33% 0.73% 1.13%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
---------------------------------------------------------------------------------------
Additional
Transaction Sales Charge
Sales Charge Fee (as a (Load)
(Load) percentage Imposed on
Imposed on of amount Deferred Sales Reinvested Redemption Exchange
Portfolio Purchases Invested) Charge (Load) Distributions Fees Fees
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Small Company Growth
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
- ------------------------------------------------------------------------------------------------------------------------
International Equity Index
Class A None 1.00% None None None None
Class C None 1.00% None None None None
Class D None 1.00% None None None None
- ------------------------------------------------------------------------------------------------------------------------
International Growth
Class A None None None None None None
Class C None None None None None None
Class D None None None None None None
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets)
-----------------------------------------------------------------------------------------------------
Other Expenses Total Annual
Other Total Other Portfolio
Management Distribution Servicing Transfer Operating Operating Operating
Fees/1/ (12b-1) Fees Fees Agency Fees Expenses/2/ Expenses Expenses/3/
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1.10% None None 0.01% 0.18% 0.19% 1.29%
1.10% None 0.15% 0.10% 0.18% 0.43% 1.53%
1.10% None 0.25% 0.15% 0.18% 0.58% 1.68%
- --------------------------------------------------------------------------------------------------------------
0.50% None None 0.01% 0.49% 0.50% 1.00%
0.50% None 0.15% 0.10% 0.49% 0.74% 1.24%
0.50% None 0.25% 0.15% 0.49% 0.89% 1.39%
- --------------------------------------------------------------------------------------------------------------
1.00% None None 0.01% 0.30% 0.31% 1.31%
1.00% None 0.15% 0.10% 0.30% 0.55% 1.55%
1.00% None 0.25% 0.15% 0.30% 0.70% 1.70%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
- --------------------------------------------------------------------------------
FOOTNOTES /1/ For the fiscal year ended November 30, 1998, 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 fiscal year ended
November 30, 1998, 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 Inc.") 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 0.25% 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 Market Preferred, Mid Cap Growth and
Small Company Growth Portfolios did not conduct investment
operations during the fiscal year ended November 30, 1998. 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, 1998 as
a result of fee waivers and expense reimbursements.
48
<PAGE>
<TABLE>
<CAPTION>
Management Distribution Other Total Annual
Portfolio Fees (12b-1) Fees Expenses Operating Expenses
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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% 0.11% 0.66%
Class C 0.55% 0.00% 0.35% 0.90%
Class D 0.55% 0.00% 0.50% 1.05%
- --------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Management Distribution Other Total Annual
Portfolio Fees (12b-1) Fees Expenses Operating Expenses
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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% 0.11% 0.31%
Class C 0.20% 0.00% 0.35% 0.55%
Class D 0.20% 0.00% 0.50% 0.70%
- -----------------------------------------------------------------------------------------------
International Equity Index
Class A 0.25% 0.00% 0.30% 0.55%
Class C 0.25% 0.00% 0.54% 0.79%
Class D 0.25% 0.00% 0.69% 0.94%
- -----------------------------------------------------------------------------------------------
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>
Management Distribution Other Total Annual
Portfolio Fees (12b-1) Fees Expenses Operating Expenses
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MarketPower
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.
50
<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>
Portfolio 1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Securities
Class A $ 88 $274 $ 477 $1,061
Class C $112 $350 $ 606 $1,340
Class D $127 $397 $ 686 $1,511
- -------------------------------------------------------------------
Short-Intermediate Bond
Class A $ 78 $243 $ 422 $ 942
Class C $102 $318 $ 552 $1,225
Class D $117 $365 $ 633 $1,398
- -------------------------------------------------------------------
Intermediate Bond
Class A $111 $347 $ 601 $1,329
Class C $135 $421 $ 729 $1,601
Class D $151 $468 $ 808 $1,768
- -------------------------------------------------------------------
U.S. Treasury Index
Class A $ 79 $246 $ 428 $ 985
Class C $103 $322 $ 558 $1,236
Class D $118 $368 $ 638 $1,409
- -------------------------------------------------------------------
Bond
Class A $ 77 $240 $ 417 $ 930
Class C $101 $315 $ 547 $1,213
Class D $116 $362 $ 628 $1,386
- -------------------------------------------------------------------
International Bond
Class A $155 $480 $ 829 $1,813
Class C $179 $554 $ 954 $2,073
Class D $194 $600 $1032 $2,233
- -------------------------------------------------------------------
Balanced
Class A $106 $331 $ 574 $1,271
Class C $130 $406 $ 702 $1,545
Class D $146 $452 $ 782 $1,713
- -------------------------------------------------------------------
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Index
Class A Shares $ 47 $148 $ 258 $ 579
Class C Shares $ 72 $224 $ 390 $ 871
Class D Shares $ 87 $271 $ 471 $1,049
- -------------------------------------------------------------------
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 $131 $409 $ 708 $1,556
Class C Shares $156 $483 $ 834 $1,824
Class D Shares $171 $530 $ 913 $1,987
- -------------------------------------------------------------------
MarketPower
Class A Shares $171 $530 N/A N/A
Class C Shares $195 $603 N/A N/A
Class D Shares $210 $649 N/A N/A
- -------------------------------------------------------------------
Mid Cap Growth
Class A Shares $171 $530 N/A N/A
Class C Shares $195 $603 N/A N/A
Class D Shares $210 $649 N/A N/A
- -------------------------------------------------------------------
Small Company Index
Class A Shares $ 76 $237 $ 411 $ 918
Class C Shares $100 $312 $ 542 $1,201
Class D Shares $115 $359 $ 622 $1,375
- -------------------------------------------------------------------
Small Company Growth
Class A Shares $131 $409 N/A N/A
Class C Shares $156 $483 N/A N/A
Class D Shares $171 $530 N/A N/A
- -------------------------------------------------------------------
International Equity Index
Class A Shares $102 $318 $ 552 $1,225
Class C Shares $126 $393 $ 681 $1,500
Class D Shares $142 $440 $ 761 $1,669
- -------------------------------------------------------------------
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>
52
<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
September 30, 1999, Northern Trust Corporation and its subsidiaries had
approximately $33.7 billion in assets, $19.1 billion in deposits and employed
over 8,360 persons.
Northern has for more than 100 years, managed the taxes of individuals,
charitable organizations, foundations and large corporate investors. Northern
and its affiliates administered in various capacities (including as master
trustee, investment manager or custodian) approximately $1.38 trillion of assets
as of September 30, 1999, including approximately $262.8 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.
53
<PAGE>
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, 1998.
<TABLE>
<CAPTION>
Advisory Fee Paid
Contractual for Fiscal Year
Portfolio Rate Ended 11/30/98
- -------------------------------------------------------------------
<S> <C> <C>
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.
54
<PAGE>
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 Trust, 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 Trust 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.
55
<PAGE>
- --------------------------------------------------------------------------------
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 after it commences operations. 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 Market Power Portfolio will be R. Randall Canent and
Robert G. Mitchell, Vice Presidents of Northern, after it commences operations.
Mr. Canent joined Northern in 1992 and during the past five years has managed
various equity portfolios. Mr. Mitchell joined Northern Trust 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 will be Ken Turek,
Vice President of Northern, after it commences operations. 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.
56
<PAGE>
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 42
under "Portfolio Fees and Expenses" and in the Statement of Additional
Information. Northern and PFPC Inc., formerly First Data Investor Services
Group, Inc. ("PFPC Inc."), serve as co-administrators for the Portfolios. The
fees that Northern and PFPC receive for their co-administrative services are
described on page 42 under "Portfolio Fees and Expenses."
57
<PAGE>
Purchasing and Selling Shares
- --------------------------------------------------------------------------------
PURCHASING SHARES
Institutional investors, acting on their own behalf or on behalf of their
customers, clients, employees, participants and others ("Customers"), may
purchase shares of the Portfolios through their institutional accounts at
Northern or an affiliate. They may also purchase shares directly from the Trust.
There is no sales charge imposed on purchases of shares. Institutional investors
include:
. Northern and its affiliates;
. Defined contribution plans having at least $30 million in assets or annual
contributions of at least $5 million; and
. Other institutions and organizations.
The Portfolios currently offer a choice of three classes of shares to meet the
special needs of institutional investors ("Institutions").
Class A Shares are designed for Institutions that can obtain information about
their shareholder accounts and do not require the additional services available
to other classes.
Class C Shares are designed for Institutions that require the Transfer Agent and
a Servicing Agent to provide certain account-related services incident to
Customers being the beneficial owners of shares.
Class D Shares are designed for Institutions that require the Transfer Agent and
a Servicing Agent to provide them and their Customers with certain
account-related services and other information.
Different shareholder servicing and transfer agency fees are payable by each
class of shares (see "Portfolio Fees and Expenses" on page 42). 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.
58
<PAGE>
ABOUT YOUR ACCOUNT
- --------------------------------------------------------------------------------
By Telephone
Read this prospectus carefully.
Call the Transfer Agent at 1-800-637-1380.
To open a new account please provide:
. The name of the Portfolio in which you'd like to invest
. The number of shares or dollar amount to be invested
. The method of payment
To add to an existing account,please provide:
. The Institution's name
. Your Account Number
- --------------------------------------------------------------------------------
By Wire or Automated Clearing House Transfer ("ACH Transfer")
To open a new account:
Call the Transfer Agent at 1-800-637-1380 for instructions.
For more information about the purchase of shares, call the Transfer Agent at
1-800-637-1380.
To add to an existing account:
Have your bank wire Federal funds or effect an ACH Transfer to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152
(Reference 10 Digit Portfolio Account No.)
(Reference Shareholder's Name)
- --------------------------------------------------------------------------------
SELLING SHARES
Through an Institutional Account.
Institutions may sell (redeem) shares through their institutional account by
contacting their Northern account representative.
Directly through the Trust. Institutions that purchase shares directly from the
Trust may redeem their shares through the Transfer Agent in one of the following
ways:
- --------------------------------------------------------------------------------
By Mail
Send a written request to:
Northern Institutional Funds
c/o The Northern Trust Company
P.O. Box 75943
Chicago, Illinois 60675-5943
The letter of instruction must include:
. The signature of a duly authorized person
. Your account number
. The name of the Portfolio
. The number of shares or the dollar amount to be redeemed
- --------------------------------------------------------------------------------
By Telephone
. Call the Transfer Agent at 1-800-637-1380 for instructions
. During periods of unusual economic or market activity, telephone
redemptions may be difficult to implement. In such event, shareholders
should follow the procedures outlined above under "Selling Shares - By
Mail."
- --------------------------------------------------------------------------------
By Wire
. Call the Transfer Agent at 1-800-637-1380 for instructions.
. You must have given prior authorization for expedited wire redemption.
. The minimum amount that may be redeemed by this method is $10,000.
59
<PAGE>
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 63.
Additional Transaction Fee. Purchases of, and exchanges for, shares of the Small
Company Index and International Equity Index Portfolios require the payment of
an additional transaction fee. This fee equals 0.50% and 1.00%, respectively, of
the dollar amount purchased. It does not apply to reinvested dividends or
capital gains distributions.
60
<PAGE>
ABOUT YOUR ACCOUNT
- --------------------------------------------------------------------------------
This transaction fee is not a sales charge. It is paid to the Portfolios and is
used to protect existing shareholders by offsetting the transaction costs
associated with new purchases of securities by the Portfolios. Because these
transaction costs are not paid out of their other assets, the Small Company
Index Portfolio and the International Equity Index Portfolio are expected to
track their respective indices more closely.
Tax Identification Number. Federal regulations require you to provide to the
Transfer Agent a taxpayer identification number when you open an account.
Purchase orders without such a number or an indication that a number has been
applied for will not be accepted. If you have applied for a number, you must
provide it to the Transfer Agent within 60 days of the date of the order.
In-Kind Purchases and Redemptions. The Trust reserves the right to accept
payment for shares in the form of securities that are permissible investments
for a Portfolio. The Trust also reserves the right to pay redemptions by a
distribution "in-kind" of securities (instead of cash) from a Portfolio. See the
Statement of Additional Information for further information about the terms of
these purchases and redemptions.
Miscellaneous Purchase Information.
. Institutions are responsible for transmitting purchase orders to the
Transfer Agent and delivering required funds on a timely basis.
. Institutions are responsible for all losses and expenses of a Portfolio in
the event of any failure to make payment according to the procedures
outlined in this prospectus. Northern may redeem shares from any account it
maintains to protect the Portfolios and Northern against loss. In addition,
a $20 charge will be imposed if a check does not clear.
. The Trust reserves the right to reject any purchase order. The Trust also
reserves the right to change or discontinue any of its purchase procedures.
Timing of Redemption and Exchange Requests. Redemption and exchange requests
received in good order by the Transfer Agent or other authorized intermediary by
3:00 p.m., Chicago time, on a Business Day will be executed on the same day. The
redemption or exchange will be effected at that day's closing share price (plus
any additional transaction fee, in the case of an exchange). Redemption proceeds
will normally be sent or credited on the next Business Day.
Orders received in good order on a non-Business Day or after 3:00 p.m., Chicago
time, on a Business Day will be executed the next Business Day, at that day's
closing share price (plus any additional transaction fee, in the case of an
exchange). The proceeds will normally be sent or credited the second Business
Day. We consider requests to be in "good order" when all required documents are
properly completed, signed and received, including a certified corporate
resolution or other acceptable evidence of authority.
In certain circumstances, the Trust may advance the time by which redemption and
exchange orders must be received. See "Early Closings" on page 63.
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.
61
<PAGE>
Account Policies and Other Information continued
- --------------------------------------------------------------------------------
. 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.
