<PAGE> 1
As filed with the Securities and Exchange Commission on June 12, 1996
Registration Nos. 33-73404
811-8236
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. / /
---
Post-Effective Amendment No. 9 /x/
---
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 9
---
--------------------
Northern Funds
(Exact Name of Registrant as Specified in Charter)
207 E. Buffalo Street
Suite 400
Milwaukee, Wisconsin 53202
(Address of Principal Executive Offices)
Registrant's Telephone Number:
1-800-595-9111
Jeffrey A. Dalke, Esquire
Drinker Biddle & Reath
1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/X/ 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
// this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Registrant has previously filed a declaration of indefinite registration of
its shares of beneficial interest, $.0001 par value per share, of all classes
of the Registrant, now existing or hereafter created, under the Securities Act
of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended. Registrant's Rule 24f-2 Notice with respect to its Money Market
Shares, U.S. Government Money Market Shares, Municipal Money Market Shares,
U.S. Government Select Money Market Shares, California Municipal Money Market
Shares, U.S. Government Shares, Fixed Income Shares,
<PAGE> 2
Intermediate Tax-Exempt Shares, Tax-Exempt Shares, International Fixed Income
Shares, Income Equity Shares, Growth Equity Shares, Select Equity Shares, Small
Cap Growth Shares, International Growth Equity Shares and International Select
Equity Shares for the fiscal year ended March 31, 1996 was filed on May 24,
1996.
<PAGE> 3
This filing includes the Prospectus and Statement of Additional
Information for the Stock Index Fund and the Prospectus and Statement of
Additional Information for the Florida Intermediate Tax-Exempt Bond Fund of
Northern Funds. The Prospectus and Statement of Additional Information for the
Money Market, U.S. Government Money Market, Municipal Money Market, California
Municipal Money Market, U.S. Government Select Money Market, U.S. Government,
Fixed Income, Intermediate Tax-Exempt, Tax-Exempt, International Fixed Income,
Income Equity, Growth Equity, Select Equity, Small Cap Growth, International
Growth Equity, International Select Equity and Technology Funds are
incorporated herein by reference to Post-Effective Amendment No. 6 to Northern
Funds' Registration Statement on Form N-1A filed with the Securities and
Exchange Commission on July 27, 1995.
<PAGE> 4
NORTHERN FUNDS
Florida Intermediate Tax-Exempt Bond Fund
Pursuant to Rule 485(a)
under the Securities Act of 1933
----------------------
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
Part A
- ------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . Expense Summary
3. Condensed Financial Information . . . . . . . . . . . . *
4. General Description of Registrant . . . . . . . . . . . Cover Page; Investment Information; Management;
Further Information
5. Management of the Fund . . . . . . . . . . . . . . . . Management; Opening An Account and Purchasing
Shares; Redeeming and Exchanging Shares
5.A. Management's Discussion of
Fund Performance . . . . . . . . . . . . . . . . . . *
6. Capital Stock and Other
Securities . . . . . . . . . . . . . . . . . . . . . Opening An Account and Purchasing Shares;
Redeeming and Exchanging Shares; Distributions
and Taxes; Further Information
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . . . . . . . . . . . Opening An Account and Purchasing Shares;
Redeeming and Exchanging Shares
8. Redemption or Repurchase . . . . . . . . . . . . . . . Redeeming and Exchanging Shares
9. Pending Legal Proceedings . . . . . . . . . . . . . . . *
</TABLE>
- --------------------
* Item inapplicable or answer negative.
<PAGE> 5
NORTHERN FUNDS
PROSPECTUS
August __, 1996
Florida Intermediate Tax-Exempt Bond Fund
<PAGE> 6
NORTHERN FUNDS
THE NORTHERN TRUST COMPANY Investment Adviser,
50 S. LaSalle Street Transfer Agent and
Chicago, Illinois 60675 Custodian
1-800-595-9111
The shares offered by this Prospectus represent interests in the
Florida Intermediate Tax-Exempt Bond Fund (the "Fund"). The Fund seeks to
provide a high level of current income exempt from regular federal income tax
by investing in municipal instruments while maintaining a dollar-weighted
average maturity between three and ten years. The Fund intends, but cannot
guarantee, that its shares will qualify for exemption from the Florida
intangibles tax.
The Fund is one of 19 no-load mutual funds (the "Funds") comprising
the Northern Funds. Northern Funds is a no-load management investment company,
designed to offer investors a range of investment opportunities. Northern
Funds also offers money market funds, equity funds and other domestic and
international fixed income funds which are described in separate prospectuses.
The Fund is advised by The Northern Trust Company ("Northern Trust").
Shares are sold and redeemed without any purchase or redemption charge by
Northern Funds, although Northern Trust and other institutions may charge their
customers for their services in connection with investments.
This Prospectus provides information about the Fund that you should know before
investing. It should be read and retained for future reference. Further
information is included in a statement of additional information dated August
__, 1996 (the "Additional Statement"), which is incorporated by reference
herein. For a free copy, write to Northern Funds' distributor, Sunstone
Financial Group, Inc., at 207 E. Buffalo Street, Suite 400, Milwaukee,
Wisconsin 53202 or call 1-414-271-5885. The Florida Intermediate Tax-Exempt
Bond Fund is not available in certain states. Please call 1-800-595-9111 to
determine availability in your state.
SHARES OF NORTHERN FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED, ENDORSED OR OTHERWISE SUPPORTED BY, THE NORTHERN TRUST COMPANY, ITS
PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED
BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
<PAGE> 7
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is August __, 1996
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
EXPENSE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
INVESTMENT INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Fundamentals of Fixed Income Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ADDITIONAL INVESTMENT INFORMATION, RISKS AND CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Description of Securities and Investment Techniques . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
OPENING AN ACCOUNT AND PURCHASING SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Purchasing Shares Directly from the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Purchasing Shares Through Northern Trust and Other
Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Additional Purchase Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
REDEEMING AND EXCHANGING SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Redeeming and Exchanging Directly from the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Redeeming and Exchanging Through Northern Trust and Other Institutions . . . . . . . . . . . . . . . . . 23
Additional Redemption and Exchange Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
DISTRIBUTIONS AND TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Tax Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Board of Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Investment Adviser, Transfer Agent and Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Administrator and Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Service Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
FURTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Determining Share Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Advertising Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Shareholder Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>
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<PAGE> 9
HIGHLIGHTS
Q. WHAT IS NORTHERN FUNDS?
A. Northern Funds is an open-end management investment company (commonly
known as a mutual fund) that offers investors the opportunity to
invest in different investment portfolios, each having separate
investment objectives and policies. Northern Funds presently consists
of nineteen portfolios, including money market, domestic and
international fixed income and equity portfolios. This Prospectus
describes only the Florida Intermediate Tax-Exempt Bond Fund.
Q. WHO ADVISES THE FUND?
A. Northern Trust, the principal subsidiary of Northern Trust
Corporation, serves as investment adviser to Northern Funds. Northern
Trust also serves as the Fund's transfer agent and custodian.
Northern Trust administered over $641.2 billion in assets as of March
31, 1996 in various capacities, including approximately $114.5 billion
for which Northern Trust had investment management responsibility.
See "Management."
Q. HOW DOES ONE BUY AND REDEEM SHARES?
A. Shares of the Fund are distributed by Sunstone Financial Group, Inc.
Shares may be purchased directly from Northern Funds or through a
qualified account at Northern Trust or certain other institutions.
Shares are sold and redeemed without any purchase or redemption charge
by Northern Funds, although Northern Trust and other institutions may
charge their customers for their services in connection with
investments. The minimum initial investment for purchases directly
with Northern Funds is $2,500 ($500 for an IRA; $250 for a spousal
IRA; and $250 under the Automatic Investment Plan). The minimum for
subsequent investments is $50. Northern Trust or other organizations
may impose particular customer account requirements such as minimum
account sizes. Share purchase and redemption information for both
purchases and redemptions directly with Northern Funds or through
qualified accounts is provided below under "Opening an Account and
Purchasing Shares" and "Redeeming and Exchanging Shares."
Q. WHAT SHAREHOLDER SERVICES ARE AVAILABLE?
A. Northern Funds offers the advantage of automatic dividend reinvestment
in shares of the Fund or in another Northern Fund, exchange privileges
among Northern Funds should your investment goals change, telephone
exchange and redemption privileges, an Automatic Investment Plan (with
a reduced
-1-
<PAGE> 10
minimum initial investment) and a Systematic Withdrawal Plan. See
"Opening an Account and Purchasing Shares" and "Redeeming and
Exchanging Shares." Shares of Northern Funds may be purchased in
connection with a variety of tax-sheltered retirement plans. See
"Further Information -- Retirement Plans."
Q. WHEN ARE DISTRIBUTIONS MADE?
A. Dividends from the net investment income of the Fund are declared
daily and paid monthly. Net realized capital gains of the Fund are
distributed at least annually. See "Distributions and Taxes."
Q. WHAT ARE THE POTENTIAL RISKS PRESENTED BY THE FUND'S INVESTMENT
PRACTICES?
A. Investing in the Fund involves the risks common to any investment in
fixed income securities. The market value of fixed income securities
will generally vary inversely with changes in prevailing interest
rates as described below under "Investment Information -- Fundamentals
of Fixed Income Investing." Certain risks are presented as a result
of the Fund's investments in Florida Municipal Instruments. See
"Investment Information -- Other Information." In addition, the Fund
is "non-diversified," which means its portfolio can be dependent upon
the performance of a smaller number of securities than in the case of
a diversified portfolio.
The Fund may engage in certain transactions involving puts and calls.
The Fund may also purchase eligible securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" or
"delayed settlement" basis.
The Fund may invest up to 15% of its net assets in illiquid
securities.
The Fund may also purchase "derivative" instruments. "Derivative"
instruments are instruments that derive value from the performance of
underlying assets, interest rates, or indices, and include (but are
not limited to) interest rate and futures contracts, options and
structured debt obligations (including asset-backed securities,
"stripped" securities and various floating rate instruments, including
"inverse" floaters). Derivative instruments present, to varying
degrees, market risk that the performance of the underlying assets,
exchange rates or indices will decline; credit risk that the dealer or
other counterpart to the transaction will fail to pay its obligations;
volatility and leveraging risk that, if interest or exchange rates
change
-2-
<PAGE> 11
adversely, the value of the "derivative" instrument will decline more
than the assets, rates or indices on which it is based; liquidity risk
that the Fund will be unable to sell a "derivative" instrument when it
wants because of lack of market depth or market disruption; pricing
risk that the value of a "derivative" instrument (such as an option)
will not correlate exactly to the value of the underlying assets,
rates or indices on which it is based; and operations risk that loss
will occur as a result of inadequate systems and controls, human error
or otherwise. Some "derivative" instruments are more complex than
others, and for those instruments that have been developed recently,
complete information is lacking regarding their actual performance
over entire market cycles. Northern Trust will evaluate the risks
presented by the "derivative" instruments purchased by the Fund, and
will determine, in connection with its day-to-day management of the
Fund, how they will be used in furtherance of the Fund's investment
objectives. It is possible, however, that Northern Trust's
evaluations will prove to be inaccurate or incomplete and, even when
accurate and complete, it is possible that the Fund will, because of
the risks discussed above, incur loss as a result of its investment in
"derivative" instruments.
The foregoing is a summary of certain of the potential risks presented
by the Fund's investment practices. Details regarding these and other
risks presented by the policies of the Fund are described under
"Additional Investment Information, Risks and Considerations."
-3-
<PAGE> 12
EXPENSE SUMMARY
The following table will help you understand the expenses you will
bear directly or indirectly as a shareholder of the Fund. SHAREHOLDER
TRANSACTION EXPENSES are charges you pay when buying or selling Fund shares.
ANNUAL OPERATING EXPENSES are the annualized operating expenses the Fund
expects to pay during the current fiscal year. An example based on this
information is also provided.
<TABLE>
<CAPTION>
Florida
Intermediate
Tax-Exempt
Bond Fund
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases . . . . . . . . . . . . . . . . . . . . . . None
Sales Charge Imposed on
Reinvested Distributions . . . . . . . . . . . . . . . . . . . . None
Deferred Sales Charge Imposed
on Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . None
Redemption Fees(1) . . . . . . . . . . . . . . . . . . . . . . . . None
Exchange Fees . . . . . . . . . . . . . . . . . . . . . . . . . . None
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after fee
reductions and waivers) . . . . . . . . . . . . . . . . . . . . . 0.70%
12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Other Expenses (after fee
reductions and reimbursements) . . . . . . . . . . . . . . . . . 0.15%
-----
TOTAL OPERATING EXPENSES(2)
After Fee Reductions, Waivers and
Reimbursements . . . . . . . . . . . . . . . . . . . . . . . . . 0.85%
=====
EXAMPLE OF EXPENSES
Based on the foregoing table, you
would pay the following expenses on a
$1,000 investment, assuming a 5%
annual return and redemption at the
end of each time period:
One Year . . . . . . . . . . . . . . . . . . . . . . . . . . . $9
Three Years . . . . . . . . . . . . . . . . . . . . . . . . . . . $28
</TABLE>
(1) A fee of $15.00 may be applicable for each wire redemption.
(2) The table and example shown do not reflect any charges that may be
imposed by Northern Trust or other institutions on their
customers.
The above information reflects the estimated expenses the Fund expects
to pay during the current fiscal year. Without the fee reductions, waivers and
reimbursements, "Management Fees" would be .75% for the Fund, the estimated
"Other Expenses" for the current fiscal year would be 0.73%, and "Total
Operating Expenses" would be 1.48%, for the Fund. In addition, Northern Funds
does not expect to pay any 12b-1 fees (otherwise payable at an annual rate of
up to 0.25%) under its Distribution and Service
-4-
<PAGE> 13
Plan for the current fiscal year. For more expense information, see
"Management."
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. THE FUND IS NEW AND ACTUAL OPERATING
EXPENSES AND INVESTMENT RETURN MAY BE MORE OR LESS THAN THOSE SHOWN.
INFORMATION ABOUT THE ACTUAL PERFORMANCE OF THE FUND WILL BE CONTAINED IN THE
FUND'S FUTURE ANNUAL REPORTS TO SHAREHOLDERS, WHICH MAY BE OBTAINED WITHOUT
CHARGE WHEN THEY BECOME AVAILABLE.
-5-
<PAGE> 14
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Fund are described below.
Additional information regarding the securities, investment techniques and
restrictions of the Fund are described under "Additional Investment
Information, Risks and Considerations."
The investment objective of the Florida Intermediate Tax-Exempt Bond
Fund is to seek a high level of current income exempt from regular federal
income tax. The Fund seeks to achieve its objective by investing in debt
instruments, the interest on which is, in the opinion of bond counsel or
counsel for the issuers, exempt from regular income tax ("Municipal
Instruments"). These opinions may contain various assumptions, qualifications
or exceptions that are reasonably acceptable to Northern Trust. The Fund's
dollar-weighted average maturity will be between three and ten years.
Municipal Instruments purchased by the Fund will be investment grade
or better at the time of purchase (within the four highest rating categories of
Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Co. ("Duff") or Fitch Investors Service, Inc.
("Fitch") or, if unrated, of comparable quality as determined by Northern
Trust. Short-term obligations will be limited to high quality instruments
rated within the two highest rating categories of S&P, Moody's, Duff or Fitch
or, if unrated, determined by Northern Trust to be of comparable quality.
As a matter of fundamental policy, changeable only with the approval
of the holders of a majority of the outstanding shares of the Fund, at least
80% of the Fund's annual gross income will be derived from Municipal
Instruments, except in extraordinary circumstances, such as when Northern Trust
believes that market conditions indicate that the Fund should adopt a temporary
defensive posture by holding uninvested cash or investing in taxable short-term
securities ("Taxable Investments"). ("Private activity bonds," the interest
from which may be treated as an item of tax preference to shareholders under
the federal alternative minimum tax ("AMT obligations"), will not be counted in
determining the Fund's investments in Municipal Instruments for this purpose.)
In addition, as a matter of non-fundamental policy which may be changed by the
Board of Trustees, under normal market conditions, at least 65% of the value of
the Fund's total assets will be invested in Municipal Instruments issued by the
state of Florida and its municipalities, counties and other taxing districts,
as well as other securities exempt from the Florida intangibles tax. Under
normal market conditions, Taxable Investments and AMT obligations will not
exceed 20% of the value
-6-
<PAGE> 15
of the total assets of the Fund; during temporary defensive periods, however,
all or any portion of a Fund's assets may be invested in such instruments.
Certain Municipal Instruments purchased by the Fund (such as "moral obligation"
bonds) may be issued by issuers with a "moral" but not legal obligation to
provide for the payment of the bonds. See "Additional Investment Information,
Risks and Considerations -- Description of Securities and Investment Techniques
- -- Municipal Instruments."
OTHER INFORMATION. If Florida or any of its political subdivisions should
suffer serious financial difficulties to the extent their ability to pay their
obligations might be jeopardized, the ability of such entities to market their
securities, and the value of the Fund, could be adversely affected.
In addition, the Fund is classified as a non-diversified investment
company under the Investment Company Act of 1940 (the "1940 Act"). Investment
return on a non-diversified portfolio typically is dependent upon the
performance of a smaller number of securities relative to the number held in a
diversified portfolio. Consequently, the change in value of any one security
may affect the overall value of a non-diversified portfolio more than it would
a diversified portfolio.
The Fund may invest 25% or more of its total assets in Municipal
Instruments the interest on which is paid solely from revenues of similar
projects. When a substantial portion of the Fund's assets is invested in
instruments which are used to finance facilities involving a particular
industry or which are otherwise related, there is a possibility that an
economic, business or political development affecting one instrument would
likewise affect the related instruments.
The Fund may utilize options and futures contracts as more fully
described under "Additional Investment Information, Risks and Considerations."
FUNDAMENTALS OF FIXED INCOME INVESTING
Even though interest-bearing securities are investments which often
offer a stable stream of income, the prices of fixed income securities are
affected by changes in the prevailing level of interest rates. These
securities experience appreciation when interest rates decline and depreciation
when interest rates rise. A bond fund portfolio consisting of fixed income
securities will react in a similar manner. Generally, the longer the maturity
of a fixed income security, the higher its yield and the greater its price
volatility. Conversely, the shorter the maturity, the lower the yield but the
greater the price stability. The values of fixed income securities also may be
affected by changes in the credit rating or financial condition of the issuing
entities. A
-7-
<PAGE> 16
security's rating normally depends on the likelihood that the borrower will
meet each interest and principal installment on a timely basis. As a result,
lower-rated bonds typically yield more than higher-rated bonds of the same
maturity. Credit ratings evaluate the safety of principal and interest
payments, not market risk, and rating agencies may or may not make timely
changes in a rating to reflect economic or company conditions that affect a
security's market value. As a result, the ratings of rating services are used
by Northern Trust only as indicators of investment quality. For a more
complete discussion of ratings, see Appendix A to the Additional Statement.
ADDITIONAL INVESTMENT INFORMATION, RISKS AND CONSIDERATIONS
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
MUNICIPAL INSTRUMENTS. The Fund intends to invest primarily in Municipal
Instruments. Municipal Instruments include debt obligations issued by or on
behalf of states, territories and possessions of the United States and their
political subdivisions, agencies, authorities and instrumentalities. Municipal
Instruments include both "general" and "revenue" obligations. General
obligations are secured by the issuer's pledge of its full faith, credit and
taxing power for the payment of principal and interest. Revenue obligations
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source such as lease revenue payments from the user of
the facility being financed. Industrial development bonds are in most cases
revenue securities and are not payable from the unrestricted revenues of the
municipal issuer. Consequently, the credit quality of an industrial revenue
bond is usually directly related to the credit standing of the private user of
the facility involved.
The Fund may also invest in "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of a
moral obligation bond is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund (if such a fund has been
established), the restoration of which is a moral commitment but not a legal
obligation of the state or municipality which created the issuer.
Within the principal classifications of Municipal Instruments
described above there are a variety of categories, including municipal bonds,
municipal notes, municipal leases, custodial receipts and participation
certificates. Municipal notes include tax, revenue and bond anticipation notes
of short maturity, generally less than three years, which are issued to obtain
temporary funds for various public purposes. Municipal leases are obligations
issued by state and local governments or
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authorities to finance the acquisition of equipment and facilities. Certain
municipal lease obligations may include "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Custodial receipts are underwritten by securities dealers
or banks and evidence ownership of future interest payments, principal payments
or both on certain municipal securities. Participation certificates are
obligations issued by state or local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participation in a
lease, an installment purchase contract, or a conditional sales contract.
Municipal leases (and participation in such leases) present the risk that a
municipality will not appropriate funds for the lease payments. Northern
Trust, under the supervision of Northern Funds' Board of Trustees, will
determine the credit quality of any unrated municipal leases on an ongoing
basis, including an assessment of the likelihood that the leases will not be
cancelled.
The Fund may also hold tax-exempt derivative instruments that have
interest rates that reset inversely to changing short-term rates and/or have
imbedded interest rate floors and caps that require the issuer to pay an
adjusted interest rate if market rates fall below or rise above a specified
rate. These derivative instruments represent beneficial interests in Municipal
Instruments that are marketed by investment banking firms under various names
such as FLOATs(SM), RITEs(SM), SAVRs(SM) and RIBs(SM). These instruments
represent relatively recent innovations in the municipal bond markets, and the
trading market for these instruments is less developed than the markets for
traditional types of Municipal Instruments. It is uncertain how certain of
these instruments will perform under different economic and interest-rate
scenarios. Because certain of these instruments are leveraged, their market
values may be more volatile than other types of Municipal Instruments and may
present greater potential for capital gain or loss. On the other hand, the
imbedded option features of other derivative instruments could limit the amount
of appreciation a Fund can realize on its investment, could cause the Fund to
hold a security it might otherwise sell or could force the sale of a security
at inopportune times or for prices that do not reflect current market value.
The possibility of default by the issuer or the issuer's credit provider may be
greater for these derivative instruments than for other types of instruments.
In some cases it may be difficult to determine the fair value of a derivative
instrument because of a lack of reliable objective information and an
established secondary market for some instruments may not exist. In many
cases, the Internal Revenue Service has not ruled on whether the interest
received on a tax-exempt derivative instrument is tax-exempt and, accordingly,
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purchases of such instruments are based on the opinion of counsel to the
sponsors of the instruments. Neither the Fund nor Northern Trust will review
the proceedings related to the creation of any tax-exempt derivatives or the
basis for such opinions.
The Fund may acquire "stand-by commitments" relating to the Municipal
Instruments held by it. Under a standby commitment, a dealer agrees to
purchase, at the Fund's option, specified Municipal Instruments at a specified
price. A stand-by commitment may increase the cost, and thereby reduce the
yield, of the Municipal Instruments to which the commitment relates. The Fund
will acquire stand-by commitments solely to facilitate portfolio liquidity and
do not intend to exercise their rights for trading purposes.
Municipal Instruments purchased by the Fund may be backed by letters
of credit issued by domestic or foreign banks. Foreign letters of credit may
involve certain risks in addition to those of domestic obligations. Foreign
banks and foreign branches of domestic banks may be subject to less stringent
reserve requirements, and to different accounting, auditing and recordkeeping
requirements than domestic banks.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment
objective, the Fund may write covered call options, buy put options, buy call
options and write secured put options for the purpose of hedging or earning
additional income, which may be deemed speculative. These options may relate
to particular securities, financial instruments or securities indices and may
or may not be listed on a securities exchange and may or may not be issued by
the Options Clearing Corporation. The Fund will not purchase put and call
options where the aggregate premiums on outstanding options exceed 5% of its
net assets at the time of purchase, and will not write options on more than 25%
of the value of its net assets (measured at the time an option is written).
Options trading is a highly specialized activity that entails greater than
ordinary investment risks. In addition, unlisted options are not subject to
the protection afforded purchasers of listed options issued by the Options
Clearing Corporation, which performs the obligations of its members if they
default.
To the extent consistent with its investment objective, the Fund may
also invest in futures contracts and options on futures contracts for hedging
purposes or to maintain liquidity. The value of the Fund's futures contracts
may equal or exceed 100% of the Fund's total assets, although the Fund will not
purchase or sell a futures contract unless immediately afterwards the aggregate
amount of margin deposits on its existing futures positions plus the amount of
premiums paid for related futures options is 5% or less of its net assets.
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Futures contracts obligate the Fund, at maturity, to take or make
delivery of certain securities or the cash value of a securities index. The
Fund may sell a futures contract in order to offset an expected decrease in the
value of its portfolio that might otherwise result from a market decline. The
Fund may do so either to hedge the value of its securities portfolio as a
whole, or to protect against declines occurring prior to sales of securities,
in the value of the securities to be sold. In addition, the Fund may utilize
futures contracts in anticipation of changes in the composition of its
holdings.
The Fund may purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When the Fund purchases an
option on a futures contract, it has the right to assume a position as a
purchaser or a seller of a futures contract at a specified exercise price
anytime during the option period. When the Fund sells an option on a futures
contract, it becomes obligated to sell or buy a futures contract if the option
is exercised. In connection with the Fund's position in a futures contract or
related option, the Fund will create a segregated account of liquid high grade
assets or will otherwise cover its position in accordance with applicable SEC
requirements.
The primary risks associated with the use of futures contracts and
options are: (a) the imperfect correlation between the change in market value
of the instruments held by the Fund and the price of the futures contract or
option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c)
losses caused by unanticipated market movements, which are potentially
unlimited; and (d) Northern Trust's ability to predict correctly the direction
of securities prices, interest rates and other economic factors. For further
discussion of risks involved with domestic and foreign futures and options, see
"Futures Contracts and Related Options" and Appendix B in the Additional
Statement.
Northern Funds intends to comply with the regulations of the Commodity
Futures Trading Commission exempting the Fund from registration as a "commodity
pool operator."
INTEREST RATE SWAPS. In order to protect its value from interest rate
fluctuations, the Fund may enter into interest rate swaps. The Fund expects to
enter into interest rate swaps primarily to preserve a return or spread of a
particular investment or portion of its respective holdings and to protect
against an increase in the price of securities the Fund anticipates purchasing
at a later date. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest (e.g.,
an exchange of floating rate payments for fixed rate payments).
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The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate will be accrued on a daily
basis and an amount of liquid assets, such as cash, U.S. Government securities
or other liquid high grade debt securities, having an aggregate net asset value
at least equal to such accrued excess will be maintained in a segregated
account by Northern Funds' custodian. The Fund will not enter into any
interest rate or swap 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.
VARIABLE AND FLOATING RATE INSTRUMENTS. In accordance with its investment
objective, the Fund may purchase rated and unrated variable and floating rate
instruments. These instruments may include variable amount master demand notes
that permit the indebtedness to vary in addition to providing for periodic
adjustments in the interest rate. The Fund may purchase variable and floating
rate instruments with stated maturities in excess of its maturity limitations
provided that the Fund may demand payment of the principal of the instrument at
least once within the applicable maturity limitation on not more than thirty
days' notice (unless the instrument is issued or guaranteed by the U.S.
Government or an agency or instrumentality thereof). Unrated instruments will
be determined by Northern Trust to be of comparable quality at the time of
purchase to rated instruments purchasable by the Fund.
The Fund may also invest in leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate of an inverse floater
resets in the opposite direction from the market rate of interest to which it
is indexed. An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest. The higher degree of leverage inherent
in inverse floaters is associated with greater volatility in their market
values.
The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for the Fund to
dispose of the instruments if the issuer defaulted on its payment obligation or
during periods that the Fund is not entitled to exercise demand rights, and the
Fund could, for these or other reasons, suffer a loss with respect to such
instruments. Variable and floating rate instruments (including inverse
floaters) will be subject to the Fund's limitation on illiquid investments when
the Fund may not demand payment of the principal amount within seven days and a
reliable trading market is absent. See "Illiquid Securities."
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. The Fund is authorized to
make limited borrowings as described below under
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"Investment Restrictions." If the securities held by the Fund should decline
in value while borrowings are outstanding, the net asset value of the Fund's
outstanding shares will decline in value by proportionately more than the
decline in value suffered by the Fund's securities. Borrowings may be made
through reverse repurchase agreements under which the Fund sells portfolio
securities to financial institutions such as banks and broker/dealers and
agrees to repurchase them at a particular date and price. The Fund 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. The Fund may utilize
reverse repurchase agreements when it is anticipated that the interest income
to be earned from the investment of the proceeds of the transaction is greater
than the interest expense of the transaction. This use of reverse repurchase
agreements may be regarded as leveraging and, therefore, speculative. Reverse
repurchase agreements involve the risks that the interest income earned in the
investment of the proceeds will be less than the interest expense, that the
market value of the securities sold by the Fund may decline below the price of
the securities the Fund is obligated to repurchase and that the securities may
not be returned to the Fund. During the time a reverse repurchase agreement is
outstanding, the Fund will maintain a segregated account with Northern Funds'
custodian containing cash, U.S. Government or other appropriate liquid
high-grade debt securities having a value at least equal to the repurchase
price. The Fund's reverse repurchase agreements, together with any other
borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its
total assets. In addition, whenever borrowings exceed 5% of the Fund's total
assets, the Fund will not make any investments.
SECURITIES LENDING. The Fund may seek additional income from time to time by
lending securities on a short-term basis to banks, brokers and dealers. The
securities lending agreements will require that the loans be secured by
collateral in cash, cash equivalents, U.S. Government securities or irrevocable
bank letters of credit maintained on a current basis equal in value to at least
the market value of the loaned securities. The Fund may not make such loans in
excess of 33 1/3% of the value of its total assets. Securities loans involve
risks of delay in receiving additional collateral or in recovering the loaned
securities, or possibly loss of rights in the collateral if the borrower of the
securities becomes insolvent.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS.
The Fund may purchase or sell securities on a when-issued or delayed-delivery
basis and make contracts to purchase or sell securities for a fixed price at a
future date beyond customary settlement time. Securities purchased or sold on
a when-issued, delayed-delivery or forward commitment basis
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<PAGE> 22
involve a risk of loss if the value of the security to be purchased declines,
or the value of the security to be sold increases, before the settlement date.
Although the Fund will generally purchase securities with the intention of
acquiring them, the Fund may dispose of securities purchased on a when-issued,
delayed-delivery or a forward commitment basis before settlement when deemed
appropriate by Northern Trust.
INVESTMENT COMPANIES. In connection with the management of its daily cash
positions, the Fund may invest in securities issued by other investment
companies which invest in short-term, high-quality debt securities and
determine their net asset value per share based on the amortized cost or
penny-rounding method of valuation. In addition, the Fund may invest in
securities issued by other investment companies if otherwise consistent with
its investment objective and policies. As a shareholder of another investment
company, the Fund will bear, along with other shareholders, its pro rata
portion of the other investment company's expenses including advisory fees.
These expenses would be in addition to the advisory fees and other expenses the
Fund bears directly in connection with its own operations. Investments in
other investment companies will be subject to the limits imposed by the 1940
Act.
TEMPORARY INVESTMENTS. The Fund may hold uninvested cash if, in the opinion of
Northern Trust, suitable obligations bearing tax-exempt interest are
unavailable. Uninvested cash will not earn income. In addition, the Fund may
invest from time to time, to the extent consistent with its investment
objective, a portion of its assets on a temporary basis or for temporary
defensive purposes in short-term money market instruments ("Temporary
Investments"), the income from which is subject to Federal income tax.
Temporary Investments will generally not exceed 20% of the total
assets of the Fund except when made for temporary defensive purposes, and may
include obligations of the U.S. Government or its agencies or
instrumentalities; debt securities (including commercial paper) of issuers
having, at the time of purchase, a quality rating within the two highest
categories of S&P, Duff, Fitch or Moody's; or, if unrated, of comparable
quality as determined by Northern Trust; certificates of deposit, bankers'
acceptances and other obligatories of domestic and foreign banks;
dollar-denominated securities issued or guaranteed by foreign governments or
their political subdivisions, agencies or instrumentalities; and repurchase
agreements with respect to such obligations.
