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SIGNATURE GUY NORDAHL
TITLE MANAGER
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REPORT OF INDEPENDENT ACCOUNTANTS
__________________________
To the Board of Trustees of
Northstar Funds:
In planning and performing our audit of the financial statements
and financial highlights of Northstar Funds (formerly Northstar
Advantage Funds), comprising Northstar Government Securities
Fund, Northstar Strategic Income Fund, Northstar High Yield
Fund, Northstar Balance Sheet Opportunities Fund, Northstar
Growth Fund and Northstar Special Fund (formerly Northstar
Advantage Government Securities Fund, Northstar Advantage
Strategic Income Fund, Northstar Advantage High Yield Fund,
Northstar Advantage Income Fund, Northstar Advantage Growth Fund
and Northstar Advantage Special Fund, respectively) for the year
ended December 31, 1996, we considered its internal control
structure, including procedures for safeguarding securities, in
order to determine our auditing procedures for the purposes of
expressing our opinion on the financial statements and financial
highlights and to comply with the requirements of Form N-SAR,
not to provide assurance on the internal control structure.
The management of Northstar Funds is responsible for
establishing and maintaining an internal control structure. In
fulfilling this responsibility, estimates and judgments by
management are required to assess the expected benefits and
related costs of internal control structure policies and
procedures. Two of the objectives of an internal control
structure are to provide management with reasonable, but not
absolute, assurance that assets are safeguarded against loss
from unauthorized use or disposition and that transactions are
executed in accordance with management's authorization and
recorded properly to permit preparation of financial statements
in conformity with generally accepted accounting principles.
Because of inherent limitations in any internal control
structure, errors or irregularities may occur and may not be
detected. Also, projection of any evaluation of the structure
to future periods is subject to the risk that it may become
inadequate because of changes in conditions or that the
effectiveness of the design and operation may deteriorate.
Our consideration of the internal control structure would not
necessarily disclose all matters in the internal control
structure that might be material weaknesses under standards
established by the American Institute of Certified Public
Accountants. A material weakness is a condition in which the
design or operation of the specific internal control structure
elements does not reduce to a relatively low level the risk that
errors or irregularities in amounts that would be material in
relation to the financial statements and financial highlights
being audited may occur and not be detected within a timely
period by employees in the normal course of performing their
assigned functions. However, we noted no matters involving the
internal control structure, including procedures for
safeguarding securities, that we consider to be material
weaknesses, as defined above, as of December 31, 1996.
This report is intended solely for the information and use of
management of Northstar Funds and the Securities and Exchange
Commission.
COOPERS & LYBRAND L.L.P.
New York, New York
January 31, 1997
NORTHSTAR FUNDS
MULTIPLE CLASS PRICING TESTING REPORT
INDEX
Report of Independent Accountants
A.Overview of Internal Control Structure Policies and Procedures for
Calculating Net Asset Value, Dividend Distributions, and Allocation
of Income and Expenses Among Multiple Classes of Shares
B.Control Objectives and Procedures of the Northstar Funds' Multiple Class
Pricing Worksheet
C.Testing Compliance with Internal Control Procedures Relating to the Northstar
Multiple Class Pricing Worksheet for the Year Ended December 31, 1996
Report of Independent Accountants
Northstar Distributors, Inc.