62
<PAGE>
ABOUT YOUR ACCOUNT
- --------------------------------------------------------------------------------
Early Closings. The Portfolios reserve the right to cease, or to advance the
time for, accepting purchase, redemption or exchange orders for same Business
Day credit when Northern or the Exchange closes early as a result of unusual
weather or other conditions. They also reserve this right when The Bond Market
Association recommends that securities markets close or close early.
Authorized Intermediaries. The Trust may authorize certain financial
intermediaries (including banks, trust companies, brokers and investment
advisers), which provide recordkeeping, reporting and processing services, to
accept purchase, redemption and exchange orders from their Customers on behalf
of the Trust. They may also designate other intermediaries to accept such
orders, if approved by the Trust. Authorized intermediaries are responsible for
transmitting orders and delivering funds on a timely basis. A Portfolio will be
deemed to have received an order when the order is accepted by the authorized
intermediary on a Business Day, and the order will be priced at the Portfolio's
per share NAV next determined.
Servicing Agents. Certain Institutions may perform (or arrange to have
performed) various administrative support services for Customers who are the
beneficial owners of Class C or D shares through agreements with the Trust
("Service Agents"). These agreements are permitted under the Trust's Shareholder
Servicing Plan. The level of support services required by an Institution and its
Customers generally will determine whether they purchase Class A, C or D shares.
Administrative support services may include:
. processing purchase and redemption requests from investors;
. placing net purchase and redemption orders with the Transfer Agent;
. providing necessary personnel and facilities to establish and maintain
investor accounts and records; and
. providing information periodically to investors showing their positions in
Portfolio shares.
Servicing Agents will receive fees from the Portfolios for such services at an
annual rate of up to 0.15% and 0.25% of the average daily net asset value of
Class C and Class D shares, respectively. These fees will be borne exclusively
by the beneficial owners of Class C and D shares. Please note that Northern and
NTQA may also provide compensation to certain dealers and other financial
intermediaries who provide services to their Customers who invest in the Trust
or whose Customers purchase significant amounts of a Portfolio's shares. The
amount of such compensation may be made on a one-time and/or periodic basis, and
may represent all or a portion of the annual fees earned by Northern and NTQA as
Investment Advisers (after adjustments). This additional compensation will be
paid by Northern, NTQA or their affiliates and will not represent an additional
expense to the Trust or its shareholders.
Customers purchasing shares through an Institution should read their account
agreements carefully. An Institution's requirements may differ from those listed
in this Prospectus. An Institution may also impose account charges, such as
asset allocation fees, account maintenance fees, and other charges that will
reduce the net return on an investment in a Portfolio. If a Customer has agreed
with a particular Institution to maintain a minimum balance with the Institution
and the balance falls below this minimum, the Customer may be required to redeem
all or a part of his investment in a Portfolio.
Conflict of interest restrictions may apply to the receipt of compensation paid
by the Trust to a Servicing Agent in connection with the investment of fiduciary
funds in Portfolio shares. Banks and other institutions regulated by the Office
of Comptroller of the Currency, Board of Governors of the Federal Reserve System
and state banking commissions, and investment advisers and other money managers
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions, are urged to consult legal counsel before entering into
servicing agreements.
State securities laws regarding the registration of dealers may differ from
Federal law. As a result, Institutions investing in the Portfolios on behalf of
their Customers may be required to register as dealers.
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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>
Dividends, Capital Gains,
if any, if any,
Declared Declared
Portfolio and Paid and Paid
- -------------------------------------------------------------
<S> <C> <C>
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.
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Tax Considerations
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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.
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TIMING
Dividends and distributions from each Portfolio will generally be taxable to you
in the tax year in which they are paid, with one exception. Dividends and
distributions declared by a Portfolio in October, November or December and paid
in January are taxed as though they were paid by December 31.
Every year, the Trust will send you information detailing the amount of ordinary
income and capital gains distributed to your account for the previous year.
Effect of foreign taxes. So long as more than 50% of the value of the total
assets of the International Bond, International Growth and International Equity
Index Portfolios consists of stock or securities (including debt securities) of
foreign corporations at the close of a taxable year, these Portfolios may elect,
for Federal income tax purposes, to treat certain foreign taxes paid by them,
including generally any withholding and other foreign income taxes, as paid by
their shareholders. Should the Portfolios make this election, the amount of such
foreign taxes paid by the Portfolios will be included in their shareholders'
income pro rata (in addition to taxable distributions actually received by
them), and such shareholders will be entitled either (a) to credit their
proportionate amounts of such taxes against their Federal income tax
liabilities, or (b) to deduct such proportionate amounts from their Federal
taxable income under certain circumstances.
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TAX EFFECT OF "BUYING A DIVIDEND"
A Portfolio's share price may, at any time, reflect undistributed capital gains
or income and unrealized appreciation. When these amounts are distributed, they
will be taxable to you. For this reason, you should be especially mindful that
if you buy shares on or just before the record date of a dividend or capital
gains distribution, you will pay the full price for the shares and then receive
back a portion of the money you have just invested in the form of a taxable
dividend or capital gain.
Your investment in the Portfolios could have additional tax consequences. You
should consult your tax professional for information regarding all tax
consequences applicable to your investments in the Portfolios. More tax
information is provided in the Statement of Additional Information. This short
summary is not intended as a substitute for careful tax planning.
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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 substantially completed work on its critical
systems and that 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 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.
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Appendix A
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.
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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 changed without
shareholder approval.
Derivatives. Each Portfolio may purchase certain "derivative" instruments. A
derivative is a financial instrument whose value is derived from -- or based
upon -- the performance of underlying assets, interest or currency exchange
rates, or indices. Many types of instruments representing a wide range of
potential risks and rewards are derivatives, including futures contracts,
options, interest rate and currency swaps, equity swaps, structured securities,
forward currency contracts and structured debt obligations (including
collateralized mortgage obligations and other types of asset-backed securities,
"stripped" securities and various floating rate instruments, including leveraged
"inverse floaters").
Investment strategy. A Portfolio will invest in derivatives only if the
potential risks and rewards are consistent with the Portfolio's objective,
strategies and overall risk profile. The Portfolios may use derivatives for
hedging purposes to offset a potential loss in one position by establishing an
interest in an opposite position. The Portfolios may also use derivatives for
speculative purposes to invest for potential income or capital gain.
Special risks. Engaging in derivative transactions involves special risks,
including (a) market risk that the Portfolio's derivatives position will lose
value; (b) credit risk that the counterparty to the transaction will default;
(c) leveraging risk that the value of the derivative instrument will decline
more than the value of the assets on which it is based; (d) illiquidity risk
that a Portfolio will be unable to sell its position because of lack of market
depth or disruption; (e) pricing risk that the value of a derivative instrument
will be difficult to determine; and (f) operations risk that loss will occur as
a result of inadequate systems or human error. Many types of derivatives have
been recently developed and have not been tested over complete market cycles.
For these reasons, a Portfolio may suffer a loss whether or
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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
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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").
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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.
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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.
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ADDITIONAL DESCRIPTION OF SECURITIES AND COMMON INVESTMENT TECHNIQUES
Asset-Backed Securities. Asset-backed securities are sponsored by entities such
as government agencies, banks, financial companies and commercial or industrial
companies. They represent interests in pools of mortgages or other cash-flow
producing assets such as automobile loans, credit card receivables and other
financial assets. In effect, these securities "pass through" the monthly
payments that individual borrowers make on their mortgages or other assets net
of any fees paid to the issuers. Examples of these include guaranteed mortgage
pass-through certificates, collateralized mortgage obligations ("CMOs") and real
estate mortgage investment conduits ("REMICs").
Investment strategy. The Short-Intermediate Bond, Bond, Intermediate Bond,
International Bond and Balanced Portfolios may purchase various types of
asset-backed securities. The U.S. Government Securities Portfolio may only
purchase mortgage-backed securities that are issued by an agency of the U.S.
Government. The Portfolios will normally invest in asset-backed securities
rated investment grade (rated BBB or better by S&P, Duff or Fitch, or Baa or
better by Moody's) at the time of purchase. The Portfolios may also invest in
unrated mortgage-backed securities which 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).
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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). These transactions may be entered into as a
temporary measure for emergency purposes or to meet redemption requests. 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 invest-
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ment 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, MarketPower, 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
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<PAGE>
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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
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<PAGE>
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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 again 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 Shares(SM) 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
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<PAGE>
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"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
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<PAGE>
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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.
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,
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<PAGE>
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
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<PAGE>
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.
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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.
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Financial Information
The financial highlights tables are intended to help you understand a
Portfolio's financial performance for the past five years (or, if shorter, the
period of the Portfolio's operations). Certain information reflects financial
results for a single Portfolio share. The total returns in the tables represent
the rate that an investor would have earned or lost on an investment in a
Portfolio (assuming reinvestment of all dividends and distributions). The
information for the years or periods ended on or before November 30, 1998 has
been audited by Ernst & Young LLP, whose report is included in the Portfolios'
annual report along with the Portfolios' financial statements. Information for
the period ended May 31, 1999 has not been audited and is included in the
semiannual report along with the Portfolio's financial statements. The annual
report and semiannual report are available upon request and without charge.
83
<PAGE>
continued
Financial Highlights
For the Six Months Ended May 31, 1999 (Unaudited)
and the Years Ended November 30,
U.S. Government Securities Portfolio
<TABLE>
<CAPTION>
Class A
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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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.
(c) For the period December 29, 1995 (Class C Shares issue date) through
November 30, 1996.
(d) Class C Shares were fully redeemed as of February 10, 1999.
(e) For the period September 15, 1994 (Class D Shares issue date) through
November 30, 1994.
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<PAGE>
<TABLE>
<CAPTION>
Class C
For the Six
Months
Ended For the For the For the
May 31 Year Ended Year Ended Year Ended
1999 1998 1997 1996(c)
- ------------------------------------------------------------
<C> <C> <C> <C>
$20.26 $ 19.98 $20.06 $ 20.13
0.03 1.12 1.14 0.91
0.01 0.26 (0.04) (0.12)
0.04 1.38 1.10 0.79
- ------------------------------------------------------------
(0.08) (1.10) (1.18) (0.86)
(0.29) -- -- --
-- -- -- --
(0.37) (1.10) (1.18) (0.86)
(0.33) 0.28 (0.08) (0.07)
- ------------------------------------------------------------
$19.93(d) $ 20.26 $19.98 $ 20.06
0.20% 7.10% 5.67% 4.05%
1.03% 1.10% 1.09% 1.18%
0.60% 0.60% 0.60% 0.60%
1.09% 5.27% 5.14% 4.39%
1.52% 5.77% 5.63% 4.97%
26.31% 115.55% 95.73% 119.75%
$ -- $ 3,942 $3,118 $ 3,535
- ------------------------------------------------------------
<CAPTION>
Class D
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(e)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 20.22 $ 19.94 $ 20.03 $ 20.04 $ 19.05 $ 19.43
0.50 1.08 1.16 0.96 0.96 0.22
(0.38) 0.28 (0.10) (0.03) 1.00 (0.38)
0.12 1.36 1.06 0.93 1.96 (0.16)
- -------------------------------------------------------------------------------
(0.45) (1.08) (1.15) (0.94) (0.97) (0.22)
(0.29) -- -- -- -- --
-- -- -- -- -- --
(0.74) (1.08) (1.15) (0.94) (0.97) (0.22)
(0.62) 0.28 (0.09) (0.01) 0.99 (0.38)
- -------------------------------------------------------------------------------
$ 19.60 $ 20.22 $19.94 $ 20.03 $ 20.04 $ 19.05
0.53% 6.96% 5.52% 4.77% 10.66% (0.90)%
1.18% 1.25% 1.24% 1.33% 1.48% 1.51%
0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
4.40% 5.05% 5.01% 4.25% 4.35% 3.89%
4.83% 5.55% 5.50% 4.83% 5.08% 4.65%
26.31% 115.55% 95.73% 119.75% 141.14% 45.55%
$ 810 $ 1,224 $ 312 $ 225 $ 67 $ 13
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</TABLE>
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Financial Highlights
For the Six Months Ended May 31, 1999 (Unaudited)
and the Years Ended November 30,
Short-Intermediate Bond Portfolio
<TABLE>
<CAPTION>
Class A
For the Six
Months For the For the For the
Ended Year Year Year
May 31 Ended Ended Ended
1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 20.03 $ 20.36 $ 20.70 $ 20.73
Income (loss) from investment operations:
Net investment income 0.91 1.84 1.46 1.14
Net realized and unrealized gain (loss) (0.52) (0.36) (0.29) (0.01)
Total income (loss) from investment operations 0.39 1.48 1.17 1.13
- -----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (0.84) (1.78) (1.46) (1.16)
Net realized gain (0.27) (0.03) (0.05) --
Return of capital -- -- -- --
Total distributions to shareholders (1.11) (1.81) (1.51) (1.16)
Net increase (decrease) (0.72) (0.33) (0.34) (0.03)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.31 $ 20.03 $ 20.36 $ 20.70
Total return (a) 1.88% 7.50% 5.95% 5.68%
Ratio to average net assets of (b):
Expenses, before waivers and reimbursements 0.77% 0.76% 0.81% 0.88%
Expenses, net of waivers and reimbursements 0.36% 0.36% 0.36% 0.36%
Net investment income, before waivers
and reimbursements 8.96% 9.21% 7.23% 5.31%
Net investment income, net of waivers
and reimbursements 9.37% 9.61% 7.68% 5.83%
Portfolio turnover rate 55.50% 89.97% 48.49% 47.68%
Net assets at end of period (in thousands) $ 178,733 $182,999 $201,457 $153,675
- -----------------------------------------------------------------------------------------------------------------------
</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.