ILLIQUID SECURITIES. The Fund may invest up to 15% of the value of its net
assets in illiquid securities. Illiquid securities generally include
repurchase agreements and time deposits with notice/termination dates in excess
of seven days, interest rate
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swaps, unlisted over-the-counter options and certain securities which are
subject to trading restrictions because they are not registered under the
Securities Act of 1933 (the "1933 Act").
If otherwise consistent with its investment objective and policies,
the Fund may purchase commercial paper issued pursuant to Section 4(2) of the
1933 Act and securities that are not registered under the 1933 Act but can be
sold to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. These securities will not be considered illiquid so long as Northern
Trust determines, under guidelines approved by Northern Funds' Board of
Trustees, that an adequate trading market exists. This practice could increase
the level of illiquidity during any period that qualified institutional buyers
become uninterested in purchasing these securities. The ability to sell to
qualified institutional buyers under Rule 144A is a relatively recent
development, and it is not possible to predict how this market will ultimately
develop.
PORTFOLIO TRANSACTIONS AND TURNOVER. Northern Trust's Advisory Agreement
provides that in selecting brokers or dealers to place orders for transactions
involving bonds and other fixed income obligations, Northern Trust shall
attempt to obtain best net price and execution.
The portfolio turnover rate of the Fund will vary from year to year,
and may be affected by changes in the holdings of specific issuers. High
portfolio turnover (100% or more) may result in the realization of short-term
capital gains which are taxable to shareholders as ordinary income. In
addition, higher turnover rates can result in corresponding increases in
commissions and other transaction costs. Northern Trust will not consider
turnover rate a limiting factor in making investment decisions. Northern Funds
expects that the annual turnover rate of the Fund will generally not exceed
100%.
MISCELLANEOUS. After its purchase by the Fund, a rated security may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. Northern Trust will consider such an event in
determining whether the Fund should continue to hold the security. Northern
Trust expects to sell promptly any securities that are non-investment grade
which exceed 5% of a Fund's net assets.
For a description of applicable securities ratings, see Appendix A to
the Additional Statement. Investment grade securities rated BBB by S&P, Duff
or Fitch, or Baa by Moody's have certain speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead
to a weakened capacity to make principal and interest payments than in the case
of higher rated securities.
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<PAGE> 24
The Fund does not intend to purchase certificates of deposit of
Northern Trust or its affiliate banks, commercial paper issued by Northern
Trust's parent holding company or other securities issued or guaranteed by
Northern Trust, its parent holding company or their subsidiaries or affiliates.
INVESTMENT RESTRICTIONS
The Fund's investment objective may be changed by Northern Funds'
Board of Trustees without shareholder approval. Shareholders will, however, be
notified of any changes. Any such change may result in the Fund having an
investment objective different from the objective which the shareholder
considered appropriate at the time of investment in the Fund. No assurance can
be provided that the Fund will achieve its investment objective.
The Fund has also adopted certain fundamental investment restrictions
that may be changed only with the approval of a majority of the Fund's
outstanding shares. The following description summarizes several of the Fund's
fundamental restrictions, which are set forth in full in the Additional
Statement.
The Fund may not:
1. invest 25% or more of its total assets at the time of purchase
in securities of issuers whose principal business activities are in the same
industry; and
2. borrow money except in amounts up to 33 1/3% of the value of
its total assets at the time of borrowing.
As a non-fundamental investment restriction, the Fund will not hold
any securities (except U.S. Government securities and repurchase agreements
collateralized by such 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 Fund's total assets may be
invested without regard to this limitation so long as no more than 25% of the
Fund's total assets are invested in any one issuer (except the U.S.
Government, its agencies and instrumentalities).
OPENING AN ACCOUNT AND PURCHASING SHARES
An investment account may be opened and shares purchased directly from
Northern Funds by following the instructions below under "Purchasing Shares
Directly from the Funds." If you maintain certain accounts at Northern Trust
or another institution (such as a bank or broker/dealer) that has entered into
an agreement with Northern Funds to provide services to its customers, you may
purchase shares through your institution in
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<PAGE> 25
accordance with its procedures. See "Purchasing Shares Through Northern Trust
and Other Institutions" below for more details. If you have any questions or
need any assistance in opening an investment account or purchasing shares, call
1-800-595-9111.
PURCHASING SHARES DIRECTLY FROM THE FUND
For your convenience, there are a number of ways to invest directly
with Northern Funds. When establishing an investment account directly with
Northern Funds, the minimum initial investment in the Fund is $2,500 ($500 for
an IRA; $250 for a spousal IRA; $250 under the Automatic Investment Plan; and
$500 for employees of the Northern Trust and its affiliates). The minimum
subsequent investment is $50 (except for reinvestments of distributions for
which there is no minimum). The Fund reserves the right to waive these
minimums.
BY MAIL. You may purchase shares by mail by sending a Purchase Application, a
copy of which accompanies this Prospectus, together with a check or money order
payable to Northern Funds in the envelope provided or by addressing your
envelope to Northern Funds at P.O. Box 75986, Chicago, Illinois 60690-6319.
Additional requirements may be imposed. If using overnight delivery use the
following address: 801 South Canal Street, Chicago, Illinois 60607, Attn:
Northern Funds. Your check must be drawn on a bank located in the U.S. and
must be payable in U.S. dollars. When making subsequent investments, enclose
your check with the return remittance portion of the confirmation of your
previous investment, or indicate on your check or a separate piece of paper
your name, address and account number.
A $20 fee will be charged by the Transfer Agent if any check used for
investment does not clear. In addition, you will be responsible for any loss
suffered by the Fund. If you purchase shares by check and subsequently request
the redemption of those shares, Northern Funds may delay the payment of
redemption proceeds until the Transfer Agent is satisfied that the check has
cleared, which may take up to 15 days from the purchase date. If you
anticipate redemptions soon after purchase, you may wish to wire funds to avoid
delays. Northern Funds will not accept payment in cash or third party checks
for the purchase of shares.
BY WIRE. You may make initial or subsequent investments in shares of the Fund
by wiring federal funds. If you are opening an account with a wire purchase,
you must call 1-800-595-9111 for instructions prior to wiring funds. You must
promptly complete a Purchase Application and forward it to the Transfer Agent
in the envelope provided herewith, or by addressing your envelope to Northern
Funds at P.O. Box 75986, Chicago, Illinois 60690-6319. Additional
requirements may be imposed. Redemptions will not be paid until your completed
application has been received by the
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<PAGE> 26
Transfer Agent. If you wish to add to an existing account by wire purchase,
you may wire federal funds to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152,
(Reference 10 Digit Fund Account Number)
(Reference Shareholder's Name)
DIRECT DEPOSIT. You may purchase additional shares through the Direct Payroll
Deposit Plan offered by Northern Funds. Through this plan, periodic
investments (minimum $50) are made automatically from your payroll check into
your existing Fund account. In order to participate in the plan, your employer
must have direct deposit capabilities through the Automated Clearing House
("ACH") available to its employees. The plan may be used for other direct
deposits, such as social security checks, military allotments, and annuity
payments. Further details about this service may be obtained from the Transfer
Agency by calling 1-800-595-9111. Northern Funds reserves the right, at any
time and without prior notice, to limit or terminate the Direct Payroll Deposit
privilege or its use in any manner by any person.
AUTOMATIC INVESTMENT. Northern Funds offers an Automatic Investment Plan that
allows you to automatically purchase shares on a regular, monthly basis ($250
initial minimum, $50 monthly minimum additions). Under this plan the Transfer
Agent originates an ACH request to your financial institution which forwards
funds periodically to the Transfer Agent to purchase shares. The plan can be
established with any financial institution that participates in the ACH funds
transfer system. No service fee is currently charged by Northern Funds for
participation in the plan. You may establish the plan by completing the
appropriate section on the Purchase Application when opening an account. You
may also establish the plan after an account is opened by completing an
Automatic Investment Plan Application which may be obtained by calling
1-800-595-9111. If an investor discontinues participation in the plan, the
Fund reserves the right to redeem the investor's account involuntarily, upon 60
days' written notice, if the account's net asset value is $1,000 or less.
DIRECTED REINVESTMENTS. In addition to having your income dividends and/or
capital gains distributions reinvested in shares of the Fund from which such
distributions are paid, you may elect the directed reinvestment option and have
dividends and capital gains distributions automatically invested in another
Northern Fund. In addition, systematic withdrawals from one account and
reinvestments in another account may be established. See "Redeeming and
Exchanging Directly from the Funds -- Systematic Withdrawals." Reinvestments
can only be directed to an existing Northern Funds' account (which must meet
the minimum investment
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<PAGE> 27
requirement). Directed reinvestments may be used to invest funds from a
regular account to another regular account, from a qualified plan account to
another qualified plan account, or from a qualified plan account to a regular
account. Directed reinvestments from a qualified plan account to a regular
account may have adverse tax consequences including imposition of a penalty tax
and therefore you should consult your own tax adviser before commencing these
transactions.
BY EXCHANGE. You may open a new account or add to an existing account by
exchanging shares of the Fund for shares of any other Fund offered by Northern
Funds. See "Redeeming and Exchanging Shares" for details.
PURCHASING SHARES THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
Northern Trust customers may purchase shares through their qualified
accounts and should consult with their account officer for additional
information and instructions. Customers of other institutions (together with
Northern Trust, "Service Organizations"), such as banks or broker-dealers that
have entered into agreements with Northern Funds, should contact their account
officers for appropriate purchase instructions. Northern Trust or another
Service Organization may impose particular customer account requirements in
connection with investments in the Fund, such as minimum account size or
minimum account thresholds above which excess cash balances may be invested in
Fund shares. To determine whether you may purchase shares through your
institution, contact your institution directly or call 1-800-595-9111.
Purchases (and redemptions) placed through Northern Trust or another Service
Organization are processed only on days that both Northern Funds and the
particular institution are open for business.
Depending on the terms of the particular account used to purchase Fund
shares, Northern Trust or other institutions may impose charges against the
account. These charges could include asset allocation fees, account
maintenance fees, sweep fees, compensating balance requirements or other
charges based upon account transactions, assets or income. The charges will
reduce the net return on an investment in the Fund. For further discussion of
Service Organizations and the procedures for purchasing (and redeeming) shares
through them, see "Management -- Service Organizations."
ADDITIONAL PURCHASE INFORMATION
EFFECTIVE TIME AND PRICE OF PURCHASES. A purchase order for Fund shares
received by the Transfer Agent by 3:00 p.m. (Chicago Time) on a Business Day
(as defined below under "Further Information -- Miscellaneous") will be priced
at the net asset value determined on that day, provided that either: (a) the
order is accompanied
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by payment of the purchase price; or (b) the order is placed by Northern Trust
or a Service Organization that is acting on behalf of itself or its qualified
customer accounts and undertakes to make payment on the next Business Day in
the form of federal funds or other immediately available funds. If an order in
proper form with proper payment is not received by the Transfer Agent by such
time, the order will be processed at the next determined net asset value after
the Transfer Agent has received both an order in proper form and such payment.
MISCELLANEOUS PURCHASE INFORMATION. You will be responsible for all losses and
expenses of the Fund as a result of a check that does not clear or an ACH
transfer that is rejected. Northern Funds may decline to accept a purchase
order when, in the judgment of Northern Funds or its investment adviser, it
would not be in the best interest of existing shareholders to accept the order.
Federal regulations require that you provide a social security number or other
certified taxpayer identification number upon opening or reopening an account.
Purchase Applications without such a number or an indication that a number has
been applied for will not be accepted. If a number has been applied for, the
number must be provided and certified within sixty days of the date of the
Purchase Application. Payment for shares of the Fund may, in the discretion of
Northern Trust, be made in the form of securities that are permissible
investments for the Fund. For further information, see the Additional
Statement. Additions or changes to any information in your account
registration (for example, a change in registration from a joint account to an
individual account) may be made by submitting a written request to the Transfer
Agent accompanied by a signature guarantee by a financial institution that is a
participant in the Stock Transfer Agency Medallion Program ("STAMP") or such
other means or evidence of authority as may be acceptable to the Transfer
Agent. Additional requirements may be imposed. In the interests of economy
and convenience, certificates representing shares of the Fund are not issued.
Northern Funds may reproduce this Prospectus in an electronic format which may
be available on the Internet. If you have received this Prospectus in its
electronic format you, or your representative, may contact the transfer agent
for a free paper copy of this Prospectus by writing to Northern Funds Center at
P.O. Box 75986, Chicago, Illinois 60690-6319 or by calling 1-800-595-9111.
REDEEMING AND EXCHANGING SHARES
You can arrange to withdraw your investment in the Fund by selling
some or all of your shares. This process is known as "redeeming" your shares.
The procedures for redeeming shares differ depending on whether you purchase
your shares directly from Northern Funds or through Northern Trust or another
Service Organization. If you purchase your shares through an account at
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<PAGE> 29
Northern Trust or another Service Organization, you will redeem them in
accordance with the instructions pertaining to that account.
REDEEMING AND EXCHANGING DIRECTLY FROM THE FUND
When you purchase your shares directly from Northern Funds, you may
redeem or exchange shares by the methods described below. You may also use any
of these methods if you purchase your shares through an account at Northern
Trust or another Service Organization and you appear on Northern Funds' records
as the registered holder. You may call 1-800-595-9111 if you have any
questions regarding redemptions or exchanges.
Northern Funds imposes no charges when you redeem or exchange shares.
Remember, however, when shares are purchased through Northern Trust or another
Service Organization, a fee may be charged by those institutions for providing
services in connection with your investment.
BY MAIL. You may redeem shares in any number or dollar amount by sending a
written request to Northern Funds, P.O. Box 75986, Chicago, Illinois
60690-6319. The redemption request must state the number of shares or the
dollar amount to be redeemed and identify the Fund account number. If the
redemption proceeds are to be sent elsewhere than the address of record, each
request must be accompanied by a signature guarantee by a financial institution
that participates in STAMP or such other means or evidence of authority as may
be acceptable to the Transfer Agent. In addition, written requests for
redemptions exceeding $50,000 must be accompanied by a signature guarantee by a
financial institution that participates in STAMP or such other means or
evidence of authority as may be acceptable to the Transfer Agent. Additional
requirements may be imposed. A signature notarized by a notary public is
unacceptable. Northern Funds reserves the right to require signature
guarantees in other circumstances based on the amount of the redemption request
or other factors, and may impose additional requirements.
BY WIRE. If you authorize wire redemptions on your Purchase Application,
shares can be redeemed and the proceeds sent by federal wire transfer to a
previously designated account. You will be charged $15 for each wire
redemption unless the designated account is maintained at Northern Trust or an
affiliated bank. The minimum amount that may be redeemed by this method is
$250. Northern Funds reserves the right to change this minimum or to terminate
the wire redemption privilege at any time without notice. To change bank
instructions, a written request accompanied by a signature guarantee by a
financial institution that participates in STAMP, or such other means or
evidence of authority acceptable to the Transfer Agent, must be sent to
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Northern Funds, P.O. Box 75986, Chicago, Illinois 60690-6319. Additional
requirements may be imposed.
SYSTEMATIC WITHDRAWALS. Northern Funds offers a Systematic Withdrawal Plan.
If you own shares of the Fund with a minimum value of $10,000, you may elect to
have a fixed sum redeemed at regular intervals ($250 minimum amount per
withdrawal) and distributed in cash or reinvested in one or more of the other
Funds offered by Northern Funds. See "Purchasing Shares Directly from the Fund
- -- Directed Reinvestments." An application form and additional information may
be obtained from the Transfer Agent by calling 1-800-595-9111.
EXCHANGE PRIVILEGE. Northern Funds offers an exchange privilege that permits
you to exchange shares of the Fund for shares of another Fund offered by
Northern Funds. To establish the exchange privilege, you must check the
appropriate box on the Purchase Application or, if your Fund account is already
opened, you may send a written request to the Transfer Agent, and must
establish or maintain accounts with an identical title in each Fund involved in
an exchange transaction. In addition, the shares being exchanged must have a
value of at least $1,000 ($2,500 if a new account is being established by the
exchange).
Since an excessive number of exchanges may be disadvantageous to
Northern Funds, Northern Funds reserves the right, at any time without prior
notice, to suspend, limit or terminate the exchange privilege of any
shareholder who makes more than eight exchanges of shares in a year and/or two
exchanges of shares in a calendar quarter. A shareholder may continue making
exchanges until notified that the exchange privilege has been suspended,
limited or terminated. Questions regarding the exchange privilege may be
directed to 1-800-595-9111 or to your account officer at your Service
Organization. Exchanges will be processed only when the shares being acquired
can be legally sold in the state of the investor's residence.
Exchanges may have tax consequences. No exchange fee is currently
imposed by Northern Funds on exchanges. Northern Funds reserves, however, the
right to impose a charge in the future.
TELEPHONE PRIVILEGE. This privilege permits you to redeem or exchange shares
by telephone. To establish the telephone privilege, you must check the
appropriate box on the Purchase Application, or if your Fund account is already
opened, you may send a written request to the Transfer Agent. The request must
be signed by each owner of the account and accompanied by signature guarantees
as provided below or such other means or evidence of authority as may be
acceptable to the Transfer Agent. Once you have established the telephone
privilege, you may use the telephone privilege by calling the Transfer Agent at
1-800-595-9111.
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The Transfer Agent has adopted procedures in an effort to establish
reasonable safeguards against fraudulent telephone transactions. The proceeds
for redemption orders will be sent by check, by wire transfer or by transfer to
an account maintained at Northern Trust or an affiliated bank. All checks will
be made payable to the shareholder of record and mailed only to the
shareholder's address of record. The address of record for redemption checks
may be changed only by a written request accompanied by signature guarantees by
a financial institution that participates in STAMP or such other means or
evidence of authority as may be acceptable to the Transfer Agent and sent to
Northern Funds, P.O. Box 75986, Chicago, Illinois 60690-6319. Additionally,
the Transfer Agent utilizes recorded lines for telephone transactions and will
request a form of personal identification if such identification has been
furnished to the Transfer Agent. Neither Northern Funds nor its Transfer Agent
will be responsible for the authenticity of instructions received by telephone
that are reasonably believed to be genuine. To the extent that Northern Funds
fails to use reasonable procedures to verify the genuineness of telephone
instructions, it or its service providers may be liable for instructions that
prove to be fraudulent or unauthorized. In all other cases, you will bear the
risk of loss.
Northern Funds reserves the right to refuse a telephone redemption if
it believes it is advisable to do so. Procedures for redeeming shares by
telephone may be modified or terminated by Northern Funds at any time without
notice. During periods of substantial economic or market change, telephone
redemptions may be difficult to place. If you are unable to contact the
Transfer Agent by telephone, shares may also be redeemed by mail as described
above under the discussion of redemptions by mail.
REDEEMING AND EXCHANGING THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
If you purchase your shares through an account at Northern Trust or
another Service Organization, you will redeem or exchange them in accordance
with the instructions pertaining to that account. If you are listed on the
books of Northern Funds as the shareholder of record, you may also redeem and
exchange your shares using any of the methods described above under "Redeeming
and Exchanging Directly from the Fund." Questions regarding these redemptions
or exchanges should be directed to your account representative at Northern
Trust or another Service Organization. Although Northern Funds imposes no
charges when you redeem, when shares are purchased through Northern Trust or
another Service Organization a fee may be charged by those institutions for
providing services in connection with your account.
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<PAGE> 32
ADDITIONAL REDEMPTION AND EXCHANGE INFORMATION
EFFECTIVE TIME AND PRICE OF REDEMPTIONS AND EXCHANGES. Redemption orders for
shares of the Fund are processed at the net asset value next determined at 3:00
p.m. (Chicago Time) after receipt in good order by the Transfer Agent by 3:00
p.m. (Chicago Time) on a Business Day. Good order means that the request must
include the following information: the account number and Fund name; the
amount of the transaction (as specified in dollars or number of shares); the
signatures of all account owners exactly as they are registered on the account
(except for telephone and wire redemptions); required signature guarantees (if
applicable); and other supporting legal documents that might be required in the
case of estates, corporations, trusts and certain other accounts. Call
1-800-595-9111 for the additional documentation that may be required of these
entities. Exchange orders are likewise processed at the net asset value per
share next determined after receipt in good order by the Transfer Agent on a
Business Day.
PAYMENT OF REDEMPTION PROCEEDS -- The Fund will make payment for redeemed
shares typically within one or two Business Days, but no later than the seventh
day after receipt by the Transfer Agent of a request in good order on a
Business Day, except as otherwise provided by the rules of the SEC. However,
if any portion of the shares to be redeemed represents an investment made by
check, the Fund may delay the payment of the redemption proceeds until the
Transfer Agent is reasonably satisfied that the check has been collected, which
could take up to fifteen days from the purchase date. This procedure does not
apply to shares purchased by money order or wire payment. During the period
prior to the time the shares are redeemed, dividends on such shares will accrue
and be payable.
MISCELLANEOUS REDEMPTION INFORMATION. All redemption proceeds will be sent by
check unless Northern Trust or the Transfer Agent is directed otherwise. The
ACH system may be utilized for payment of redemption proceeds. Redemptions may
not be processed if a shareholder has failed to submit a completed and signed
Purchase Application. Northern Funds may require any information reasonably
necessary to ensure that a redemption has been duly authorized.
To relieve Northern Funds of the cost of maintaining uneconomical
accounts, Northern Funds reserves the right to redeem the shares held in any
account if at the time of any redemption of shares in the account, the net
asset value of the remaining shares in the account falls below $1,000. Before
such involuntary redemption would occur, you would be given at least 60 days'
written notice and, during that period, you could make an additional investment
to restore the account to at least the minimum amount, in which case there
would be no such redemption.
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<PAGE> 33
Involuntary redemptions will not be made because the value of shares in an
account falls below the minimum amount solely because of a decline in a Fund's
net asset value. Any involuntary redemption would be at net asset value.
Northern Funds also reserves the right to redeem shares involuntarily if it is
otherwise appropriate to do so under the 1940 Act (see "Amortized Cost
Valuation" in the Additional Statement).
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Dividends from the net investment income of the Fund are declared
daily on each Business Day and paid monthly. Shares of the Fund are entitled
to the dividends declared by the Fund beginning on the next Business Day after
the purchase order is executed.
The net realized capital gains of the Fund are distributed at least
annually.
Dividends and capital gain distributions, if any, will reduce the net
asset value of the Fund by the amount of the dividend or capital gain
distribution. Dividends and capital gain distributions, if any, are
automatically reinvested (without any sales charge or portfolio transaction
fee) in additional shares of the Fund at its net asset value determined on the
payment date. You may, however, notify the Transfer Agent in writing that you
elect to have dividends and/or capital gain distributions paid in cash or
reinvested in shares of another Fund offered by Northern Funds at their net
asset value determined on the payment date (provided you maintain an account in
such Fund). This election will become effective for distributions paid two
days after its receipt by the Transfer Agent.
TAXES
As with any investment, you should consider the tax implications of an
investment in Northern Funds. The following is only a short summary of the
important tax considerations generally affecting the Fund and its shareholders.
You should consult your tax adviser with specific reference to your own tax
situation. Northern Funds will send written notices to shareholders annually
regarding the tax status of distributions made by the Fund. The Fund will
determine annually the percentages of their respective net investment income
which are exempt from tax, which constitute an item of tax preference for
purposes of the federal alternative minimum tax, and which are fully taxable
and will apply these percentages uniformly to all dividends declared from net
investment income during that year.
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<PAGE> 34
These percentages may differ significantly from the actual percentages for any
particular day.
FEDERAL TAXES. The Fund intends to qualify as a "regulated investment company"
under the Internal Revenue Code (the "Code"), meaning that to the extent the
Fund's earnings are distributed to shareholders as required by the Code, the
Fund itself generally is not required to pay federal income taxes.
To qualify, the Fund will pay as dividends at least 90% of its
investment company taxable income and at least 90% of its net tax-exempt income
(if any) each year. Investment company taxable income includes taxable
interest, dividends and short-term capital gains less expenses. Dividends
based on either investment company taxable income (which includes income
resulting from investments in options and futures contracts) or the excess of
net short-term capital gain over net long-term capital loss are treated as
ordinary income in determining gross income for tax purposes, whether or not
the dividends are received in cash or additional shares. Any distribution
based on the excess of long-term capital gain over net short-term capital loss
will be taxable as a long-term capital gain, no matter how long you hold Fund
shares. (Federal income taxes for distributions to an IRA or other qualified
retirement account are deferred under the Code.)
Dividends paid by the Fund that are derived from interest on Municipal
Instruments ("exempt-interest dividends") may be treated by you as excludable
from your gross income (unless because of your particular situation exclusion
would be disallowed). You should note that income that is not subject to
federal income taxes may nevertheless have to be considered along with other
adjusted gross income in determining whether any Social Security payments
received by you are subject to federal income taxes. You should also note that
a portion of the exempt-interest dividends paid by the Fund may be an item of
tax preference for both corporate and individual taxpayers in determining
federal alternative minimum and environmental tax liability. (Corporate
taxpayers will be required to take into account all exempt-interest dividends
from the Fund in determining certain adjustments for alternative minimum tax
and environmental tax purposes.)
If you hold shares for six months or less, and during that time
receive exempt-interest dividends, any loss realized on the sale of those
shares will be disallowed to the extent of the exempt-interest dividends.
Similarly, if you hold shares for six months or less, and during that
time, receive a distribution that is taxable as a long-term capital gain, any
loss realized on the sale of those
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<PAGE> 35
shares will be treated as long-term loss to the extent of the earlier capital
gain distribution.
Before purchasing shares you should consider the effect of any capital
gain distributions that are expected to be declared or that have been declared
but not yet paid. The per share price will be reduced by the amount of the
payment, so that a shareholder will, in effect, have paid full price for the
shares and then received a portion of the price back as a taxable distribution.
This is because at any given time the value of your shares includes the
undistributed net gains, if any, realized by a Fund on the sale of portfolio
securities. Because such gains are included in the price of your shares, when
they are distributed, the price of your shares is reduced by the amount of the
distribution. Accordingly, if your distribution is reinvested in additional
shares, the distribution has no effect on the value of your investment; while
you own more shares, the price of each share has been reduced by the amount of
the distribution. Likewise, if you take your distribution in cash, the value
of your shares after the record date plus the cash received is equal to the
value of the shares before the record date.
Any dividends declared in October, November or December and payable to
shareholders during those months will be deemed to have been paid by the Fund
and received by shareholders on December 31, so long as the dividends are
actually paid, as expected, in January of the following year.
Shareholders may realize a taxable gain or loss when redeeming,
transferring or exchanging their shares (or in using the Systematic Withdrawal
Plan to direct reinvestments), depending on the difference in the prices at
which the shares were originally purchased and when redeemed, transferred or
exchanged.
Northern Funds will be required in certain cases to withhold and remit
to the U.S. Treasury 31% of the taxable dividends and distributions paid to any
investor (i) who has provided either an incorrect Social Security Number or
Taxpayer Identification Number or no number at all, (ii) who is subject to
withholding by the Internal Revenue Service for failure to properly include on
his return payments of interest or dividends, or (iii) who has failed to
certify to Northern Funds, when required to do so, that the investor is not
subject to backup withholding or is an "exempt recipient."
STATE AND LOCAL TAXES GENERALLY. Because your state and local taxes may be
different from the federal taxes described above, you should see your tax
adviser. In particular, dividends may be taxable under state or local law as
dividend income even though all or part of those dividends come from interest
on obligations
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<PAGE> 36
that, if held by you directly, would be free of such income taxes.
Florida does not currently have an income tax for individuals, and
therefore individual shareholders of the Fund will not be subject to any
Florida income tax on amounts received from the Fund. However, Florida does
impose an income tax on certain corporations, so that such amounts may be
taxable to corporate shareholders.
Florida also imposes an "intangibles tax" at the annual rate of 2
mills or 0.20% on certain securities and other intangible assets owned by
Florida residents. With respect to the first mill, or first .10%, of the
intangibles tax, every natural person is entitled each year to an exemption of
the first $20,000 of the value of the property subject to the tax. A husband
and wife filing jointly will have an exemption of $40,000. With respect to the
last one mill, or last .10% of the intangibles tax, every natural person is
entitled each year to an exemption of the first $100,000 of the value of the
property subject to the tax. A husband and wife filing jointly will have an
exemption of $200,000.
Obligations issued by the State of Florida or its municipalities,
counties, and other taxing districts, or by the U.S. Government, certain U.S.
Government agencies and certain U.S. territories and possessions (such as Guam,
Puerto Rico and the Virgin Islands), as well as cash, are exempt from this
intangibles tax. If on December 31 of any year the portfolio of the Fund
consists solely of such exempt assets, then the Fund's shares will be entirely
exempt from the Florida intangibles tax payable in the following year.
The Fund intends, but cannot guarantee, that its shares will qualify
for exemption from the Florida intangibles tax.
TAX TABLE
You may find it particularly useful to compare the tax-free yield of
the Fund to the equivalent yield from taxable investments. For an investor in
a low tax bracket, it may not be helpful to invest in a tax-exempt investment
if a higher after-tax yield can be achieved from a taxable instrument.
The following table illustrates the difference between hypothetical
tax-free yields and tax-equivalent yields for different tax brackets. You
should be aware, however, that tax brackets can change over time and that your
tax adviser should be consulted for specific yield calculations. (The federal
tax brackets and rates below are those currently available for 1996.)
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<PAGE> 37
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FEDERAL
MARGINAL TAX-EXEMPT YIELDS
TAXABLE INCOME TAX RATE 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
- ------------------------------------------------------------------------------------------------------------------------------------
SINGLE RETURN JOINT RETURN EQUIVALENT TAXABLE YIELDS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Not over $24,000 Not over $40,100 15.000% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82% 9.41%
$ 24,001-$ 58,150 $ 40,101-$ 96,900 28.000% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42% 11.11%
$ 58,151-$121,300 $ 96,901-$147,700 31.000% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87% 11.59%
$121,301-$263,750 $147,701-$263,750 36.000% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16% 10.94% 11.72% 12.50%
Over $263,750 Over $263,750 39.600% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76% 11.59% 12.42% 13.25%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax-exempt yields used here are hypothetical and no assurance can be
made that the Fund will attain any particular yield. The Fund's yield
fluctuates as market conditions change. The tax brackets do not take into
account the effect of reductions in the deductibility of itemized deductions for
taxpayers with adjusted gross income over $118,000 or the possible effect of the
federal alternative minimum tax. Additionally, effective brackets and
equivalent taxable yields could be higher than those shown. The brackets do not
take into consideration the Florida intangibles tax, and equivalent taxable
yields would actually be greater than those shown when compared to a taxable
security which is also subject to the Florida intangibles tax.
- -------------------------------------------------------------------------------
MANAGEMENT
BOARD OF TRUSTEES
The business and affairs of Northern Funds are managed under the
direction of its Board of Trustees. The Additional Statement contains the name
of each Trustee and other background information.
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern Trust, with offices at 50 S. LaSalle Street, Chicago,
Illinois 60675, serves as Northern Funds' investment adviser, transfer agent
and custodian. As transfer agent, Northern Trust provides various
administrative servicing functions, and any shareholder inquiries may be
directed to it.
Northern Trust, a member of the Federal Reserve System, is an Illinois
state-chartered commercial bank and the principal subsidiary of Northern Trust
Corporation, a bank holding company. Northern Trust was formed in 1889 with
capitalization of $1 million. As of March 31, 1996, Northern Trust Corporation
and its subsidiaries had approximately $20.3 billion in assets, $12.1 billion
in deposits and employed over 6,500 persons.
Northern Trust and its affiliates administered in various capacities
(including as master trustee, investment manager or custodian) over $641.2
billion in assets as of March 31, 1996 including over $114.5 billion for which
Northern Trust had investment management responsibility.