Northstar Investment Management Corporation
We have examined the accompanying description (Appendix A) of the overview of
internal control structure policies and procedures of Northstar Government
Securities Fund, Northstar Strategic Income Fund, Northstar High Yield Fund,
Northstar Balance Sheet Opportunities Fund, Northstar Growth Fund and
Northstar Special Fund (formerly Northstar Advantage Government Securities
Fund, Northstar Advantage Strategic Income Fund, Northstar Advantage High
Yield Fund, Northstar Advantage Income Fund, Northstar Advantage Growth Fund
and Northstar Advantage Special Fund, respectively) (the "Funds") for
calculating the net asset value, dividend distributions, and allocation of
expenses among multiple classes of fund shares. Our examination included
procedures to obtain reasonable assurance about whether (1) the accompanying
description presents fairly, in all material respects, the aspects of the
Funds' policies and procedures that may be relevant to the Funds' internal
control structure, (2) the control structure policies and procedures were
suitably designed to achieve the control objectives specified in the
description, if those policies and procedures were complied with
satisfactorily, and (3) such policies and procedures had been placed in
operation as of December 31, 1996. The control objectives were specified
by the Funds' management in the Second Amended and Restated Application
Pursuant to Section 6(c) of the Investment Company Act of 1940 for an Order
of Exemption from the Provisions of Section 2(a)(32), 2(a)(35), 18(f), 18(g),
18(i), 22(c) and 22(d) of such Act and Rule 22c-1 thereunder. Our
examination was performed in accordance with standards established by the
American Institute of Certified Public Accountants and included those
procedures we considered necessary in the circumstances to obtain a
reasonable basis for rendering our opinion.
In our opinion, the accompanying description of the aforementioned overview
of internal control structure policies and procedures for calculation of the
net asset value, dividend distributions and allocation of income and expenses
among the classes of fund shares of the Funds present fairly, in all material
respects, the relevant aspects of the Funds' policies and procedures that had
been placed in operation as of December 31, 1996. Also, in our opinion, the
policies and procedures, as described, are suitably designed to provide
reasonable assurance that the specified control objectives would be achieved
if the described policies and procedures were complied with satisfactorily.
In addition to the procedures we considered necessary to render our opinion
as expressed in the previous paragraph, we applied tests, listed in Appendix
C, to specific policies and procedures to obtain evidence about their
effectiveness in meeting the control objectives, described in Appendix B,
for the year ended December 31, 1996. The specific policies and procedures
and the nature, timing, extent, and results of our tests are listed in
Appendix C. In our opinion, the policies and procedures that were tested
as described in Appendix C, were operating with sufficient effectiveness to
provide reasonable, but not absolute, assurance that the control objectives
specified in Appendix B were achieved for the year ended December 31, 1996.
However, the scope of our engagement did not include tests to determine
whether the control objectives listed in Appendix B and not listed in
Appendix C were achieved; accordingly, we express no opinion on the
achievement of control objectives listed in Appendix B and not tested in
Appendix C.
The description of policies and procedures with respect to the Funds is as of
December 31, 1996, and information about tests of the operating effectiveness
of specified policies and procedures covers the year ended December 31, 1996.
Any projection of such information to the future is subject to the risk that,
because of change, the description may no longer portray the system in
existence. The potential effectiveness of specified policies and procedures
with respect to the Funds are subject to inherent limitations and,
accordingly, errors or irregularities may occur and not be detected.
Furthermore, the projection of any conclusions, based on our findings, to
future periods is subject to the risk that changes may alter the validity of
such conclusions.
This report is intended solely for the use of the management of the Funds,
Northstar Distributors, Inc., and Northstar Investment Management Corporation
and for filing with the Securities and Exchange Commission and should not be
used for any other purpose.
New York, New York
January 31, 1997.