(d) For the period September 14, 1994 (Class D Shares issue date) through
November 30, 1994.
86
<PAGE>
<TABLE>
<CAPTION>
Class D
For the Six
For the For the Months For the For the For the For the For the
Year Year Ended Year Year Year Year Year
Ended Ended May 31 Ended Ended Ended Ended Ended
1995 1994 1999(c) 1998 1997 1996 1995 1994(d)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 19.53 $ 20.33 $ 19.97 $20.31 $20.66 $20.71 $19.53 $ 19.82
1.02 0.97 0.89 1.78 1.43 1.07 0.94 0.23
1.19 (0.80) (0.54) (0.40) (0.34) (0.02) 1.18 (0.29)
2.21 0.17 0.35 1.38 1.09 1.05 2.12 (0.06)
- ------------------------------------------------------------------------------------
(1.01) (0.97) (0.79) (1.69) (1.39) (1.10) (0.94) (0.23)
-- -- (0.27) (0.03) (0.05) -- -- --
-- -- -- -- -- -- -- --
(1.01) (0.97) (1.06) (1.72) (1.44) (1.10) (0.94) (0.23)
1.20 (0.80) (0.71) (0.34) (0.35) (0.05) 1.18 (0.29)
- ------------------------------------------------------------------------------------
$ 20.73 $ 19.53 $ 19.26 $19.97 $20.31 $20.66 $20.71 $ 19.53
11.58% 0.84% 1.70% 7.08% 5.54% 5.22% 11.09% (0.30)%
0.91% 0.95% 1.16% 1.15% 1.20% 1.27% 1.30% 1.34%
0.36% 0.36% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
4.59% 4.25% 8.57% 8.91% 7.03% 4.44% 4.30% 3.83%
5.14% 4.84% 8.98% 9.31% 7.48% 4.96% 4.85% 4.42%
54.68% 48.67% 55.50% 89.97% 48.49% 47.68% 54.68% 48.67%
$158,678 $96,209 $ 246 $ 824 $ 891 $ 343 $ 13 $ 1
- ------------------------------------------------------------------------------------
</TABLE>
87
<PAGE>
Financial Highlights
For the Six Months Ended May 31, 1999 (Unaudited)
and the Years Ended November 30,
Intermediate Bond Portfolio
<TABLE>
<CAPTION>
Class A Class D
For the For
Six the Six
Months For the Months For the
Ended Year For the Ended Year
May 31 Ended Year Ended May 31 Ended
1999 1998 1997(a) 1999 1998(b)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 operations (0.10) 1.46 0.23 (0.14) (0.14)
- ------------------------------------------------------------------------------------------------------------------------
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 reimbursements 0.78% 1.09% 2.28% 1.17% 1.48%
Expenses, net of waivers
and reimbursements 0.36% 0.36% 0.36% 0.75% 0.75%
Net investment income,
before waivers
and reimbursements 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.
(d) Annualized for periods less than a full year.
88
<PAGE>
This page intentionally left blank.
89
<PAGE>
Financial Highlights
For the Six Months Ended May 31, 1999 (Unaudited)
and the Years Ended November 30,
U.S. Treasury Index Portfolio
<TABLE>
<CAPTION>
Class A
For the Six
Months For the For the For the For the For the
Ended Year Year Year Year Year
May 31 Ended Ended Ended Ended Ended
1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 21.77 $ 20.81 $ 20.60 $ 20.78 $ 18.77 $ 21.05
Income (loss) from investment operations:
Net investment income 0.54 1.23 1.26 1.19 1.11 1.15
Net realized and unrealized gain (loss) (1.04) 0.97 0.20 (0.18) 2.01 (1.93)
Total income (loss) from investment operations (0.50) 2.20 1.46 1.01 3.12 (0.78)
- --------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (0.55) (1.24) (1.25) (1.19) (1.11) (1.14)
Net realized gain -- -- -- -- -- (0.36)
Return of capital -- -- -- -- -- --
Total distributions to shareholders (0.55) (1.24) (1.25) (1.19) (1.11) (1.50)
Net increase (decrease) (1.05) 0.96 0.21 (0.18) 2.01 (2.28)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 20.72 $ 21.77 $ 20.81 $ 20.60 $ 20.78 $ 18.77
Total return (b) (2.39)% 10.92% 7.44% 5.10% 16.95% (3.80)%
Ratio to average net assets of (c):
Expenses, before waivers and reimbursements 0.75% 0.77% 0.82% 1.04% 0.89% 0.79%
Expenses, net of waivers and reimbursements 0.26% 0.26% 0.26% 0.26% 0.26% 0.26%
Net investment income, before
waivers and reimbursements 4.75% 5.22% 5.80% 5.15% 4.46% 5.07%
Net investment income, net of
waivers and reimbursements 5.24% 5.73% 6.36% 5.93% 5.09% 5.60%
Portfolio turnover rate 59.39% 69.84% 72.61% 42.49% 80.36% 52.80%
Net assets at end of period (in thousands) $22,246 $22,085 $33,839 $26,273 $17,674 $37,305
- --------------------------------------------------------------------------------------------------------------------
</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.
(d) For the period November 16, 1994 (Class D Shares issue date) through
November 30, 1994.
90
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
For the Six For the Six
Months For the Months For the For the For the For the For the
Ended Year Ended Year Year Year Year Year
May 31 Ended May 31 Ended Ended Ended Ended Ended
1999 1998(a) 1999 1998 1997 1996 1995 1994(d)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 21.81 $ 22.28 $ 21.74 $20.77 $20.57 $20.75 $18.77 $18.80
0.45 0.21 0.61 1.13 1.20 1.17 1.00 0.09
(1.02) (0.52) (1.16) 1.00 0.18 (0.24) 2.03 (0.03)
(0.57) (0.31) (0.55) 2.13 1.38 0.93 3.03 0.06
- -----------------------------------------------------------------------------------------------
(0.52) (0.16) (0.50) (1.16) (1.18) (1.11) (1.05) (0.09)
-- -- -- -- -- -- -- --
-- -- -- -- -- -- -- --
(0.52) (0.16) (0.50) (1.16) (1.18) (1.11) (1.05) (0.09)
(1.09) (0.47) (1.05) 0.97 0.20 (0.18) 1.98 (0.03)
- -----------------------------------------------------------------------------------------------
$ 20.72 $ 21.81 $ 20.69 $21.74 $20.77 $20.57 $20.75 $18.77
(2.66)% (1.39)% (2.58)% 10.50% 7.03% 4.72% 16.43% 0.37%
0.99% 1.01% 1.14% 1.16% 1.21% 1.43% 1.28% 1.18%
0.50% 0.50% 0.65% 0.65% 0.65% 0.65% 0.65% 0.65%
4.51% 4.71% 4.36% 4.84% 5.51% 4.79% 4.78% 5.52%
5.00% 5.22% 4.85% 5.35% 6.07% 5.57% 5.41% 6.05%
59.39% 69.84% 59.39% 69.84% 72.61% 42.49% 80.36% 52.80%
$ 140 $ 17 $ 508 $1,721 $1,707 $ 848 $ 286 --
- ---------------------------------------------------------------------------------------------
</TABLE>
91
<PAGE>
Financial Highlights
For the Six Months Ended May 31, 1999 (Unaudited)
and the Years Ended November 30,
Bond Portfolio
<TABLE>
<CAPTION>
Class A
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
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
- -------------------------------------------------------------------------------------------------------------------------------
Distrubutions 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 reimbursements 6.30 % 6.68% 6.25% 5.91% 5.46% 6.80 %
Net investment income, net of waivers
and reimbursements 6.70 % 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.
(c) For the period July 3, 1995 (Class C Shares issue date) through November
30, 1995.
(d) For the period September 14, 1994 (Class D Shares issue date) through
November 30, 1994.
92
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
For the Six For the Six
Months Months
Ended For the For the For the For the Ended For the For the For the For the For the
May 31 Year Ended Year Ended Year Ended Year Ended May 31 Year Ended Year Ended Year Ended Year Ended Year Ended
1999 1998 1997 1996 1995(c) 1999 1998 1997 1996 1995 1994(d)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 21.60 $ 21.07 $ 20.78 $ 20.96 $ 20.21 $ 21.58 $ 21.05 $ 20.76 $ 20.94 $ 18.29 $ 18.74
0.67 1.42 1.29 1.25 0.47 0.66 1.38 1.24 1.22 1.08 0.28
(0.95) 0.62 0.28 (0.18) 0.74 (0.97) 0.63 0.30 (0.18) 2.66 (0.45)
(0.28) 2.04 1.57 1.07 1.21 (0.31) 2.01 1.54 1.04 3.74 (0.17)
- ----------------------------------------------------------------------------------------------------------------------------------
(0.64) (1.39) (1.28) (1.22) (0.45) (0.62) (1.36) (1.25) (1.19) (1.09) (0.28)
(0.68) (0.12) -- -- -- (0.68) (0.12) -- -- -- --
-- -- -- (0.03) (0.01) -- -- -- (0.03) -- --
(1.32) (1.51) (1.28) (1.25) (0.46) (1.30) (1.48) (1.25) (1.22) (1.09) (0.28)
(1.60) 0.53 0.29 (0.18) 0.75 (1.61) 0.53 0.29 (0.18) 2.65 (0.45)
- ----------------------------------------------------------------------------------------------------------------------------------
$ 20.00 $ 21.60 $ 21.07 $ 20.78 $ 20.96 $ 19.97 $ 21.58 $ 21.05 $ 20.76 $ 20.94 $ 18.29
(1.46)% 10.04% 7.88% 5.33% 6.08% (1.53)% 9.89% 7.74% 5.17% 21.06% (0.94)%
1.00 % 0.99% 1.01% 1.08% 1.08% 1.15 % 1.14% 1.16% 1.23% 1.23% 1.26 %
0.60 % 0.60% 0.60% 0.60% 0.60% 0.75 % 0.75% 0.75% 0.75% 0.75% 0.75 %
6.06 % 6.44% 5.98% 5.61% 5.11% 5.91 % 6.31% 5.86% 5.51% 5.00% 5.80 %
6.46 % 6.83% 6.39% 6.09% 5.59% 6.31 % 6.70% 6.27% 5.99% 5.48% 6.31 %
40.98 % 84.80% 76.30% 101.38% 74.19% 40.98 % 84.80% 76.30% 101.38% 74.19% 103.09 %
$ 60,696 $ 61,450 $ 50,554 $ 7,342 $ 3,704 $ 1,625 $ 2,039 $ 601 $ 220 $ 120 $ 15
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
93
<PAGE>
Financial Highlights
For the Six Months Ended May 31, 1999 (Unaudited)
and the Years Ended November 30,
International Bond Portfolio
<TABLE>
<CAPTION>
Class C
For the Six
Months
Ended For the For the For the
May 31 Year Ended Year Ended Year Ended
1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 21.35 $ 20.13 $ 22.16 $ 21.74
Income (loss) from investment operations:
Net investment income 1.02 0.98 1.02 1.54
Net realized and unrealized gain (loss) (1.88) 1.33 (1.70) 0.43
Total income (loss) from investment operations (0.86) 2.31 (0.68) 1.97
- --------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (b) (0.73) (0.79) (1.01) (1.55)
Net realized gain (0.14) (0.30) (0.34) --
Return of capital -- -- -- --
Total distributions to shareholders (0.87) (1.09) (1.35) (1.55)
Net increase (decrease) (1.73) 1.22 (2.03) 0.42
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.62 $ 21.35 $ 20.13 $ 22.16
Total return (c) (4.53)% 11.85% (3.02)% 9.47%
Ratio to average net assets of (d):
Expenses, before waivers and reimbursements 1.46% 1.52% 1.52% 1.58%
Expenses, net of waivers and reimbursements 0.96% 0.96% 0.96% 0.96%
Net investment income, before waivers
and reimbursements 4.50% 4.71% 5.05% 5.29%
Net investment income, net of waivers
and reimbursements 5.00% 5.27% 5.61% 5.91%
Portfolio turnover rate 6.67% 23.76% 29.29% 33.89%
Net assets at end of period (in thousands) $27,720 $28,568 $26,383 $34,183
- --------------------------------------------------------------------------------------------------------------------
</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.
94
<PAGE>
<TABLE>
<CAPTION>
Class D
For the Six
Months
For the For the Ended For the For the For the For the
Year Ended Year Ended May 31 Year Ended Year Ended Year Ended Year Ended
1995 1994(a) 1999(e) 1998 1997 1996 1995(f)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 19.93 $ 20.00 $ 21.26 $20.06 $ 22.14 $21.74 $ 22.17
1.26 0.79 0.38 0.93 0.97 1.37 0.02
2.28 0.01 (1.40) 1.29 (1.72) 0.51 (0.08)
3.54 0.80 (1.02) 2.22 (0.75) 1.88 (0.06)
- ------------------------------------------------------------------------------------------------
(1.73) (0.87) (0.54) (0.72) (0.99) (1.48) (0.37)
-- -- (0.14) (0.30) (0.34) -- --
-- -- -- -- -- -- --
(1.73) (0.87) (0.68) (1.02) (1.33) (1.48) (0.37)
1.81 (0.07) (1.70) 1.20 (2.08) 0.40 (0.43)
- ------------------------------------------------------------------------------------------------
$ 21.74 $ 19.93 $ 19.56 $21.26 $ 20.06 $22.14 $ 21.74
18.20% 4.03% (5.00)% 11.43% (3.38)% 9.04% (0.30)%
1.47% 1.49% 1.85% 1.91% 1.91% 1.97% 1.86%
0.96% 0.96% 1.35% 1.35% 1.35% 1.35% 1.35%
5.41% 5.40% 4.11% 4.34% 4.80% 5.05% 2.75%
5.92% 5.93% 4.61% 4.90% 5.36% 5.67% 3.26%
54.46% 88.65% 6.67% 23.76% 29.29% 33.89% 54.46%
$32,673 $26,947 $ 1 $ 132 $ 91 $ 52 $ 9
- ------------------------------------------------------------------------------------------------
</TABLE>
95
<PAGE>
Financial Highlights
For the Six Months Ended May 31, 1999 (Unaudited)
and the Years Ended November 30,
Balanced Portfolio
<TABLE>
<CAPTION>
Class A
For the
Six
Months For the For the For the For the For the
Ended Year Year Year Year Year
May 31 Ended Ended Ended Ended Ended
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 reimbursements 2.22% 2.40% 2.49% 2.44% 2.69% 1.68%
Net investment income,
net of waivers
and reimbursements 2.61% 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 year
(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.