Subject to the general supervision of Northern Funds' Board of
Trustees, Northern Trust is responsible for making investment
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<PAGE> 38
decisions for the Funds and placing purchase and sale orders for portfolio
securities. Northern Trust is also responsible for monitoring and preserving
the records required to be maintained under the regulations of the SEC (with
certain exceptions unrelated to its activities for Northern Funds). In making
investment recommendations for the Funds, investment advisory personnel must
not inquire or take into consideration whether issuers of securities proposed
for purchase or sale for the Fund's accounts are customers of Northern Trust's
commercial banking department. These requirements are designed to prevent
investment advisory personnel for the Fund from knowing which companies have
commercial business with Northern Trust and from purchasing securities where
they know the proceeds will be used to repay loans to the bank.
As compensation for its advisory services and its assumption of
related expenses, Northern Trust is entitled to a fee, computed daily and
payable monthly, at an annual rate of .75% of the Fund's average daily net
assets. Although these advisory fee rate is higher than the rates payable by
most mutual funds, the Board of Trustees believes it is comparable to the rates
payable by other fixed income funds.
Northern Trust also receives compensation as Northern Funds' custodian
and transfer agent. The fees payable by the Funds for these services are
described in the Additional Statement.
The Fund is advised by Northern Trust's Investment Services Group.
James M. Snyder, Vice President of Northern Trust since 1980, Senior Vice
President since 1991 and Chief Investment Officer since 1995, oversees the
management of all fixed income, equity and money market assets managed by
Northern Trust and is the head of Northern's Investment Services Group. Mr.
Snyder received his B.S. degree from Indiana University and his M.B.A. from
DePaul University. He is a Chartered Financial Analyst and a member of the
Investment Analysts Society of Chicago.
Primary responsibility for the management of the Fund lies with Eric
M. Bergson, Vice President in the Fixed Income Management Division. Mr. Bergson
received his A.B. and M.B.A. degrees from the University of Chicago. He is a
member of the Institute of Chartered Financial Analysts and the Investment
Analysts Society of Chicago. Mr. Bergson joined Northern Trust in 1986. During
the past five years, Mr. Bergson has managed various municipal bond portfolios,
including common trust funds comprised of municipal securities.
ADMINISTRATOR AND DISTRIBUTOR
Sunstone Financial Group, Inc. ("Sunstone"), 207 E. Buffalo Street,
Suite 400, Milwaukee, Wisconsin 53202, acts as administrator and distributor
for Northern Funds. Shares of the Fund are sold by Sunstone, as distributor,
on a continuous basis. As compensation for its administrative services (which
include clerical, compliance, regulatory and other services) and the assumption
of related expenses, Sunstone is entitled to a fee,
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<PAGE> 39
computed daily and payable monthly, at an annual rate of .15% of Northern
Funds' average net assets. No compensation is payable by Northern Funds to
Sunstone for its distribution services.
SERVICE ORGANIZATIONS
Northern Funds may enter into agreements with Service Organizations
such as banks, corporations, brokers, dealers and other financial institutions,
including Northern Trust, concerning the provision of support and/or
distribution services to their customers who own Fund shares. These services,
which are described more fully in the Additional Statement, may include support
services such as assisting investors in processing administrative purchase,
exchange and redemption requests; processing dividend and distribution payments
from the Funds; providing information to customers showing their positions in
the Funds; and providing subaccounting with respect to Fund shares beneficially
owned by customers or the information necessary for subaccounting. In
addition, Service Organizations may provide assistance, such as the forwarding
of sales literature and advertising to their customers, in connection with the
distribution of Fund shares. For their services, Service Organizations may
receive fees from the Fund at annual rate of up to .25% of the average daily
net asset value of the shares covered by their agreements.
Service Organizations may charge their customers fees for providing
administrative services in connection with investments in the Fund. Under the
terms of their agreements with Northern Funds, Service Organizations are
required to provide a schedule of these fees to their customers. In addition,
investors should contact their Service Organization with respect to the
availability of shareholder services and the particular Service Organization's
procedures for purchasing and redeeming shares. It is the responsibility of
Service Organizations to transmit purchase and redemption orders and record
those orders on a timely basis in accordance with their agreements with their
customers.
Conflict-of-interest restrictions may apply to the receipt of
compensation paid by Northern Funds in connection with the investment of
fiduciary funds in Fund shares. Institutions, including banks regulated by the
Comptroller of the Currency, Federal Reserve Board 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 their legal counsel before entering into
agreements with Northern Funds.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting securities.
Accordingly, banks will be engaged
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<PAGE> 40
under agreements with Northern Funds only to perform the administrative and
investor servicing functions described above, and will represent that the
services provided by them under the agreements will not be primarily intended
to result in the sale of Fund shares.
Agreements that contemplate the provision of distribution services by
Service Organizations are governed by a Distribution and Service Plan (the
"Plan") that has been adopted by Northern Funds pursuant to Rule 12b-1 under
the 1940 Act. No payments are made to Sunstone under the Plan. However,
payments to Service Organizations, including Northern Trust, under the Plan are
not tied directly to their own out-of-pocket expenses and therefore may be used
as they elect (for example, to defray their overhead expenses), and may exceed
their direct and indirect costs.
EXPENSES
Except as set forth above and in the Additional Statement, the Fund is
responsible for the payment of its expenses. These expenses include, without
limitation, the fees and expenses payable to Northern Trust and Sunstone,
brokerage fees and commissions, fees for the registration or qualification of
Fund shares under federal or state securities laws, expenses of the Fund's
organization, 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
Northern Funds for violation of any law, legal, tax and auditing fees and
expenses, expenses of preparing and printing prospectuses, statements of
additional information, proxy materials, reports and notices and the printing
and distributing of the same to the Fund's shareholders and regulatory
authorities, compensation and expenses of its Trustees, payments to Service
Organizations, fees of industry organizations such as the Investment Company
Institute, and miscellaneous and extraordinary expenses incurred by Northern
Funds.
Northern Trust and Sunstone intend to voluntarily reimburse a portion
of the Fund's expenses and/or reduce their advisory and administrative fees
from the Fund during the current fiscal year. The result of these
reimbursements and fee reductions will be to increase the performance of the
Fund during the periods for which the reductions and reimbursements are made.
FURTHER INFORMATION
DETERMINING SHARE PRICE
Net asset value per share for purposes of purchases and redemptions is
calculated by Northern Trust on each Business Day as of 3:00 p.m. (Chicago
Time) for the Fund. Net asset value is
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<PAGE> 41
calculated by dividing the value of all securities and other assets belonging
to the Fund, less the liabilities charged to the Fund, by the number of the
Fund's outstanding shares.
Securities held by the Fund that are listed on a recognized U.S.
securities exchange are valued at the last quoted sales price on the securities
exchange on which the securities are primarily traded. If securities listed on
a U.S. exchange are not traded on a valuation date, they will be valued at the
last quoted bid price. Securities that are traded in the U.S.
over-the-counter markets, absent a last quoted sales price, 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. Any securities
for which no current quotations are readily available are valued at fair value
as determined in good faith by Northern Trust under the supervision of the
Board of Trustees. Temporary short-term investments are valued at amortized
cost which Northern Trust has determined, pursuant to Board authorization,
approximates market value. Securities may be valued on the basis of prices
provided by independent pricing services when those prices are believed to
reflect the fair market value of the securities.
ADVERTISING PERFORMANCE
The performance of the Fund may be compared to those of other mutual
funds with similar investment objectives and to stock, bond and other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For
example, the performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc. and the Consumer Price Index. Performance of the
Fund may also be compared to the Lehman Brothers Mutual Fund Florida
Intermediate Municipal Bond Index. Performance data as reported in national
financial publications such as Money Magazine, 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 the Fund.
The Fund calculates its total return on an "average annual total
return" basis for various periods from the date the Fund commences investment
operations and for other periods as permitted under SEC rules. Average annual
total return reflects the average annual percentage change in value of an
investment over the measuring period. Total return 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 Fund's
shares and assume that any dividends and capital gain distributions are
reinvested. When considering average total return figures for
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<PAGE> 42
periods longer than one year, you should note that the annual total return for
any one year may be more or less than the average for the entire period. The
Fund may also advertise its total return on an aggregate, year-by-year or other
basis for various specified periods through charts, graphs, schedules or
quotations.
The yield of the Fund is computed based on the Fund's net income
during a specified 30-day (or one-month) period. More specifically, the Fund's
yield is computed by dividing its per share net income during the relevant
period by the per share net asset value on the last day of the period and
annualizing the result on a semi-annual basis.
The tax-equivalent yield for the Fund shows the amount of taxable
yield needed to produce an after-tax equivalent of a tax-free yield, and is
calculated by increasing the yield (as calculated above) by the amount
necessary to reflect the payment of federal and/or state income taxes at a
stated rate. The tax-equivalent yield for the Fund will always be higher than
the Fund's yield.
Performance is based on historical earnings and is not intended to
indicate future performance. The investment return and principal value of an
investment in the Fund will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Performance data may not provide
a basis for comparison with bank deposits and other investments which provide a
fixed yield for a stated period of time. Changes in the net asset value should
be considered in ascertaining the total return to shareholders for a given
period. Total return data should also be considered in light of the risks
associated with the Fund's composition, quality, operating expenses and market
conditions. Any fees charged by Northern Trust or a Service Organization
directly to its customers in connection with investments in the Fund will not
be included in Northern Funds' calculations of performance data.
VOTING RIGHTS
Northern Funds was formed as a Massachusetts Business Trust on October
12, 1993 under an Agreement and Declaration of Trust (the "Trust Agreement").
The Trust Agreement permits the Board of Trustees to issue an unlimited number
of shares of beneficial interest of one or more separate series representing
interests in different investment portfolios. Northern Funds currently offers
nineteen separate Funds. This Prospectus relates only to the Florida
Intermediate Tax-Exempt Bond Fund.
Shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held. Each series
entitled to vote on a matter will vote in the
-34-
<PAGE> 43
aggregate and not by series, except as required by law or when the matter to be
voted on affects only the interests of shareholders of a particular series.
The Additional Statement gives examples of situations where the law requires
voting by series. Voting rights are not cumulative and, accordingly, the
holders of more than 50% of the aggregate shares of Northern Funds may elect
all of the Trustees.
Northern Funds does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law.
Pursuant to the Trust Agreement, the Trustees will promptly call a meeting of
shareholders to vote upon the removal of any Trustee when so requested in
writing by the record holders of 10% or more of the outstanding shares. To the
extent required by law, Northern Funds will assist in shareholder
communications in connection with the meeting.
As of July __, 1996, Northern Trust possessed sole or shared voting or
investment power for its customer accounts with respect to more than __% of the
outstanding shares of Northern Funds.
SHAREHOLDER REPORTS
Shareholders of record will be provided each year with a semi-annual
report showing portfolio investments and other information as of September 30
and, after the close of the Fund's fiscal year March 31, with an annual report
containing audited financial statements. To eliminate unnecessary duplication,
only one copy of shareholder reports will be sent to shareholders with the same
mailing address. Shareholders who desire a duplicate copy of shareholder
reports to be mailed to their residence should call 1-800-595-9111.
MISCELLANEOUS
The address of Northern Funds is 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202 and the telephone number is 1-800-595-9111.
Northern Funds is registered as an open-end management investment company under
the 1940 Act, and the Fund is classified under that Act as a non-diversified
portfolio.
As used in this Prospectus, "Business Day" means each day Northern
Trust and the New York Stock Exchange (the "Exchange") are open, which is
Monday through Friday, except for holidays observed by Northern Trust and/or
the Exchange. In 1996, these holidays are New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veteran's Day, Thanksgiving and Christmas. On days when
Northern Trust or the Exchange closes early as a result of unusual weather or
other conditions, the right is reserved to advance the time by which purchase
and redemption requests must be received. In addition, on any
-35-
<PAGE> 44
Business Day when the Public Securities Association ("PSA") recommends that the
securities markets close early, the Fund reserves the right to cease or to
advance the deadline for accepting purchase and redemption orders for same
Business Day credit up to one hour before the PSA recommended closing time.
Purchase and redemption requests received after the advanced closing time will
be effected on the next Business Day. Northern Trust is not required to
calculate the net asset value of the Fund on days during which no shares are
tendered to the Fund for redemption and no orders to purchase or sell shares
are received by the Fund, or on days on which there is an insufficient degree
of trading in the Fund's portfolio securities for changes in the value of such
securities to materially affect the net asset value per share.
From time to time, Northern Funds' distributor may provide promotional
incentives to brokers whose representatives have sold or are expected to sell
shares of the Fund. At various times, the distributor may implement programs
under which a broker's sales force may be eligible to win cash or non-cash
awards for sales efforts, and may finance broker sales contests or recognition
programs conforming to criteria established by the distributor. The
distributor may also provide marketing services to brokers consisting of
written informational material relating to sales incentive campaigns conducted
by such brokers for their representatives.
Northern Trust is sometimes referred to as "The Northern Trust Bank"
in advertisements and other literature.
--------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN NORTHERN FUNDS'
ADDITIONAL STATEMENT IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY NORTHERN FUNDS OR ITS DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY NORTHERN FUNDS OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-36-
<PAGE> 45
NORTHERN FUNDS
Stock Index Fund
Pursuant to Rule 485(a)
under the Securities Act of 1933
--------------------------
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- -------------- ------------------
Part A
- ------
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . Expense Summary
3. Condensed Financial
Information . . . . . . . . . . . . . . . . . . . . *
4. General Description of
Registrant . . . . . . . . . . . . . . . . . . . . Cover Page; Investment
Information; Management; Further Information
5. Management of the Fund . . . . . . . . . . . . . . Management; Opening An Account and Purchasing
Shares; Redeeming and Exchanging Shares
5.A. Management's Discussion of
Fund Performance . . . . . . . . . . . . . . . . *
6. Capital Stock and Other
Securities . . . . . . . . . . . . . . . . . . . Opening An Account and Purchasing Shares;
Redeeming and Exchanging Shares; Distributions
and Taxes; Further Information
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . . . . . . . . . Opening An Account and Purchasing Shares;
Redeeming and Exchanging Shares
8. Redemption or Repurchase . . . . . . . . . . . . . Redeeming and Exchanging Shares
9. Pending Legal Proceedings . . . . . . . . . . . . . *
</TABLE>
- --------------
* Item inapplicable or answer negative.
<PAGE> 46
NORTHERN FUNDS
PROSPECTUS
August __, 1996
Stock Index Fund
<PAGE> 47
NORTHERN FUNDS
STOCK INDEX FUND
THE NORTHERN TRUST COMPANY Investment Adviser,
50 S. LaSalle Street Transfer Agent and
Chicago, Illinois 60675 Custodian
1-800-595-9111
The shares offered by this Prospectus represent interests in the Stock
Index Fund (the "Fund"). The Fund's investment objective is to seek to provide
investment results approximating the aggregate price and dividend performance
of the securities included in the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index") by investing substantially all of its assets in
securities comprising the S&P 500 Index. The Fund is one of 19 no-load mutual
funds (the "Funds") comprising the Northern Funds. Northern Funds is a no-load
management investment company designed to offer investors a range of investment
opportunities. Northern Funds also offers money market funds and domestic and
international fixed income and other equity funds, which are described in
separate Prospectuses.
The Fund is advised by The Northern Trust Company ("Northern Trust").
Shares are sold and redeemed without any purchase or redemption charge by
Northern Funds, although Northern Trust and other institutions may charge their
customers for their services in connection with investments.
This Prospectus provides information about the Fund that you should
know before investing. It should be read and retained for future reference.
Further information is included in a statement of additional information dated
August __, 1996 (the "Additional Statement"), which is incorporated by
reference herein. For a free copy, write to Northern Funds' distributor,
Sunstone Financial Group, Inc., at 207 E. Buffalo Street, Suite 400, Milwaukee,
Wisconsin 53202 or call 1-414-271-5885.
SHARES OF NORTHERN FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED, ENDORSED OR OTHERWISE SUPPORTED BY, THE NORTHERN TRUST COMPANY, ITS
PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED
BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY
<PAGE> 48
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is August ___, 1996
<PAGE> 49
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
EXPENSE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
INVESTMENT INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Investment Objective and Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ADDITIONAL INVESTMENT INFORMATION, RISKS AND CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Description of Securities and Investment Techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
OPENING AN ACCOUNT AND PURCHASING SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Purchasing Shares Directly from the Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Purchasing Shares Through Northern Trust and Other Institutions . . . . . . . . . . . . . . . . . . . . . 15
Additional Purchase Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
REDEEMING AND EXCHANGING SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Redeeming and Exchanging Directly from the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Redeeming and Exchanging Through Northern Trust and Other Institutions . . . . . . . . . . . . . . . . . . 19
Additional Redemption and Exchange Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
DISTRIBUTIONS AND TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Board of Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Investment Adviser, Transfer Agent and Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Administrator and Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Service Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
FURTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Determining Share Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Advertising Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Shareholder Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
-i-
<PAGE> 50
HIGHLIGHTS
Q. WHAT IS NORTHERN FUNDS?
A. Northern Funds is an open-end management investment company (commonly
known as a mutual fund) that offers investors the opportunity to
invest in different investment portfolios, each having separate
investment objectives and policies. Northern Funds presently consists
of nineteen portfolios, including money market, domestic and
international fixed income and equity portfolios. This Prospectus
describes only the Stock Index Fund.
Q. WHO ADVISES THE FUND?
A. Northern Trust, the principal subsidiary of Northern Trust
Corporation, serves as investment adviser to the Fund. Northern Trust
also serves as the Fund's transfer agent and custodian. Northern
Trust administered over $641 billion in assets as of March 31, 1996 in
various capacities, including approximately $114.5 billion for which
Northern Trust had investment management responsibility. See
"Management."
Q. HOW DOES ONE BUY AND REDEEM SHARES?
A. Shares of the Fund are distributed by Sunstone Financial Group, Inc.
Shares may be purchased directly from Northern Funds or through a
qualified account at Northern Trust or certain other institutions.
Shares are sold and redeemed without any purchase or redemption charge
by Northern Funds, although Northern Trust and other institutions may
charge their customers for their services in connection with
investments. The minimum initial investment for purchases directly
with Northern Funds is $2,500 ($500 for an IRA; $250 for a spousal
IRA; and $250 under the Automatic Investment Plan). The minimum for
subsequent investments is $50. Northern Trust or other organizations
may impose particular customer account requirements such as minimum
account sizes.
The Fund will not commence investment operations until it has received
orders for the purchase of its shares aggregating $5 million, and will
not accept payment for the purchase of shares until the orders in the
aggregate amount are received. Northern Trust believes that if the
Fund holds at least $5 million in assets, the Fund will be able to
hold the securities of at least 75% of the issuers included in the S&P
500 Index.
Additional share purchase and redemption information for both
purchases and redemptions directly with Northern Funds or through
qualified accounts is provided below under
-1-
<PAGE> 51
"Opening an Account and Purchasing Shares" and "Redeeming and Exchanging
Shares."
Q. WHAT SHAREHOLDER SERVICES ARE AVAILABLE?
A. Northern Funds offers the advantage of automatic dividend reinvestment
in shares of the Fund or in another Northern Fund, exchange privileges
among Northern Funds should your investment goals change, telephone
exchange and redemption privileges, an Automatic Investment Plan (with
a reduced minimum initial investment) and a Systematic Withdrawal
Plan. See "Opening an Account and Purchasing Shares" and "Redeeming
and Exchanging Shares." Shares of Northern Funds may be purchased in
connection with a variety of tax-sheltered retirement plans. See
"Further Information -- Retirement Plans."
Q. WHEN ARE DISTRIBUTIONS MADE?
A. Dividends from the net investment income of the Fund is declared and
paid quarterly.
Net realized capital gains of the Fund are distributed at least
annually. See "Distributions and Taxes."
Q. WHAT ARE THE POTENTIAL RISKS PRESENTED BY THE FUND'S INVESTMENT
PRACTICES?
A. Investing in the Fund involves the risks common to an investment in
common stocks, including the risk that the financial condition of the
issuers of securities held by the Fund or the general condition of the
common stock market may worsen. When this occurs, the value of the
securities held by the Fund and, therefore, the value of its shares
may decline.
The Fund may engage in certain transactions involving puts and calls.
The Fund may lend its securities and enter into repurchase agreements
and reverse repurchase agreements with qualifying banks and
broker/dealers which may involve leveraging. The Fund may also
purchase eligible securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" or "delayed settlement"
basis. The Fund may invest up to 15% of its net assets in illiquid
securities. The Fund may also invest in futures contracts, options
and securities issued by other investment companies (such as "SPDRs").
The foregoing is a summary of certain of the potential risks
presented by the Fund's investment practices. Details regarding these
and other risks presented by the policies of
-2-
<PAGE> 52
the Fund are described under "Additional Investment Information, Risks and
Considerations."
-3-
<PAGE> 53
EXPENSE SUMMARY
The following tables will help you understand the expenses you
will bear directly or indirectly as a shareholder of the Fund.
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or
selling Fund shares. ANNUAL OPERATING EXPENSES are the annualized
operating expenses the Fund expects to pay during the current fiscal
year. Examples based on this information are also provided.
<TABLE>
<CAPTION>
STOCK INDEX
FUND
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases . . . . . . . . . . . . . . . . . . . . . None
Sales Charge Imposed on
Reinvested Distributions . . . . . . . . . . . . . . . . . . . None
Deferred Sales Charge
Imposed on Redemptions . . . . . . . . . . . . . . . . . . . . None
Redemption Fees(1) . . . . . . . . . . . . . . . . . . . . . . . None
Exchange Fees . . . . . . . . . . . . . . . . . . . . . . . . . None
ANNUAL OPERATING EXPENSES
(as a percentage of
average net assets)
Management Fees (after
fee reductions
and waivers) . . . . . . . . . . . . . . . . . . . . . . . . . . 0.40%
12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Other Expenses (after
fee reductions and
reimbursements) . . . . . . . . . . . . . . . . . . . . . . . . 0.15%
-----
TOTAL OPERATING EXPENSES(2)
After Fee Reductions,
Waivers and
Reimbursements . . . . . . . . . . . . . . . . . . . . . . . . 0.55%
=====
EXAMPLE OF EXPENSES
Based on the foregoing table,
you would pay the following
expenses on a $1,000
investment, assuming a 5%
annual return and redemption
at the end of each time period:
One Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5
Three Years . . . . . . . . . . . . . . . . . . . . . . . . . . $18
</TABLE>
-4-
<PAGE> 54
(1) A fee of $15.00 may be applicable for each wire redemption.
(2) The table and example shown do not reflect any charges that may be
imposed by Northern Trust or other institutions on their customers.
- ------------------------
The above information reflects the estimated expenses the Fund expects
to pay during the current fiscal year. Without the fee reductions, waivers and
reimbursements, "Management Fees" would be 0.60% for the Fund, the estimated
"Other Expenses" for the current fiscal year would be 0.91%, and "Total
Operating Expenses" would be 1.51%, for the Fund. In addition, Northern Funds
does not expect to pay any 12b-1 fees (otherwise payable at an annual rate of
up to 0.25%) under its Distribution and Service Plan for the current fiscal
year. For more expense information, see "Management."
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. THE FUND IS NEW AND ACTUAL OPERATING
EXPENSES AND INVESTMENT RETURN MAY BE MORE OR LESS THAN THOSE SHOWN.
INFORMATION ABOUT THE ACTUAL PERFORMANCE OF THE FUND WILL BE CONTAINED IN THE
FUND'S FUTURE ANNUAL REPORTS TO SHAREHOLDERS, WHICH MAY BE OBTAINED WITHOUT
CHARGE WHEN THEY BECOME AVAILABLE.
INVESTMENT INFORMATION
The investment objective and policies of the Fund are described below.
Additional information regarding the securities, investment techniques and
restrictions of the Fund are described under "Additional Investment
Information, Risks and Considerations."
INVESTMENT OBJECTIVE AND POLICIES.
The Fund seeks to provide investment results approximating the
aggregate price and dividend performance of the securities included in the S&P
500 Index. Although the Fund will not always hold securities of all 500
issuers included in the S&P 500 Index, it will normally hold the securities of
at least 80% of such issuers. 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 National Market System and selected
by Standard & Poor's Corporation (the "S&P") through a detailed screening
process starting on a macro-economic level and working toward a micro-economic
level dealing with company specific information such as market value, industry
group classification, capitalization and trading activity. S&P'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
-5-
<PAGE> 55
industries within the U.S. economy. 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.
S&P makes no representation or warranty, implied or express, to purchasers of
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 Fund is managed through the use of a "passive" or "indexing"
investment approach, which attempts to duplicate the investment composition and
performance of the S&P 500 Index through statistical procedures. As a result,
Northern Trust does not employ traditional methods of fund investment
management, such as selecting securities on the basis of economic, financial
and market analysis.
Northern Trust believes that under normal market conditions, the
quarterly performance of the Fund will be within a .95 correlation with the S&P
500 Index. However, there is no assurance that the Fund will be able to do so
on a consistent basis. Deviations from the performance of the S&P 500 Index
("tracking error") may result from shareholder purchases and redemptions of
shares of the Fund that occur daily, as well as from the expenses borne by the
Fund. Such purchases and redemptions may necessitate the purchase and sale of
securities by the Fund and the resulting transaction costs which may be
substantial because of the number and the characteristics of the securities
held. In addition, transaction costs are incurred because sales of securities
received in connection with spin-offs and other corporate reorganizations are
made to conform the Fund's holdings with its investment objective. Tracking
error may also occur due to factors such as the size of the Fund, the
maintenance of a cash reserve pending investment or to meet expected
redemptions, changes made in the S&P 500 Index or the manner in which the S&P
500 Index is calculated or because the indexing and investment approach of
Northern Trust does not produce the intended goal of the Fund. In the event
the performance of the Fund is not comparable to the performance of the S&P 500
Index, the Board of Trustees will evaluate the reasons for the deviation and
the availability of corrective measures. If substantial deviation in the
Fund's performance were to continue for extended periods, it is expected that
the Board of Trustees would consider possible changes to the Fund's investment
objective.
The Fund may invest in options, futures contracts and securities
issued by other investment companies (such as "SPDRs"). The Fund may also
invest in certain short-term fixed income securities as cash reserves.
However, the Fund will not invest in cash reserves, options or futures
contracts and related options as part of a temporary defensive strategy such as
-6-
<PAGE> 56
lowering its investment in common stocks to protect against potential stock
market declines.
ADDITIONAL INVESTMENT INFORMATION, RISKS AND CONSIDERATIONS
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment
objective, the Fund may write covered call options, buy put options, buy call
options and write secured put options. These options may relate to particular
securities, financial instruments, or stock indices and may or may not be
listed on a securities exchange and may or may not be issued by the Options
Clearing Corporation. The Fund will not purchase put and call options where
the aggregate premiums on outstanding options exceed 5% of its net assets at
the time of purchase, and will not write options on more than 25% of the value
of its net assets (measured at the time an option is written). Options trading
is a highly specialized activity that entails greater than ordinary investment
risks. In addition, unlisted options are not subject to the protections
afforded purchasers of listed options issued by the Options Clearing
Corporation, which performs the obligations of its members if they default.
To the extent consistent with its investment objective, the Fund may
also invest in futures contracts and options on futures contracts to maintain
liquidity to meet potential shareholder redemptions, invest cash balances or
dividends or minimize trading costs. The value of the Fund's futures contracts
may equal or exceed 100% of the Fund's total assets, although the Fund will not
purchase or sell a futures contract unless immediately afterwards the aggregate
amount of margin deposits on its existing futures positions plus the amount of
premiums paid for related futures options is 5% or less of its net assets.
Futures contracts obligate the Fund, at maturity, to take or make
delivery of certain securities or, the cash value of a securities index. The
Fund may purchase and sell call and put options on futures contracts traded on
an exchange or board of trade. When a Fund purchases an option on a futures
contract, it has the right to assume a position as a purchaser or a seller of a
futures contract at a specified exercise price anytime during the option
period. When the Fund sells an option on a futures contract, it becomes
obligated to sell or buy a futures contract if the option is exercised. In
connection with the Fund's position in a futures contract or related option,
the Fund will create a segregated account of liquid high grade assets or will
otherwise cover its position in accordance with applicable SEC requirements.
-7-
<PAGE> 57
The primary risks associated with the use of futures contracts and
options are: (a) the imperfect correlation between the change in market value
of the instruments held by the Fund and the price of the futures contract or
option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; and (c)
losses caused by unanticipated market movements, which are potentially
unlimited. For further discussion of risks involved with domestic and foreign
futures and options, see "Futures Contracts and Related Options" and Appendix B
in the Additional Statement.
Northern Funds intends to comply with the regulations of the Commodity
Futures Trading Commission exempting the Fund from registration as a "commodity
pool operator."
LIQUIDITY MANAGEMENT. Pending investment, to meet anticipated redemption
requests, or as a temporary defensive measure if Northern Trust determines that
market conditions warrant, the Fund may also invest without limitation in
short-term U.S. Government obligations, high quality money market instruments,
variable and floating rate instruments and repurchase agreements.
High quality money market instruments may include Europaper, which is
U.S. dollar-denominated commercial paper of a foreign issuer. The Fund may
also purchase U.S. dollar-denominated bank obligations, such as certificates of
deposit, bankers' acceptances and interest-bearing savings and time deposits,
issued by U.S. or foreign banks or savings institutions having total assets at
the time of purchase in excess of $1 billion. Short-term obligations purchased
by the Fund will either have short-term debt ratings at the time of purchase in
the top two categories by one or more unaffiliated nationally recognized
statistical rating organizations ("NRSROs") or one issued by issuers with such
ratings. Unrated instruments purchased by the Fund will be of comparable
quality as determined by Northern Trust.
Variable and floating rate instruments may include variable amount
master demand notes that permit the indebtedness to vary in addition to
providing for periodic adjustments in the interest rate. Unrated instruments
will be determined by Northern Trust to be of comparable quality at the time of
purchase to rated instruments purchasable by the Fund.
Under a repurchase agreement the Fund agrees to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price. 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 Fund's acquisition of the securities and normally will be
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within a shorter period of time. Securities subject to repurchase agreements
are held either by Northern Funds' 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 Fund to possible
loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. The Fund is authorized to
make limited borrowings as described below under "Investment Restrictions." If
the securities held by the Fund should decline in value while borrowings are
outstanding, the net asset value of the Fund's outstanding shares will decline
in value by proportionately more than the decline in value suffered by the
Fund's securities. Borrowings may be made through reverse repurchase
agreements under which the Fund sells portfolio securities to financial
institutions such as banks and broker/dealers and agrees to repurchase them at
a particular date and price. The Fund 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. The Fund may utilize reverse repurchase
agreements when it is anticipated that the interest income to be earned from
the investment of the proceeds of the transaction is greater than the interest
expense of the transaction. This use of reverse repurchase agreements may be
regarded as leveraging and, therefore, speculative. Reverse repurchase
agreements involve the risks that the interest income earned in the investment
of the proceeds will be less than the interest expense, that the market value
of the securities sold by the Fund may decline below the price of the
securities the Fund is obligated to repurchase and that the securities may not
be returned to the Fund. During the time a reverse repurchase agreement is
outstanding, the Fund will maintain a segregated account with Northern Funds'
custodian containing cash, U.S. Government or other appropriate liquid
high-grade debt securities having a value at least equal to the repurchase
price. The Fund's reverse repurchase agreements, together with any other
borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its
total assets. In addition, whenever borrowings exceed 5% of the Fund's total
assets, the Fund will not make any investments.