Appendix A
OVERVIEW OF INTERNAL CONTROL STRUCTURE POLICIES AND
PROCEDURES FOR CALCULATING NET ASSET VALUE, DIVIDEND
DISTRIBUTIONS, AND ALLOCATION OF INCOME AND EXPENSES
AMONG MULTIPLE CLASSES OF FUND SHARES
The Northstar Government Securities Fund, Northstar Strategic Income Fund,
Northstar High Yield Fund, Northstar Balance Sheet Opportunities Fund,
Northstar Growth Fund and Northstar Special Fund (formerly Northstar
Advantage Government Securities Fund, Northstar Advantage Strategic Income
Fund, Northstar Advantage High Yield Fund, Northstar Advantage Income Fund,
Northstar Advantage Growth Fund and Northstar Advantage Special Fund,
respectively) (the "Funds") have adopted a Multiple Pricing System,
consisting of four classes of shares, Class A, Class B, Class C, and Class T
shares. Class A shares are subject to a front-end sales charge with a
distribution ("12b-1") fee. Class B and Class T shares are charged a
contingent deferred sales charge and a greater 12b-1 fee. Class C shares are
offered with a level sales charge and a greater 12b-1 fee. The multiple
classes of shares represent interests in the same portfolio of investments of
the Funds and are identical in all respects, except with respect to the
expense allocable exclusively to each class. Since 12b-1 fees will vary for
each class of shares, separate NAV's, dividends and distributions must be
calculated for each class. The procedures for calculating NAV, dividends
and distributions are substantially similar, but will vary slightly depending
on the dividend policy of the particular Fund.
In maintaining the records for each Fund, the income and expense accounts
must be allocated to each class of shares. Investment income, unrealized
and realized gains or losses will be allocated daily to each class based on
the percentage of net assets at the beginning of each day.
Daily expenses of the Funds will be allocated to each class depending upon
the nature of the expense item. Operating expenses, which are attributable
to all classes, will be allocated based on the percentages of net assets at
the beginning of the day. Operating expenses will include fees paid to the
Advisor and Administrator, and all other expenses such as accounting, custody
and transfer agent fees, professional fees, and registration and other
regulatory fees and printing charges. Certain expenses that have a greater
cost for one class versus another (i.e., 12b-1 fees and transfer agent fees)
will be calculated and charged to the respective class as follows:
12b-1 Fees: Using prior day's net assets for each class, calculate the
current day's accrual based upon the respective rates for each class.
Transfer Agent Fees: For those charges where different rates may exist for
each class of shares, use existing budgets for each class and accrue
separately the daily amount for each class.
<PAGE>
Such "unique" expenses which are greater for one class versus another must
be calculated prior to determining the daily NAV or dividend/distibutions as
they may potentially impact the NAV of each class (i.e., create different
NAV's for each class).
In order to allocate income and expenses among the multiple classes of shares,
State Street Bank & Trust (the "Accounting Agent"), the Funds' recordkeeper,
utilizes the Multiple Class Pricing Worksheets (the "Worksheets"). The
Worksheets utilize relevant data input by the Fund Accountant of the
Accounting Agent obtained from the Funds' primary accounting system. The
Worksheets allocate income and expenses among the multiple classes of shares
and computes the daily net asset value, and if applicable, the dividend/
distribution for each class of shares. Internal accounting controls that
are relevant to the Funds can be divided into two components - control
relevant to the mutual fund accounting system resident at the Accounting
Agent (the "primary accounting system") and controls related to the
Worksheets. The design of the internal controls structure policies and
procedures related to the Worksheets contemplate the application of certain
internal control structure policies and procedures to the primary accounting
system.
The Trust has provided the detail description of the procedures for
accounting and reconciling multiple classes of shares and calculating
dividend rates and net asset value for Class A Shares, Class B Shares,
Class C and Class T Shares in Appendix B.
The specific control objectives relating to the Worksheets are described in
Appendix B.
Appendix C discusses the scope of specific audit procedures performed and
the results of those procedures.
<PAGE>
Appendix B
CONTROL OBJECTIVES AND PROCEDURES OF THE
NORTHSTAR FUNDS'
MULTIPLE CLASS PRICING WORKSHEETS
Certain data is utilized from the primary accounting system to allocate
income and expenses and to calculate the daily net asset value and, if
applicable, dividends/distributions for each class of shares. The primary
accounting system includes the details of transactions in accordance with
the Investment Company Act of 1940, as amended.
The following represents the internal accounting control objectives and
procedures for the allocation of income and expenses and the computation of
the net asset value and, if applicable, the dividend/distribution for each
class of shares utilizing the format of the Worksheets. It does not cover
the internal accounting control procedures surrounding the processing of
information into each Fund's primary accounting system as maintained by the
Accounting Agent. These control procedures are applicable to all of the
Funds.