(c) Financial Highlights for the six months ended May 31, 1999 were calculated
using average shares outstanding for the period.
(d) For the period December 29, 1995 (Class C Shares issue date) through
November 30, 1996.
(e) For the period February 20, 1996 (Class D Shares issue date) through
November 30, 1996.
96
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
For For
the Six the Six
Months For the For the For the Months For the For the For the
Ended Year Year Year Ended Year Year Year
May 31 Ended Ended Ended May 31 Ended Ended Ended
1999 1998 1997 1996(d) 1999 1998 1997 1996(e)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$14.91 $13.56 $12.24 $ 11.12 $14.88 $13.54 $12.23 $ 11.34
0.20 0.37 0.36 0.29 0.15 0.40 0.34 0.22
0.03 1.78 1.64 1.12 0.09 1.72 1.64 0.96
0.23 2.15 2.00 1.41 0.24 2.12 1.98 1.18
- -----------------------------------------------------------------------------------------
(0.23) (0.29) (0.37) (0.29) (0.28) (0.27) (0.36) (0.29)
(0.51) (0.51) (0.31) -- (0.51) (0.51) (0.31) --
-- -- -- -- -- -- -- --
(0.74) (0.80) (0.68) (0.29) (0.79) (0.78) (0.67) (0.29)
(0.51) 1.35 1.32 1.12 (0.55) 1.34 1.31 0.89
- -----------------------------------------------------------------------------------------
$14.40 $14.91 $13.56 $ 12.24 $14.33 $14.88 $13.54 $ 12.23
7.12% 16.61% 17.00% 12.72% 6.92% 16.45% 16.82% 10.55%
1.24% 1.28% 1.35% 1.44% 1.39% 1.43% 1.50% 1.59%
0.85% 0.85% 0.85% 0.85% 1.00% 1.00% 1.00% 1.00%
1.98% 2.15% 2.25% 2.21% 1.83% 2.01% 2.10% 2.19%
2.37% 2.58% 2.75% 2.80% 2.22% 2.44% 2.60% 2.78%
41.89% 67.16% 59.06% 104.76% 41.89% 67.16% 59.06% 104.76%
$ 816 $5,459 $4,587 $ 5,997 $ 522 $ 752 $ 322 $ 232
- -----------------------------------------------------------------------------------------
</TABLE>
97
<PAGE>
Financial Highlights
For the Six Months Ended May 31, 1999 (Unaudited)
and the Years Ended November 30,
Equity Index Portfolio
<TABLE>
<CAPTION>
Class A
For the Six
Months For the For the For the For the For the
Ended Year Year Year Year Year
May 31 Ended Ended Ended Ended Ended
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 (d):
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. Total return is not annualized for periods less than one year.
(b) For the period September 28, 1995 (Class C Shares issue date) through
November 30, 1995.
(c) For the period September 14, 1994 (Class D Shares issue date) through
November 30, 1994.
(d) Annualized for periods less than a full year.
98
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
For the For the
Six Six
Months For the For the For the For the Months For the For the For the For the For the
Ended Year Year Year Year Ended Year Year Year Year Year
May 31 Ended Ended Ended Ended May 31 Ended Ended Ended Ended Ended
1999 1998 1997 1996 1995(b) 1999 1998 1997 1996 1995 1994(c)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 22.64 $ 20.05 $ 16.79 $ 13.86 $ 13.43 $ 22.58 $ 20.00 $ 16.77 $13.83 $10.60 $ 10.96
0.12 0.24 0.26 0.28 0.05 0.08 0.21 0.26 0.27 0.25 0.02
2.54 4.01 4.11 3.35 0.45 2.55 4.00 4.07 3.36 3.47 (0.31)
2.66 4.25 4.37 3.63 0.50 2.63 4.21 4.33 3.63 3.72 (0.29)
- -------------------------------------------------------------------------------------------------------------------------------
(0.16) (0.22) (0.28) (0.27) (0.07) (0.12) (0.19) (0.27) (0.26) (0.28) (0.07)
(1.43) (1.44) (0.83) (0.43) -- (1.43) (1.44) (0.83) (0.43) (0.21) --
-- -- -- -- -- -- -- -- -- -- --
(1.59) (1.66) (1.11) (0.70) (0.07) (1.55) (1.63) (1.10) (0.69) (0.49) (0.07)
1.07 2.59 3.26 2.93 0.43 1.08 2.58 3.23 2.94 3.23 (0.36)
- -------------------------------------------------------------------------------------------------------------------------------
$ 23.71 $ 22.64 $ 20.05 $ 16.79 $ 13.86 $ 23.66 $ 22.58 $ 20.00 $16.77 $13.83 $ 10.60
12.28% 23.09% 27.64% 27.24% 3.94% 12.18% 22.90% 27.45% 27.20% 36.20% (2.68)%
0.68% 0.70% 0.70% 0.74% 0.78% 0.83% 0.85% 0.85% 0.89% 0.93% 0.96%
0.45% 0.45% 0.46% 0.46% 0.46% 0.60% 0.60% 0.61% 0.61% 0.61% 0.60%
0.77% 0.87% 1.18% 1.61% 1.97% 0.62% 0.71% 1.03% 1.50% 1.75% 2.31%
1.00% 1.12% 1.42% 1.89% 2.29% 0.85% 0.97% 1.27% 1.78% 2.07% 2.67%
4.77% 15.26% 18.96% 18.02% 15.27% 4.77% 15.26% 18.96% 18.02% 15.27% 71.98%
$113,100 $111,991 $82,982 $53,929 $18,390 $16,645 $31,703 $30,650 $8,005 $ 810 $ 3
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
99
<PAGE>
Financial Highlights
For the Six Months Ended May 31, 1999 (Unaudited)
and the Years Ended November 30,
Diversified Growth Portfolio
<TABLE>
<CAPTION>
Class A
For the
Six
Months For the For the For the
Ended Year Year Year
May 31 Ended Ended Ended
1999 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period $ 17.76 $ 16.20 $ 14.36 $ 12.20
Income (loss) from
investment operations:
Net investment income 0.04 0.07 0.11 0.14
Net realized and
unrealized gain (loss) 1.94 3.46 3.33 2.33
Total income (loss) from
investment operations 1.98 3.53 3.44 2.47
- --------------------------------------------------------------------------------
Distributions to
shareholders from:
Net investment income (0.07) (0.11) (0.14) (0.15)
Net realized gain (1.92) (1.86) (1.46) (0.16)
Return of capital -- -- -- --
Total distributions to
shareholders (1.99) (1.97) (1.60) (0.31)
Net increase (decrease) (0.01) 1.56 1.84 2.16
- --------------------------------------------------------------------------------
Net asset value, end of
period $ 17.75 $ 17.76 $ 16.20 $ 14.36
Total return (a) 11.81% 25.22% 27.06% 20.83%
Ratio to average net
assets of (d):
Expenses, before waivers
and reimbursements 0.95% 0.96% 1.03% 1.10%
Expenses, net of waivers
and reimbursements 0.66% 0.66% 0.67% 0.66%
Net investment income
(loss), before waivers
and reimbursements 0.13% 0.15% 0.40% 0.54%
Net investment income,
net of waivers
and reimbursements 0.42% 0.45% 0.76% 0.98%
Portfolio turnover rate 30.62% 37.74% 45.53% 59.99%
Net assets at end of
period (in thousands) $188,512 $177,947 $158,383 $142,055
- --------------------------------------------------------------------------------
</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) Financial highlights for the six months ended May 31, 1999 were calculated
using average shares outstanding for the period.
(c) For the period September 14, 1994 (Class D Shares issue date) through
November 30, 1994.
(d) Annualized for periods less than a full year.
100
<PAGE>
<TABLE>
<CAPTION>
Class D
For the
Six
For the For the Months For the For the For the For the For the
Year Year For the Year Year Year Year Year
Ended Ended May 31 Ended Ended Ended Ended Ended
1995 1994 1999(b) 1998 1997 1996 1995 1994(c)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 9.88 $ 10.65 $ 17.53 $ 16.03 $14.26 $12.16 $ 9.88 $10.41
0.15 0.09 0.02 0.03 0.09 0.11 0.11 0.01
2.26 (0.83) 1.89 3.40 3.27 2.29 2.25 (0.54)
2.41 (0.74) 1.91 3.43 3.36 2.40 2.36 (0.53)
- -------------------------------------------------------------------------------------------
(0.09) (0.01) (0.01) (0.07) (0.13) (0.14) (0.08) --
-- (0.02) (1.92) (1.86) (1.46) (0.16) -- --
-- -- -- -- -- -- -- --
(0.09) (0.03) (1.93) (1.93) (1.59) (0.30) (0.08) --
2.32 (0.77) (0.02) 1.50 1.77 2.10 2.28 (0.53)
- -------------------------------------------------------------------------------------------
$ 12.20 $ 9.88 $ 17.51 $ 17.53 $16.03 $14.26 $12.16 $ 9.88
24.55% (6.98)% 11.48% 24.73% 26.60% 20.39% 24.19% (5.14)%
1.12% 1.08% 1.34% 1.35% 1.42% 1.49% 1.51% 1.46%
0.69% 0.67% 1.05% 1.05% 1.06% 1.05% 1.08% 1.05%
0.73% 0.35% (0.26)% (0.24)% 0.01% 0.15% 0.30% 0.53%
1.16% 0.77% 0.03% 0.06% 0.37% 0.59% 0.73% 0.94%
81.65% 78.94% 30.62% 37.74% 45.53% 59.99% 81.65% 78.94%
$146,731 $164,963 $ 327 $ 1,122 $ 696 $ 433 $ 221 $ 40
- -------------------------------------------------------------------------------------------
</TABLE>
101
<PAGE>
Financial Highlights
For the Six Months Ended May 31, 1999 (Unaudited)
and the Years Ended November 30,
Focused Growth Portfolio
<TABLE>
<CAPTION>
Class A
For the
Six
Months For the For the For the For the For the
Ended Year Year Year Year Year
May 31 Ended Ended Ended Ended Ended
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 (c) 17.86% 24.03% 27.05% 17.82% 28.38% (6.15)%
Ratio to average net
assets of (d):
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) 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 year. Total
return is not annualized for periods less than one year.
(d) Annualized for periods less than a full year.
102
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
For For
the Six the Six
Months For the For the For the Months For the For the For the For the
Ended Year Year Year Ended Year Year Year Year
May 31 Ended Ended Ended May 31 Ended Ended Ended Ended
1999 1998 1997 1996(a) 1999 1998 1997 1996 1995(b
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 (0.03) (0.05) 0.01 (0.01) (0.10) (0.05) 0.03 (0.03) 0.02
Net realized and
unrealized gain (loss) 2.79 3.09 3.37 1.02 2.81 3.04 3.30 2.15 2.93
Total income (loss) 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: -- (0.01) (0.01) -- -- (0.01) (0.01) (0.04) (0.02)
Net investment income
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 (decrease) 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 reimbursements 1.50% 1.53% 1.58% 1.67% 1.65% 1.68% 1.73% 1.82% 1.86%
Expenses, net of waivers
and reimbursements 1.15% 1.16% 1.16% 1.15% 1.30% 1.31% 1.31% 1.30% 1.30%
Net investment loss,
before waivers
and reimbursements (0.78)% (0.66)% (0.36)% (0.64)% (0.93)% (0.81)% (0.51)% (0.80)% (0.67)%
Net investment income,
net of waivers
and reimbursements (0.43)% (0.29)% 0.06% (0.12)% (0.58)% (0.44)% (0.09)% (0.28)% (0.11)%
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 thousands) $9,948 $8,719 $ 8,325 $ 6,993 $ 812 $ 1,779 $ 1,206 $ 656 $ 489
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
103
<PAGE>
Financial Highlights
For the Six Months Ended May 31, 1999 (Unaudited)
and the Years Ended November 30,
Small Company Index Portfolio
<TABLE>
<CAPTION>
Class A
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
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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.
(d) For the period January 8, 1998 (Class C Shares issue date) through November
30, 1998.
(e) For the period December 8, 1994 (Class D Shares issue date) through
November 30, 1995.
(f) 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.