SECURITIES LENDING. The Fund may seek additional income from time to time by
lending securities on a short-term basis to banks, brokers and dealers. The
securities lending agreements will require that the loans be secured by
collateral in cash, cash equivalents, U.S. Government securities or irrevocable
bank letters of credit maintained on a current basis equal in value to
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at least the market value of the loaned securities. The Fund may not make such
loans in excess of 33 1/3% of the value of its total assets. Securities loans
involve risks of delay in receiving additional collateral or in recovering the
loaned securities, or possibly loss of rights in the collateral if the borrower
of the securities becomes insolvent.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS.
The Fund may purchase or sell securities on a when-issued or delayed-delivery
basis and make contracts to purchase or sell securities for a fixed price at a
future date beyond customary settlement time. Securities purchased or sold on
a when-issued, delayed-delivery or forward commitment basis involve a risk of
loss if the value of the security to be purchased declines, or the value of the
security to be sold increases, before the settlement date. Although the Fund
will generally purchase securities with the intention of acquiring them, the
Fund may dispose of securities purchased on a when-issued, delayed-delivery or
a forward commitment basis before settlement when deemed appropriate by
Northern Trust.
INVESTMENT COMPANIES. In connection with the management of its daily cash
positions, the Fund may invest in securities issued by other investment
companies which invest in short-term, high-quality debt securities and
determine their net asset value per share based on the amortized cost or
penny-rounding method of valuation. The Fund may also invest in shares or
units of other investment companies that are structured to seek a similar
correlation to the performance of the S&P 500 Index, such as Standard & Poor's
Depository Receipts ("SPDRs"). SPDRs are securities traded on the American
Stock Exchange that represent ownership in the SPDR Trust, a long-term unit
investment trust which is intended to provide investment results that generally
correspond to the price and yield performance of the S&P 500 Index. As a
shareholder of another investment company, a Fund will bear, along with other
shareholders, its pro rata portion of the other investment company's expenses
including advisory fees. These expenses would be in addition to the advisory
fees and other expenses the Fund bears directly in connection with its own
operations. Investments in other investment companies will be subject to the
limits imposed by the 1940 Act.
ILLIQUID SECURITIES. The Fund may invest up to 15% of the value of its net
assets in illiquid securities. Illiquid securities generally include
repurchase agreements and time deposits with notice/termination dates in excess
of seven days, unlisted over-the-counter options and certain securities which
are subject to trading restrictions because they are not registered under the
Securities Act of 1933 (the "1933 Act").
If otherwise consistent with its investment objective and policies,
the Fund may purchase commercial paper issued pursuant
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to Section 4(2) of the 1933 Act and securities that are not registered under
the 1933 Act but can be sold to "qualified institutional buyers" in accordance
with Rule 144A under the 1933 Act. These securities will not be considered
illiquid so long as Northern Trust determines, under guidelines approved by
Northern Funds' Board of Trustees, that an adequate trading market exists.
This practice could increase the level of illiquidity during any period that
qualified institutional buyers become uninterested in purchasing these
securities. The ability to sell to qualified institutional buyers under Rule
144A is a relatively recent development, and it is not possible to predict how
this market will ultimately develop.
PORTFOLIO TRANSACTIONS AND TURNOVER. Northern Trust's Advisory Agreement
provides that in selecting brokers or dealers to place orders for transactions
(a) involving common and preferred stocks, Northern Trust shall use its best
judgment to obtain the best overall terms available and (b) involving bonds and
other fixed income obligations, Northern Trust shall attempt to obtain best net
price and execution. In assessing the best overall terms available for any
transaction, Northern Trust is to consider all factors it deems 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, Northern
Trust may consider the brokerage and research services provided to the Fund
and/or other accounts over which Northern Trust or an affiliate of Northern
Trust exercises investment discretion. 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.
The portfolio turnover rate of the Fund will vary from year to year,
and may be affected by changes in the holdings of specific issuers. High
portfolio turnover (100% or more) may result in the realization of short-term
capital gains which are taxable to shareholders as ordinary income. In
addition, higher turnover rates can result in corresponding increases in
commissions and other transaction costs. Northern Trust will not consider
turnover rate a limiting factor in making investment decisions. Northern Funds
expects that the annual turnover rate of the Fund will generally not exceed
100%.
MISCELLANEOUS. The Fund does not intend to purchase certificates of deposit of
Northern Trust or its affiliate banks, commercial paper issued by Northern
Trust's parent holding company or other securities issued or guaranteed by
Northern Trust, its parent holding company or their subsidiaries or affiliates.
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INVESTMENT RESTRICTIONS
The Fund's investment objective may be changed by Northern Funds' Board of
Trustees without shareholder approval. Shareholders will, however, be notified
of any changes. Any such change may result in the Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund. No assurance can be
provided that the Fund will achieve its investment objective.
The Fund has also adopted certain fundamental investment restrictions
that may be changed only with the approval of a majority of the Fund's
outstanding shares. The following description summarizes several of the Fund's
fundamental restrictions, which are set forth in full in the Additional
Statement.
The Fund may not:
1. purchase securities (except U.S. Government securities and
repurchase agreements collateralized by such securities) if more than 5% of its
total assets at the time of purchase will be invested in the securities of any
one issuer, except that up to 25% of the Fund's total assets may be invested
without regard to this 5% limitation;
2. subject to the foregoing 25% exception, purchase more than 10%
of the outstanding voting securities of any issuer;
3. invest 25% or more of its total assets at the time of purchase
in securities of issuers whose principal business activities are in the same
industry; and
4. borrow money except in amounts up to 33 1/3% of the value of
its total assets at the time of borrowing.
OPENING AN ACCOUNT AND PURCHASING SHARES
An investment account may be opened and shares purchased directly from
Northern Funds by following the instructions below under "Purchasing Shares
Directly from the Fund." If you maintain certain accounts at Northern Trust or
another institution (such as a bank or broker/dealer) that has entered into an
agreement with Northern Funds to provide services to its customers, you may
purchase shares through your institution in accordance with its procedures.
See "Purchasing Shares Through Northern Trust and Other Institutions" below for
more details. If you have any questions or need any assistance in opening an
investment account or purchasing shares, call 1-800-595-9111.
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The Fund will not commence investment operations until it has received
orders for the purchase of its shares aggregating $5 million, and will not
accept payment for the purchase of shares until the orders in the aggregate
amount are received. Northern Trust believes that if the Fund holds at least
$5 million in assets, the Fund will be able to hold the securities of at least
75% of the issuers included in the S&P 500 Index.
PURCHASING SHARES DIRECTLY FROM THE FUNDS
For your convenience, there are a number of ways to invest directly
with Northern Funds. When establishing an investment account directly with
Northern Funds, the minimum initial investment in the Fund is $2,500 ($500 for
an IRA; $250 for a spousal IRA; $250 under the Automatic Investment Plan; and
$500 for employees of the Northern Trust and its affiliates). The minimum
subsequent investment is $50 (except for reinvestments of distributions for
which there is no minimum). The Fund reserves the right to waive these
minimums.
BY MAIL. You may purchase shares by mail by sending a Purchase Application, a
copy of which accompanies this Prospectus, together with a check or money order
payable to Northern Funds in the envelope provided or by addressing your
envelope to Northern Funds at P.O. Box 75986, Chicago, Illinois 60690-6319.
Additional requirements may be imposed. If using overnight delivery use the
following address: 801 South Canal Street, Chicago, Illinois 60607, Attn:
Northern Funds. Your check must be drawn on a bank located in the U.S. and
must be payable in U.S. dollars. When making subsequent investments, enclose
your check with the return remittance portion of the confirmation of your
previous investment, or indicate on your check or a separate piece of paper
your name, address and account number.
A $20 fee will be charged by the Transfer Agent if any check used for
investment does not clear. In addition, you will be responsible for any loss
suffered by the Fund. If you purchase shares by check and subsequently request
the redemption of those shares, Northern Funds may delay the payment of
redemption proceeds until the Transfer Agent is satisfied that the check has
cleared, which may take up to 15 days from the purchase date. If you
anticipate redemptions soon after purchase, you may wish to wire funds to avoid
delays. Northern Funds will not accept payment in cash or third party checks
for the purchase of shares.
BY WIRE. You may make initial or subsequent investments in shares of the Fund
by wiring federal funds. If you are opening an account with a wire purchase,
you must call 1-800-595-9111 for instructions prior to wiring funds. You must
promptly complete a Purchase Application and forward it to the Transfer Agent
in the envelope provided herewith, or by addressing your envelope to Northern
Funds at P.O. Box 75986, Chicago, Illinois 60690-6319.
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Additional requirements may be imposed. Redemptions will not be paid until
your completed application has been received by the Transfer Agent. If you
wish to add to an existing account by wire purchase, you may wire federal funds
to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152,
(Reference 10 Digit Fund Account Number)
(Reference Shareholder's Name)
DIRECT DEPOSIT. You may purchase additional shares through the Direct Payroll
Deposit Plan offered by Northern Funds. Through this plan, periodic
investments (minimum $50) are made automatically from your payroll check into
your existing Fund account. In order to participate in the plan, your employer
must have direct deposit capabilities through the Automated Clearing House
("ACH") available to its employees. The plan may be used for other direct
deposits, such as social security checks, military allotments, and annuity
payments. Further details about this service may be obtained from the Transfer
Agency by calling 1-800-595-9111. Northern Funds reserves the right, at any
time and without prior notice, to limit or terminate the Direct Payroll Deposit
privilege or its use in any manner by any person.
AUTOMATIC INVESTMENT. Northern Funds offers an Automatic Investment Plan that
allows you to automatically purchase shares on a regular, monthly basis ($250
initial minimum, $50 monthly minimum additions). Under this plan the Transfer
Agent originates an ACH request to your financial institution which forwards
funds periodically to the Transfer Agent to purchase shares. The plan can be
established with any financial institution that participates in the ACH funds
transfer system. No service fee is currently charged by Northern Funds for
participation in the plan. You may establish the plan by completing the
appropriate section on the Purchase Application when opening an account. You
may also establish the plan after an account is opened by completing an
Automatic Investment Plan Application which may be obtained by calling
1-800-595-9111. If an investor discontinues participation in the plan, the
Fund reserves the right to redeem the investor's account involuntarily, upon 60
days' written notice, if the account's net asset value is $1,000 or less.
DIRECTED REINVESTMENTS. In addition to having your income dividends and/or
capital gains distributions reinvested in shares of the Fund from which such
distributions are paid, you may elect the directed reinvestment option and have
dividends and capital gains distributions automatically invested in another
Northern Fund. In addition, systematic withdrawals from one account and
reinvestments in another account may be established. See "Redeeming and
Exchanging Directly from the Funds -- Systematic
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Withdrawals." Reinvestments can only be directed to an existing Northern
Funds' account (which must meet the minimum investment requirement). Directed
reinvestments may be used to invest funds from a regular account to another
regular account, from a qualified plan account to another qualified plan
account, or from a qualified plan account to a regular account. Directed
reinvestments from a qualified plan account to a regular account may have
adverse tax consequences including imposition of a penalty tax and therefore
you should consult your own tax adviser before commencing these transactions.
BY EXCHANGE. You may open a new account or add to an existing account by
exchanging shares of the Fund for shares of any other Fund offered by Northern
Funds. See "Redeeming and Exchanging Shares" for details.
PURCHASING SHARES THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
Northern Trust customers may purchase shares through their qualified
accounts and should consult with their account officer for additional
information and instructions. Customers of other institutions (together with
Northern Trust, "Service Organizations"), such as banks or broker-dealers that
have entered into agreements with Northern Funds, should contact their account
officers for appropriate purchase instructions. Northern Trust or another
Service Organization may impose particular customer account requirements in
connection with investments in the Fund, such as minimum account size or
minimum account thresholds above which excess cash balances may be invested in
Fund shares. To determine whether you may purchase shares through your
institution, contact your institution directly or call 1-800-595-9111.
Purchases (and redemptions) placed through Northern Trust or another Service
Organization are processed only on days that both Northern Funds and the
particular institution are open for business.
Depending on the terms of the particular account used to purchase Fund
shares, Northern Trust or other institutions may impose charges against the
account. These charges could include asset allocation fees, account
maintenance fees, sweep fees, compensating balance requirements or other
charges based upon account transactions, assets or income. The charges will
reduce the net return on an investment in a Fund. For further discussion of
Service Organizations and the procedures for purchasing (and redeeming) shares
through them, see "Management -- Service Organizations."
ADDITIONAL PURCHASE INFORMATION
EFFECTIVE TIME AND PRICE OF PURCHASES. A purchase order for Fund shares
received by the Transfer Agent by 3:00 p.m. (Chicago Time) on a Business Day
(as defined below under "Further Information --
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Miscellaneous") will be priced at the net asset value determined on that day,
provided that either: (a) the order is accompanied by payment of the purchase
price; or (b) the order is placed by Northern Trust or a Service Organization
that is acting on behalf of itself or its qualified customer accounts and
undertakes to make payment on the next Business Day in the form of federal
funds or other immediately available funds. If an order in proper form with
proper payment is not received by the Transfer Agent by such time, the order
will be processed at the next determined net asset value after the Transfer
Agent has received both an order in proper form and such payment.
MISCELLANEOUS PURCHASE INFORMATION. You will be responsible for all losses and
expenses of the Fund as a result of a check that does not clear or an ACH
transfer that is rejected. Northern Funds may decline to accept a purchase
order when, in the judgment of Northern Funds or its investment adviser, it
would not be in the best interest of existing shareholders to accept the order.
Federal regulations require that you provide a social security number or other
certified taxpayer identification number upon opening or reopening an account.
Purchase Applications without such a number or an indication that a number has
been applied for will not be accepted. If a number has been applied for, the
number must be provided and certified within sixty days of the date of the
Purchase Application. Payment for shares of the Fund may, in the discretion of
Northern Trust, be made in the form of securities that are permissible
investments for the respective Fund. For further information, see the
Additional Statement. Additions or changes to any information in your account
registration (for example, a change in registration from a joint account to an
individual account) may be made by submitting a written request to the Transfer
Agent accompanied by a signature guarantee by a financial institution that is a
participant in the Stock Transfer Agency Medallion Program ("STAMP") or such
other means or evidence of authority as may be acceptable to the Transfer
Agent. Additional requirements may be imposed. In the interests of economy
and convenience, certificates representing shares of the Funds are not issued.
Northern Funds may reproduce this Prospectus in an electronic format which may
be available on the Internet. If you have received this Prospectus in its
electronic format you, or your representative, may contact the transfer agent
for a free paper copy of this Prospectus by writing to Northern Funds Center at
P.O. Box 75986, Chicago, Illinois 60690-6319 or by calling 1-800-595-9111.
REDEEMING AND EXCHANGING SHARES
You can arrange to withdraw your investment in the Fund by selling
some or all of your shares. This process is known as "redeeming" your shares.
The procedures for redeeming shares
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differ depending on whether you purchase your shares directly from Northern
Funds or through Northern Trust or another Service Organization. If you
purchase your shares through an account at Northern Trust or another Service
Organization, you will redeem them in accordance with the instructions
pertaining to that account.
REDEEMING AND EXCHANGING DIRECTLY FROM THE FUND
When you purchase your shares directly from Northern Funds, you may
redeem or exchange shares by the methods described below. You may also use any
of these methods if you purchase your shares through an account at Northern
Trust or another Service Organization and you appear on Northern Funds' records
as the registered holder. You may call 1-800-595-9111 if you have any
questions regarding redemptions or exchanges.
Northern Funds imposes no charges when you redeem or exchange shares.
Remember, however, when shares are purchased through Northern Trust or another
Service Organization, a fee may be charged by those institutions for providing
services in connection with your investment.
BY MAIL. You may redeem shares in any number or dollar amount by sending a
written request to Northern Funds, P.O. Box 75986, Chicago, Illinois
60690-6319. The redemption request must state the number of shares or the
dollar amount to be redeemed and identify the Fund account number. If the
redemption proceeds are to be sent elsewhere than the address of record, each
request must be accompanied by a signature guarantee by a financial institution
that participates in STAMP or such other means or evidence of authority as may
be acceptable to the Transfer Agent. In addition, written requests for
redemptions exceeding $50,000 must be accompanied by a signature guarantee by a
financial institution that participates in STAMP or such other means or
evidence of authority as may be acceptable to the Transfer Agent. Additional
requirements may be imposed. A signature notarized by a notary public is
unacceptable. Northern Funds reserves the right to require signature
guarantees in other circumstances based on the amount of the redemption request
or other factors, and may impose additional requirements.
BY WIRE. If you authorize wire redemptions on your Purchase Application,
shares can be redeemed and the proceeds sent by federal wire transfer to a
previously designated account. You will be charged $15 for each wire
redemption unless the designated account is maintained at Northern Trust or an
affiliated bank. The minimum amount that may be redeemed by this method is
$250. Northern Funds reserves the right to change this minimum or to terminate
the wire redemption privilege at any time without notice. To change bank
instructions, a written request accompanied by a signature guarantee by a
financial institution
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that participates in STAMP, or such other means or evidence of authority
acceptable to the Transfer Agent, must be sent to Northern Funds, P.O. Box
75986, Chicago, Illinois 60690-6319. Additional requirements may be imposed.
SYSTEMATIC WITHDRAWALS. Northern Funds offers a Systematic Withdrawal Plan.
If you own shares of the Fund with a minimum value of $10,000, you may elect to
have a fixed sum redeemed at regular intervals ($250 minimum amount per
withdrawal) and distributed in cash or reinvested in one or more of the other
Funds offered by Northern Funds. See "Purchasing Shares Directly from the Fund
- -- Directed Reinvestments." An application form and additional information may
be obtained from the Transfer Agent by calling 1-800-595-9111.
EXCHANGE PRIVILEGE. Northern Funds offers an exchange privilege that permits
you to exchange shares of the Fund for shares of another Fund offered by
Northern Funds. To establish the exchange privilege, you must check the
appropriate box on the Purchase Application or, if your Fund account is already
opened, you may send a written request to the Transfer Agent, and must
establish or maintain accounts with an identical title in each Fund involved in
an exchange transaction. In addition, the shares being exchanged must have a
value of at least $1,000 ($2,500 if a new account is being established by the
exchange).
Since an excessive number of exchanges may be disadvantageous to
Northern Funds, Northern Funds reserves the right, at any time without prior
notice, to suspend, limit or terminate the exchange privilege of any
shareholder who makes more than eight exchanges of shares in a year and/or two
exchanges of shares in a calendar quarter. A shareholder may continue making
exchanges until notified that the exchange privilege has been suspended,
limited or terminated. Questions regarding the exchange privilege may be
directed to 1-800-595-9111 or to your account officer at your Service
Organization. Exchanges will be processed only when the shares being acquired
can be legally sold in the state of the investor's residence.
Exchanges may have tax consequences. No exchange fee is currently
imposed by Northern Funds on exchanges. Northern Funds reserves, however, the
right to impose a charge in the future.
TELEPHONE PRIVILEGE. This privilege permits you to redeem or exchange shares
by telephone. To establish the telephone privilege, you must check the
appropriate box on the Purchase Application, or if your Fund account is already
opened, you may send a written request to the Transfer Agent. The request must
be signed by each owner of the account and accompanied by signature guarantees
as provided below or such other means or evidence of authority as may be
acceptable to the Transfer Agent. Once you have established the telephone
privilege, you may use
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the telephone privilege by calling the Transfer Agent at 1-800-595-9111.
The Transfer Agent has adopted procedures in an effort to establish
reasonable safeguards against fraudulent telephone transactions. The proceeds
for redemption orders will be sent by check, by wire transfer or by transfer to
an account maintained at Northern Trust or an affiliated bank. All checks will
be made payable to the shareholder of record and mailed only to the
shareholder's address of record. The address of record for redemption checks
may be changed only by a written request accompanied by signature guarantees by
a financial institution that participates in STAMP or such other means or
evidence of authority as may be acceptable to the Transfer Agent and sent to
Northern Funds, P.O. Box 75986, Chicago, Illinois 60690-6319. Additionally,
the Transfer Agent utilizes recorded lines for telephone transactions and will
request a form of personal identification if such identification has been
furnished to the Transfer Agent. Neither Northern Funds nor its Transfer Agent
will be responsible for the authenticity of instructions received by telephone
that are reasonably believed to be genuine. To the extent that Northern Funds
fails to use reasonable procedures to verify the genuineness of telephone
instructions, it or its service providers may be liable for instructions that
prove to be fraudulent or unauthorized. In all other cases, you will bear the
risk of loss.
Northern Funds reserves the right to refuse a telephone redemption if
it believes it is advisable to do so. Procedures for redeeming shares by
telephone may be modified or terminated by Northern Funds at any time without
notice. During periods of substantial economic or market change, telephone
redemptions may be difficult to place. If you are unable to contact the
Transfer Agent by telephone, shares may also be redeemed by mail as described
above under the discussion of redemptions by mail.
REDEEMING AND EXCHANGING THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
If you purchase your shares through an account at Northern Trust or
another Service Organization, you will redeem or exchange them in accordance
with the instructions pertaining to that account. If you are listed on the
books of Northern Funds as the shareholder of record, you may also redeem and
exchange your shares using any of the methods described above under "Redeeming
and Exchanging Directly from the Fund." Questions regarding these redemptions
or exchanges should be directed to your account representative at Northern
Trust or another Service Organization. Although Northern Funds imposes no
charges when you redeem, when shares are purchased through Northern Trust or
another Service Organization a fee may be charged by those
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institutions for providing services in connection with your account.
ADDITIONAL REDEMPTION AND EXCHANGE INFORMATION
EFFECTIVE TIME AND PRICE OF REDEMPTIONS AND EXCHANGES. Redemption orders for
shares of the Fund are processed at the net asset value next determined at 3:00
p.m. (Chicago Time) after receipt in good order by the Transfer Agent by 3:00
p.m. (Chicago Time) on a Business Day. Good order means that the request must
include the following information: the account number and Fund name; the
amount of the transaction (as specified in dollars or number of shares); the
signatures of all account owners exactly as they are registered on the account
(except for telephone and wire redemptions); required signature guarantees (if
applicable); and other supporting legal documents that might be required in the
case of estates, corporations, trusts and certain other accounts. Call
1-800-595-9111 for the additional documentation that may be required of these
entities. Exchange orders are likewise processed at the net asset value per
share next determined after receipt in good order by the Transfer Agent on a
Business Day.
PAYMENT OF REDEMPTION PROCEEDS. The Fund will make payment for redeemed shares
typically within one or two Business Days, but no later than the seventh day
after receipt by the Transfer Agent of a request in good order on a Business
Day, except as otherwise provided by the rules of the SEC. However, if any
portion of the shares to be redeemed represents an investment made by check,
the Fund may delay the payment of the redemption proceeds until the Transfer
Agent is reasonably satisfied that the check has been collected, which could
take up to fifteen days from the purchase date. This procedure does not apply
to shares purchased by money order or wire payment. During the period prior to
the time the shares are redeemed, dividends on such shares will accrue and be
payable.
MISCELLANEOUS REDEMPTION INFORMATION. All redemption proceeds will be sent by
check unless Northern Trust or the Transfer Agent is directed otherwise. The
ACH system may be utilized for payment of redemption proceeds. Redemptions may
not be processed if a shareholder has failed to submit a completed and signed
Purchase Application. Northern Funds may require any information reasonably
necessary to ensure that a redemption has been duly authorized.
To relieve Northern Funds of the cost of maintaining uneconomical
accounts, Northern Funds reserves the right to redeem the shares held in any
account if at the time of any redemption of shares in the account, the net
asset value of the remaining shares in the account falls below $1,000. Before
such involuntary redemption would occur, you would be given at least
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60 days' written notice and, during that period, you could make an additional
investment to restore the account to at least the minimum amount, in which case
there would be no such redemption. Involuntary redemptions will not be made
because the value of shares in an account falls below the minimum amount solely
because of a decline in the Fund's net asset value. Any involuntary redemption
would be at net asset value. Northern Funds also reserves the right to redeem
shares involuntarily if it is otherwise appropriate to do so under the 1940
Act.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Dividends from the net investment income of the Fund are declared and
paid quarterly.
The net realized capital gains of the Fund are distributed at least
annually.
Dividends and capital gain distributions, if any, will reduce the net
asset value of the Fund by the amount of the dividend or capital gain
distribution. Dividends and capital gain distributions, if any, are
automatically reinvested (without any sales charge or portfolio transaction
fee) in additional shares of the Fund at their net asset value determined on
the payment date. You may, however, notify the Transfer Agent in writing that
you elect to have dividends and/or capital gain distributions paid in cash or
reinvested in shares of another Fund offered by Northern Funds at their net
asset value determined on the payment date (provided you maintain an account in
such Fund). This election will become effective for distributions paid two
days after its receipt by the Transfer Agent.
TAXES
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a short summary of the important
tax considerations generally affecting the Fund and its shareholders. You
should consult your tax adviser with specific reference to your own tax
situation. Northern Funds will send written notices to shareholders annually
regarding the tax status of distributions made by the Fund. The Fund will
determine annually the percentages of their respective net investment income
which are exempt from tax, which constitute an item of tax preference for
purposes of the federal alternative minimum tax, and which are fully taxable
and will apply these percentages uniformly to all dividends declared from net
investment income during that year. These percentages may differ significantly
from the actual percentages for any particular day.
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FEDERAL TAXES. The Fund intends to qualify as a "regulated investment company"
under the Internal Revenue Code (the "Code"), meaning that to the extent the
Fund's earnings are distributed to shareholders as required by the Code, the
Fund itself is not required to pay federal income taxes.
To qualify, the Fund will pay as dividends at least 90% of its
investment company taxable income and at least 90% of its net tax-exempt income
(if any) each year. Investment company taxable income includes taxable
interest, dividends and short-term capital gains less expenses. Dividends
based on either investment company taxable income (which includes income
resulting from investments in options and futures contracts) or the excess of
net short-term capital gain over net long-term capital loss are treated as
ordinary income in determining gross income for tax purposes, whether or not
the dividends are received in cash or additional shares. (Federal income taxes
for distributions to an IRA or other qualified retirement account are deferred
under the Code.)
Any distribution based on the excess of long-term capital gain over
net short-term capital loss will be taxable as a long-term capital gain, no
matter how long you hold Fund shares.
Before purchasing shares you should consider the effect of any
dividends that are expected to be declared or that have been declared but not
yet paid. Any such dividend, although in effect a return of capital, will be
taxable to you.
Any dividends declared in October, November or December and payable to
shareholders during those months will be deemed to have been paid by the Fund
and received by shareholders on December 31, so long as the dividends are
actually paid in January of the following year.
Shareholders may realize a taxable gain or loss when redeeming,
transferring or exchanging their shares (or in using the Systematic Withdrawal
Plan to direct reinvestments), depending on the difference in the prices at
which the shares were originally purchased and when redeemed, transferred or
exchanged. If you hold shares for six months or less, and during that time
receive a distribution that is taxable as a long-term capital gain, any loss
realized on the sale of those shares will be treated as a long-term loss to the
extent of the earlier capital gain distribution.
Northern Funds will be required in certain cases to withhold and remit
to the U.S. Treasury 31% of the dividends and distributions paid to any
investor (i) who has provided either an incorrect Social Security Number or
Taxpayer Identification Number or no number at all, (ii) who is subject to
withholding by the Internal Revenue Service for failure to properly include on
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his return payments of interest or dividends, or (iii) who has failed to
certify to Northern Funds, when required to do so, that he is not subject to
backup withholding or that he is an "exempt recipient."
STATE AND LOCAL TAXES GENERALLY. Because your state and local taxes may be
different than the federal taxes described above, you should see your tax
adviser.
MANAGEMENT
BOARD OF TRUSTEES
The business and affairs of Northern Funds are managed under the
direction of its Board of Trustees. The Additional Statement contains the name
of each Trustee and other background information.
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern Trust, with offices at 50 S. LaSalle Street, Chicago,
Illinois 60675, serves as Northern Funds' investment adviser, transfer agent
and custodian. As transfer agent, Northern Trust provides various
administrative servicing functions, and any shareholder inquiries may be
directed to it.
Northern Trust, a member of the Federal Reserve System, is an Illinois
state-chartered commercial bank and the principal subsidiary of Northern Trust
Corporation, a bank holding company. Northern Trust was formed in 1889 with
capitalization of $1 million. As of March 31, 1996, Northern Trust Corporation
and its subsidiaries had approximately $20.3 billion in assets, $12.1 billion
in deposits and employed over 6,500 persons.
Northern Trust and its affiliates administered in various capacities
(including as master trustee, investment manager or custodian) over $641.2
billion in assets as of March 31, 1996 including over $114.5 billion for which
Northern Trust had investment management responsibility.
Subject to the general supervision of Northern Funds' Board of
Trustees, Northern Trust is responsible for making investment decisions for the
Fund and placing purchase and sale orders for portfolio securities. Northern
Trust is also responsible for monitoring and preserving the records required to
be maintained under the regulations of the SEC (with certain exceptions
unrelated to its activities for Northern Funds). In making investment
recommendations for the Funds, investment advisory personnel must not inquire
or take into consideration whether issuers of securities proposed for purchase
or sale for the Fund's accounts are customers of Northern Trust's commercial
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<PAGE> 73
banking department. These requirements are designed to prevent investment
advisory personnel for the Fund from knowing which companies have commercial
business with Northern Trust and from purchasing securities where they know the
proceeds will be used to repay loans to the bank.
As compensation for its advisory services and its assumption of
related expenses, Northern Trust is entitled to a fee, computed daily and
payable monthly, at an annual rate of .60% of the average daily net assets of
the Fund.
Northern Trust also receives compensation as Northern Funds' custodian
and transfer agent. The fees payable by the Fund for these services are
described in the Additional Statement.
The Fund is advised by Northern Trust's Investment Services Group.
James M. Snyder, Vice President of Northern Trust since 1980, Senior Vice
President since 1991 and Chief Investment Officer since 1995, oversees the
management of all fixed income, equity and money market assets managed by
Northern Trust and is the head of Northern's Investment Services Group. Mr.
Snyder received his B.S. degree from Indiana University and his M.B.A. degree
from DePaul University. He is a Chartered Financial Analyst and a member of
the Investment Analysts Society of Chicago.
ADMINISTRATOR AND DISTRIBUTOR
Sunstone Financial Group, Inc. ("Sunstone"), 207 E. Buffalo Street,
Suite 400, Milwaukee, Wisconsin 53202, acts as administrator and distributor
for Northern Funds. Shares of the Fund are sold by Sunstone, as distributor,
on a continuous basis. As compensation for its administrative services (which
include clerical, compliance, regulatory and other services) and the assumption
of related expenses, Sunstone is entitled to a fee, computed daily and payable
monthly, at an annual rate of .15% of Northern Funds' average net assets. No
compensation is payable by Northern Funds to Sunstone for its distribution
services.
SERVICE ORGANIZATIONS
Northern Funds may enter into agreements with Service Organizations
such as banks, corporations, brokers, dealers and other financial institutions,
including Northern Trust, concerning the provision of support and/or
distribution services to their customers who own Fund shares. These services,
which are described more fully in the Additional Statement, may include support
services such as assisting investors in processing administrative purchase,
exchange and redemption requests; processing dividend and distribution payments
from the Funds; providing information to customers showing their positions in
the
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<PAGE> 74
Fund; and providing subaccounting with respect to Fund shares beneficially
owned by customers or the information necessary for subaccounting. In
addition, Service Organizations may provide assistance, such as the forwarding
of sales literature and advertising to their customers, in connection with the
distribution of Fund shares. For their services, Service Organizations may
receive fees from the Fund at annual rates of up to .25% of the average daily
net asset value of the shares covered by their agreements.
Service Organizations may charge their customers fees for providing
administrative services in connection with investments in the Fund. Under the
terms of their agreements with Northern Funds, Service Organizations are
required to provide a schedule of these fees to their customers. In addition,
investors should contact their Service Organization with respect to the
availability of shareholder services and the particular Service Organization's
procedures for purchasing and redeeming shares. It is the responsibility of
Service Organizations to transmit purchase and redemption orders and record
those orders on a timely basis in accordance with their agreements with their
customers.