The following are the control objectives:
To ascertain the "unique" fees (i.e., 12b-1) charged to each class of shares
are correctly recorded in the Fund's accounting records and are correctly
allocated to each class.
To ascertain that income and operating expenses are allocated properly to
each class based on the appropriate net assets of each class at the beginning
of each day.
To ascertain that the dividend rates and daily NAV per share for each class
of shares reflect the proper allocation of income and operating expenses as
well as the full amount of "unique" fees charged to the respective class of
shares.
Set forth below are additional procedures which have been implemented to
satisfy the objectives described above for the calculation of dividends/
distributions and NAV for each class. These procedures presume that the
normal procedures and controls remain in effect for all other daily fund
accounting. The procedures are described for the Funds based upon the
respective dividend policy. <PAGE>
The calculation procedure for NAV and
dividends/distributions consistent with each Fund's dividend policy will be
as follows:
Fund Declares Net Investment Income Daily, Declares Periodic Net Realized
Gains; Does Not Distribute Unrealized Gains/Losses:
Dividends/Distributions
Determination of the dividend/distribution by class is made upon completion
of the Multiple Class Pricing Worksheet by dividing daily net income by the
number of shares eligible to receive dividends. The appropriate dividend is
then posted to each class' trial balance.
Annual distribution rate for realized gains will be determined by taking net
realized gains for the entire Fund and dividing by total shares outstanding.
NAV
After completion of the Multiple Class Pricing Worksheet and corresponding
posting to the respective class' trial balance, the NAV by class will be
determined by dividing the net assets applicable to a specific class by the
number of shares outstanding relating to that class.
Fund Distributes Net Investment Income (and Possibly Net Short Term Gains)
Quarterly/Monthly/Annually, Net Long-Term Gains and Short-Term Gains on
Annual Basis; Does Not Distribute Unrealized Gains/Losses:
Dividends/Distributions: The dividend rate for net investment income will
be calculated as follows:
Dividends
Determine total Fund (all classes) net income available for distribution for
the appropriate period by reference to the applicable trial balances.
Add incremental distribution fees and other unique expenses to obtain the
adjusted net income.
Divide adjusted net income by the total shares of all classes outstanding to
obtain the dividend rate before class specific expenses.
Dividend rate for each class is determined by subtracting from the dividend
rate before class specific expenses the incremental class specific expenses
per share.
Distributions
Distribution rate is determined by dividing Fund's total undistributed net
realized gains by the total shares outstanding.
NAV:
After completion of the Multiple Class Pricing Worksheet and corresponding
posting to the class' trial balance, the NAV by class will be determined by
dividing the net assets applicable to the class by the respective class'
number of shares outstanding.
CONTROL PROCEDURES
On a daily basis a fund accountant at the Accounting Agent checks the
appropriate rate to be charged each class for the 12b-1 fee. The fund
accountant calculates the amount of the 12b-1 charge for each class of
shares by multiplying the appropriate daily rate times the value of the
shares outstanding.
The fund accountant then calculates any other "unique" expenses to be charged
to the appropriate class. This charge will be at the daily accrual rate
established for these expenses which will be calculated based upon invoices
and fee estimates received.
After calculating these "unique" expenses, the fund accountant allocates
income and fund expenses among the different classes of shares based on the
value of their relative outstanding shares using the attached worksheet.
The number of shares is provided by the Transfer Agent, who maintains
separate records of shares outstanding for each class of shares. Expense
allocations are adjusted so that any limitations on expenses are not exceeded,
including for daily dividend funds, to assure that accrual expenses do not
exceed accrued income. The fund accountant calculates the appropriate
limitation percentage and allocates the expenses accordingly.