104
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
For the Six For the Six
Months Months
For the For the Ended For the For the For the For the
May 31 Year Ended May 31 Year Ended Year Ended Year Ended Year Ended
1999 1998(d) 1999 1998 1997 1996 1995(e)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$12.98 $13.89 $ 12.94 $ 15.01 $ 13.96 $ 12.95 $ 10.51
0.05 0.03 .011 0.11 0.17 0.13 0.18
1.09 (0.94) 1.08 (1.19) 2.62 1.83 2.96
1.14 (0.91) 1.19 (1.08) 2.79 1.96 3.14
- --------------------------------------------------------------------------------------
(0.03) -- (0.10) (0.10) (0.15) (0.14) (0.14)
(1.51) -- (1.51) (0.89) (1.59) (0.81) (0.56)
-- -- -- -- -- -- --
(1.54) -- (1.61) (0.99) (1.74) (0.95) (0.70)
(0.40) (0.91) (0.42) (2.07) 1.05 1.01 2.44
- --------------------------------------------------------------------------------------
$12.58 $12.98 $ 12.52 $ 12.94 $ 15.01 $ 13.96 $ 12.95
9.89% (6.54)% (9.83)% (7.58)% 22.68% 16.20% 31.62%
1.04% 0.55% 1.19% 0.70% 0.71% 0.71% 0.71%
0.60%(f) 0.98% 0.75%(e) 1.13% 1.07% 1.18% 1.20%
0.61% 0.55% 0.46% 0.37% 0.40% 0.55% 0.41%
1.05% 0.98% 0.90% 0.80% 0.76% 1.02% 0.90%
46.54% 59.21% 46.54% 59.21% 42.66% 46.26% 38.46%
$ 361 $ 870 $ 559 $ 855 $ 690 $ 269 $ 44
- --------------------------------------------------------------------------------------
</TABLE>
105
<PAGE>
Financial Highlights
For the Six Months Ended May 31, 1999 (Unaudited)
and the Years Ended November 30,
International Growth Portfolio
<TABLE>
<CAPTION>
Class A
For the Six
Months
Ended For the For the For the
May 31 Year Ended Year Ended Year Ended
1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period $ 11.78 $ 10.52 $ 10.63 $ 9.88
Income (loss) from investment
operations:
Net investment income 0.11 0.09 0.11 0.10
Net realized and
unrealized gain (loss) 0.93 1.90 0.31 0.87
Total income (loss) from
investment operations 1.04 1.99 0.42 0.97
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to
shareholders from:
Net investment income (0.23) (0.16) (0.08) (0.22)
Net realized gain (0.76) (0.57) (0.45) --
Return of capital -- -- -- --
Total distributions to
shareholders (0.99) (0.73) (0.53) (0.22)
Net increase (decrease) 0.05 1.26 (0.11) 0.75
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.83 $ 11.78 $ 10.52 $ 10.63
Total return (b) 9.36% 20.44% 4.21% 9.96%
Ratio to average net assets of (c):
Expenses, before waivers
and reimbursements 1.31% 1.31% 1.37% 1.43%
Expenses, net of waivers
and reimbursements 1.06% 1.06% 1.06% 1.06%
Net investment income
(loss), before waivers
and reimbursements 1.33% 0.64% 0.66% 0.36%
Net investment income, net of waivers
and reimbursements 1.58% 0.89% 0.97% 0.73%
Portfolio turnover rate 85.67% 160.13% 154.62% 202.47%
Net assets at end of
period (in thousands) $114,123 $111,594 $106,774 $138,182
- ------------------------------------------------------------------------------------------------------------------------------------
</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 year,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the year. Total
return is not annualized for periods less than one year.
(c) Annualized for periods less than a full year.
(d) Financial highlights for the six months ended May 31, 1999 were calculated
using average shares outstanding for the period.
(e) For the period November 16, 1994 (Class D Shares issue date) through
November 30, 1994.
106
<PAGE>
<TABLE>
<CAPTION>
Class D
For the Six
Months
For the For the Ended For the For the For the For the For the
Year Ended Year Ended May 31 Year Ended Year Ended Year Ended Year Ended Year Ended
1995 1994(a) 1999(d) 1998 1997 1996 1995 1994(e)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 10.21 $ 10.00 $ 11.60 $ 10.39 $ 10.54 $ 9.83 $ 10.21 $ 10.47
Income (loss) from investment
operations:
Net investment income 0.12 0.05 (0.01) 0.09 0.09 0.01 0.19 --
Net realized and
unrealized gain (loss) (0.36) 0.16 1.00 1.83 0.29 0.92 (0.48) (0.26)
Total income (loss) from
investment operations (0.24) 0.21 0.99 1.92 0.38 0.93 (0.29) (0.26)
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to
shareholders from:
Net investment income (0.05) -- (0.14) (0.14) (0.08) (0.22) (0.05) --
Net realized gain (0.04) -- (0.76) (0.57) (0.45) -- (0.04) --
Return of capital -- -- -- -- -- -- -- --
Total distributions to
shareholders (0.09) -- (0.90) (0.71) (0.53) (0.22) (0.09) --
Net increase (decrease) (0.33) 0.21 0.09 1.21 (0.15) 0.71 (0.38) (0.26)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $ 9.88 $ 10.21 $ 11.69 $ 11.60 $ 10.39 $ 10.54 $ 9.83 $ 10.21
Total return (b) (2.32)% 2.11% 9.18% 19.91% 3.79% 9.59% (2.78)% (2.56)%
Ratio to average net
assets of (c):
Expenses, before waivers
and reimbursements 1.38% 1.47% 1.70% 1.70% 1.76% 1.82% 1.77% 1.78%
Expenses, net of waivers
and reimbursements 1.06% 1.04% 1.45% 1.45% 1.45% 1.45% 1.45% 1.35%
Net investment income
(loss), before waivers
and reimbursements 0.90% 0.33% (0.34)% 0.34% 0.27% 0.07% 1.69% (0.43)%
Net investment income,
net of waivers
and reimbursements 1.22% 0.76% (0.09)% 0.59% 0.58% 0.44% 2.01% --
Portfolio turnover rate 215.31% 77.79% 85.67% 160.13% 154.62% 202.47% 215.31% 77.79%
Net assets at end of
period (in thousands) $148,704 $133,212 $ 10 $ 203 $ 234 $ 94 $ 20 --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
107
<PAGE>
Financial Information continued
Financial Highlights
For the Six Months Ended May 31, 1999 (Unaudited)
and the Years Ended November 30,
International Equity Index Portfolio
<TABLE>
<CAPTION>
Class A Class D
-------------------------------------- -------------------------
For the Six For the Six
Months Months
Ended For the For the Ended For the
May 31 Year Ended Year Ended May 31 Year Ended
1999 1998 1997(a) 1999 1998(b)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
and reimbursements 1.13% 0.91% 1.18% 0.74% (0.80)%
Net investment income (loss), net of waivers
and reimbursements 1.54% 1.36% 1.75% 1.15% (0.11)%
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.
108
<PAGE>
This page intentionally left blank.
109
<PAGE>
For More Information
- --------------------------------------------------------------------------------
ANNUAL/ SEMIANNUAL REPORT
Additional information about the Portfolios' investments is available in the
Portfolios' annual and semiannual reports to shareholders. In the Portfolios'
annual reports, you will find a discussion of the market conditions and
investment strategies that significantly affected the Portfolios' performance
during their last fiscal year.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Portfolios and their policies is also available
in the Portfolios' Statement of Additional Information ("SAI"). The SAI is
incorporated by reference into this Prospectus (is legally considered part of
this Prospectus).
The Portfolios' annual and semiannual reports, and the SAI, are available free
upon request by calling 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 the SEC's website at http://www.sec.gov
You may review and obtain copies of Trust documents by visiting the SEC's Public
Reference Room in Washington, D.C. You may also obtain copies of Trust documents
by sending your request and a duplicating fee to the SEC's Public Reference
Section, Washington, D.C. 20549-6009. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Northern Institutional Funds
811-3605
110
<PAGE>
INVESTMENT ADVISERS
The Northern Trust Company
Northern Trust Quantitative Advisors, Inc.
50 South LaSalle Street
Chicago, Illinois 60075
TRANSFER AGENT
AND CUSTODIAN
The Northern Trust Company
<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 December 29, 1999 (the
"Additional Statement") is not a prospectus. Copies of the prospectus dated
December 29, 1999 for the Balanced, Equity Index, Diversified Growth, Focused
Growth, Small Company Index, Small Company Growth Portfolio, Mid Cap Growth
Portfolio, MarketCommand Portfolio, 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 unaudited financial statements contained in the Semi-Annual Report
to the Portfolio's shareholders for the period ended May 31, 1999 and the
audited financial statements and related report of Ernst & Young LLP,
independent auditors, contained in the Annual Report to the Portfolio's
shareholders for the fiscal year ended November 30, 1998 are incorporated herein
by reference in the section "Financial Statements." No other portions of the
Fund's Semi-Annual or Annual Reports are incorporated by reference.
1
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
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................................................ 61
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS............ 62
FOREIGN INVESTORS.................................... 63
DESCRIPTION OF SHARES................................ 64
OTHER INFORMATION.................................... 69
FINANCIAL STATEMENTS................................. 70
APPENDIX A........................................... A-1
APPENDIX B........................................... B-1
</TABLE>
--------------
No person has been authorized to give any information or to make any
representations not contained in this Additional Statement or in the Prospectus
in connection with the offering made by the Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Trust or its distributor. The Prospectus does not constitute
an offering by the Trust or by the distributor in any jurisdiction in which such
offering may not lawfully be made.
An investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. An investment in a Portfolio involves investment risks, including
possible loss of principal.
2
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
Classification and History
Northern Institutional Funds (the "Trust") is an open-end, management
investment company. Each Portfolio 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, formerly known as The Benchmark Funds, changed
its name to Northern Institutional Funds on July 15, 1998. The Portfolios were
formerly series of The Benchmark Funds, a Massachusetts business trust, and were
reorganized into the Trust on March 31, 1998.
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.
3
<PAGE>
American Depository Receipts. 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. 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
4
<PAGE>
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 EAFE Index. As of
November 30, 1998, fifteen European countries (Austria, Belgium, Denmark,
Finland, France, Germany, Ireland, Italy, the
5
<PAGE>
Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United
Kingdom) constitute approximately 73% of the EAFE Index. Five Asian/Pacific
countries (Australia, Hong Kong, Japan, 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
6
<PAGE>
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.
7
<PAGE>
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
8
<PAGE>
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
9
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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
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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
11
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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 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 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
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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.
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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 the 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, the 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 the 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.
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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
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<PAGE>
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 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 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.
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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
17
<PAGE>
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 interest 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.
18
<PAGE>
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 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
19
<PAGE>
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 Standard & Poor's 500 Composite
Stock Price Index (the "S&P 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
20
<PAGE>
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 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 Standard & Poor's 500(R) Composite Stock Price Index
-------------
(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, American Stock Exchange
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
21
<PAGE>
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 Fund or the ability of
the S&P 500 Index to track general stock market performance.
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 June 1, 1999, the approximate market
capitalization range of the companies included in the S&P MidCap 400 Index was
between $200 million and $13.4 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 10% of the total market capitalization of
the Russell 3000 Index. As of May 31, 1999, the average market capitalization
of the companies included in the Russell 2000 Index was approximately $526.4
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
22
<PAGE>
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 (a) through the purchase of debt obligations in
accordance with the Portfolio's investment objective and policies, (b)
through repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities./1/
23
<PAGE>
(2) Mortgage, pledge or hypothecate any assets (other than pursuant to
reverse repurchase agreements) except to secure permitted borrowings (this
restriction does not apply to the MarketCommand and MidCap Growth
Portfolios);
(3) 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.
(4) Purchase or sell commodities or commodity contracts or oil or gas or
other mineral exploration or development programs, except that each
Portfolio may, to the extent appropriate to its investment policies,
purchase securities of companies engaging in whole or in part in such
activities, enter into futures contracts and related options, and enter
into forward currency contracts in accordance with its investment objective
and policies./1/
(5) Invest in companies for the purpose of exercising control.
(6) 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.
(7) Write puts, calls or combinations thereof, except for transactions in
options on securities, financial instruments, currencies and indices of
securities (and, in the case of the International Growth Portfolio, yield
curve options); futures contracts; options on futures contracts; forward
currency contracts; short sales of securities against the box; interest
rate swaps; and pair-off transactions (except in the case of the
International Growth Portfolio). (This restriction does not apply to the
Small Company Growth, Mid Cap Growth and MarketCommand Portfolios. In
addition, this restriction does not apply to any type of option, futures
contract, forward contract, short sale, swap or pair-off transaction unless
it involves a put, call or combination thereof written by a Portfolio.)
(8) 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.)
(9) 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.
(10) Borrow money (other than pursuant to reverse repurchase agreements),
except (a) as a temporary measure, and then only in amounts not exceeding
5% of the value of the
24
<PAGE>
Portfolio's total assets or (b) from banks, provided that immediately after
any such borrowing all borrowings of the Portfolio do not exceed one-third
of the Portfolio's total assets. No purchases of securities will be made if
borrowings subject to this restriction exceed 5% of the value of the
Portfolio's assets. The exceptions in (a) and (b) to this restriction are
not for investment leverage purposes but are solely for extraordinary or
emergency purposes or to facilitate management of the Portfolios by
enabling the Trust to meet redemption requests when the liquidation of
Portfolio instruments is deemed to be disadvantageous or not possible. If
due to market fluctuations or other reasons the total assets of a Portfolio
fall below 300% of its borrowings, the Trust will promptly reduce the
borrowings of such Portfolio in accordance with the 1940 Act./1/
(11) 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.
/1/The Small Company Growth Portfolio, Mid Cap Growth Portfolio and
MarketCommand Portfolio are not subject to this investment restriction, but
instead are subject to the fundamental investment restrictions enumerated below.
These Portfolios may not:
(1) Make loans, except through (a) the purchase of debt obligations in
accordance with a Portfolio's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, (c) loans of securities, and (d) an interfund lending program
with other affiliated funds.