Conflict-of-interest restrictions may apply to the receipt of
compensation paid by Northern Funds in connection with the investment of
fiduciary funds in Fund shares. Institutions, including banks regulated by the
Comptroller of the Currency, Federal Reserve Board 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 their legal counsel before entering into
agreements with Northern Funds.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting securities.
Accordingly, banks will be engaged under agreements with Northern Funds only to
perform the administrative and investor servicing functions described above,
and will represent that the services provided by them under the agreements will
not be primarily intended to result in the sale of Fund shares.
Agreements that contemplate the provision of distribution services by
Service Organizations are governed by a Distribution and Service Plan (the
"Plan") that has been adopted by Northern Funds pursuant to Rule 12b-1 under
the 1940 Act. No payments are made to Sunstone under the Plan. However,
payments to Service Organizations, including Northern Trust, under the Plan are
not tied directly to their own out-of-pocket expenses and therefore may be used
as they elect (for example, to defray their overhead expenses), and may exceed
their direct and indirect costs.
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<PAGE> 75
EXPENSES
Except as set forth above and in the Additional Statement, the Fund is
responsible for the payment of its expenses. These expenses include, without
limitation, the fees and expenses payable to Northern Trust and Sunstone,
brokerage fees and commissions, fees for the registration or qualification of
Fund shares under federal or state securities laws, expenses of the Fund's
organization, 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
Northern Funds for violation of any law, legal, tax and auditing fees and
expenses, expenses of preparing and printing prospectuses, statements of
additional information, proxy materials, reports and notices and the printing
and distributing of the same to the Fund's shareholders and regulatory
authorities, compensation and expenses of its Trustees, payments to Service
Organizations, fees of industry organizations such as the Investment Company
Institute, and miscellaneous and extraordinary expenses incurred by Northern
Funds.
Northern Trust and Sunstone intend to voluntarily reimburse a portion
of the Fund's expenses and/or reduce their advisory and administrative fees
from the Fund during the current fiscal year. The result of these
reimbursements and fee reductions will be to increase the performance of the
Fund during the periods for which the reductions and reimbursements are made.
FURTHER INFORMATION
DETERMINING SHARE PRICE
Net asset value per share for purposes of purchases and redemptions is
calculated by Northern Trust on each Business Day as of 3:00 p.m. (Chicago
Time) for the Fund. Net asset value is calculated by dividing the value of all
securities and other assets belonging to the Fund, less the liabilities charged
to the Fund, by the number of the Fund's outstanding shares.
Securities held by the Fund that are listed on a recognized U.S.
securities exchange are valued at the last quoted sales price on the securities
exchange on which the securities are primarily traded. If securities listed on
a U.S. exchange are not traded on a valuation date, they will be valued at the
last quoted bid price. Securities that are traded in the U.S.
over-the-counter markets, absent a last quoted sales price, are valued at the
last quoted bid price. Any securities for which no current quotations are
readily available are valued at fair value as determined in good faith by
Northern Trust under the supervision of the Board of Trustees. Temporary
short-term investments are valued at amortized cost which Northern Trust has
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<PAGE> 76
determined, pursuant to Board authorization, approximates market value.
Securities may be valued on the basis of prices provided by independent pricing
services when those prices are believed to reflect the fair market value of the
securities.
ADVERTISING PERFORMANCE
The performance of the Fund may be compared to those of other mutual
funds with similar investment objectives and to stock, bond and other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For
example, the performance of the Fund will be compared to the S&P 500 Index, and
may be compared to data prepared by Lipper Analytical Services, Inc., the
Russell 1000 Small Stock Index, the Consumer Price Index or the Dow Jones
Industrial Average. Performance data as reported in national financial
publications such as Money Magazine, 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 the Fund.
The Fund calculates its total return on an "average annual total
return" basis for various periods from the date the Fund commences investment
operations and for other periods as permitted under SEC rules. Average annual
total return reflects the average annual percentage change in value of an
investment over the measuring period. Total return 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 Fund's
shares and assume that any dividends and capital gain distributions are
reinvested. When considering average total return figures for periods longer
than one year, you should note that the annual total return for any one year
may be more or less than the average for the entire period. The Fund may also
advertise its total return on an aggregate, year-by-year or other basis for
various specified periods through charts, graphs, schedules or quotations.
Performance is based on historical earnings and is not intended to
indicate future performance. The investment return and principal value of an
investment in the Fund will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Performance data may not provide
a basis for comparison with bank deposits and other investments which provide a
fixed yield for a stated period of time. Changes in the net asset value should
be considered in ascertaining the total return to shareholders for a given
period. Total return data should also be considered in light of the risks
associated with a Fund's composition, quality, operating expenses and market
conditions. Any fees charged by Northern Trust or a Service
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<PAGE> 77
Organization directly to its customers in connection with investments in the
Fund will not be included in Northern Funds' calculations of performance data.
VOTING RIGHTS
Northern Funds was formed as a Massachusetts Business Trust on October
12, 1993 under an Agreement and Declaration of Trust (the "Trust Agreement").
The Trust Agreement permits the Board of Trustees to issue an unlimited number
of shares of beneficial interest of one or more separate series representing
interests in different investment portfolios. Northern Funds currently offers
nineteen separate funds. This Prospectus relates only to the Stock Index Fund.
Shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held. Each Northern Fund
entitled to vote on a matter will vote in the aggregate and not by fund, except
as required by law or when the matter to be voted on affects only the interests
of shareholders of a particular series. The Additional Statement gives
examples of situations where the law requires voting by series. Voting rights
are not cumulative and, accordingly, the holders of more than 50% of the
aggregate shares of Northern Funds may elect all of the Trustees.
Northern Funds does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law.
Pursuant to the Trust Agreement, the Trustees will promptly call a meeting of
shareholders to vote upon the removal of any Trustee when so requested in
writing by the record holders of 10% or more of the outstanding shares. To the
extent required by law, Northern Funds will assist in shareholder
communications in connection with the meeting.
As of July __, 1996, Northern Trust possessed sole or shared voting or
investment power for its customer accounts with respect to more than ___% of
the outstanding shares of Northern Funds.
SHAREHOLDER REPORTS
Shareholders of record will be provided each year with a semi-annual
report showing portfolio investments and other information as of September 30
and, after the close of the Fund's fiscal year March 31, with an annual report
containing audited financial statements. To eliminate unnecessary duplication,
only one copy of shareholder reports will be sent to shareholders with the same
mailing address. Shareholders who desire a duplicate copy of shareholder
reports to be mailed to their residence should call 1-800-595-9111.
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<PAGE> 78
RETIREMENT PLANS
Shares of the Fund may be purchased in connection with certain
tax-sheltered retirement plans, including profit-sharing plans, 401(k) plans,
money purchase pension plans, target benefit plans and individual retirement
accounts. Further information about how to participate in these plans, the
fees charged and the limits on contributions can be obtained from Northern
Trust. To invest through any of the tax-sheltered retirement plans, please
call Northern Trust for information and the required separate application. To
determine whether the benefits of a tax-sheltered retirement plan are available
and/or appropriate, a shareholder should consult with a tax adviser.
MISCELLANEOUS
The address of Northern Funds is 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202 and the telephone number is 1-800-595-9111.
Northern Funds is registered as an open-end management investment company under
the 1940 Act, and the Fund is classified under that Act as a diversified
portfolio.
As used in this Prospectus, "Business Day" means each day Northern
Trust and the New York Stock Exchange (the "Exchange") are open, which is
Monday through Friday, except for holidays observed by Northern Trust and/or
the Exchange. In 1996, these holidays are New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veterans Day, Thanksgiving and Christmas. On days when
Northern Trust or the Exchange closes early as a result of unusual weather or
other conditions, the right is reserved to advance the time by which purchase
and redemption requests must be received. In addition, on any Business Day
when the Public Securities Association ("PSA") recommends that the securities
markets close early, the Funds reserve the right to cease or to advance the
deadline for accepting purchase and redemption orders for same Business Day
credit up to one hour before the PSA recommended closing time. Purchase and
redemption requests received after the advanced closing time will be effected
on the next Business Day. Northern Trust is not required to calculate the net
asset value of the Fund on days during which no shares are tendered to the Fund
for redemption and no orders to purchase or sell shares are received by the
Fund, or on days on which there is an insufficient degree of trading in the
Fund's portfolio securities for changes in the value of such securities to
materially affect the net asset value per share.
From time to time, Northern Funds' distributor may provide promotional
incentives to brokers whose representatives have sold or are expected to sell
shares of the Fund. At various times, the distributor may implement programs
under which a broker's
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<PAGE> 79
sales force may be eligible to win cash or non-cash awards for sales efforts,
and may finance broker sales contests or recognition programs conforming to
criteria established by the distributor. The distributor may also provide
marketing services to brokers consisting of written informational material
relating to sales incentive campaigns conducted by such brokers for their
representatives.
Northern Trust is sometimes referred to as "The Northern Trust Bank"
in advertisements and other literature.
The Stock 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
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 Index or any data included
therein. S&P makes no express or implied warranties and expressly disclaims
all such warranties of merchantability of fitness for a particular purpose for
use with respect to the S&P 500 Index or any data included therein.
--------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN THE FUND'S ADDITIONAL
STATEMENT IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY NORTHERN FUNDS OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY NORTHERN FUNDS OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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<PAGE> 80
33-73404
811-8236
PART B
STATEMENT OF ADDITIONAL INFORMATION
FLORIDA INTERMEDIATE TAX-EXEMPT BOND FUND
("THE FUND")
NORTHERN FUNDS
(THE "TRUST")
This Statement of Additional Information (the "Additional
Statement") dated August __, 1996 is not a prospectus. This Additional
Statement should be read in conjunction with the Prospectus dated August __,
1996, as amended or supplemented from time to time, for the Fund (the
"Prospectus"). Copies of the Prospectus may be obtained without charge from
the transfer agent by writing to the Northern Funds Center, P.O. Box 75986,
Chicago, Illinois 60690-9069 or by calling 1-800-595-9111. Capitalized terms
not otherwise defined have the same meaning as in the Prospectus.
----------
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 NORTHERN FUNDS OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY NORTHERN FUNDS OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
SHARES OF NORTHERN FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED, ENDORSED OR OTHERWISE SUPPORTED BY, THE NORTHERN TRUST BANK,
ITS PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION,
FEDERAL RESERVE BOARD, OR ANY OTHERS GOVERNMENTAL AGENCY.
<PAGE> 81
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL INVESTMENT INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Taxable Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Special Considerations Relating to Florida Municipal
Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ADDITIONAL TRUST INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Investment Adviser, Transfer Agent and Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Administrator and Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Service Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Counsel and Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
In-Kind Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Automatic Investing Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Redemptions and Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Federal - General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Federal - Tax-Exempt Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Taxation of Certain Financial Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Special Florida Tax Considerations Pertaining to the
Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
APPENDIX A DESCRIPTION OF SECURITIES RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B DESCRIPTION OF FUTURE TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
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<PAGE> 82
ADDITIONAL INVESTMENT INFORMATION
INVESTMENT OBJECTIVE AND POLICIES
The following supplements the investment objective and
policies of the Fund set forth in the Prospectus.
Florida Intermediate Tax-Exempt Bond Fund seeks a high level
of current income exempt from regular federal income tax. The
Fund intends, but cannot guarantee, that its shares will
qualify for exemption from the Florida intangibles tax.
REVERSE REPURCHASE AGREEMENTS. The Fund 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"). Reverse repurchase agreements are
considered to be borrowings under Investment Company Act of 1940 ("1940 Act").
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Fund may decline below the repurchase price. The Fund
will pay interest on amounts obtained pursuant to a reverse repurchase
agreement. While reverse repurchase agreements are outstanding, the Fund will
maintain in a segregated account cash, U.S. Government securities or other
liquid high-grade debt securities of an amount at least equal to the market
value of the securities, plus accrued interest, subject to the agreement.
VARIABLE AND FLOATING RATE INSTRUMENTS. With respect to the
variable and floating rate instruments that may be acquired by the Fund as
described in the Prospectus, Northern Trust 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 to meet payment on demand. In determining
weighted average portfolio maturity, an instrument will usually be deemed to
have a maturity equal to the longer of the period remaining until the next
interest rate adjustment or the time the Fund can recover payment of principal
as specified in the instrument. Variable rate U.S. Government obligations held
by the Fund, however, may be deemed to have maturities equal to the period
remaining until the next interest rate adjustment. Where necessary to ensure
that a variable or floating rate instrument is of the minimum required credit
quality for the Fund, the issuer's obligation to pay the principal of the
instrument will be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-
DELIVERY TRANSACTIONS. The Fund may purchase securities on a when-issued basis
or purchase or sell securities on a forward commitment (sometimes called
delayed delivery) basis. These
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transactions involve a commitment by the Fund to purchase or sell securities at
a future date. The price of the underlying securities (usually expressed in
terms of yield) and the date when the securities will be delivered and paid for
(the settlement date) are fixed at the time the transaction is negotiated.
When-issued purchases and forward commitment transactions are normally
negotiated directly with the other party.
The Fund will purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however,
the Fund may dispose of or negotiate a commitment after entering into it. The
Fund also may sell securities it has committed to purchase before those
securities are delivered to the Fund on the settlement date.
When the Fund purchases securities on a when-issued,
delayed-delivery or forward commitment basis, the Fund's custodian will
maintain in a segregated account cash, U.S. Government securities or other
high-grade debt obligations having a value (determined daily) at least equal to
the amount of the Fund's purchase commitments. In the case of a forward
commitment to sell portfolio securities, the custodian or subcustodian will
hold the portfolio securities themselves in a segregated account while the
commitment is outstanding. These procedures are designed to ensure that the
Fund will maintain sufficient assets at all times to cover its obligations
under when-issued purchases, forward commitments and delayed-delivery
transactions. For purposes of determining a Fund's average dollar-weighted
maturity, the maturity of when-issued, delayed-delivery or forward commitment
securities will be calculated from the commitment date.
MUNICIPAL INSTRUMENTS. Opinions relating to the validity of
Municipal Instruments and to the exemption of interest thereon from regular
federal income tax are rendered by counsel to the respective issuing
authorities at the time of issuance. Such opinions may contain various
assumptions, qualifications or exceptions that are reasonably acceptable to
Northern Trust. Neither Northern Funds nor Northern Trust will review the
proceedings relating to the issuance of Municipal Instruments or the bases for
such opinions.
An issuer's obligations under its Municipal Instruments are
subject to the provisions of bankruptcy, insolvency and other laws affecting
the rights and remedies of creditors, such as the Federal Bankruptcy Code, and
laws, if any, which may be enacted by federal or state legislatures extending
the time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations or upon the ability of
municipalities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest on and principal
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of its Municipal Instruments may be materially adversely affected by litigation
or other conditions.
From time to time proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Instruments. For example, under the Tax
Reform Act of 1986 interest on certain private activity bonds must be included
in an investor's federal alternative minimum taxable income, and corporate
investors must include all tax-exempt interest in their federal alternative
minimum taxable income. Northern Funds cannot predict what legislation, if
any, may be proposed in the future in Congress as regards the federal income
tax status of interest on Municipal Instruments or which proposals, if any,
might be enacted. Such proposals, if enacted, might materially and adversely
affect the availability of Municipal Instruments for investment by the Fund and
the Fund's liquidity and value. In such an event the Board of Trustees would
reevaluate the Fund's investment objective and policies and consider changes in
their structure or possible dissolution.
Certain of the Municipal Instruments held by the Fund may be
insured as to the timely payment of principal and interest. The insurance
policies will usually be obtained by the issuer of the Municipal Instrument at
the time of its original issuance. In the event that the issuer defaults on an
interest or principal payment, the insurer will be notified and will be
required to make payment to the bondholders. There is, however, no guarantee
that the insurer will meet its obligations. In addition, such insurance will
not protect against market fluctuations caused by changes in interest rates and
other factors. The Fund may, from time to time, invest more than 25% of its
assets in Municipal Instruments covered by insurance policies.
Interest earned by the Fund on private activity bonds (if any)
that is treated as a specific tax preference item under the federal alternative
minimum tax will not be deemed to have been derived from Municipal Instruments
for purposes of determining whether that Fund meets its fundamental policy that
at least 80% of its annual gross income be derived from Municipal Instruments.
As described in the Prospectus, the Fund may invest in
municipal leases, which may be considered liquid under guidelines established
by Northern Funds' Board of Trustees. The guidelines will provide for
determination of the liquidity and proper valuation of a municipal lease
obligation based on factors including the following: (1) the frequency of
trades and quotes for the obligation; (2) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (3) the
willingness of dealers to undertake to make a market in the security; and (4)
the nature of the marketplace trades, including the time needed to dispose of
the security, the method of
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soliciting offers and the mechanics of transfer. Northern Trust, under the
supervision of Northern Funds' Board of Trustees, will also consider the
continued marketability of a municipal lease obligation based upon an analysis
of the general credit quality of the municipality issuing the obligation and
the essentiality to the municipality of the property covered by the lease.
STANDBY COMMITMENTS. The Fund may enter into standby
commitments with respect to Municipal Instruments held by them. Under a standby
commitment, a dealer agrees to purchase at the Fund's option a specified
Municipal Instrument at its amortized cost value to the Fund plus accrued
interest, if any. Standby commitments may be exercisable by the Fund at any
time before the maturity of the underlying Municipal Instruments and may be
sold, transferred or assigned only with the instruments involved.
The Fund expects that standby commitments will generally be
available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Fund may pay for a standby commitment
either separately in cash or by paying a higher price for Municipal Instruments
which are acquired subject to the commitment (thus reducing the yield to
maturity otherwise available for the same securities). The total amount paid
in either manner for outstanding standby commitments held by the Fund will not
exceed 1/2 of 1% of the value of the Fund's total assets calculated immediately
after each standby commitment is acquired.
The Fund intends to enter into standby commitments only with
dealers, banks and broker-dealers which, in Northern Trust's opinion, present
minimal credit risks. The Fund will acquire standby commitments solely to
facilitate portfolio liquidity and do not intend to exercise their rights
thereunder for trading purposes. The acquisition of a standby commitment will
not affect the valuation of the underlying Municipal Instrument. The actual
standby commitment will be valued at zero in determining net asset value.
Accordingly, where the Fund pays directly or indirectly for a standby
commitment, its cost will be reflected as an unrealized loss for the period
during which the commitment is held by the Fund and will be reflected in
realized gain or loss when the commitment is exercised or expires.
OPTIONS. The Fund may buy put options and buy call options
and write covered call and secured put options. Such options may relate to
particular securities, securities indices or financial instruments, and may or
may not be listed on a domestic or foreign securities exchange ("Exchange") and
may or may not be issued by the Options Clearing Corporation. Options trading
is a highly specialized activity which entails greater than ordinary investment
risk. Options 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.
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A call option for a particular security gives the purchaser of
the option the right to buy, and a writer the obligation to sell, the
underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is in consideration for undertaking the obligation
under the option contract. A put option for a particular security gives the
purchaser the right to sell the security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. Options on indices provide the holder with the right to make
or receive a cash settlement upon exercise of the option. With respect to
options on indices, the amount of the settlement will equal the difference
between the closing price of the index at the time of exercise and the exercise
price of the option expressed in dollars, times a specified multiple.
The Fund 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 the Fund owns the instrument underlying the call or has an absolute and
immediate right to acquire that instrument without additional cash
consideration (or, if additional cash consideration is required, cash, U.S.
Government securities or other liquid high grade debt obligations, in such
amount as are held in a segregated account by its custodian) upon conversion or
exchange of other securities held by it. For a call option on an index, the
option is covered if the Fund maintains with its custodian a diversified
portfolio of securities comprising the index or liquid assets equal to the
contract value. A call option is also covered if the Fund holds a call on the
same instrument or index as the call written where the exercise price of the
call held is (i) equal to or less than the exercise price of the call written,
or (ii) greater than the exercise price of the call written provided the
difference is maintained by the Fund in liquid assets in a segregated account
with its custodian. The Fund will write put options only if they are "secured"
by liquid assets maintained in a segregated account by the Fund's custodian in
an amount not less than the exercise price of the option at all times during
the option period.
The Fund's obligation to sell an instrument subject to a
covered call option written by it, or to purchase an instrument subject to a
secured put option written by it, may be terminated prior to the expiration
date of the option by the Fund'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 instrument, 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 instrument
from being called, to permit the sale of the underlying instrument or to permit
the
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writing of a new option containing different terms on such underlying
instrument. 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 Fund 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 instrument (in the case of a covered call option) or
liquidate the segregated account (in the case of a secured put option) until
the option expires or the optioned instrument 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 instrument during such
period.
When the Fund purchases an option, the premium paid by it is
recorded as an asset of the Fund. When the Fund writes an option, an amount
equal to the net premium (the premium less the commission) received by the Fund
is included in the liability section of the Fund'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 Fund expires unexercised, the Fund realizes a loss
equal to the premium paid. If the Fund enters into a closing sale transaction
on an option purchased by it, the Fund will realize a gain if the premium
received by the Fund 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
Fund expires on the stipulated expiration date or if the Fund 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 Fund is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Fund will realize a
gain or loss.
There are several risks associated with transactions in
options. For example, there are significant differences between the securities
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 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
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interrupt normal operations on an Exchange; the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading value; or one or more Exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that Exchange (or in that class or series of options) would
cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that Exchange would
continue to be exercisable in accordance with their terms.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may purchase
and sell futures contracts and may purchase and sell call and put options on
futures contracts. For a detailed description of futures contracts and related
options, see Appendix B to this Additional Statement.
SECURITIES LENDING. Collateral for loans of portfolio
securities made by the Fund may consist of cash, 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 the Fund 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 the Fund if a
material event affecting the investment is to occur.
INTEREST RATE SWAPS. The Fund may enter into interest rate
swaps for hedging purposes and not for speculation. The Fund 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. Interest rate swaps involve the exchange by the Fund 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 Fund will only enter into interest rate swaps on a net
basis, i.e. the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. Inasmuch
as these transactions are entered into for good faith hedging purposes, the
Fund and Northern Trust believe that such obligations do not constitute senior
securities as defined in the Investment Company Act of 1940 ("the 1940 Act")
and, accordingly, will not treat them as being subject to the Fund's borrowing
restrictions.
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The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis, and an amount of cash, U.S. Government securities
or other liquid high grade debt securities, having an aggregate net asset value
at least equal to such accrued excess, will be maintained in a segregated
account by the Fund's custodian.
The Fund will not enter into an interest rate swap unless the
unsecured commercial paper, senior debt or the claims-paying ability of the
other party thereto is rated either A or A-1 or better by Standard & Poor's
Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps Credit Co.
("Duff") or Fitch Investors Service, Inc. ("Fitch"), or A or P-1 or better by
Moody's Investors Service, Inc. ("Moody's"). If there is a default by the
other party to such transaction, the Fund 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.
INVESTMENT COMPANIES. The Fund currently intends to limit its
investments in securities issued by other investment companies so that, as
determined immediately after a purchase of such securities is made, not more
than 3% of the total outstanding stock of any one investment company will be
owned by Northern funds as a whole and its affiliated persons (as defined in
the 1940 Act). An investment company whose securities are purchased by the
fund or other portfolios of Northern Funds or the Trusts is not 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.
YIELDS AND RATINGS. The yields on fixed income obligations in
which the Fund invests, are dependent on a variety of factors, including
general economic conditions, conditions in the particular market for the
obligation, financial condition of the issuer, size of the offering, maturity
of the obligation and ratings of the issue. The ratings of S&P, Moody's, Duff,
Fitch and Thomson BankWatch, Inc. 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.
CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio
turnover rate for the Fund is calculated by dividing the lesser of purchases or
sales of portfolio investments for the reporting
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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 Fund to receive
favorable tax treatment.
MISCELLANEOUS. The Fund will not normally engage in the
trading of securities for short-term profits. However, the Fund is not
restricted by policy with regard to portfolio turnover and will make changes in
their investment portfolio from time to time as business and economic
conditions as well as market prices may dictate. Securities may be purchased
on margin only to obtain such short-term credits as are necessary for the
clearance of purchases and sales of securities. The Fund will not engage in
selling securities short. The Fund may, however, make short sales against the
box although the Fund has no current intention to do so during the current
fiscal year. "Selling short against the box" involves selling a security that
the Fund owns for delivery at a specified date in the future.
TAXABLE INVESTMENTS
As stated in the Prospectus, the Fund may invest from time to
time in Taxable Investments. The investments are described below in this
section.
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, although there is no market for such deposits. Bank notes and bankers'
acceptances rank junior to deposit liabilities of the bank and pari passu with
other senior, unsecured obligations of the bank. Bank notes are classified as
"other borrowings" on a bank's balance sheet, while deposit notes and
certificates of deposit are
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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.
The Fund may invest a portion of its net 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.
REPURCHASE AGREEMENTS. The Fund 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 Investment Company Act of 1940 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
a Fund's acquisition of the securities and normally will be within a shorter
period of time. Securities subject to repurchase agreements are held by
Northern Funds' custodian 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 Fund to possible loss because of adverse market action or
delay in connection with the disposition of the underlying obligations.
UNITED STATES GOVERNMENT OBLIGATIONS. To the extent
consistent with its investment objective, the Fund may invest in a variety of
U.S. Treasury obligations consisting of bills, notes and bonds, which
principally differ only in their interest rates, maturities and issuance dates.
The Fund may also invest in other securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Obligations of certain agencies
and instrumentalities, such as the Government National Mortgage Association
("GNMA"), are supported by the full faith and credit of the U.S. Treasury;
others, such as those of the Export-Import Bank
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of the United States, are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Student Loan Marketing Association ("SLMA"), are supported only by the
credit of the instrumentalities. No assurance can be given that the U.S.
Government would provide financial support to its agencies or instrumentalities
if it is not obligated to do so by law. Obligations of the International Bank
for Reconstruction and Development (also known as the World Bank) 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.
Securities guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities are deemed to include (a)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. Government or an agency or
instrumentality thereof, and (b) participations in loans made to foreign
governments or their agencies that are so guaranteed. The secondary market for
certain of these participations is limited. Such participations will therefore
be regarded as illiquid. No assurance can be given that the U.S. Government
would provide financial support to its agencies or instrumentalities if it is
not obliged to do so by law.
Examples of the types of U.S. Government obligations that may
be acquired by the Fund include U.S. Treasury Bills, Treasury Notes and
Treasury Bonds and the obligations of Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Federal National Mortgage Association ("FNMA"), Government
National Mortgage Association ("GNMA"), General Services Administration,
Student Loan Marketing Association ("SLMA"), Central Bank for Cooperatives,
Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit
Banks and Maritime Administration.
SUPRANATIONAL BANK OBLIGATIONS. The Fund 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
International Bank for Reconstruction and Development). Obligations of
supranational banks may be supported by appropriated but unpaid commitments of
their member countries and there is no assurance that these commitments will be
undertaken or met in the future.
STRIPPED OBLIGATIONS. To the extent consistent with its
investment objective, the Fund may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the
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future interest payments or the future principal payments on U.S. Government
and other obligations. These participations, which may be issued by the U.S.
Government (or a U.S. Government agency or instrumentality) or by private
issuers such as banks and other institutions, are issued at a discount to their
"face value," and may include stripped mortgage-backed securities ("SMBS").
Stripped securities, particularly SMBS, may exhibit greater price volatility
than ordinary debt securities because of the manner in which their principal
and interest are returned to investors.
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 cases, 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 Fund may fail
to fully recoup its initial investment. The market value of the class
consisting entirely of principal payments can be 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 greater 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 Northern Funds' 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 Fund's per share net asset value.
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with
its investment objective, the Fund may invest in debt obligations of domestic
or foreign corporations and banks, and may acquire commercial obligations
issued by Canadian corporations and Canadian counterparts of U.S. corporations,
as well as Europaper, which is U.S. dollar-denominated commercial paper of a
foreign issuer. Bank obligations may include certificates of deposit, notes,
bankers' acceptances and fixed time deposits. These obligations may be general
obligations of the parent bank or may be limited to the issuing branch or
subsidiary by the terms of specific obligation or by government regulation.
For purposes of determining the permissibility of an investment in bank
obligations, the total assets of a bank are determined on the basis of the
bank's most recent annual financial statements.
STRIPPED GOVERNMENT OBLIGATIONS. Within the past several
years, the Treasury Department has facilitated transfers of
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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 Fund may purchase securities registered in the STRIPS
program. Under the STRIPS program, the Fund 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 Fund may acquire U.S. Government obligations
and their unmatured interest coupons that have been separated ("stripped") by
their holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including
"Treasury Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on
Treasury Securities" ("CATS"). The stripped coupons are sold separately from
the underlying principal, which is usually sold at a deep discount because the
buyer receives only the right to receive a future fixed payment on the security
and does not receive any rights to periodic interest (cash) payments. The
underlying U.S. Treasury bonds and notes themselves are held in book-entry form
at the Federal Reserve Bank or, in the case of bearer securities (i.e.,
unregistered securities which are ostensibly owned by the bearer or holder), in
trust on behalf of the owners. Counsel to the underwriters of these
certificates or other evidences of ownership of U.S. Treasury securities have
stated that, in their opinion, purchasers of the stripped securities most
likely will be deemed the beneficial holders of the underlying U.S. Government
obligations for federal tax purposes. Northern Funds is unaware of any binding
legislative, judicial or administrative authority on this issue. Investments
by the Fund in these securities will not exceed 5% of the value of the Fund's
total assets.
ASSET-BACKED SECURITIES. To the extent described in the
Prospectus, the Fund 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
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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. Asset-backed securities
acquired by the Fund may include collateralized mortgage obligations ("CMOs")
issued by private companies.
There are a number of important differences among the agencies
and instrumentalities of the U.S. Government that issue mortgage-related
securities and among the securities that they issue. Mortgage-related
securities guaranteed by the GNMA include GNMA Mortgage Pass-Through
Certificates (also known as "Ginnie Maes") which are guaranteed as to the
timely payment of principal and interest by GNMA and backed by the full faith
and credit of the United States. GNMA is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development. GNMA
certificates also are supported by the authority of GNMA to borrow funds from
the U.S. Treasury to make payments under its guarantee. Mortgage-backed
securities issued by the 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
FHLMC include FHLMC Mortgage Participation Certificates (also known as "Freddie
Macs" or "Pcs"). FHLMC is a corporate instrumentality of the United States,
created pursuant to an Act of Congress, which is owned entirely by Federal Home
Loan Banks. Freddie Macs are not guaranteed and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by FHLMC.
FHLMC guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee
timely payment of principal, FHLMC may remit the amount due on account of its
guarantee of ultimate payment of principal at any time after default on an
underlying mortgage, but in no event later than one year after it becomes
payable.
SPECIAL CONSIDERATIONS RELATING TO FLORIDA MUNICIPAL INSTRUMENTS
Some of the significant financial considerations relating to
investments by the Fund in Municipal Instruments issued by the state of Florida
and its municipalities, counties and other taxing districts ("Florida Municipal
Instruments") are summarized below. This summary information is derived
principally from official statements released prior to the date of this
Statement of Additional Information relating to issues of Florida Municipal
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<PAGE> 96
Instruments and does not purport to be a complete description of any of the
considerations mentioned herein. While the Fund has not independently verified
such information, it has no reason to believe such information is not correct
in all material respects.
The financial condition of the State of Florida may be
affected by various financial, social, economic and political factors. Those
factors can be very complex, may vary from fiscal year to fiscal year, and are
frequently the result of actions taken not only by the State and its agencies
and instrumentalities but also by entities that are not under the control of
the State. Adverse developments affecting the State's financing activities, its
agencies or its political subdivisions could adversely affect the State's
financial condition.