For fluctuating NAV funds, the fund accountant determines whether the
proration calculation is being calculated on an ex-dividend date. If it is
an ex-dividend date, the dividend must be accrued and reflected in that day's
NAV. The fund accountant must insert the calculated amounts (as described
above) on the appropriate lines of the worksheet.
The fund accountant then completes the Multiple Class Pricing Worksheet,
using the allocated income and expense calculations from step 3 above, the
additional fees calculated from 1 and 2 above, and the dividends and
distributions calculated in step 4. The results of this worksheet are the
determination of net asset value and daily dividend rates and amounts for
each class of shares.
The fee calculations, income and expense allocations, determination of net
asset value and the Multiple Class Pricing Worksheet are included in the
daily work which is reviewed by the Fund Manager at the Accounting Agent.
The reviewer verifies the calculation of the net asset value and dividend
rates after reviewing the fee calculations, allocation of income and expenses
and daily dividends. The reviewer also ensures that the income and expense
allocation rates used agree to the rates generated by their multiple class
allocation system. Special attention is paid to the differences between the
daily yields or the daily NAV per share of the different classes of shares.
Because the sole difference between any class of shares is the "unique"
expenses, the difference in the daily NAV per share of any of the classes
should be equal to the difference in the "unique" expenses charged to those
classes. <PAGE>
If the reviewer notes any unusual differences in NAV per share,
or any other unusual fluctuations, the fund accountant is asked to research
such items and provide the reviewer with a complete explanation as well as a
corrected trial balance and Multiple Class Pricing Worksheet, as necessary.
Once the reviewer is satisfied that the above steps have been completed and
that the NAV per share and dividend rates are correct, he signs the Multiple
Class Pricing Worksheet to evidence his review and releases this data to the
transfer agent for processing purposes.
On a monthly basis, the fund accountant verifies the calculation of the 12b-1
fee and any other "unique" expenses of each class. In doing so, the fund
accountant also keeps a separate record of the average daily net assets of
each class of shares in each Fund. The monthly fee is then agreed to the
General Ledger of each Fund.
<PAGE>
Appendix C
TESTING COMPLIANCE WITH INTERNAL CONTROL
PROCEDURES RELATING TO NORTHSTAR MULTIPLE
CLASS PRICING WORKSHEETS (the "Worksheets")
FOR THE YEAR ENDED DECEMBER 31, 1996
We reviewed the methodology and procedures for calculating the daily net
asset value and, if applicable, the dividends/distributions of the multiple
classes of shares and the allocation of income and accrual of expenses for
those classes of shares.
AUDIT PROCEDURES
We performed the following procedures with respect to the Worksheets.
Examined 10 worksheets to ensure proper sign-off by the fund accountant and
fund manager (preparer and reviewer).
We tested the daily activity on 6 Worksheets to test compliance with control
procedures described in Appendix B, as follows:
Agreed the prior day's total net assets to the previous day's Worksheet.
Agreed the capital share activity (shares) to the Daily Supersheet obtained
from the transfer agent.
Recalculated the capital share activity (amount) by multiplying the prior
day's net asset value per share with the current day's capital share activity.
Recalculated the current day's adjusted net assets (which is the basis for
determining the allocation percentage for each class of shares) by adding the
capital share activity for the day to the prior day's total net assets by
class.
Recalculated the percentage of net assets by class for each class of shares
by dividing the respective class's ending net assets by the total Fund's
ending net assets.
Agreed gross income, operating expenses and realized and unrealized gains/
losses to the Trial Balance.
Recalculated the allocation of gross income, operating expenses, exclusive
class specific expenses, and realized and unrealized gains/losses for each
class of shares.
Recalculated the allocation of management fees for each class of shares.
Recalculated the distribution fee based on a percentage of net assets as
specified in the prospectus.
Recalculated the allocation of transfer agent fees for each class of shares.
Recalculated shares outstanding by adding the shares outstanding for the
prior day to the current day's subscriptions and redemptions for each class.
Recalculated the net asset value per share for each class of shares by
dividing its net assets by the shares outstanding.