(2) 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.
(3) Borrow money, except that to the extent permitted by applicable law (a)
each 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 its 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, the Portfolios
will not issue senior securities to the extent such issuance would violate
applicable law.
* * *
In applying Restriction No. 9 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. 9 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.
In addition, as a matter of fundamental policy, the International Equity
Index and International Growth Portfolios will not issue senior securities
except as stated in the Prospectus or this Additional Statement.
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
25
<PAGE>
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).
26
<PAGE>
ADDITIONAL TRUST INFORMATION
Trustees and Officers
The business and affairs of the Trust and each Portfolio are managed under the
direction of the Trust's Board of Trustees. Information pertaining to the
Trustees and officers of the Trust is set forth below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
- ----------- --- ---------- -------------------
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William H. Springer 70 Chairman Vice Chairman of Ameritech (a
701 Morningside Drive and telecommunications holding company) from
Lake Forest, IL 60045 Trustee February 1987 to retirement in August 1992;
Vice Chairman, Chief Financial and
Administrative Officer of Ameritech prior to
1987. Director of Walgreen Co. (a retail drug
store business); Director of Baker, Fentress &
Co. (a closed-end, non-diversified
management investment company) from April
1992 to present; Trustee of Goldman Sachs
Trust (a registered investment company) from
1989 to present.
- ------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
- ----------- --- ---------- -------------------
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard Gordon Cline 64 Trustee Chairman of Hawthorne Inc. (a management
4200 Commerce Court, advisory services and private investment
Suite 300 company) since January 1996; Chairman and
Lisle, IL 60532 Director of Hussman International Inc.
(commercial refrigeration company) since
January 1998; Chairman and CEO of NICOR
Inc. (a diversified public utility holding
company) from 1985 to 1996 and President,
1992-1993; Chairman of the 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.
- ------------------------------------------------------------------------------------------------------
Edward J. Condon, Jr. 59 Trustee Chairman of The Paradigm Group, Ltd.
Sears Tower, Suite 9650 (a financial advisor) since July 1993; Vice
233 S. Wacker Drive President and Treasurer of Sears Roebuck and
Chicago, IL 60606 Co. (a retail corporation) from February
1989 to July 1993; Member of Advisory Board
of Real-Time USA, Inc.; Member of Board of
Managers of The Liberty Hampshire Company,
LLC; Vice Chairman and Director of Energenics
LLC; Director: University Eldercare, Inc.;
Financial Pacific Company. Trustee: Dominican
University.
- ------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
- ----------- --- ---------- -------------------
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John W. English 66 Trustee Private Investor; Vice President and Chief
50-H New England Ave. Investment Officer of The Ford Foundation
P.O. Box 640 (a charitable trust) from 1981 to 1993;
Summit, NJ 07902-0640 Trustee of The China Fund, Inc. Select
Sector SPDR Trust; WM Funds; American Red
Cross in Greater New York, Mote Marine
Laboratory and United Board for Christian
Higher Education in Asia. Director of
University of Iowa Foundation, Blanton-Peale
Institutes of Religion and Health, Community
Foundation of Sarasota County; Duke
Management Company and John Ringling Centre
Foundation.
- ------------------------------------------------------------------------------------------------------
Sandra Polk Guthman 55 Trustee President and CEO of Polk Bros. Foundation
420 N. Wabash Avenue (an Illinois not-for-profit corporation)
Suite 204 from 1993 to present; Director of Business
Chicago, IL 60611 Transformation from 1992-1993 and Midwestern
Director of Marketing from 1988-1992 for IBM
Corporation; Director of MBIA Insurance
Corporation of Illinois; MB Financial Corp.
(a stock savings and loan holding company).
- ------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
- ----------- --- ---------- -------------------
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard P. Strubel 60 Trustee Managing Director of Tandem Partners, Inc.
737 N. Michigan Avenue (a privately held management services firm)
Suite 1405 from 1990 to 1999; President and Chief
Chicago, IL 60611 Executive Officer of Microdot, Inc. (a
privately held manufacturing firm)
from January 1984 to October 1994;
Director: Gildan Activewear, Inc.; Children's
Memorial Medical Center. Trustee: University
of Chicago; Goldman Sachs Trust; Goldman
Sachs Variable Insurance Trust.
- ------------------------------------------------------------------------------------------------------
Jylanne M. Dunne 39 President Senior Vice President for Distribution
4400 Computer Drive Services at PFPC Inc. (formerly First Data
Westborough, MA 01581 Investor Services Group, Inc., ("FDISG"))
(since 1988).
- ------------------------------------------------------------------------------------------------------
Richard H. Rose 43 Vice Vice President and Division Manager of Mutual
4400 Computer Drive President Fund Administration at PFPC (formerly FDISG)
Westborough, MA 01581 (since 1994); Senior Vice President at
The Boston Company Advisors, Inc.
(prior thereto).
- ------------------------------------------------------------------------------------------------------
Brian R. Curran 31 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
- ------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Name Position(s) Principal Occupation(s)
and Address Age with Trust During Past 5 Years
- ----------- --- ---------- -------------------
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(February 1997 to October 1997); Senior
Auditor at Price Waterhouse L.L.P. (February
1994 to February 1997); Manager of Fund
Accounting at State Street Bank and Trust
Company (prior thereto).
- ------------------------------------------------------------------------------------------------------
Linda J. Hoard 51 Secretary Counsel at PFPC (formerly FDISG) (since
4400 Computer Drive 1998); Attorney Consultant for Fidelity
Westborough, MA 01581 Investments (aninvestment adviser), Investors
Bank & Trust Company (a financial service
provider) and FDISG (September 1994 to
June 1998); Vice President and Assistant
General Counsel at MFS Investment Management
(an investment adviser) (prior thereto).
- ------------------------------------------------------------------------------------------------------
Teresa M.R. Hamlin 34 Assistant Counsel at PFPC (formerly FDISG) (since
4400 Computer Drive Secretary 1994); Paralegal Manager at The Boston Company
Westborough, MA 01581 Advisors, Inc. (an investment adviser)
(prior thereto).
- ------------------------------------------------------------------------------------------------------
Therese Hogan 36 Assistant Director of the State Regulation Department
4400 Computer Drive Secretary at PFPC (formerly FDISG) (since 1994);
Westborough, MA 01581 Senior Legal Assistant at Palmer and Dodge
(a Massachusetts law firm) (prior thereto).
- ------------------------------------------------------------------------------------------------------
</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 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 of which NFD, PFPC provides services.
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
three members including a Chairman of the Committee. The Audit Committee
members are Messrs. Condon and
31
<PAGE>
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 election of his or her successor; (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 Investor Services Group, 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, 1998:
Pension or
Retirement
Aggregate Benefits Total
Compensation Accrued as Compensation
from the Part of Trust's from Trust
Name of Trustee Trust Expenses Paid to Trustees
--------------- ----- -------- ----------------
William H. Springer $ 46,750 $0 $46,750
Richard G. Cline $ 34,000 $0 $34,000
Edward J. Condon, Jr. $ 37,000 $0 $37,000
John W. English $ 32,500 $0 $32,500
Sandra Polk Guthman $ 34,000 $0 $34,000
Frederick T. Kelsey/1/ $ 37,000 $0 $37,000
Richard P. Strubel $ 42,250 $0 $42,250
_______________________
/1/ Mr. Kelsey retired from the Board of Trustees in November 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
32
<PAGE>
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
September 30, 1999, the Investment Advisers and their affiliates had
approximately $262.8 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 Agreements with
the Trust provide 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
33
<PAGE>
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 Agreements provide 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 Agreements provide that the Investment Advisers may render
similar services to others so long as their services under such Agreements are
not impaired thereby. The Advisory Agreements also provide 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
34
<PAGE>
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
35
<PAGE>
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 Agreements, 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, 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 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) was as follows:
36
<PAGE>
1998 1997 1996
---- ---- ----
Balanced Portfolio $ 297,879 $ 270,536 $ 226,872
Equity Index Portfolio 1,136,850 830,952 603,016
Diversified Growth Portfolio 905,091 795,346 768,689
Focused Growth Portfolio 1,045,682 934,052 811,643
Small Company Index Portfolio 248,736 242,421 212,150
International Growth Portfolio 869,641 993,121 1,089,874
International Equity Index Portfolio(1) 117,326 44,662 N/A
__________________
(1) Commenced investment operations on April 1, 1997.
For the fiscal years or periods ended November 30 as indicated, the
Investment Advisers waived advisory fees as follows:
1998 1997 1996
---- ---- ----
Balanced Portfolio $ 178,727 $ 162,322 $ 136,185
Equity Index Portfolio 2,273,722 1,661,904 1,206,801
Diversified Growth Portfolio 411,405 361,521 349,197
Focused Growth Portfolio 392,131 350,269 304,447
Small Company Index Portfolio 248,733 242,421 212,148
International Growth Portfolio 217,410 248,280 272,159
International Equity Index Portfolio (1) 117,319 44,662 N/A
__________________
(1) Commenced investment operations on April 1, 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:
1998 1997 1996
---- ---- ----
Balanced Portfolio $ 11,754 $ 10,622 $ 8,853
Equity Index Portfolio 249,731 172,360 92,186
Diversified Growth Portfolio 17,453 15,280 14,368
Focused Growth Portfolio 23,773 19,546 12,738
Small Company Index Portfolio 13,858 12,676 11,706
International Growth Portfolio 11,469 12,624 13,559
International Equity Index Portfolio (1) 4,696 1,780 N/A
__________________
(1) Commenced investment operations on April 1, 1997.
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:
37
<PAGE>
1998 1997 1996
---- ---- ----
Balanced Portfolio $ 22,993 $ 24,371 $ 21,294
Equity Index Portfolio 268,057 142,960 154,259
Diversified Growth Portfolio 28,035 27,587 26,634
Focused Growth Portfolio 28,583 23,050 21,498
Small Company Index Portfolio 227,658 66,695 67,319
International Growth Portfolio 122,373 158,611 170,117
International Equity Index Portfolio (1) 67,398 49,999 N/A
___________________
(1) Commenced investment operations on April 1, 1997.
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."
38
<PAGE>
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.
During the fiscal year ended November 30, 1998, the Balanced Portfolio
acquired and sold securities of Lehman Brothers, Inc. and Merrill Lynch & Co.,
Inc., each a regular broker/dealer. At November 30, 1998, 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
$202,000; Lehman Brothers, Inc., with an approximate aggregate market value of
$837,000; Merrill Lynch & Co., Inc., with an approximate aggregate market value
of $90,000; and Salomon Brothers, Inc., with an approximate aggregate market
value of $667,000.
During the fiscal year ended November 30, 1998, the Equity Index Portfolio
acquired and sold securities of Bankers Trust, Bear Stearns & Co., Lehman
Brothers, Inc., J.P. Morgan Securities, Inc., Merrill Lynch & Co., Inc. and
Morgan Stanley Group, Inc., each a regular broker/dealer. At November 30, 1998,
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: Bankers Trust, with an approximate aggregate market value of
$1,166,000; Bear Stearns & Co., with an approximate aggregate market value of
$664,000; Lehman Brothers, Inc., with an approximate aggregate market value of
$824,000; J.P. Morgan Securities, Inc., with an approximate aggregate market
value of $2,629,000; Merrill Lynch & Co., Inc., with an approximate aggregate
market value of $3,637,000; and Morgan Stanley Group, Inc., with an approximate
aggregate market value of 5,681,000.
During the fiscal year ended November 30, 1998, the Diversified Growth
Portfolio acquired and sold securities of Merrill Lynch & Co., Inc., a regular
broker/dealer. At November 30, 1998, 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 $510,000.
During the fiscal year ended November 30, 1998, the Focused Growth
Portfolio acquired and sold securities of Merrill Lynch & Co., Inc., a regular
broker/dealer. At November 30, 1998, 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: Merrill Lynch & Co., Inc., with
an approximate aggregate market value of $1,826,000.
During the fiscal year ended November 30, 1998, the Small Company Index
Portfolio acquired and sold securities of Everen Capital Corp. and Hambrecht and
Quist, each a regular broker/dealer. At November 30, 1998, the Small Company
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:
Everen Capital Corp., with an approximate aggregate market value of $47,000; and
Hambrecht and Quist, with an approximate aggregate market value of $63,000.
39
<PAGE>
During the fiscal year ended November 30, 1998, the International Equity
Index Portfolio acquired and sold securities of ABN-AMRO, HSBC Securities, Inc.,
Nomura Securities Co. and UBS Securities, each a regular broker/dealer. At
November 30, 1998, the International 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: ABN-AMRO, with an approximate aggregate
market value of $204,000; HSBC Securities, Inc., with an approximate aggregate
market value of $424,000; Nomura Securities Co., with an approximate aggregate
market value of $117,000; and UBS Securities, with an approximate aggregate
market value of $421,000.
During the fiscal year ended November 30, 1998, the International Growth
Portfolio did not acquire, sell or own any securities of its regular
broker/dealers or their parents.
During the fiscal year ended November 30, 1998, the MarketCommand, Mid Cap
Growth and Small Company Growth Portfolios had not yet commenced operations.