The State's revenues increased from $29,115,034,000 during the
1993-94 fiscal year ended June 30, 1994 to $31,178,025,000 during the fiscal
year ended June 30, 1995. The State's expenses increased from $27,878,146,000
during the 1993-94 fiscal year ended June 30, 1994 to $30,775,597,000 during
the 1994-95 fiscal year ended June 30, 1995. The Florida Comptroller also
projected non-agricultural jobs to gross 3.2% and 3.0% in fiscal years 1995-96
and 1996-97, respectively.
The Constitution of the State of Florida limits the right of
the State and its local governments to tax. The Constitution requires the
State to have a balanced budget and to raise revenues to defray its operating
expenses. The State may not borrow for the purpose of maintaining ordinary
operating expenses, but may generally borrow for capital improvements.
There are a number of methods by which the State of Florida
may incur debt. The State may issue bonds backed by the State's full faith and
credit to finance or refinance certain capital projects authorized by its
voters. The State also may issue certain bonds backed by the State's full
faith and credit to finance or refinance pollution control, solid waste
disposal and water facilities for local governments, county roads, school
districts and capital public education projects without voter authorization.
The State may also, pursuant to specific constitutional authorization, directly
guarantee certain obligations of the State's authorities, agencies and
instrumentalities. Payments of debt service on State bonds backed by the
State's full faith and credit and State-guaranteed bonds and notes are legally
enforceable obligations of the State. Revenue bonds to finance or refinance
certain capital projects also may be issued by the State of Florida without
voter authorization. However, revenue bonds are payable solely from funds
derived directly from sources other than state tax revenues.
The State of Florida currently imposes, among other taxes, an
ad valorem tax on intangible property and a corporate income tax.
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The Florida Constitution prohibits the levying of a personal income tax.
Certain other taxes the State of Florida imposes include: an estate or
inheritance tax which is limited by the State's Constitution to an amount not
in excess of the amount allowed to be credited upon or deducted from federal
estate taxes or the estate taxes of another state; and a 6% sales tax on most
goods and certain services with an option for counties to impose up to an
additional 1% sales tax on such goods and services.
The Constitution reserves the right to charge an ad valorem
tax on real estate and tangible personal property to Florida's local
governments. All other forms of taxation are preempted to the State of Florida
except as may be provided by general law. Motor vehicles, boats, airplanes,
trailers, trailer coaches and mobile homes, as defined by law, may be subject
to a license tax for their operation, but may not be subject to an ad valorem
tax.
Under the Constitution, ad valorem taxes may not be levied in
excess of the following millage upon the assessed value of real estate and
tangible personal property: for all county purposes, ten mills; for all
municipal purposes, ten mills; for all school purposes, ten mills; for water
management purposes for the northwest portion of the State, .05 mills; for
water management purposes for the remaining portion of the State, one mill; and
for all other special districts a millage authorized by law and approved by
referendum. When authorized by referendum, the above millage caps may be
exceeded for up to two years. Counties, school districts, municipalities,
special districts and local governmental bodies with taxing powers may issue
bonds to finance or refinance capital projects payable from ad valorem taxes in
excess of the above millage cap when approved by referendum. It should be
noted that several municipalities and counties have charters that further limit
either ad valorem taxes or the millage that may be assessed.
The Florida legislature has passed a number of mandates which
limit or place requirements on local governments without providing the local
governments with compensating changes in their fiscal resources. The Florida
legislature enacted a comprehensive growth management act which forces local
governments to establish and implement comprehensive planning programs to guide
and control future development. This legislation prohibits public or private
development that does not conform with the locality's comprehensive plan.
Local governments may face greater requirements for services and capital
expenditures than they had previously experienced if their locality experiences
increased growth or development. The burden for funding these potential
services and capital expenditures which has been left to the local governments
may be quite large.
The State of Florida enacted an amendment to the Florida
Constitution ("Amendment 10") which limits ad valorem taxes on homestead real
property, effective as of January 1994. Beginning
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in 1995, Amendment 10 limits the assessed value of homestead real property for
ad valorem tax purposes to the lower of (A) three percent (3%) of the assessed
value for the prior year; or (B) the percentage change in the Consumer Price
Index for the preceding calendar year. In addition, no such assessed value
shall exceed "just value" and such just value shall be reassessed
(notwithstanding the 3% cap) as of January 1 of the year following a change of
ownership of the assessed real property.
The payment on most Florida Municipal Instruments held by the
Fund will depend upon the issuer's ability to meet its obligations. If the
State or any of its political subdivisions were to suffer serious financial
difficulties jeopardizing their ability to pay their obligations, the
marketability of obligations issued by the State or localities within the
State, and the value of the Fund's portfolio, could be adversely affected.
OTHER INVESTMENT INFORMATION. Northern Trust believes that it is likely that
sufficient Municipal Instruments and certain specified Federal obligations
should be available to satisfy the investment objective, policies and
limitations of the Fund. If the Northern Funds' Board of Trustees, after
consultation with Northern Trust, should for any reason determine that it is
impracticable to satisfy the Fund's investment objective, policies and
limitations, the Board would re-evaluate the Fund's investment objective and
policies and consider changes in its structure and name or possible
dissolution.
INVESTMENT RESTRICTIONS
The Fund is subject to the fundamental investment restrictions
enumerated below which may be changed only by a vote of the holders of a
majority of the Fund's outstanding shares.
The Fund may not:
(1) Make loans, except (a) through the purchase
of debt obligations in accordance with the Fund's investment
objective and policies, (b) through repurchase agreements with
banks, brokers, dealers and other financial institutions, and
(c) loans of securities.
(2) Mortgage, pledge or hypothecate any assets
(other than pursuant to reverse repurchase agreements) except
to secure permitted borrowings.
(3) Purchase or sell real estate or real estate
limited partnerships, but this restriction shall not prevent
the Fund 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.
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(4) Purchase or sell commodities or commodity
contracts or oil or gas or other mineral exploration or
development programs or leases, except that the Fund may, to
the extent appropriate to its investment policies, purchase
securities of companies engaging in whole or in part in such
activities, and may enter into futures contracts and related
options and forward currency exchange contracts in accordance
with its investment objective and policies.
(5) Invest in companies for the purpose of
exercising control.
(6) Act as underwriter of securities, except as
the Fund may be deemed to be an underwriter under the
Securities Act of 1933 (the "1933 Act") 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; futures
contracts; options on futures contracts; forward currency
exchange contracts; short sales against the box; interest rate
and currency swaps; and pair-off transactions.
In addition, as summarized in the Prospectus, the Fund may
not:
(8) Purchase securities (other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements collateralized by
such obligations) if, such purchase would cause 25% or more in
the aggregate of the market value of the total assets of the
Fund 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, state and
municipal governments and their agencies and authorities are
not deemed to be industries; as to utility companies, the gas,
electric, water and telephone businesses are considered
separate industries; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered
to be in the industries of their parents if their activities
are primarily related to financing the activities of their
parents.
(9) 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 a Fund's
total assets or (b) from banks, provided that immediately
after any such borrowing all borrowings of the Fund do not
exceed one-third of the Fund's total assets. The exceptions
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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 a Fund by
enabling Northern Funds 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 Fund fall
below 300% of its borrowings, Northern Funds will reduce the
borrowings of the Fund in accordance with the 1940 Act. In
addition, as a matter of fundamental policy, the Fund may not
enter into reverse repurchase agreements exceeding in the
aggregate one-third of its total assets.
In addition, as a matter of fundamental policy, the Fund will
not issue senior securities except as stated in the Prospectus or this
Additional Statement.
As a non-fundamental investment restriction, the Fund may not,
at the end of any tax quarter, hold more than 10% of the outstanding voting
securities of any one issuer, except that up to 50% of the total value of the
assets of the Fund may be invested in any securities without regard to this 10%
limitation so long as no more than 25% of the total value of its assets is
invested in the securities of any one issuer (except the U.S. Government).
For the purpose of Investment Restriction (8), in determining
industry classification, Northern Funds intends to use the industry
classification titles in the Standard Industrial Classification Manual.
Securities held in escrow or separate accounts in connection with the Fund'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.
A security is considered to be issued by the entity, or
entities, whose assets and revenues back the security. A guarantee of a
security is not deemed to be a security issued by the guarantor when the value
of all securities issued and guaranteed by the guarantor, and owned by the
Fund, does not exceed 10% of the value of the Fund's total assets.
Any restriction which involves a maximum percentage will not
be considered violated unless an excess over the percentage occurs immediately
after, and is caused by, an acquisition or encumbrance of securities or assets
of, or borrowings by, the Fund.
In order to permit the sale of the Fund's shares in certain
states, Northern Funds may make commitments with respect to the Fund more
restrictive than the investment policies listed above and in the Prospectus.
Should Northern Funds determine that any commitment made to permit the sale of
the Fund's shares in any state is no longer in the best interests of the Fund,
it will
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revoke the commitment by terminating sales of a Fund's shares in the state
involved.
ADDITIONAL TRUST INFORMATION
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of
Northern Funds is set forth below.
Mr. Silas S. Cathcart,*,** Chairman of the Board and
President, Age 70, 222 Wisconsin Avenue, Lake Forest, Illinois 60045. Chairman
of Kidder Peabody Inc. from May 1987 until his retirement in December 1989.
Director/Trustee of General Electric Co., Baxter International, Inc. (worldwide
development, distribution and manufacture of health care products, systems and
services), The Quaker Oats Co., Montgomery Ward, and American Academics, Inc.
Retired Director and Trustee of Illinois Tool Works, Inc., and Bradley Trust,
respectively.
Mr. James W. Cozad, Trustee, Age 69, 205 N. Michigan
Avenue, Suite 4310, Chicago, Illinois 60601. Vice Chairman of Amoco
Corporation from September 1983 to December 1989 and Chairman and CEO of
Whitman Corporation (holding company for Pepsi-Cola General Bottlers, Inc.,
Midas International Corporation (automotive services) and Hussmann Corporation
(refrigeration systems and equipment) from January 1990 until his retirement in
May 1992. Director of Whitman Corporation, Eli Lilly and Company (life science
products), Inland Steel Company, Inland Steel Industries, Inc. and Inland Steel
Company and Sears, Roebuck & Company. Retired Director of GATX Corporation
(transportation, distribution and warehousing)
Ms. Susan Crown,** Trustee, Age 38, 222 North LaSalle
Street, Suite 2000, Chicago, Illinois 60601. Vice President of Henry Crown and
Company (family-owned and operated company including diversified manufacturing
companies and real estate development) since 1984. Director and President of
Arie and Ida Crown Memorial (grant-making foundation), Director of Baxter
International, Inc. (worldwide development, distribution and manufacture of
health care products, systems and services) and Illinois Tool Works, Inc.
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Mr. Wesley M. Dixon, Jr.,1 Trustee, Age 68, 400
Skokie Blvd., Suite 675, Northbrook, Illinois 60062. Director of Earl Kinship
Capital Corporation since 1985. Vice Chairman and Director of G.D. Searle &
Co. (manufacture and sale of food products and pharmaceuticals) from 1977 to
1983 and President of G.D. Searle & Co. prior thereto.
Mr. William J. Dolan, Jr., Trustee, Age 65, 1534
Basswood Circle, Glenview, Illinois 60025. Partner of Arthur Andersen & Co.
S.C. (accounting firm) from 1966 until his retirement in December 1989.
Financial Consultant, Ernst & Young from 1992 to 1993. Director of Household
Bank, Federal Savings Bank.
Mr. Raymond E. George, Jr.,2 Trustee, Age 65, 703
Prospect Avenue, Winnetka, Illinois 60093. Senior Vice President and Senior
Fiduciary Officer of The Northern Trust Company from 1988 until his retirement
in October 1993.
Miriam M. Allison, Vice President and Treasurer, Age
48, 207 E. Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. President
and Director of Sunstone Financial Group, Inc. since 1990 and Vice President of
First Wisconsin Trust Company prior thereto.
Mary M. Tenwinkel, Vice President, Age 48, 207 E.
Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. Vice President. of
Sunstone Financial Group, Inc. since August of 1993 and First Vice President
and head of Personal Services Group at Firstar Trust Company prior thereto.
Anita M. Zagrodnik, Assistant Treasurer, Age 36,
207 E. Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. Client
Services, Accounting and Tax Manager of Sunstone Financial Group, Inc. since
1990 and Senior Accountant at Price Waterhouse prior thereto.
Jeffrey A. Dalke, Secretary, Age 45, Philadelphia
National Bank Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107.
Secretary. Partner in the law firm of Drinker Biddle & Reath.
Certain of the Trustees and officers and the organizations
with which they are associated have had in the past, and may have in the
future, transactions with Northern Trust, Sunstone and their respective
affiliates. Northern Funds has been advised by such
- --------------------
*. Messrs. Cathcart and Dixon are first cousins.
**. Messrs. Cathcart and George and Ms. Crown are considered to be
"interested persons" of Northern Funds as defined in the 1940 Act.
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<PAGE> 103
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. Ms. Allison holds similar positions with one
or more investment companies that are distributed by Sunstone. As a result of
the responsibilities assumed by Northern Trust under its Advisory Agreement,
Transfer Agency Agreement and Custodian Agreement and by Sunstone under its
Administration Agreement and Distribution Agreement, Northern Funds itself
requires no employees.
Each Trustee earns an annual fee of $15,000 and an additional
fee of $1,250 for each meeting attended, plus reimbursement of expenses
incurred as a Trustee. The Chairman of the Board earns an annual fee of
$20,000 and an additional fee of $1,250 for each meeting attended, plus
reimbursement of expenses incurred as a Trustee. Northern Funds' officers do
not receive fees from Northern Funds for services in such capacities, although
Sunstone, of which Mmes. Allison and Tenwinkel are also officers, receives fees
from Northern Funds for administrative services. Drinker Biddle & Reath, of
which Mr. Dalke is a partner, receives legal fees as counsel to Northern Funds.
For the fiscal year ended March 31, 1996, the Trustees
received the following compensation:
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<TABLE>
<CAPTION>
===============================================================================
Pension or
Retirement
Aggregate Benefits Total
Compensation Accrued as Part Compensation
from the of Trust from the
Name of Trustee Trust Expense Trust**
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Silas S. Cathcart $25,000 None $25,000
- -------------------------------------------------------------------------------
James W. Cozad $20,000 None $20,000
- -------------------------------------------------------------------------------
Susan Crown $20,000 None $20,000
- -------------------------------------------------------------------------------
Wesley M. Dixon, Jr. $18,750 None $18,750
- -------------------------------------------------------------------------------
William J. Dolan, Jr. $20,000 None $20,000
- -------------------------------------------------------------------------------
Raymond E. George, Jr. $20,000 None $20,000
===============================================================================
</TABLE>
** This column presents the same information as the first column because none
of the Trustees served on a board of another mutual fund related to the Trust.
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern Trust is a wholly-owned subsidiary of The Northern
Trust Corporation, a Chicago-based multi-bank holding company with subsidiaries
in Illinois, Florida, New York, Arizona, California and Texas. Northern Trust
has for more than 100 years managed the assets of individuals, charitable
organizations, foundations and large corporate investors. One of the nation's
leading providers of trust and investment management services, Northern Trust
first entered the mutual fund business in 1983 by offering money market funds
to institutional clients. As part of its investment advisory services,
Northern Trust offers extensive research services to its clients. As of the
date of this Additional Statement, nearly [300] financial institutions
nationwide purchase Northern Trust's economic advisory services. As of March
31, 1996, Northern Trust and its affiliates had approximately $20.3 billion in
assets, $12.1 billion in deposits, and administered in various capacities
(including as master trustee, investment manager or custodian) over $641.2
billion in assets. As of March 31, 1996, Northern Trust's investment
management group had management responsibility for approximately $114.5
billion. Northern Trust is one of the strongest banking organizations in the
United States and its clients include public and private retirement funds,
endowments, foundations, trusts, corporations and individuals. Northern Funds
complements the banking and personal trust services available through Northern
Trust by allowing Northern Trust's banking and trust clients to consolidate the
management of their finances and
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<PAGE> 105
thereby move one step closer to one-stop financial shopping. Northern Funds
utilizes a state-of-the-art investor services center. Also, trained investment
representatives are available at Northern Trust's offices to assist investors
in allocating their investments. Northern Trust 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. Northern
Trust manages the Funds through a team of professionals, led by portfolio
managers who follow a disciplined process to develop investment strategies.
The purpose of this approach is to promote consistent management. The
portfolio managers draw upon the resources of Northern Trust's research
department with specialists in economic analysis, investment strategy, credit
quality and tax law, and which supplies information on interest rates, GNP
growth, corporate profits and other factors.
Subject to the general supervision of the Board of Trustees,
Northern Trust makes decisions with respect to and places orders for all
purchases and sales of portfolio securities for the Funds, and also provides
certain ancillary services. Northern Trust's Advisory Agreement with Northern
Funds has been approved by the Board of Trustees, including the
"non-interested" Trustees, and the initial shareholder of Northern Funds. The
Advisory Agreement provides that in executing portfolio transactions and in
selecting brokers or dealers (a) with respect to common and preferred stocks,
Northern Trust shall use its best judgment to obtain the best overall terms
available, and (b) with respect to other securities, Northern Trust shall
attempt to obtain best net price and execution. 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. No commissions were paid by the Funds to any
"affiliated" persons (as defined in the 1940 Act) of the Funds. 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,
Northern Trust 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 Fund may participate, if and when practicable, in bidding
for the purchase of portfolio securities directly from an issuer in order to
take advantage of the lower purchase price available to
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<PAGE> 106
members of a bidding group. The Fund will engage in this practice, however,
only when Northern Trust believes such practice to be in the Fund's interests.
Northern Trust's investment advisory duties for Northern Funds
are carried out through its Trust Department. On occasions when Northern Trust
deems the purchase or sale of a security to be in the best interests of the
Fund as well as other fiduciary or agency accounts managed by it (including any
other portfolio, investment company or account for which Northern Trust acts as
adviser), the Agreement provides that Northern Trust, to the extent permitted
by applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
accounts in order to obtain the best overall terms available with respect to
common and preferred stocks and the best net price and execution with respect
to other securities. In such event, allocation of the securities so purchased
or sold, as well as the expenses incurred in the transaction, will be made by
Northern Trust in the manner it considers to be most equitable and consistent
with its fiduciary obligations to the Fund and other accounts involved. In
some instances, this procedure may adversely affect the size of the position
obtainable for the Fund or the amount of the securities that are able to be
sold for the Fund. To the extent that the execution and price available from
more than one broker or dealer are believed to be comparable, the Agreement
permits Northern Trust, at its discretion but subject to applicable law, to
select the executing broker or dealer on the basis of Northern Trust's opinion
of the reliability and quality of such broker or dealer.
The Advisory Agreement provides that Northern Trust may render
similar services to others so long as its services under such Agreement are not
impaired thereby. The Advisory Agreement also provides that Northern Funds
will indemnify Northern Trust against certain liabilities (including
liabilities under the federal securities laws relating to untrue statements or
omissions of material fact and actions that are in accordance with the terms of
the Agreement) or, in lieu thereof, contribute to resulting losses.
From time to time, Northern Trust may voluntarily waive a
portion or all of its fees otherwise payable to it with respect to the Fund.
Under its Transfer Agency Agreement with Northern Funds,
Northern Trust has undertaken, among other things, to perform the following
services: (1) answer shareholder inquiries and respond to requests for
information regarding Northern Funds; (2) process purchase and redemption
transactions; (3) establish and maintain shareholder accounts and subaccounts;
(4) furnish confirmations in accordance with applicable law, and provide
periodic account statements to each shareholder; (5) furnish proxy statements
and proxies, annual and semi-annual financial statements, and dividend,
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<PAGE> 107
distribution and tax notices to shareholders; (6) act as income disbursing
agent; and (7) maintain appropriate records relating to its services. Northern
Trust may appoint one or more sub-transfer agents in the performance of its
services.
As compensation for the services rendered by Northern Trust
under the Transfer Agency Agreement and the assumption by Northern Trust of
related expenses, Northern Trust is entitled to a fee from Northern Funds,
payable monthly, at an annual rate of .10% of the average daily net asset value
of the Fund.
Northern Trust maintains custody of the assets of the Fund
pursuant to the terms of its Custodian Agreement with Northern Funds. Under
this agreement, Northern Trust (l) holds the Fund's cash and securities, (2)
maintains such cash and securities in separate accounts in the name of the
Fund, (3) makes receipts and disbursements of funds on behalf of the Fund, (4)
receives, delivers and releases securities on behalf of the Fund, (5) collects
and receives all income, principal and other payments in respect of the Fund's
investments held by Northern Trust under the agreement, and (6) maintains the
accounting records of Northern Funds. Northern Trust may employ one or more
subcustodians under the Custody Agreement, provided that Northern Trust shall
have no more responsibility or liability to Northern Funds on account of any
action or omission of any subcustodian so employed than such subcustodian has
to Northern Trust and that the responsibility or liability of the subcustodian
to Northern Trust shall conform to the resolution of the Trustees of Northern
Funds authorizing the appointment of the particular subcustodian. Northern
Trust may also appoint an agent to carry out such of the provisions of the
Custody Agreement as Northern Trust may from time to time direct, provided that
the appointment of such an agent shall not relieve Northern Trust of any of its
responsibilities under the agreement.
As compensation for the services rendered to the Fund under
the Custodian Agreement, and the assumption by Northern Trust of certain
related expenses, Northern Trust is entitled to payment from the Fund as
follows: (a) a basic custodial fee of (i) $18,000 annually for the Fund, plus
(ii) 1/100th of 1% annually of the Fund's average daily net assets to the
extent they exceed $100 million, plus (b) a basic accounting fee of (i) $25,000
annually for the Fund, plus (ii) 1/100th of 1% annually of the Fund's average
daily net assets to the extent they exceed $50 million, plus (c) a fixed dollar
fee for each trade in portfolio securities, plus (d) a fixed dollar fee for
each time that Northern Trust as Custodian receives or transmits funds via
wire, plus (e) reimbursement of expenses incurred by Northern Trust as
Custodian for telephone, postage, courier fees, office supplies and
duplicating. The fees referred to in clauses (c) and (d) are subject to annual
upward adjustments based on increases in the Consumer Price Index for All Urban
Consumers, provided that
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<PAGE> 108
Northern Trust may permanently or temporarily waive all or any portion of any
upward adjustment.
Unless sooner terminated, each of the Advisory Agreement,
Transfer Agency Agreement and Custodian Agreement between Northern Trust and
Northern Funds will continue in effect with respect to the Fund until March 31,
1997, and thereafter for successive 12-month periods, provided that the
continuance is approved at least annually (a) 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 (b) by the
Trustees or by the vote of a majority of the outstanding shares of the Fund (as
defined under "Organization" in the Prospectus). Each agreement is terminable
at any time without penalty by Northern Funds (by specified Trustee or
shareholder action) on 60 days' written notice to Northern Trust and by
Northern Trust on 60 days' written notice to Northern Funds.
Banking laws and regulations currently prohibit a bank holding
company registered under the Federal Bank Holding Company Act of 1956 or any
bank or non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company
continuously engaged in the issuance of its shares, but such banking laws and
regulations do not prohibit such a holding company or affiliate or banks
generally from acting as investment adviser, transfer agent or custodian to
such an investment company, or from purchasing shares of such a company as
agent for and upon the order of customers. Northern Trust believes that it may
perform the services contemplated by its agreements with Northern Funds without
violation of such banking laws or regulations, which are applicable to it. It
should be noted, however, that future changes in either federal or state
statutes and regulations relating to the permissible activities of banks and
their subsidiaries or affiliates, as well as future judicial or administrative
decisions or interpretations of current and future statutes and regulations,
could prevent Northern Trust from continuing to perform such services for
Northern Funds.
Should future legislative, judicial or administrative action
prohibit or restrict the activities of Northern Trust in connection with the
provision of services on behalf of Northern Funds, Northern Funds might be
required to alter materially or discontinue its arrangements with Northern
Trust and change its method of operations. It is not anticipated, however,
that any change in Northern Funds' method of operations would affect the net
asset value per share of the Fund or result in a financial loss to any
shareholder. Moreover, if current restrictions preventing a bank from legally
sponsoring, organizing, controlling or distributing shares of an open-end
investment company were relaxed, Northern Funds expects that Northern Trust
would consider the possibility of offering to perform some or all of the
services now provided by
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<PAGE> 109
Sunstone. It is not possible, of course, to predict whether or in what form
such restrictions might be relaxed or the terms upon which Northern Trust might
offer to provide services for consideration by the Trustees.
In the Advisory Agreement, Northern Trust agrees that the name
"Northern" may be used in connection with Northern Funds' business on a
royalty-free basis. Northern Trust has reserved to itself the right to grant
the non-exclusive right to use the name "Northern" to any other person. The
Advisory Agreement provides that at such time as the Agreement is no longer in
effect, Northern Funds will cease using the name "Northern."
ADMINISTRATOR AND DISTRIBUTOR
Under its Administration Agreement, Sunstone has agreed,
subject to the direction and control of Northern Funds' Board of Trustees and
utilizing information provided by Northern Funds and its agents, to (1) provide
office space, facilities, equipment and personnel to carry out its services;
(2) compile data for and prepare with respect to the Fund timely Notices to
the Securities and Exchange Commission ("SEC") required pursuant to Rule 24f-2
under the 1940 Act and Semi-Annual Reports on Form N-SAR; (3) prepare for
execution by Northern Funds and file all federal income and excise tax returns
and state income tax returns (and such other required tax filings as may be
agreed to by the parties) other than those required to be made by Northern
Funds' custodian and transfer agent; (4) prepare compliance filings relating to
the registration of the securities of the Fund pursuant to state securities
laws with the advice of Northern Funds' counsel; (5) assist the Fund
accountants with preparing the Annual and Semi-Annual Reports required pursuant
to Section 30(d) under the 1940 Act; (6) assist to the extent requested by
Northern Funds with the preparation of the Registration Statement for the Fund
(on Form N-1A or any replacement therefor) and any amendments thereto, and
proxy materials; (7) prepare and monitor the Fund's expense accruals and cause
all appropriate expenses to be paid from Fund assets on proper authorization
from the Fund; (8) assist in the acquisition of the Funds' fidelity bond
required by the 1940 Act, monitor the amount of the bond and make the necessary
SEC filings related thereto; (9) from time to time as Northern Funds may
reasonably request or as Sunstone deems appropriate, check the Fund's compliance
with the policies and limitations relating to portfolio investments as set forth
in the Prospectus, Additional Statement and Declaration of Trust and monitor the
Fund's status as a regulated investment company under Subchapter M of the
Internal Revenue Code, as amended (but this function shall not relieve the
Fund's investment adviser of its primary day-to-day responsibility for assuring
such compliance); (10) maintain, and/or coordinate with the other service
providers the maintenance of, the accounts, books and other documents required
pursuant to Rule 31a-1(a) and (b) under the 1940 Act; and (11) generally assist
in each Fund's
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<PAGE> 110
administrative operations. In addition, Sunstone has agreed to monitor
Northern Funds' arrangements with respect to services provided by Service
Organizations. Under the Administration Agreement, Sunstone is not liable for
any error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Administration Agreement, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Sunstone in the performance of its duties or from its reckless disregard of
its duties and obligations under the Agreement.
Unless sooner terminated the Administration Agreement will
continue in effect with respect to the Fund until March 31, 1997, and
thereafter for successive 12-month periods, provided that the agreement is
approved annually (a) by the vote of a majority of the Trustees who are not
parties to the agreement or "interested persons" (as such term is defined by
the 1940 Act) of any party thereto, cast in person at a meeting called for the
purpose of voting on such approval, and (b) by the Trustees or by the vote of a
majority of the outstanding shares of such Fund (as defined under "Description
of Shares"). Notwithstanding the foregoing, the Administration Agreement shall
continue automatically for an indefinite period unless the Board of Trustees
shall have provided Sunstone with at least 90 days' written notice of its
determination not to renew the Agreement. In addition, the Administration
Agreement provides that in the event Northern Funds terminates the Agreement
during its initial term for any reason other than mutual agreement of the
parties or a material breach by Sunstone that remains uncured after notice
thereof, Northern Funds shall pay Sunstone the administration fees that would
otherwise be due under the Agreement for the remaining unexpired initial term.
For its administrative services, Sunstone is entitled to an
administration fee, computed daily and payable monthly, at the annual rate of
.15% of the Fund's average aggregate daily net assets.
Northern Funds has also entered into a Distribution Agreement
under which Sunstone, as agent, sells shares of the Fund on a continuous basis.
Sunstone pays the cost of printing and distributing prospectuses to persons who
are not shareholders of Northern Funds (excluding preparation and typesetting
expenses) and of certain other distribution efforts. No compensation is
payable by Northern Funds to Sunstone for such distribution services.
The Administration Agreement and the Distribution Agreement
provide that Sunstone may render similar services to others so long as its
services under the Agreements are not impaired thereby. The Administration and
Distribution Agreements provide that Northern Funds will indemnify Sunstone
against certain liabilities (including liabilities under the federal securities
laws relating to untrue statements or omissions of material fact and actions
that
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<PAGE> 111
are in accordance with the terms of such Agreements) under certain
circumstances.
SERVICE ORGANIZATIONS
As stated in the Fund's Prospectus, the Fund may enter into
agreements from time to time with Service Organizations providing for support
and/or distribution services to customers of the Service Organizations who are
the beneficial owners of Fund shares. Under the agreements, the Fund may pay
Service Organizations up to .25% (on an annualized basis) of the average daily
net asset value of the shares beneficially owned by their customers. Support
services provided by Service Organizations under their agreements may include:
(a) processing dividend and distribution payments from the Fund; (b) providing
information periodically to customers showing their share positions; (c)
arranging for bank wires; (d) responding to customer inquiries; (e) providing
subaccounting with respect to shares beneficially owned by customers or the
information necessary for subaccounting; (f) forwarding shareholder
communications; (g) assisting in processing share purchase, exchange and
redemption requests from customers; (h) assisting customers in changing
dividend options, account designations and addresses; and (i) other similar
services requested by the Fund. In addition, Service Organizations may provide
assistance (such as the forwarding of sales literature and advertising to their
customers) in connection with the distribution of Fund shares.
The Fund's arrangements with Service Organizations under the
agreements are governed by two Plans (a Service Plan and a Distribution and
Service Plan), which have been adopted by the Board of Trustees and (in the
case of the Distribution and Service Plan) by the initial shareholder of
Northern Funds. Because the Distribution and Service Plan contemplates the
provision of services related to the distribution of Fund shares (in addition
to support services), that Plan has been adopted in accordance with Rule 12b-1
under the 1940 Act. In accordance with the Plans, the Board of Trustees
reviews, at least quarterly, a written report of the amounts expended in
connection with the Fund's arrangements with Service Organizations and the
purposes for which the expenditures were made. In addition, the Fund's
arrangements with Service Organizations must be approved annually by a majority
of the Trustees, including a majority of the Trustees who are not "interested
persons" of the Fund as defined in the 1940 Act and have no direct or indirect
financial interest in such arrangements (the "Disinterested Trustees").
The Board of Trustees believes that there is a reasonable
likelihood that their arrangements with Service Organizations will benefit the
Fund and its shareholders. Any material amendment to the arrangements with
Service Organizations under the agreements must be approved by a majority of
the Board of Trustees (including a majority of the Disinterested Trustees), and
any amendment to
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increase materially the costs under the Distribution and Service Plan with
respect to the Fund must be approved by the holders of a majority of the
outstanding shares of the Fund involved. So long as the Distribution and
Service Plan is in effect, the selection and nomination of the members of the
Board of Trustees who are not "interested persons" (as defined in the 1940 Act)
of Northern Funds will be committed to the discretion of such disinterested
Trustees.
COUNSEL AND AUDITORS
Drinker Biddle & Reath, with offices at Suite 1100, 1345
Chestnut Street, Philadelphia, Pennsylvania 19107, serve as counsel to Northern
Funds.
Arthur Andersen LLP, independent accountants, 33 West Monroe
Street, Chicago, Illinois 60603-5385 serve as auditors for Northern Funds.
IN-KIND PURCHASES
Payment for shares of the Fund may, in the discretion of
Northern Trust, be made in the form of securities that are permissible
investments for the Fund as described in the Prospectus. For further
information about this form of payment, contact the Transfer Agent. In
connection with an in-kind securities payment, the Fund will require, among
other things, that the securities be valued on the day of purchase in
accordance with the pricing methods used by the Fund and that the Fund 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 Fund; and that adequate information be provided concerning the basis and
other tax matters relating to the securities. In addition, so long as shares
in the Fund are offered or sold in Texas, any securities that are accepted as
payment for the shares of the Fund will be limited to securities that are
issued in transactions that involve a bona fide reorganization or statutory
merger, or will be limited to other acquisitions of portfolio securities
(except for municipal debt securities issued by state political subdivisions or
their agencies or instrumentalities) that: (a) meet the investment objective
and policies of the Fund; (b) are acquired for investment and not for resale;
(c) are liquid securities that are not restricted as to transfer either by law
or liquidity of market; and (d) have a value that is readily ascertainable (and
not established only by evaluation procedures) as evidenced by a listing on the
American Stock Exchange, New York Stock Exchange or Nasdaq or as evidenced by
their status as U.S. Government Securities, bank certificates of deposit,
banker's acceptances, corporate and other debt securities that are actively
traded, money market securities and other like securities with a readily
ascertainable value.
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<PAGE> 113
AUTOMATIC INVESTING PLAN
The Automatic Investing Plan permits an investor to use
"Dollar Cost Averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at
predetermined intervals. This may help investors reduce their average cost per
share because the agreed upon fixed investment amount allows more shares to be
purchased during periods of lower share prices and fewer shares during periods
of higher share prices. In order to be effective, Dollar Cost Averaging should
usually be followed on a sustained, consistent basis. Investors should be
aware, however, that shares bought using Dollar Cost Averaging are purchased
without regard to their price on the day of investment or to market trends.
Dollar Cost Averaging does not assure a profit and does not protect against
losses in a declining market. In addition, while investors may find Dollar
Cost Averaging to be beneficial, it will not prevent a loss if an investor
ultimately redeems his shares at a price which is lower than their purchase
price. An investor may want to consider his financial ability to continue
purchases through periods of low price levels.
REDEMPTIONS AND EXCHANGES
Exchange requests received on a Business Day prior to the time
shares of the Fund are priced will be processed on the date of receipt.
"Processing" a request means that shares in the fund from which the shareholder
is withdrawing will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the new fund of the Trust into
which the shareholder is investing will also normally be purchased at the net
asset value per share next determined coincident to or after the time of
redemption. Exchange requests received on a Business Day after the time shares
of the Fund are priced will be processed on the next Business Day in the manner
described above.
Northern Funds reserves the right to make payment for
redemptions in readily marketable securities. If this occurred, a shareholder
would bear any brokerage or other transaction costs incurred in converting the
securities so received to cash. Northern Funds also reserves the right to
require a shareholder to redeem involuntarily shares in the Fund if the balance
held of record by the shareholder drops below $750 and the shareholder does not
increase such balance to $1,000 or more upon 30 days' notice. Northern Funds
will not require a shareholder to redeem shares of the Fund if the balance held
of record by the shareholder is less than $750 solely because of a decline in
the net asset value of the Fund's shares or because the shareholder has made an
initial investment in a lower amount in accordance with the Automatic
Investment Plan. Northern Funds may also redeem shares involuntarily if the
redemption is appropriate to carry out Northern Funds' responsibilities under
the 1940 Act.
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<PAGE> 114
Northern Funds may redeem shares involuntarily to reimburse
the Fund for any loss sustained by reason of the failure of a shareholder to
make full payment for shares purchased by the shareholder or to collect any
charge relating to a transaction effected for the benefit of a shareholder
which is applicable to Fund shares as provided in the Fund's Prospectus from
time to time.
PERFORMANCE INFORMATION
The Fund calculates its "average annual total 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:
ERV
T = [(-----) 1/n - 1]
P
<TABLE>
<S> <C> <C>
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1, 5 or 10
year (or other) periods at the end of the applicable period (or a fractional portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in years.
</TABLE>
The Fund calculates its "aggregate total 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
Aggregate Total Return = [(----) - 1]
P
The calculations are made assuming that (a) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the
price per share existing on the reinvestment date, and (b) all recurring fees
charged to all shareholder accounts are included. The ending redeemable value
(variable "ERV" in the formula) is determined by assuming complete redemption
of the hypothetical investment after deduction of all nonrecurring charges at
the end of the measuring period.
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<PAGE> 115
The Fund calculates its 30-day (or one month) standard yield
in accordance with the method prescribed by the SEC for mutual funds:
a - b 6
-----
Yield = 2[(cd + 1) - 1]
<TABLE>
<S> <C> <C>
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.
</TABLE>
The Fund's "tax-equivalent" yield is computed by: (a)
dividing the portion of the Fund's yield (calculated as above) that is exempt
from federal income tax by one minus a stated federal income tax rate; and (b)
adding the quotient to that portion, if any, of the Fund's yield that is not
exempt from federal income tax.
GENERAL INFORMATION
The Fund may include discussions or illustrations of the
potential investment goals of a prospective investor, investment management
techniques, policies or investment suitability of the Fund, economic
conditions, the effects of inflation and historical performance of various
asset classes, including but not limited to, stocks, bonds and Treasury bills.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of the Fund), as well as the views of
Northern Trust as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to the Fund. The Fund may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, treasury bills and shares of the
Fund. In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or communications may include symbols, headlines
or other material which highlight or summarize the information discussed in
more detail therein.
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<PAGE> 116
Any fees imposed by Northern Trust or other Service
Organizations on their customers in connection with investments in the Fund are
not reflected in Northern Funds' calculations of performance for the Fund.
The Fund's performance will fluctuate, unlike bank deposits or
other investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates,
portfolio expenses and other factors. Performance is one basis investors may
use to analyze the Fund as compared to other funds and other investment
vehicles. However, performance of other funds and other investment vehicles
may not be comparable because of the foregoing variables, and differences in
the methods used in valuing their portfolio instruments, computing net asset
value and determining performance.
TAXES
The following summarizes certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its 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 federal and state 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
The Fund 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, the
Fund 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
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"Distribution Requirement") and satisfies certain other requirements of the
Code that are described below.
In addition to satisfaction of the Distribution Requirement,
the Fund 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 other income derived with respect to its business
of investing in such stock, securities, or currencies (the "Income
Requirement") and derive less than 30% of its gross income from the sale or
other disposition of securities and certain other investments held for less
than three months (the "Short-Short Test"). Interest (including original issue
discount and accrued market discount) received by the Fund at maturity or on
disposition of a security held for less than three months will not be treated
as other income which is attributable to realized market appreciation, but will
be treated as gross income from the sale or other disposition of securities for
this purpose.
In addition to the foregoing requirements, at the close of
each quarter of its taxable year, at least 50% of the value of the Fund's
assets must consist of cash and cash items, U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of its
total assets in securities of such issuer and as to which the Fund does not
hold more than 10% of the outstanding voting securities of such issuer) and no
more than 25% of the value of each Fund'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 the Fund controls and which are engaged in the same or similar trades or
businesses.
The Fund intends to distribute to shareholders any excess of
net long-term capital gain over net short-term capital loss ("net capital
gain") for each taxable year. Such gain is distributed as a capital gain
dividend and is taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held the shares, whether such gain
was recognized by the Fund prior to the date on which a shareholder acquired
shares of the Fund and whether the distribution was paid in cash or reinvested
in shares. In addition, investors should be aware that any loss realized upon
the sale, exchange or redemption of shares held for six months or less will be
treated as a long-term capital loss to the extent of any capital gain dividends
that have been paid with respect to such shares.
It is not anticipated that any distribution from the Fund will
qualify for the dividends received deduction for corporations.
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<PAGE> 118
Ordinary income of individuals is taxable at a maximum nominal
rate of 39.6%, but because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gains are currently taxable at a maximum nominal rate of 28%.
For corporations, long-term capital gains and ordinary income are both taxable
at a maximum nominal rate of 35% (an effective marginal rate of 39% applies in
the case of corporations with taxable incomes between $100,000 and $335,000,
and an effective marginal rate of 38% applies in the case of corporations with
taxable incomes between $15 million and $18,333,333).
If for any taxable year the Fund 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 (whether or not derived from
exempt-interest income) would be taxable as ordinary income to the extent of
the Fund'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). The Fund 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 the Fund 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, the Fund may be subject to the tax laws of such states or
localities.
FEDERAL - TAX-EXEMPT INFORMATION
As described in the Prospectus, the Fund is designed to
provide investors with tax-exempt interest income. The Fund is not intended to
constitute a balanced investment program and are not designed for investors
seeking capital appreciation or maximum tax-exempt income irrespective of
fluctuations in principal. Shares of the Fund would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, would
not gain any additional benefit from the Funds' dividends being tax-exempt. In
addition, the Fund
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<PAGE> 119
may not be an appropriate investment for persons or entities that are
"substantial users" of facilities financed by private activity bonds or
"related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person which regularly uses a part of such
facilities in its trade or business and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds are more than 5% of
the total revenues derived by all users of such facilities, which occupies more
than 5% of the usable area of such facilities or for which such facilities or a
part thereof were specifically constructed, reconstructed or acquired.
"Related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S corporation and its
shareholders.
In order for the Fund to pay federal exempt-interest dividends
with respect to any taxable year, at the close of each taxable quarter at least
50% of the aggregate value of the Fund must consist of tax-exempt obligations.
An exempt-interest dividend is any dividend or part thereof (other than a
capital gain dividend) paid by the Fund and designated as an exempt-interest
dividend in a written notice mailed to shareholders not later than 60 days
after the close of the Fund's taxable year. However, the aggregate amount of
dividends so designated by the Fund cannot exceed the excess of the amount of
interest exempt from tax under Section 103 of the Code received by the Fund
during the taxable year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. The percentage of total dividends paid
by the Fund with respect to any taxable year which qualifies as federal
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Fund with respect to such year.
Interest on indebtedness incurred by a shareholder to purchase
or carry Fund shares generally is not deductible for federal income tax
purposes. If a shareholder holds Fund shares for six months or less, any loss
on the sale or exchange of those shares will be disallowed to the extent of the
amount of exempt-interest dividends earned with respect to the shares. The
Treasury Department, however, is authorized to issue regulations reducing the
six-month holding requirement to a period of not less than the greater of 31
days or the period between regular distributions for investment companies that
regularly distribute at least 90% of its net tax-exempt interest. No such
regulations had been issued as of the date of this Additional Statement.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Special rules govern the federal income tax treatment of
financial instruments that may be held by the Fund. These rules may have a
particular impact on the amount of income or gain that the Fund must distribute
to its shareholders to comply with the Distribution Requirement, on the income
or gain qualifying under
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<PAGE> 120
the Income Requirement and on its ability to comply with the Short-Short Test
described above.
Generally, futures contracts and options on futures contracts
held by the Fund (collectively, the "Instruments") at the close of its taxable
year are treated for federal income tax purposes as sold for their fair market
value on the last business day of such year, a process known as
"mark-to-market." Forty percent of any gain or loss resulting from such
constructive sales is treated as short-term capital gain or loss and 60% of
such gain or loss is treated as long-term capital gain or loss without regard
to the period the Fund holds the Instruments ("the 40%-60% rule"). The amount
of any capital gain or loss actually realized by the Fund in a subsequent sale
or other disposition of those Instruments is adjusted to reflect any capital
gain or loss taken into account by the Fund in a prior year as a result of the
constructive sale of the Instruments. Losses with respect to Instruments that
are regarded as parts of a "mixed straddle" because their values fluctuate
inversely to the values of specific securities held by the Fund are subject to
certain loss deferral rules which limit the amount of loss currently deductible
on either part of the straddle to the amount thereof which exceeds the
unrecognized gain (if any) with respect to the other part of the straddle, and
to certain wash sales regulations. Under short sales rules, which are also
applicable, the holding period of the securities forming part of the straddle
will (if they have not been held for the long-term holding period) be deemed
not to begin prior to termination of the straddle. With respect to certain
Instruments, deductions for interest and carrying charges may not be allowed.
Notwithstanding the rules described above, with respect to Instruments that are
part of a "mixed straddle" and are properly identified as such, the Fund may
make an election which will exempt (in whole or in part) those identified
Instruments from the rules of Section 1256 of the Code including "the 40%-60%
rule" and the mark-to-market on gains and losses being treated for federal
income tax purposes as sold on the last business day of the Fund's taxable
year, but gains and losses will be subject to such short sales, wash sales and
loss deferral rules and the requirement to capitalize interest and carrying
charges. Under Temporary Regulations, the Fund would be allowed (in lieu of
the foregoing) to elect either (a) to offset gains or losses from portions
which are part of a mixed straddle by separately identifying each mixed
straddle to which such treatment applies, or (b) to establish a mixed straddle
account for which gains and losses would be recognized and offset on a periodic
basis during the taxable year. Under either election, "the 40%-60% rule" will
apply to the net gain or loss attributable to the Instruments, but in the case
of a mixed straddle account election, not more than 50% of any net gain may be
treated as long-term and no more than 40% of any net loss may be treated as
short-term. Options on futures contracts generally receive federal tax
treatment similar to that described above.
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With respect to futures contracts and other financial
instruments subject to the mark-to-market rules, the Internal Revenue Service
has ruled in private letter rulings that a gain realized from such a futures
contact or financial instrument will be treated as being derived from a
security held for three months or more (regardless of the actual period for
which the contract or instrument is held) if the gain arises as a result of a
constructive sale under the mark-to-market rules, and will be treated as being
derived from a security held for less than three months only if the contract or
instrument is terminated (or transferred) during the taxable year (other than
by reason of mark-to-market) and less than three months have elapsed between
the date the contract or instrument is acquired and the termination date. In
determining whether the Short-Short Test is met for a taxable year, increases
and decreases in the value of the Fund's futures contacts and other investments
that qualify as part of a "designated hedge," as defined in the Code, may be
netted.
SPECIAL FLORIDA TAX CONSIDERATIONS PERTAINING TO THE FUND
The State of Florida does not currently impose an income tax
on individuals. Thus individual shareholders of the Fund will not be subject
to any Florida income tax on distributions received from the Fund. However,
Florida does currently impose an income tax on certain corporations.
Consequently, distributions may be taxable to corporate shareholders.
The State of Florida currently imposes an "intangibles tax" at
the annual rate of 2 mills or 0.20% on certain securities and other intangible
assets owned by Florida residents. With respect to the first mill, or first
.10%, of the intangibles tax, every natural person is entitled each year to an
exemption of the first $20,000 of the value of the property subject to the tax.
A husband and wife filing jointly will have an exemption of $40,000. With
respect to the last 1 mill, or last .10%, of the intangibles tax, every natural
person is entitled each year to an exemption of the first $100,000 of the value
of the property subject to the tax. A husband and wife filing jointly will
have an exemption of $200,000. Notes, bonds and other obligations issued by the
State of Florida or its municipalities, counties, and other taxing districts,
or by the United States Government, its agencies and certain U.S. territories
and possessions (such as Guam, Puerto Rico and the Virgin Islands) as well as
cash are exempt from this intangibles tax. If on December 31 of any year the
portfolio of the Florida Tax-Exempt Fund consists solely of such exempt assets,
then the Fund's shares will be exempt from the Florida intangibles tax payable
in the following year.
In order to take advantage of the exemption from the
intangibles tax in any year, the Fund must sell any non-exempt assets held in
its portfolio during the year and reinvest the proceeds in exempt assets
including cash prior to December 31.
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Transaction costs involved in restructuring the portfolio in this fashion would
likely reduce the Fund's investment return and might exceed any increased
investment return the Fund achieved by investing in non-exempt assets during
the year.
Outside the State of Florida, income distributions may be
taxable to shareholders under state or local law as dividend income even though
all or a portion of such distributions may be derived from interest on
tax-exempt obligations or U.S. Government obligations which, if realized
directly, would be exempt from such income taxes. Shareholders are advised to
consult their tax advisers concerning the application of state and local taxes.
DESCRIPTION OF SHARES
The Trust Agreement permits Northern Funds' 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 different
investment portfolios. Northern Funds may hereafter create series in addition
to Northern Funds' existing series, which represent interests in nineteen
portfolios, each of which is discussed in this Additional Statement. Under the
terms of the Trust Agreement, each share of the Fund has a par value of $.0001,
represents a proportionate interest in the Fund with each other share of its
class and is entitled to such dividends and distributions out of the income
belonging to the Fund as are declared by the Trustees. Upon any liquidation of
the Fund, shareholders of each class of the Fund 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 "Redeeming and Exchanging Shares" in the Prospectus. Pursuant
to the terms of the 1940 Act, the right of a shareholder to redeem shares and
the date of payment by the Fund 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 Fund 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 Fund 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 Fund.
Northern Funds may also suspend or postpone the recordation of the transfer of
its shares upon the occurrence of any of the foregoing conditions. In
addition, Northern Funds reserves the right to adopt, by action of the
Trustees, a policy pursuant to which it may, without shareholder approval,
redeem upon not less than 30 days' notice all of the Fund's shares if such
shares have an aggregate value below a designated amount and if the Trustees
determine that it is not practical, efficient or advisable to continue the
operation of the Fund and that any applicable requirements of the 1940 Act have
been
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met. Shares when issued as described in the Prospectus are validly issued,
fully paid and nonassessable, except as stated below.
The proceeds received by the Fund 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 the Fund. The underlying
assets of the Fund will be segregated on the books of account, and will be
charged with the liabilities in respect to the Fund and with a share of the
general liabilities of Northern Funds. Expenses with respect to the portfolios
of Northern Funds 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 Northern Funds shall not be deemed to have
been effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each investment portfolio affected by such matter. Rule
18f-2 further provides that an investment portfolio shall be deemed to be
affected by a matter unless the interests of each investment portfolio in the
matter are substantially identical or the matter does not affect any interest
of the investment portfolio. Under the Rule, the approval of an investment
advisory agreement, a distribution plan subject to Rule 12b-1 under the 1940
Act 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
may be effectively acted upon by shareholders of Northern Funds voting together
in the aggregate without regard to a particular investment portfolio.
The term "majority of the outstanding shares" of either
Northern Funds or the Fund or investment portfolio means, with respect to the
approval of an investment advisory agreement, a distribution plan or a change
in a fundamental investment policy, the vote of the lesser of (i) 67% or more
of the shares of Northern Funds or the Fund or portfolio present at a meeting,
if the holders of more than 50% of the outstanding shares of Northern Funds or
the Fund or portfolio are present or represented by proxy, or (ii) more than
50% of the outstanding shares of Northern Funds or the Fund or portfolio.
As of May 31, 1996 Northern and its affiliates held of record
substantially all of the outstanding shares of the Non-Money Market Funds as
agent, custodian, trustee or investment adviser on behalf
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of their customers. At such date, The Northern Trust Company, 50 S. LaSalle
Street, Chicago, Illinois 60657, and its affiliate banks held as beneficial
owner five percent or more of the outstanding shares of the Non-Money Market
Funds because they possessed sole voting or investment power with respect to
such shares.
As of May 31, 1996, the name and share ownership of the
entities of individuals which held of record or beneficially more than 5% of
the outstanding shares of the Money Market Fund were as follows: Northern
Trust Bank FL M&I Sweep Account, 6.42%. As of May 31, 1996, the name and share
ownership of the entities or individuals which held of record or beneficially
more than 5% of the outstanding shares of the U.S. Government Money Market Fund
were as follows: Sunstone Financial Group, Inc. for Van Wagoner Funds, 28.51%;
Northern Trust Bank FL M&I Sweep Account, 10.63%; and Sunstone Financial Group,
Inc. for Wasatch Funds, 9.69%. As of May 31, 1996, the name and share
ownership of the entities or individuals which held of record or beneficially
more than 5% of the outstanding shares of the Municipal Money Market Fund were
as follows: Northern Trust Bank FL M&I Sweep Account, 10.65%; and Harve A.
Ferrill TRST Harve A. Ferrill TR, 8.32%. As of May 31, 1996, the name and
share ownership of the entities or individuals which held of record or
beneficially more than 5% of the outstanding shares of the U.S. Government
Select Money Market Fund were as follows: Ilene S. Cole TRST Ilene S. Cole
Revocable Trust, 5.31%; Edith B. Jacobs TRST Edith B. Jacobs TRUST DTD 4/8/76,
7.13%; Charles W. Matthews TRST Charles W. Matthews REV TR, 6.93%; and Tina R.
Matthews TRST Tina R. Matthews REV TR, 5.55%. As of May 31, 1996, the name
and share ownership of the entities or individuals which held of record or
beneficially more than 5% of the outstanding shares of the California Municipal
Money Market Fund were as follows: Linnae Anderson, 6.95%; Barbara W. Folger,
5.09%; Rosalind K. Robbins TRST Rosalind K. Robbins 1987 Inter VIVDS TR
12/27/87, 8.59%; and Brian S. Bean and Kathleen T. Bean JT TEN, 14.24%. As of
May 31, 1996, the name and share ownership of the entities or individuals which
held of record or beneficially more than 5% of the outstanding shares of the
Select Equity Fund were as follows: Donaldson Lufkin & Jenrette SECS Corp,
5.76%. As of May 31, 1996, the name and share ownership of the entities or
individuals which held of record or beneficially more than 5% of the
outstanding shares of the International Select Equity Fund were as follows:
James L. Knight 1969 TRST SUB ACCT TRUST CASH PROCESSING UNIT-MIAMI, 5.73%. As
of May 31, 1996, the name and share ownership of the entities or individuals
which held of record or beneficially more than 5% of the outstanding shares of
the Technology Fund were as follows: Paul T. Delaney, 7.14%. The address of
all of the above persons is c/o The Northern Trust Bank, 50 S. LaSalle Street,
Chicago, Illinois 60657.
As a general matter, Northern Funds does not hold annual or
other meetings of shareholders. This is because the Trust Agreement provides
for shareholder voting only for the election or
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removal of one or more Trustees, if a meeting is called for that purpose, and
for certain other designated matters. Each Trustee serves until the next
meeting of shareholders, if any, called for the purpose of considering the
election or reelection of such Trustee or of a successor to such Trustee, and
until the election and qualification of his successor, if any, elected at such
meeting, or until such Trustee sooner dies, resigns, retires or is removed by
the shareholders or two-thirds of the Trustees.
Under Massachusetts law, there is a possibility that
shareholders of a business trust could, under certain circumstances, be held
personally liable as partners for the obligations of the trust. The Trust
Agreement contains an express disclaimer of shareholder (as well as Trustee and
officer) liability for acts or obligations of Northern Funds and requires that
notice of such disclaimer be given in each contract, undertaking or instrument
entered into or executed by Northern Funds or the Trustees. The Trust
Agreement provides for indemnification out of Trust property of any shareholder
charged or held personally liable for the obligations or liabilities of
Northern Funds solely by reason of being or having been a shareholder of
Northern Funds and not because of such shareholder's acts or omissions or for
some other reason. The Trust Agreement also provides that Northern Funds
shall, upon proper and timely request, assume the defense of any charge made
against any shareholder as such for any obligation or liability of Northern
Funds and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which Northern Funds itself would be unable to meet its
obligations.
The Trust Agreement provides that each Trustee of Northern
Funds will be liable for his own wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office of Trustee ("disabling conduct"), and for nothing else, and will not be
liable for errors of judgment or mistakes of fact or law. The Trust Agreement
provides further that Northern Funds will indemnify Trustees and officers of
Northern Funds against liabilities and expenses incurred in connection with
litigation and other proceedings in which they may be involved (or with which
they may be threatened) by reason of their positions with Northern Funds,
except that no Trustee or officer will be indemnified against any liability to
Northern Funds or its shareholders to which he would otherwise be subject by
reason of disabling conduct.
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.
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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 1933 Act with respect to the securities offered by Northern Funds'
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.
Statements contained in the Prospectus or in this Additional
Statement as to the contents of any contract or other documents referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a
current assessment of the likelihood of timely payment of debt considered
short-term in the relevant market. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely
payment. It is, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for
timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the
ability of issuers to repay punctually promissory obligations not having an
original maturity in excess of 9 months. The following summarizes the rating
categories used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions
are considered to have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be evidenced
by the following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions
are considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of
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the characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions
have an acceptable capacity for repayment of short-term promissory obligations.
The effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does 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 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 issue as 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 ensure against disruption in
debt service. Operating factors and market access may be subject to a high
degree of variation.
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"D-5" - Issuer has failed to meet scheduled principal
and/or interest payments.
Fitch short-term ratings apply to debt obligations
that are payable on demand or have original maturities of generally up to three
years. The following summarizes the rating categories used by Fitch for
short-term obligations:
"F-1+" - Securities possess exceptionally strong
credit quality. Issues assigned this rating are regarded as having the
strongest degree of assurance for timely payment.
"F-1" - Securities possess very strong credit
quality. Issues assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality.
Issues assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.
"F-3" - Securities possess fair credit quality.
Issues assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality.
Issues assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment
default.
Fitch may also use the symbol "LOC" with its
short-term ratings to indicate that the rating is based upon a letter of credit
issued by a commercial bank.
Thomson BankWatch short-term ratings assess the
likelihood of an untimely or incomplete payment of principal or interest of
unsubordinated instruments having a maturity of one year or less which are
issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers. The following summarizes the
ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson
BankWatch's highest rating category and indicates a very high degree of
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likelihood that principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the
degree of safety regarding timely payment 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 the lowest
investment grade category and indicates that while the debt is more susceptible
to adverse developments (both internal and external) than obligations with
higher ratings, capacity to service principal and interest in a timely fashion
is considered adequate.
"TBW-4" - This designation indicates that the debt is
regarded as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured
debt with an original maturity of less than one year which is issued by bank
holding companies and their principal bank subsidiaries. The following
summarizes the rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity
for timely repayment.
"A1" - Obligations are supported by the highest
capacity for timely repayment.
"A2" - Obligations are supported by a satisfactory
capacity for timely repayment, although such capacity may be susceptible to
adverse changes in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory
capacity for timely repayment. Such capacity is more susceptible to adverse
changes in business, economic or financial conditions than for obligations in
higher categories.
"B" - Obligations for which the capacity for timely
repayment is susceptible to adverse changes in business, economic or financial
conditions.
"C" - Obligations for which there is an inadequate
capacity to ensure timely repayment.
"D" - Obligations which have a high risk of default
or which are currently in default.
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Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard
& Poor's for corporate and municipal debt:
"AAA" - This designation represents the highest
rating assigned by Standard & Poor's to a debt obligation and indicates an
extremely strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong
capacity to pay interest and repay principal and differs from AAA issues only
in small degree.
"A" - Debt is considered to have a strong capacity to
pay interest and repay principal although such issues are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate
capacity to pay interest and repay principal. Whereas such issues normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
"BB" - Debt has less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable
vulnerability to default, and is dependent upon favorable business, financial
and
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economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal. The
"CCC" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt
subordinated to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt
subordinated to senior debt which is assigned an actual or implied "CCC-" debt
rating. The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on
which no interest is being paid.
"D" - Debt is in payment default. This rating is
used when interest payments or principal payments 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. "D" rating is also used
upon the filing of a bankruptcy petition if debt service payments 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 rating is attached to highlight
derivative, hybrid, and certain other obligations that S & P believes may
experience high volatility or high variability in expected returns due to
non-credit risks. Examples of such obligations are: securities whose principal
or interest return is indexed to equities, commodities, or currencies; certain
swaps and options; and interest only and principal only mortgage securities.
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
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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 risks appear somewhat larger
than in "Aaa" securities.
"A" - Bonds possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
"Baa" - Bonds considered 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 some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a 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 operation 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.
(P)... - When applied to forward delivery bonds,
indicates that the rating is provisional pending delivery of the bonds. The
rating may be revised prior to delivery if changes occur in the legal documents
or the underlying credit quality of the bonds.
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.
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"AA" - Debt is considered 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 and greater in
periods of economic stress.
"BBB" - Debt possesses below average protection
factors but such protection factors are still considered sufficient for prudent
investment. Considerable variability in risk is present during economic
cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that
possesses one of these ratings is considered to be below investment grade.
Although below investment grade, debt rated "BB" is deemed likely to meet
obligations when due. Debt rated "B" possesses the risk that obligations will
not be met when due. Debt rated "CCC" is well below investment grade and has
considerable uncertainty as to timely payment of principal, interest or
preferred dividends. Debt rated "DD" is a defaulted debt obligation, and the
rating "DP" represents preferred stock with dividend arrearages.
To provide more detailed indications of credit
quality, the "AA," "A," "BBB," "BB" and "B" ratings may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within these
major categories.
The following summarizes the highest four ratings
used by Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
"AA" - Bonds considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
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"BBB" - Bonds considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have an adverse
impact on these bonds, and therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" -
Bonds that possess one of these ratings are considered by Fitch to be
speculative investments. The ratings "BB" to "C" represent Fitch's assessment
of the likelihood of timely payment of principal and interest in accordance
with the terms of obligation for bond issues not in default. For defaulted
bonds, the rating "DDD" to "D" is an assessment of the ultimate recovery value
through reorganization or liquidation.
To provide more detailed indications of credit
quality, the Fitch ratings from and including "AA" to "C" may be modified by
the addition of a plus (+) or minus (-) sign to show relative standing within
these major rating categories.
IBCA assesses the investment quality of unsecured
debt with an original maturity of more than one year which is issued by bank
holding companies and their principal bank subsidiaries. The following
summarizes the rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business, economic or
financial conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or financial
conditions may increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
"BBB" - Obligations for which there is currently a
low expectation of investment risk. Capacity for timely repayment of principal
and interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead
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to increased investment risk than for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are
assigned one of these ratings where it is considered that speculative
characteristics are present. "BB" represents the lowest degree of speculation
and indicates a possibility of investment risk developing. "C" represents the
highest degree of speculation and indicates that the obligations are currently
in default.
IBCA may append a rating of plus (+) or minus (-) to
a rating to denote relative status within 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 represents the highest
category assigned by Thomson BankWatch to long-term debt and 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 Thomson
BankWatch's lowest investment grade category and indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB" are, however,
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.
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PLUS (+) OR MINUS (-) - The ratings from "AAA"
through "CC" may include a plus or minus sign designation which indicates where
within the respective category the issue is placed.
Municipal Note Ratings
A 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
very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"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" - Loans bearing this designation are
of the best quality, enjoying strong protection by established cash flows,
superior liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are
of high quality, with margins of protection ample although not so large as in
the preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are
of 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" - Loans bearing this designation are
of adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.
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"SG" - Loans bearing this designation are of
speculative quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
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APPENDIX B
DESCRIPTION OF FUTURE TRANSACTIONS
As stated in the Prospectus, the Fund 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 Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. 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.
The Fund 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 the Fund,
by using futures contracts.
Description of Interest Rate Futures Contracts. An
interest rate futures contract sale would create an obligation by the Fund, 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 the Fund, 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.
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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 Fund 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 Fund is immediately paid the difference and thus realizes a gain.
If the offsetting purchase price exceeds the sale price, the Fund pays the
difference and realizes a loss. Similarly, the closing out of a futures
contract purchase is effected by the Fund entering into a futures contract
sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain, and if the purchase price exceeds the offsetting sale price,
the Fund 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 Funds 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.