40
<PAGE>
For the fiscal years ended November 30 as indicated, each Portfolio paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Fiscal Brokerage Amount of Commissions
Year Total Commissions Transactions Paid
Ended Brokerage Paid to On Which to Brokers
November 30, Commissions Affiliated Commissions Providing
1998 Paid Brokers/1/ Paid Research/4/
---- ---- ----------- ---- -----------
<S> <C> <C> <C> <C>
Balanced
Portfolio $ 33,693 $ 2,794 $ 24,707,706 $ 25,032
(8.29%)/2/ (1.91%)/3/
Equity
Index
Portfolio 148,670 0 590,431,860 125,498
Focused
Growth
Portfolio 257,630 12,648 178,606,124 208,872
(4.91%)/2/ (0.12%)/3/
Diversified
Growth
Portfolio 148,788 19,748 116,674,485 122,744
(13.27%)/2/ (2.23%)/3/
Small Company
Index
Portfolio 98,346 0 139,815,827 97,942
International
Growth
Portfolio 933,041 23,687 325,994,274 581,629
(2.54%)/2/ (3.32%)/3/
International
Equity Index
Portfolio 72,801 0 43,852,342 61,732
</TABLE>
_____________________________
/1/ Goldman, Sachs & Co., the Trust's distributor prior to May 1, 1999, was the
only affiliated broker utilized by the Trust during the fiscal year.
/2/ Percentage of total commissions paid.
/3/ Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
/4/ The amounts of the transactions involving commissions paid to brokers
providing research were $18,453,666, $537,682,036, $145,818,514,
$94,871,574, $139,042,814, $198,366,763 and $36,469,237 for the Balanced,
Equity Index, Focused Growth, Diversified Growth, Small Company Index,
International Growth and International Equity Index Portfolios,
respectively.
41
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Fiscal Brokerage Amount of Commissions
Year Total Commissions Transactions Paid
Ended Brokerage Paid to On Which to Brokers
November 30, Commissions Affiliated Commissions Providing
1997 Paid Brokers/1/ Paid Research
---- ---- ---------- ---- --------
<S> <C> <C> <C> <C>
Balanced
Portfolio $ 32,642 $ 0 $ 20,396,168 $ 25,974
Equity
Index
Portfolio 131,385 0 254,772,161 121,495
Focused
Growth
Portfolio 300,436 1,484 226,791,529 260,384
(0.49%)/2/ (0.59%)/3/
Diversified
Growth
Portfolio 202,193 0 132,628,487 186,656
Small Company
Index
Portfolio 73,241 0 93,889,780 73,173
International
Growth
Portfolio 1,163,242 0 374,185,022 644,392
International
Equity Index
Portfolio 56,347 0 26,892,453 56,347
</TABLE>
_____________________________
/1/ Goldman, Sachs & Co., the Trust's distributor prior to May 1, 1999, was the
only affiliated broker utilized by the Trust during the fiscal year.
/2/ Percentage of total commissions paid.
/3/ Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
42
<PAGE>
<TABLE>
<CAPTION>
Total Total Brokerage
Fiscal Brokerage Amount of Commissions
Year Total Commissions Transactions Paid
Ended Brokerage Paid to On Which to Brokers
November 30, Commissions Affiliated Commissions Providing
1996 Paid Brokers/1/ Paid Research
---- ---- ---------- ---- --------
<S> <C> <C> <C> <C>
Balanced
Portfolio $ 53,002 $ 0 $ 33,133,354 $ 34,545
Equity
Index
Portfolio 86,325 0 176,685,003 71,053
Focused
Growth
Portfolio 325,022 5,623 189,320,203 248,133
(1.73%)/2/ (1.10%)/3/
Diversified
Growth
Portfolio 266,884 0 170,853,039 228,062
Small Company
Index
Portfolio 90,057 0 74,698,179 44,761
International
Growth
Portfolio 1,797,065 0 531,192,806 636,028
</TABLE>
_____________________________
/1/ Goldman, Sachs & Co., the Trust's distributor prior to May 1, 1999, was the
only affiliated broker utilized by the Trust during the fiscal year.
/2/ Percentage of total commissions paid.
/3/ Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
43
<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
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.
44
<PAGE>
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.
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:
1998 1997 1996
---- ---- ----
Balanced Portfolio $ 59,575 $ 54,096 $ 45,373
Equity Index Portfolio 1,136,850 830,785 603,816
Diversified Growth Portfolio 164,560 144,576 139,259
Focused Growth Portfolio 130,709 116,431 101,553
Small Company Index Portfolio 124,365 121,184 106,073
International Growth Portfolio 163,058 159,139 136,235
International Equity Index Portfolio (1) 70,396 26,233 N/A
__________________
(1) Commenced investment operations on April 1, 1997.
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:
1998 1997 1996
---- ---- ----
Balanced Portfolio $0 $32,260 $ 68,595
Equity Index Portfolio 0 52,050 176,462
Diversified Growth Portfolio 0 68,234 170,691
Focused Growth Portfolio 0 63,979 148,402
Small Company Index Portfolio 0 65,061 152,457
International Growth Portfolio 0 68,541 168,984
International Equity Index Portfolio (1) 0 1,460 N/A
__________________
(1) Commenced investment operations on April 1, 1997.
45
<PAGE>
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 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:
1998 1997 1996
- ------ ---- ----
Balanced Portfolio $ 78,916 $ 74,341 $ 65,547
Equity Index Portfolio 504,482 304,060 306,865
Diversified Growth Portfolio 82,995 89,069 98,425
Focused Growth Portfolio 83,616 79,410 80,020
Small Company Index Portfolio 282,541 128,881 134,838
International Growth Portfolio 49,890 67,398 55,347
International Equity Index Portfolio (1) 98,328 56,393 N/A
__________________
(1) Commenced investment operations on April 1, 1997.
Unless sooner terminated, the Co-Administration Agreement will continue in
effect until April 30, 2001, and thereafter for successive one-year terms with
respect to each Portfolio, provided that the Agreement is approved annually (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.
46
<PAGE>
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 distribution 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 with Northern Funds Distributors,
LLC, Northern Trust Corporation agrees that the name "Northern Funds" may be
used in connection with Northern 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 Funds" to any other person. The
Agreement provides that at such time as the Agreement is no longer in effect,
Northern Funds Distributors, LLC will cease using the name "Northern 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.
47
<PAGE>
For the fiscal years or periods ended November 30 as indicated, the
aggregate amount of the Shareholder Service Fee incurred by each class of each
Portfolio then in existence was as follows:
1998 1997 1996
---- ---- ----
Balanced Portfolio
Class C (1) $ 7,927 $ 8,026 $ 7,123
Class D (2) 1,860 710 61
Equity Index Portfolio
Class C 148,096 99,924 46,497
Class D 84,248 52,360 7,257
Diversified Growth Portfolio
Class C N/A N/A N/A
Class D 2,669 1,466 703
Focused Growth Portfolio
Class C (3) 13,754 11,222 3,028
Class D 4,375 2,037 1,224
Small Company Index Portfolio
Class C (4) 338 N/A N/A
Class D 2,173 993 252
International Growth Portfolio
Class C N/A N/A N/A
Class D 825 379 201
International Equity Index Portfolio
Class D (5) 5 N/A N/A
_____________________________
(1) Class C Shares were issued on December 29, 1995.
(2) Class D Shares were issued on February 20, 1996.
(3) Class C Shares were issued on June 14, 1996.
(4) Class C Shares were issued on January 8, 1998.
(5) 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
48
<PAGE>
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, 18/th/ and
Cherry Streets, Philadelphia, Pennsylvania 19103-6996, serve as counsel to the
Trust.
Ernst & Young LLP, independent auditors, 233 S. Wacker Drive, Chicago,
Illinois 60606, have been selected as auditors of the Trust. In addition to
audit services, Ernst & Young LLP reviews the Trust's Federal and state tax
returns, and provides consultation and assistance on accounting, internal
control and related matters.
In-Kind Purchases and Redemptions
Payment for shares of a Portfolio may, in the discretion of Northern, be
made in the form of securities that are permissible investments for the
Portfolio as described in the Prospectus. For further information about this
form of payment, contact Northern. In connection with an in-kind securities
payment, a Portfolio will require, among other things, that the securities be
valued on the day of purchase in accordance with the pricing methods used by the
Portfolio and that the Portfolio receive satisfactory assurances that it will
have good and marketable title to the securities received by it; that the
securities be in proper form for transfer to the Portfolio; and that adequate
information be provided concerning the basis and other tax matters relating to
the securities.
The additional transaction fee described in the Prospectus with respect to
the Small Company Index Portfolio and the International Equity Index Portfolio
does not apply to in-kind purchases of shares that are structured to minimize
the related brokerage, market impact costs and other transaction costs to such
Portfolios as described in the Prospectus.
49
<PAGE>
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:
T = (ERV)/n/
--- - 1
( P )
50
<PAGE>
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:
[(ERV)]
T = --- - 1
[( P )]
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 and International
Growth Portfolios include, for periods prior to the commencement of the
Portfolios' operations, the performance of predecessor collective funds adjusted
to reflect the higher estimated fees and expenses applicable to such Portfolios'
Class A Shares at the time of their inception. Although all such predecessor
collective funds were managed by Northern for the periods stated in a manner and
pursuant to investment objectives that were equivalent in all material respects
to the management and investment objectives of the corresponding Portfolios,
such predecessor collective funds were not registered under the 1940 Act and
were not subject to certain investment restrictions imposed by the 1940 Act. If
they had been registered under the 1940 Act, performance might have been
adversely affected. The average annual total returns and aggregate total returns
shown for the Portfolios for their Class C and/or Class D Shares also include,
for the periods prior to the inception of such classes, the performance of the
Portfolios' Class A Shares. Because the fees and expenses of Class C and Class D
Shares are, respectively, 0.24% and 0.39% higher than those of Class A
51
<PAGE>
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, 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.
52
<PAGE>
<TABLE>
<CAPTION>
For Periods Ended November 30, 1998
Average Annual Total Returns (%) Aggregate Total Returns (%)
Since Since
1 Year 5 Year 10 Year Inception 1 Year 5 Year 10 Year Inception
------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Diversified Growth/1/
Class A
with fee waivers and 25.22 17.37 16.17 - 25.22 122.73 347.65 -
expense reimbursements
without fee waivers and 24.85 16.91 15.70 - 24.85 118.40 329.87 -
expense reimbursements
Class D
with fee waivers and 24.73 17.02 16.00 - 24.73 119.43 341.14 -
expense reimbursements
without fee waivers and 24.36 16.56 15.52 - 24.36 115.15 323.23 -
expense reimbursements
Focused Growth/2/
Class A
with fee waivers and 24.03 17.47 - 16.92 24.03 123.68 - 133.38
expense reimbursements
without fee waivers and 23.58 24.25 - 21.46 23.58 196.13 - 186.93
expense reimbursements
Class C
with fee waivers and 23.73 17.34 - 16.80 23.73 122.45 - 132.08
expense reimbursements
without fee waivers and 23.28 16.75 - 16.19 23.28 116.91 - 125.60
expense reimbursements
Class D
with fee waivers and 23.60 17.12 - 16.59 23.60 120.37 - 129.87
expense reimbursements
without fee waivers and 23.15 16.53 - 15.97 23.15 114.88 - 123.31
expense reimbursements
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
For Periods Ended November 30, 1998
Average Annual Total Returns (%) Aggregate Total Returns (%)
Since Since
1 Year 5 Year 10 Year Inception 1 Year 5 Year 10 Year Inception
------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Index/3/
Class A
with fee waivers and 23.39 22.64 18.42 - 23.39 177.43 442.31 -
expense reimbursements
without fee waivers and 23.09 22.29 18.04 - 23.09 173.50 425.16 -
expense reimbursements
Class C
with fee waivers and 23.09 22.46 18.33 - 23.09 175.40 438.20 -
expense reimbursements
without fee waivers and 22.79 22.11 17.96 - 22.79 171.49 421.61 -
expense reimbursements
Class D
with fee waivers and 22.90 22.30 18.25 - 22.90 173.61 434.58 -
expense reimbursements
without fee waivers and 22.59 21.96 17.89 - 22.59 169.83 418.53 -
expense reimbursements
Small Company Index/4/
Class A
with fee waivers and -7.48 10.68 12.20 - -7.48 66.09 216.18 -
expense reimbursements
and portfolio transaction fee
with fee waivers and -7.02 10.79 12.26 - -7.02 66.92 217.87 -
expense reimbursements
but without portfolio
transaction fee
without fee waivers and -7.88 10.17 11.65 - -7.88 62.30 201.01 -
expense reimbursements
but with portfolio
transaction fee
without fee waivers and -7.42 10.28 17.71 - -7.42 63.11 202.64 -
expense reimbursements
and portfolio transaction fee
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
For Periods Ended November 30, 1998
Average Annual Total Returns (%) Aggregate Total Returns (%)
Since Since
1 Year 5 Year 10 Year Inception 1 Year 5 Year 10 Year Inception
------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Small Company Index/4/
Class C
with fee waivers and -7.79 10.60 12.17 - -7.79 65.49 215.33 -
expense reimbursements and
portfolio transaction fee
with fee waivers and expense -7.33 10.71 12.22 - -7.33 66.32 216.74 -
reimbursements but without
portfolio transaction fee
without fee waivers and -8.18 10.10 11.61 - -8.18 61.78 199.94 -
expense reimbursements but
with portfolio transaction fee
without fee waivers and -7.72 10.28 11.67 - -7.72 63.11 201.55 -
expense reimbursements and
portfolio transaction fee
Class D
with fee waivers and -8.04 10.46 12.09 - -8.04 64.45 213.09 -
expense reimbursements and
portfolio transaction fee
with fee waivers and expense -7.58 10.57 12.15 - -7.58 65.27 214.77 -
reimbursements but without
portfolio transaction fee
without fee waivers and -5.87 10.32 11.73 - -5.87 63.41 203.18 -
expense reimbursements but
with portfolio transaction fee
without fee waivers and -5.40 10.43 11.78 - -5.40 64.22 204.54 -
expense reimbursements and
portfolio transaction fee
</TABLE>
55
<PAGE>
For Periods Ended November 30, 1998
<TABLE>
<CAPTION>
Average Annual Total returns (%) Aggregate Total Returns (%)
Since Since
1 Year 5 Year 10 Year Inception 1 Year 5 Year 10 Year Inception
------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
International Growth/5/
Class A
with fee waivers and 20.52 9.43 - 6.94 20.52 56.92 - 75.97
expense reimbursements
without fee waivers and 20.25 9.06 - 6.58 20.25 54.29 - 71.11
expense reimbursements
Class D
with fee waivers and 19.96 9.06 - 6.79 19.96 54.29 - 72.97
expense reimbursements
without fee waivers and 19.69 8.70 - 6.37 19.69 51.76 - 68.27
expense reimbursements
Balanced/6/
Class A
with fee waivers and 16.90 12.36 - 11.98 16.90 79.08 - 84.66
expense reimbursements
without fee waivers and 16.44 11.67 - 11.26 16.44 73.65 - 78.35
expense reimbursements
Class C
with fee waivers and 16.61 12.19 - 11.82 16.61 77.73 - 83.30
expense reimbursements
without fee waivers and 16.15 11.51 - 11.13 16.15 72.41 - 77.18
expense reimbursements
Class D
with fee waivers and 16.45 12.12 - 11.76 16.45 77.18 - 82.69
expense reimbursements
without fee waivers and 15.99 11.43 - 11.06 15.99 71.80 - 76.59
expense reimbursements
</TABLE>
56
<PAGE>
For Periods Ended November 30, 1998
<TABLE>
<CAPTION>
Average Annual Total returns (%) Aggregate Total Returns (%)
Since Since
1 Year 5 Year 10 Year Inception 1 Year 5 Year 10 Year Inception
------ ------ ------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
International Equity Index/7/
Class A
with fee waivers and 14.36 - - 11.90 14.36 - - 20.59
expense reimbursements
and portfolio transaction fee
with fee waivers and expense 15.50 - - 12.57 15.50 - - 21.80
reimbursements but without
portfolio transaction fee
without fee waivers and 13.87 - - 10.94 13.87 - - 18.88
expense reimbursements but with
portfolio transaction fee
without fee waivers and 15.01 - - 11.60 15.01 - - 20.07
expense reimbursements
and portfolio transaction fee
Class D
with fee waivers and 15.30 - - 11.85 15.30 - - 20.50
expense reimbursements
and portfolio transaction fee
with fee waivers and expense 15.42 - - 12.52 15.42 - - 21.71
reimbursements but without
portfolio transaction fee
without fee waivers and 13.79 - - 10.89 13.79 - - 18.79
expense reimbursements but with
portfolio transaction fee
without fee waivers and 14.93 - - 11.56 14.93 - - 19.98
expense reimbursements
and portfolio transaction fee
</TABLE>
57
<PAGE>
- ----------------------
1. For Class A and D Shares, performance information prior to January 11, 1993
(commencement of Portfolio) is that of a predecessor collective fund. For Class
D Shares, performance information from January 11, 1993 to September 14, 1994
(commencement of Class D Shares) is that of Class A Shares. Because the fees
and expenses of Class D Shares are .39% higher than those of Class A Shares,
actual performance would have been lower had such higher fees and expenses been
taken into account. The predecessor collective fund has been managed in a
manner and pursuant to investment objectives equivalent in all material respects
to the management and investment objective of the Portfolio for the periods
shown. The performance information of the predecessor collective fund is
adjusted to reflect the higher fees and expenses applicable to Class A Shares at
the time of their inception.
2. For Class C and Class D Shares, performance from July 1, 1993 to June 14,
1996 (commencement of Class C Shares) and December 8, 1994 (commencement of
Class D Shares), respectively, is that of Class A Shares. Class A Shares
commenced operations on July 1, 1993. Because the fees and expenses of Class C
and Class D Shares are .24% and .39%, respectively, higher than those of Class A
Shares, actual performance would have been lower had such higher expenses been
taken into account.
3. For Class A, C and D Shares, performance information prior to January 11,
1993 (commencement of Portfolio) is that of a predecessor collective fund. For
Class C and D Shares, performance information from January 11, 1993 to September
28, 1995 (commencement of Class C Shares) and September 14, 1994 (commencement
of Class D Shares), respectively, is that of Class A Shares. Because the fees
and expenses of Class C and Class D Shares are .24% and .39%, respectively,
higher than those of Class A Shares, actual performance would have been lower
had such higher fees and expenses been taken into account. The predecessor
collective fund has been managed in a manner and pursuant to investment
objectives equivalent in all material respects to the management and investment
objective of the Portfolio for the periods shown. The performance information of
the predecessor collective fund is adjusted to reflect the higher fees and
expenses applicable to Class A Shares at the time of their inception.
4. For Class A, 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 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.
58
<PAGE>
6. For Class C and Class D Shares, performance from July 1, 1993 to December
29, 1995 (commencement of Class C Shares) and February 20, 1996 (commencement of
Class D Shares), respectively, is that of Class A Shares. Class A Shares
commenced operations on July 1, 1993. Because the fees and expenses of Class C
and Class D Shares are .24% and .39%, respectively, higher than those of Class A
Shares, actual performance would have been lower had such higher fees and
expenses been taken into account.
7. For Class D Shares, performance from April 1, 1997 to October 5, 1998
(commencement of Class D Shares) is that of Class A Shares. Class A Shares
commenced operations on April 1, 1997. Because the fees and expenses of Class D
Shares are .39% higher than those of Class A Shares, actual performance would
have been lower had such higher fees and expenses been taken into account.
59
<PAGE>
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:
[(a-b )/6/
Yield = 2 ----+1 -1 ]
[(cd ) ]
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, 1998, the annualized yields for
the Class A, Class C and Class D Shares of the Balanced Portfolio was 2.52%,
2.35% and 2.21%, respectively. During such period, Goldman Sachs 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 2.16%, 1.92% and 1.78%, 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
60
<PAGE>
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.
61
<PAGE>
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.
62
<PAGE>
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.
63
<PAGE>
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
64
<PAGE>
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.
65
<PAGE>
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.
66
<PAGE>
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 1, 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
15% 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 1, 1999:
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<PAGE>
<TABLE>
<CAPTION>
Number Percentage
of Shares of Shares
--------- ---------
<S> <C> <C>
BALANCED PORTFOLIO
Class A
Northern Trust Thrift Incentive Plan 1,625,049 35.83%
Tetra Pak Salaried Trust 834,419 18.40%
Sealed Air Corporation 562,114 12.39%
Class C
Kitch Profit Sharing Plan 55,330 100%
Class D
First National Bank of La Grange 28,241 100%
DIVERSIFIED GROWTH PORTFOLIO
Class A
Northern Trust Pension Plan 4,949,085 44.84%
EQUITY INDEX PORTFOLIO
Class A
Northern Trust Thrift Incentive Plan 8,563,920 15.39%
Meadows Fund 4,807,521 8.64%
Libby-Owens-Ford Company 3,842,565 6.90%
Class C
AMA 401K Plan 1,548,489 33.07%
Wilson Sporting Goods 1,114,577 23.81%
U.S. Silica 521,520 11.14%
Sierra Technology 433,871 9.27%
Children's Hospital San Diego 413,455 8.83%
Clark - Schwebel Retirement Partnership 333,305 7.12%
Class D
Marquette Trust Company 1,122,854 75.28%
Citizens Bank 102,684 6.88%
Midwest Trust Company 96,988 6.50%
FOCUSED GROWTH PORTFOLIO
Class C
Northern Trust Thrift Incentive Plan 4,336,190 54.90%
Doe Run Resources 767,398 9.72%
SMALL COMPANY INDEX PORTFOLIO
Class A
Masco In-House 7,859,290 44.33%
Doe Run Resources 949,832 5.36%
Class C
Amcol International Savings Plan Trust 45,810 100%
</TABLE>
68
<PAGE>
<TABLE>
<S> <C> <C>
INTERNATIONAL EQUITY INDEX PORTFOLIO
Class A
Northern Trust Pension Plan 1,258,392 31.27%
Nigas Savings Investment
& Thrift International Fund 869,017 21.59%
Felpro 401K Plan 785,013 19.51%
Northern Trust Thrift Incentive Plan 594,403 14.77%
Sisters of The Precious Blood Foundation 214,776 5.34%
INTERNATIONAL GROWTH PORTFOLIO
Class A
Northern Trust Pension Plan 1,134,142 10.80%
White Cap 740,311 7.10%
Doe Run Resources 729,202 6.90%
Global Industrial Technology 678,822 6.92%
Tuthill Pension 648,530 6.20%
Northwestern Medical Mission 525,049 5.00%
Indresco 639,992 6.10%
</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 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
69
<PAGE>
or such Portfolio present at a meeting, if the holders of more than 50% of the
outstanding shares of the Trust or such Portfolio are present or represented by
proxy, or (ii) more than 50% of the outstanding shares of the Trust or such
Portfolio.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement of
which the Prospectus and this Additional Statement form a part, each such
statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related report of Ernst & Young LLP,
independent auditors, contained in the annual report to the Portfolios'
shareholders for the fiscal year ended November 30, 1998 (the "Annual Report")
are hereby incorporated herein by reference and attached hereto. In addition,
the unaudited financial statements contained in the Semi-Annual Report for the
period ended May 31, 1999 are incorporated by reference to this Additional
Statement. No other parts of the Semi-Annual Report or 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).
70
<PAGE>
APPENDIX A
Commercial Paper Ratings
- ------------------------
A Standard & Poor's ("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 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
A-1
<PAGE>
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 for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
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.
A-2
<PAGE>
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA 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 IBCA 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 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
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch'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 Thomson BankWatch'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 Thomson BankWatch'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.
A-3
<PAGE>
"TBW-4" - This designation represents Thomson BankWatch'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 Standard & Poor's 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
A-4
<PAGE>
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.
A-5
<PAGE>
"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 Duff &
Phelps 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
A-6
<PAGE>
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 IBCA 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.
<PAGE>
"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.
A-8
<PAGE>
Municipal Note Ratings
- ----------------------
A Standard and Poor'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 Standard & Poor's Ratings Group 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 Investors Service, Inc.
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 IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-9
<PAGE>
APPENDIX B
As stated in the Prospectus, the Portfolios may enter into certain
futures transactions. Such transactions are described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established
--------------------------------------
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Portfolio may use interest rate
futures contracts as a defense, or hedge, against anticipated interest rate
changes. As described below, this would include the use of futures contract
sales to protect against expected increases in interest rates and futures
contract purchases to offset the impact of interest rate declines.
A Portfolio presently could accomplish a similar result to that which
it hopes to achieve through the use of futures contracts by selling bonds with
long maturities and investing in bonds with short maturities when interest rates
are expected to increase, or conversely, selling short-term bonds and investing
in long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market, the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by a Portfolio, by using futures contracts.
Interest rate future contracts can also be used by a Portfolio for
non-hedging (speculative) purposes to increase total return.
Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by a Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the
Portfolio's entering into a futures contract purchase for the same aggregate
amount of the specific type of financial instrument and the same delivery date.
If the price of the sale exceeds the price of the offsetting purchase, the
Portfolio is immediately paid the difference and
B-1
<PAGE>
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.
II. Index Futures Contracts
-----------------------
General. A stock or bond index assigns relative values to the stocks
-------
or bonds included in the index, which fluctuates with changes in the market
values of the stocks or bonds included. Some stock index futures contracts are
based on broad market indexes, such as Standard & Poor's 500 or the New York
Stock Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indexes, such as the Standard & Poor's 100 or
indexes based on an industry or market indexes, such as Standard & Poor's 100 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
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contracts in connection with this strategy, in order to protect against the
possibility that the value of the securities to be sold as part of the
restructuring of the portfolio will decline prior to the time of sale.
Index futures contracts may also be used by a Portfolio for
non-hedging (speculative) purposes to increase total return.
III. Futures Contracts on Foreign Currencies
---------------------------------------
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of foreign currency, for an amount fixed in U.S.
dollars. Foreign currency futures may be used by a Portfolio to hedge against
exposure to fluctuations in exchange rates between the U.S. dollar and other
currencies arising from multinational transactions.
IV. Margin Payments
---------------
Unlike purchases or sales of portfolio securities, no price is paid or
received by a Portfolio upon the purchase or sale of a futures contract.
Initially, a Portfolio will be required to deposit with the broker or in a
segregated account with a custodian or sub-custodian an amount of liquid assets,
known as initial margin, based on the value of the contract. The nature of
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Portfolio upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." For example, when a particular Portfolio
has purchased a futures contract and the price of the contract has risen in
response to a rise in the underlying instruments, that position will have
increased in value and the Portfolio will be entitled to receive from the broker
a variation margin payment equal to that increase in value. Conversely, where
the Portfolio has purchased a futures contract and the price of the future
contract has declined in response to a decrease in the underlying instruments,
the position would be less valuable and the Portfolio would be required to make
a variation margin payment to the broker. Prior to expiration of the futures
contract, Northern Trust or NTQA may elect to close the position by taking an
opposite position, subject to the availability of a secondary market, which will
operate to terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Portfolio, and the Portfolio realizes a loss or
gain.
V. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by a
Portfolio. 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
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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.
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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.
VI. Options on Futures Contracts
----------------------------
A Portfolio may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Portfolio will be required to deposit initial margin and
variation margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial margin deposits.
As an example, in
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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.
VII. Other Matters
-------------
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
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