The Fund 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. The Fund may do so
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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, the Fund 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, the Fund may utilize index futures
contracts in anticipation of changes in the composition of its portfolio
holdings. For example, in the event that the Fund 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. The Fund may also sell futures contracts in
connection with this strategy, in order to protect against the possibility that
the value of the securities to be sold as part of the restructuring of the
portfolio will decline prior to the time of sale.
III. Margin Payments
Unlike purchase or sales of portfolio securities, no
price is paid or received by the Fund upon the purchase or sale of a futures
contract. Initially, the Fund will be required to deposit with the broker or
in a segregated account with the Custodian an amount of cash or cash
equivalents, 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 Fund upon termination of the
futures contract assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying instruments fluctuates
making the long and short positions in the futures contract more or less
valuable, a process known as marking-to-the-market. For example, when the Fund
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 Fund will be entitled to receive from the broker a
variation margin payment equal to that increase in value. Conversely, where
the Fund 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 Fund would be required to make a
variation margin payment to the broker. At any time prior to expiration of the
futures contract, Northern Trust 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 Fund's position in the futures contract. A final
determination
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of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or gain.
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of
futures by the Fund as a hedging device. One risk arises because of the
imperfect correlation between movements in the price of the futures and
movements in the price of the instruments which are the subject of the hedge.
The price of the future may move more than or less than the price of the
instruments being hedged. If the price of the futures moves less than the
price of the instruments which are the subject of the hedge, the hedge will not
be fully effective but, if the price of the instruments being hedged has moved
in an unfavorable direction, the Fund 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 Fund involved will experience either a loss or gain on
the futures which will not be completely offset by movements in the price of
the instruments which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of instruments being hedged and
movements in the price of futures contracts, the Fund 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 Northern Trust.
Conversely, the Fund 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 Northern Trust. It is also
possible that, where a Fund 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 Fund may decline. If this occurred, the Fund 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 the Fund is
able to invest its cash (or cash equivalents) in an orderly fashion, it is
possible that the market may decline instead; if the Fund then concludes not to
invest its cash at that time because of concern as to possible further market
decline or for other reasons, the Fund 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.
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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 adviser may still not result in a successful
hedging transaction over a short time frame.
Positions in futures may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
Although the Fund intends to purchase or sell futures only on exchanges or
boards of trade where there appear to be active secondary markets, there is no
assurance that a liquid secondary market on any exchange or board of trade will
exist for any particular contract or at any particular time. In such event, it
may not be possible to close a futures investment position, and in the event of
adverse price movements, the Fund 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
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equipment failures, government intervention, insolvency of a brokerage firm or
clearing house or other disruptions of normal activity, which could at times
make it difficult or impossible to liquidate existing positions or to recover
excess variation margin payments.
Successful use of futures by the Fund is also subject
to Northern Trust's ability to predict correctly movements in the direction of
the market. For example, if the Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund 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 Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
V. Options on Futures Contracts
The Fund 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. The Fund 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. In anticipation of a decline in interest rates, the Fund 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 Fund intends to purchase. Similarly, if the value of the
securities held by the Fund is expected to decline as a result of an increase
in interest rates, the Fund 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
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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 Fund 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.
VI. Other Matters
Accounting for futures contracts will be in
accordance with generally accepted accounting principles.
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33-73404
811-8236
PART B
STATEMENT OF ADDITIONAL INFORMATION
STOCK INDEX FUND
NORTHERN FUNDS
(THE "TRUST")
This Statement of Additional Information (the "Additional
Statement") dated August __, 1996 is not a prospectus. This Additional
Statement should be read in conjunction with the Prospectus dated August __,
1996, as amended or supplemented from time to time, for the Stock Index Fund
(the "Fund") of Northern Funds (the "Prospectus"). Copies of the Prospectus
may be obtained without charge from the transfer agent by writing to the
Northern Funds Center, P.O. Box 75986, Chicago, Illinois 60690-9069 or by
calling 1-800-595-9111. Capitalized terms not otherwise defined have the same
meaning as in the Prospectus.
----------
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 NORTHERN FUNDS OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY NORTHERN FUNDS OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
SHARES OF NORTHERN FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED, ENDORSED OR OTHERWISE SUPPORTED BY, THE NORTHERN TRUST BANK,
ITS PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION,
FEDERAL RESERVE BOARD, OR ANY OTHERS GOVERNMENTAL AGENCY.
<PAGE> 147
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL INVESTMENT INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . 3
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . 11
ADDITIONAL TRUST INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . 14
Investment Adviser, Transfer Agent and Custodian . . . . . . . . . . . . 17
Administrator and Distributor . . . . . . . . . . . . . . . . . . . . . 22
Service Organizations . . . . . . . . . . . . . . . . . . . . . . . . . 23
Counsel and Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . 25
In-Kind Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Automatic Investing Plan . . . . . . . . . . . . . . . . . . . . . . . . 25
Redemptions and Exchanges . . . . . . . . . . . . . . . . . . . . . . . 26
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . 28
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Federal - General Information . . . . . . . . . . . . . . . . . . . . . 29
Taxation of Certain Financial Instruments . . . . . . . . . . . . . . 31
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
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<PAGE> 148
ADDITIONAL INVESTMENT INFORMATION
INVESTMENT OBJECTIVE AND POLICIES
The following supplements the investment objective and policies of the Fund
set forth in the Prospectus.
Stock Index Fund seeks to provide investment results approximating the
aggregate price and dividend performance of the securities included in the
Standard & Poor's 500 Composite Stock Price Index (the "S&P Index") by
investing substantially all of its assets in securities comprising the S&P
Index.
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, although there is no market for such deposits. Bank notes and bankers'
acceptances rank junior to deposit liabilities of the bank and pari passu with
other senior, unsecured obligations of the bank. Bank notes are classified as
"other borrowings" on a bank's balance sheet, while deposit notes and
certificates of deposit are classified as deposits. Bank notes are not insured
by the Federal Deposit Insurance Corporation or any other insurer. Deposit
notes are insured by the Federal Deposit Insurance Corporation only to the
extent of $100,000 per depositor per bank.
The Fund may invest a portion of its net 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
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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.
REPURCHASE AGREEMENTS. The Fund 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 Investment Company
Act of 1940 (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 Fund's acquisition of the
securities and normally will be within a shorter period of time. Securities
subject to repurchase agreements are held either by Northern Funds' 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 Fund to possible loss because of adverse market action or
delay in connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS. The Fund 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"). 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 Fund may
decline below the repurchase price. The Fund will pay interest on amounts
obtained pursuant to a reverse repurchase agreement. While reverse repurchase
agreements are outstanding, the Fund will maintain in a segregated account
cash, U.S. Government securities or other liquid high-grade debt securities of
an amount at least equal to the market value of the securities, plus accrued
interest, subject to the agreement.
VARIABLE AND FLOATING RATE INSTRUMENTS. With respect to the variable and
floating rate instruments that may be acquired by the Fund as described in its
Prospectus, Northern Trust 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 to meet payment on demand. In determining weighted average portfolio
maturity, an instrument will usually be deemed to have a maturity equal to the
longer of the period remaining until the next
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interest rate adjustment or the time the Fund can recover payment of principal
as specified in the instrument. Variable rate U.S. Government obligations
held by the Fund, however, may be deemed to have maturities equal to the period
remaining until the next interest rate adjustment. Where necessary to ensure
that a variable or floating rate instrument is of the minimum required credit
quality for the Fund, the issuer's obligation to pay the principal of the
instrument will be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED- DELIVERY
TRANSACTIONS. The Fund may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment (sometimes called delayed
delivery) basis. These transactions involve a commitment by the Fund to
purchase or sell securities at a future date. The price of the underlying
securities (usually expressed in terms of yield) and the date when the
securities will be delivered and paid for (the settlement date) are fixed at
the time the transaction is negotiated. When-issued purchases and forward
commitment transactions are normally negotiated directly with the other party.
The Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities.
If deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or negotiate a commitment after entering into it. The Fund also may
sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date.
When the Fund purchases securities on a when-issued, delayed-delivery or
forward commitment basis, the Fund's custodian will maintain in a segregated
account cash, U.S. Government securities or other high-grade debt obligations
having a value (determined daily) at least equal to the amount of the Fund's
purchase commitments. In the case of a forward commitment to sell portfolio
securities, the custodian will hold the portfolio securities themselves in a
segregated account while the commitment is outstanding. These procedures are
designed to ensure that the Fund will maintain sufficient assets at all times
to cover its obligations under when-issued purchases, forward commitments and
delayed-delivery transactions. For purposes of determining the Fund's average
dollar-weighted maturity, the maturity of when-issued, delayed-delivery or
forward commitment securities will be calculated from the commitment date.
UNITED STATES GOVERNMENT OBLIGATIONS. To the extent consistent with its
investment objective, the Fund may invest in a variety of U.S. Treasury
obligations consisting of bills, notes and bonds, which principally differ only
in their interest rates, maturities and issuance dates. The Fund may also
invest in other
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securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Examples of the types of U.S. Government obligations that
may be acquired by the Fund include U.S. Treasury Bills, Treasury Notes and
Treasury Bonds and the obligations of Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Federal National Mortgage Association ("FNMA"), Government
National Mortgage Association ("GNMA"), General Services Administration,
Student Loan Marketing Association ("SLMA"), Central Bank for Cooperatives,
Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit
Banks and Maritime Administration.
Obligations of certain agencies and instrumentalities, such as GNMA, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Export-Import Bank of the United States, are supported by the
right of the issuer to borrow from the Treasury; others, such as those of FNMA,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of SLMA, are supported
only by the credit of the instrumentalities. No assurance can be given that
the U.S. Government would provide financial support to its agencies or
instrumentalities if it is not obligated to do so by law. Obligations of the
International Bank for Reconstruction and Development (also known as the World
Bank) 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.
Securities guaranteed as to principal and interest by the U.S. Government,
its agencies or instrumentalities are deemed to include (a) securities for
which the payment of principal and interest is backed by an irrevocable letter
of credit issued by the U.S. Government or an agency or instrumentality
thereof, and (b) participations in loans made to foreign governments or their
agencies that are so guaranteed. The secondary market for certain of these
participations is limited. Such participations will therefore be regarded as
illiquid. No assurance can be given that the U.S. Government would provide
financial support to its agencies or instrumentalities if it is not obliged to
do so by law.
STRIPPED OBLIGATIONS. To the extent consistent with its investment objective,
the Fund may purchase Treasury receipts and other "stripped" securities that
evidence ownership in either the future interest payments or the future
principal payments on U.S. Government and other obligations. These
participations, which may be issued by the U.S. Government (or a U.S.
Government agency or instrumentality) or by private issuers such as banks and
other institutions, are issued at a discount to their "face value," and may
include stripped mortgage-backed securities ("SMBS"). Stripped securities,
particularly SMBS, may exhibit greater price volatility
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than ordinary debt securities because of the manner in which their principal
and interest are returned to investors.
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 cases, 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 Fund may fail
to fully recoup its initial investment. The market value of the class
consisting entirely of principal payments can be 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 greater 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
Northern Funds' 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 Fund's per share net asset value.
OPTIONS. The Fund may buy put options and buy call options and write
covered call and secured put options. Such options may relate to particular
securities, stock indices, financial instruments, foreign currencies and may or
may not be listed on a domestic or foreign securities exchange ("Exchange") and
may or may not be issued by the Options Clearing Corporation. Options trading
is a highly specialized activity which entails greater than ordinary investment
risk. Options 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.
A call option for a particular security gives the purchaser of the option
the right to buy, and a writer the obligation to sell, the underlying security
at the stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security. The premium paid to the writer
is in consideration for undertaking the obligation under the option contract.
A put option for a particular security gives the purchaser the right to sell
the security at the stated exercise price at any time prior to the expiration
date of the option, regardless of the market price of the security. Options
on indices and yield curve options provide the holder with the right to make or
receive a cash settlement upon exercise of the option.
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<PAGE> 153
With respect to options on indices, the amount of the settlement will equal
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. With respect to yield curve options, the amount of the settlement
will equal the difference between the yields of designated securities.
The Fund 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 the Fund
owns the instrument underlying the call or has an absolute and immediate right
to acquire that instrument without additional cash consideration (or, if
additional cash consideration is required, cash, U.S. Government securities or
other liquid high grade debt obligations, in such amount as are held in a
segregated account by its custodian) upon conversion or exchange of other
securities held by it. For a call option on an index, the option is covered if
the Fund maintains with its custodian a diversified portfolio of securities
comprising the index or liquid assets equal to the contract value. A call
option is also covered if the Fund holds a call on the same instrument or index
as the call written where the exercise price of the call held is (i) equal to
or less than the exercise price of the call written, or (ii) greater than the
exercise price of the call written provided the difference is maintained by the
Fund in liquid assets in a segregated account with its custodian. The Fund
will write put options only if they are "secured" by liquid assets maintained
in a segregated account by the Fund's custodian in an amount not less than the
exercise price of the option at all times during the option period.
The Fund's obligation to sell an instrument subject to a covered call
option written by it, or to purchase an instrument subject to a secured put
option written by it, may be terminated prior to the expiration date of the
option by the Fund'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 instrument, 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 instrument from
being called, to permit the sale of the underlying instrument or to permit the
writing of a new option containing different terms on such underlying
instrument. 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 Fund 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 instrument (in the case of a covered call option) or
liquidate the segregated account (in the case of a secured put option) until
the option expires or the
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optioned instrument 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 instrument during such period.
When the Fund purchases an option, the premium paid by it is recorded as an
asset of the Fund. When the Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund'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 Fund expires unexercised, the Fund realizes a loss equal to
the premium paid. If the Fund enters into a closing sale transaction on an
option purchased by it, the Fund will realize a gain if the premium received by
the Fund 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 Fund expires
on the stipulated expiration date or if the Fund enters into a closing purchase
transaction, the Fund 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 Fund is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Fund will realize a
gain or loss.
There are several risks associated with transactions in 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 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
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trades on that Exchange would continue to be exercisable in accordance with
their terms.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may purchase and sell
futures contracts and may purchase and sell call and put options on futures
contracts. Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade,
including the execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked
to a domestic market so that a position taken on the market may be liquidated
by a transaction on another market. Moreover, such laws or regulations will
vary depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, customers who trade foreign
futures or foreign options contracts may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the Commodity
Futures Trading Commission's ("CFTC") regulations and the rules of the National
Futures Association and any domestic exchange, including the right to use
reparations proceedings before the CFTC and arbitration proceedings provided
them by the National Futures Association or any domestic futures exchange. In
particular, the Fund's investments in foreign futures or foreign options
transactions may not be provided the same protections in respect of
transactions on United States futures exchanges. In addition, the price of any
foreign futures or foreign options contract and, therefore the potential profit
and loss thereon may be affected by any variance in the foreign exchange rate
between the time an order is placed and the time it is liquidated, offset or
exercised. For a detailed description of futures contracts and related
options, see Appendix B to this Additional Statement.
SECURITIES LENDING. Collateral for loans of portfolio securities made by
the Fund may consist of cash, 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 the
Fund 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 the Fund if a material event affecting the
investment is to occur.
INVESTMENT COMPANIES. The Fund currently intends to limit its investments
in securities issued by other investment companies so
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that, as determined immediately after a purchase of such securities is made,
not more than 3% of the total outstanding stock of any one investment company
will be owned by Northern Funds as a whole and their affiliated persons (as
defined in the 1940 Act). An investment company whose securities are purchased
by the Fund or other portfolios of Northern Funds is not 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.
CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio turnover rate for
the Fund 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 Funds to receive favorable tax treatment.
MISCELLANEOUS. The Fund will not normally engage in the trading of
securities for short-term profits. However, the Fund is not restricted by
policy with regard to portfolio turnover and will make changes in its
investment portfolio from time to time as business and economic conditions as
well as market prices may dictate. Securities may be purchased on margin only
to obtain such short-term credits as are necessary for the clearance of
purchases and sales of securities. The Fund will not engage in selling
securities short. The Fund may, however, make short sales against the box
although the Fund has no current intention to do so in the coming year.
"Selling short against the box" involves selling a security that the Fund owns
for delivery at a specified date in the future.
INVESTMENT RESTRICTIONS
The Fund is subject to the fundamental investment restrictions enumerated
below which may be changed with respect to the Fund only by a vote of the
holders of a majority of the Fund's outstanding shares.
The Fund may not:
(1) Make loans, except (a) through the purchase of debt
obligations in accordance with the Fund's investment objective and
policies, (b) through repurchase agreements with banks, brokers, dealers
and other financial institutions, and (c) loans of securities.
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<PAGE> 157
(2) Mortgage, pledge or hypothecate any assets (other than
pursuant to reverse repurchase agreements) except to secure permitted
borrowings.
(3) Purchase or sell real estate or real estate limited
partnerships, but this restriction shall not prevent the Fund 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 or leases,
except that the Fund may, to the extent appropriate to its investment
policies, purchase securities of companies engaging in whole or in part in
such activities, and may enter into futures contracts and related options
and enter into forward currency exchange contracts in accordance with its
investment objective and policies.
(5) Invest in companies for the purpose of exercising
control.
(6) Act as underwriter of securities, except as the Fund
may be deemed to be an underwriter under the Securities Act of 1933 (the
"1933 Act") 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; futures contracts; options on futures contracts;
forward currency exchange contracts; short sales against the box; interest
rate and currency swaps; and pair-off transactions.
(8) Purchase the securities of any issuer if such purchase
would cause more than 10% of the voting securities of such issuer to be
held by the Fund, except that up to 25% of the value of its total assets
may be invested without regard to this 10% limitation.
In addition, as summarized in the Prospectus, the Fund may not:
(9) Purchase securities (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements collateralized by such obligations) if such purchase
would cause more than 25% in the aggregate of the market value of the total
assets of the Fund to be invested in the securities of one or more issuers
having their principal business activities in the same
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<PAGE> 158
industry. For the purposes of this restriction, state and municipal
governments and their agencies and authorities are not deemed to be
industries; as to utility companies, the gas, electric, water and telephone
businesses are considered separate industries; personal credit finance
companies and business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of their parents.
(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 Fund's total assets or (b)
from banks, provided that immediately after any such borrowing all
borrowings of the Fund do not exceed one-third of the Fund's total 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 Fund by enabling Northern Funds 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 the Fund fall below 300% of its
borrowings, Northern Funds will reduce the borrowings of the Fund in
accordance with the 1940 Act. In addition, as a matter of fundamental
policy, the Fund may not enter into reverse repurchase agreements exceeding
in the aggregate one-third of their respective total assets.
(11) Purchase the securities of any one issuer, other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if immediately after such purchase more than 5% of the
value of the Fund's total assets would be invested in such issuer, except
that: (a) up to 25% of the value of the total assets of the Fund may be
invested in any securities without regard to this 5% limitation; and (b)
such 5% limitation shall not apply to repurchase agreements collateralized
by obligations of the U.S. Government, its agencies or instrumentalities.
In addition, as a matter of fundamental policy, the Fund will not issue
senior securities except as stated in the Prospectus or this Additional
Statement.
For the purpose of Investment Restriction (9), in determining industry
classification with respect to the Fund, Northern Funds intends to use the
industry classification titles in the Standard Industrial Classification
Manual. Securities held in escrow or separate accounts in connection with the
Fund's investment practices described in this Additional Statement and in the
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Prospectus are not deemed to be mortgaged, pledged or hypothecated for purposes
of the foregoing Investment Restrictions.
A security is considered to be issued by the entity, or entities, whose
assets and revenues back the security. A guarantee of a security is not deemed
to be a security issued by the guarantor when the value of all securities
issued and guaranteed by the guarantor, and owned by the Fund, does not exceed
10% of the value of the Fund's total assets.
Any restriction which involves a maximum percentage will not be considered
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by, the Fund.
In order to permit the sale of the Fund's shares in certain states,
Northern Funds may make commitments with respect to the Fund more restrictive
than the investment policies listed above and in the Prospectus. Should
Northern Funds determine that any commitment made to permit the sale of the
Fund's shares in any state is no longer in the best interests of the Fund, it
will revoke the commitment by terminating sales of the Fund's shares in the
state involved.
ADDITIONAL TRUST INFORMATION
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of Northern Funds is
set forth below.
Mr. Silas S. Cathcart, (*,**) Chairman of the Board and
President, Age 70, 222 Wisconsin Avenue, Lake Forest, Illinois 60045. Chairman
of Kidder Peabody Inc. from May 1987 until his retirement in December 1989.
Director/Trustee of General Electric Co., Baxter International, Inc. (worldwide
development, distribution and manufacture of health care products, systems and
services), The Quaker Oats Co., Montgomery Ward and American Academics, Inc.,
Retired Director and Trustee of Illinois Tool Works, Inc. and Bradley Trust,
respectively.
Mr. James W. Cozad, Trustee, Age 69, 205 N. Michigan Avenue,
Suite 4310, Chicago, Illinois 60601. Vice Chairman of Amoco Corporation from
September 1983 to December 1989 and Chairman and CEO of Whitman Corporation
(holding company for Pepsi-Cola General Bottlers, Inc., Midas International
Corporation (automotive services) and Hussmann Corporation (refrigeration
systems and equipment) from January 1990 until his retirement in May 1992.
Director of Whitman Corporation, Eli Lilly and Company (life
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science products), Inland Steel Company, Inland Steel Industries, Inc. and
Sears, Roebuck & Company. Retired Director of GATX Corporation
(transportation, distribution and warehousing)
Ms. Susan Crown, (**) Trustee, Age 38, 222 North LaSalle
Street, Suite 2000, Chicago, Illinois 60601. Vice President of Henry Crown and
Company (family-owned and operated company including diversified manufacturing
companies and real estate development) since 1984. Director and President of
Arie and Ida Crown Memorial (grant-making foundation), Director of Baxter
International, Inc. (worldwide development, distribution and manufacture of
health care products, systems and services) and Illinois Tool Works, Inc.
Mr. Wesley M. Dixon, Jr., (*) Trustee, Age 68, 400 Skokie
Blvd., Suite 675, Northbrook, Illinois 60062. Director of Earl Kinship Capital
Corporation since 1985. Vice Chairman and Director of G.D. Searle & Co.
(manufacture and sale of food products and pharmaceuticals) from 1977 to 1983
and President of G.D. Searle & Co. prior thereto.
Mr. William J. Dolan, Jr., Trustee, Age 65, 1534 Basswood
Circle, Glenview, Illinois 60025. Partner of Arthur Andersen & Co. S.C.
(accounting firm) from 1966 until his retirement in December 1989. Financial
Consultant, Ernst & Young from 1992 to 1993. Director of Household Bank,
Federal Savings Bank.
Mr. Raymond E. George, Jr., (**) Trustee, Age 65, 703
Prospect Avenue, Winnetka, Illinois 60093. Senior Vice President and Senior
Fiduciary Officer of The Northern Trust Company from 1988 until his retirement
in October 1993.
Miriam M. Allison, Vice President and Treasurer, Age 48, 207
E. Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. President and
Director of Sunstone Financial Group, Inc. since 1990 and Vice President of
First Wisconsin Trust Company prior thereto.
Mary M. Tenwinkel, Vice President, Age 48, 207 E. Buffalo
Street, Suite 400, Milwaukee, Wisconsin 53202. Vice President of Sunstone
Financial Group, Inc. since August of 1993 and First Vice President and head
of Personal Services Group at Firstar Trust Company prior thereto.
- -------------------------------
*. Messrs. Cathcart and Dixon are first cousins.
**. Messrs. Cathcart and George and Ms. Crown are considered to be "interested
persons" of Northern Funds as defined in the 1940 Act.
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<PAGE> 161
Anita M. Zagrodnik, Assistant Treasurer, Age 36, 207 E.
Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. Client Services,
Accounting and Tax Manager of Sunstone Financial Group, Inc. since 1990 and
Senior Accountant at Price Waterhouse prior thereto.
Jeffrey A. Dalke, Secretary, Age 45, Philadelphia National
Bank Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107. Partner
in the law firm of Drinker Biddle & Reath.
Certain of the Trustees and officers and the organizations with which they
are associated have had in the past, and may have in the future, transactions
with Northern Trust, Sunstone and their respective affiliates. Northern Funds
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. Ms. Allison holds similar
positions with one or more investment companies that are distributed by
Sunstone. As a result of the responsibilities assumed by Northern Trust under
its Advisory Agreement, Transfer Agency Agreement and Custodian Agreement and
by Sunstone under its Administration Agreement and Distribution Agreement,
Northern Funds itself requires no employees.
Each Trustee earns an annual fee of $15,000 and an additional fee of $1,250
for each meeting attended, plus reimbursement of expenses incurred as a
Trustee. The Chairman of the Board earns an annual fee of $20,000 and an
additional fee of $1,250 for each meeting attended, plus reimbursement of
expenses incurred as a Trustee. Northern Funds' officers do not receive fees
from Northern Funds for services in such capacities, although Sunstone, of
which Mmes. Allison and Tenwinkel are also officers, receives fees from
Northern Funds for administrative services. Drinker Biddle & Reath, of which
Mr. Dalke is a partner, receives legal fees as counsel to Northern Funds.
For the fiscal year ended March 31, 1996, the Trustees received the
following compensation:
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Pension or
Retirement
Benefits Total
Aggregate Accrued as Part Compensation
Compensation of Trust from the
Name of Trustee from the Trust Expense Trust**
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Silas S. Cathcart $25,000 None $25,000
- --------------------------------------------------------------------------------
James W. Cozad $20,000 None $20,000
- --------------------------------------------------------------------------------
Susan Crown $20,000 None $20,000
- --------------------------------------------------------------------------------
Wesley M. Dixon, Jr. $18,750 None $18,750
- --------------------------------------------------------------------------------
William J. Dolan, Jr. $20,000 None $20,000
- --------------------------------------------------------------------------------
Raymond E. George, Jr. $20,000 None $20,000
- --------------------------------------------------------------------------------
</TABLE>
** This column presents the same information as the first column because none
of the Trustees served on a board of another mutual fund related to the Trust.
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern Trust is a wholly-owned subsidiary of The Northern Trust
Corporation, a Chicago-based multi-bank holding company with subsidiaries in
Illinois, Florida, New York, Arizona, California and Texas. Northern Trust has
for more than 100 years managed the assets of individuals, charitable
organizations, foundations and large corporate investors. One of the nation's
leading providers of trust and investment management services, Northern Trust
first entered the mutual fund business in 1983 by offering money market funds
to institutional clients. As part of its investment advisory services,
Northern Trust offers extensive research services to its clients. As of the
date of this Additional Statement, nearly [300 financial institutions
nationwide purchase Northern Trust's economic advisory services]. As of March
31, 1996, Northern Trust and its affiliates had approximately $20.3 billion in
assets, $12.1 billion in deposits, and administered in various capacities
(including as master trustee, investment manager or custodian) over $641.2
billion in assets. As of March 31, 1996, Northern Trust's investment
management group had management responsibility for approximately $114.5
billion. Northern Trust is one of the strongest banking organizations in the
United States and its clients include public and private retirement funds,
endowments, foundations, trusts, corporations and individuals. Northern Funds
complements the banking and personal trust services available through Northern
Trust by allowing Northern Trust's banking and trust clients to consolidate the
management of their finances and thereby move one step closer to one-stop
financial shopping. Northern Funds utilizes a state-of-the-art investor
services center. Also, trained investment representatives are available at
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Northern Trust's offices to assist investors in allocating their investments.
Northern Trust 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. Northern Trust manages the Funds through a team of
professionals, led by portfolio managers who follow a disciplined process to
develop investment strategies. The purpose of this approach is to promote
consistent management. The portfolio managers draw upon the resources of
Northern Trust's research department with specialists in economic analysis,
investment strategy, credit quality and tax law, and which supplies information
on interest rates, GNP growth, corporate profits and other factors.
Subject to the general supervision of the Board of Trustees, Northern Trust
makes decisions with respect to and places orders for all purchases and sales
of portfolio securities for the Funds, and also provides certain ancillary
services. Northern Trust's Advisory Agreement with Northern Funds has been
approved by the Board of Trustees, including the "non-interested" Trustees, and
the initial shareholder of Northern Funds. The Advisory Agreement provides
that in executing portfolio transactions and in selecting brokers or dealers
(a) with respect to common and preferred stocks, Northern Trust shall use its
best judgment to obtain the best overall terms available, and (b) with respect
to other securities, Northern Trust shall attempt to obtain best net price and
execution. 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, Northern Trust 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 pricesat which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down.
The Fund may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Fund will engage in this practice, however, only when Northern Trust
believes such practice to be in the Fund's interests.
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Northern Trust's investment advisory duties for Northern Funds are carried
out through its Trust Department. On occasions when Northern Trust deems the
purchase or sale of a security to be in the best interests of the Fund as well
as other fiduciary or agency accounts managed by it (including any other
portfolio, investment company or account for which Northern Trust acts as
adviser), the Agreement provides that Northern Trust, to the extent permitted
by applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
accounts in order to obtain the best overall terms available with respect to
common and preferred stocks and the best net price and execution with respect
to other securities. In such event, allocation of the securities so purchased
or sold, as well as the expenses incurred in the transaction, will be made by
Northern Trust in the manner it considers to be most equitable and consistent
with its fiduciary obligations to the Fund and other accounts involved. In
some instances, this procedure may adversely affect the size of the position
obtainable for the Fund or the amount of the securities that are able to be
sold for the Fund. To the extent that the execution and price available from
more than one broker or dealer are believed to be comparable, the Agreement
permits Northern Trust, at its discretion but subject to applicable law, to
select the executing broker or dealer on the basis of Northern Trust's opinion
of the reliability and quality of such broker or dealer.
The Advisory Agreement provides that Northern Trust may render similar
services to others so long as its services under such Agreement are not
impaired thereby. The Advisory Agreement also provides that Northern Funds
will indemnify Northern Trust against certain liabilities (including
liabilities under the federal securities laws relating to untrue statements or
omissions of material fact and actions that are in accordance with the terms of
the Agreement) or, in lieu thereof, contribute to resulting losses.
Under its Transfer Agency Agreement with Northern Funds, Northern Trust has
undertaken, among other things, to perform the following services: (1) answer
shareholder inquiries and respond to requests for information regarding
Northern Funds; (2) process purchase and redemption transactions; (3) establish
and maintain shareholder accounts and subaccounts; (4) furnish confirmations in
accordance with applicable law, and provide periodic account statements to each
shareholder; (5) furnish proxy statements and proxies, annual and semi-annual
financial statements, and dividend, distribution and tax notices to
shareholders; (6) act as income disbursing agent; and (7) maintain appropriate
records relating to its services. Northern Trust may appoint one or more
sub-transfer agents in the performance of its services.
As compensation for the services rendered by Northern Trust under the
Transfer Agency Agreement and the assumption by Northern Trust of related
expenses, Northern Trust is entitled to a fee from
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<PAGE> 165
Northern Funds, payable monthly, at an annual rate of .10% of the average daily
net asset value of the Fund.
Northern Trust maintains custody of the assets of the Fund pursuant to the
terms of its Custodian Agreement with Northern Funds. Under the terms of this
agreement, Northern Trust (l) holds the Fund's cash and securities, (2)
maintains such cash and securities in separate accounts in the name of the
Fund, (3) makes receipts and disbursements of funds on behalf of the Fund, (4)
receives, delivers and releases securities on behalf of the Fund, (5) collects
and receives all income, principal and other payments in respect of the Fund's
investments held by Northern Trust under the agreement, and (6) maintains the
accounting records of Northern Funds. Northern Trust may employ one or more
subcustodians under the Custody Agreement, provided that Northern Trust shall
have no more responsibility or liability to Northern Funds on account of any
action or omission of any subcustodian so employed than such subcustodian has
to Northern Trust and that the responsibility or liability of the subcustodian
to Northern Trust shall conform to the resolution of the Trustees of Northern
Funds authorizing the appointment of the particular subcustodian. Northern
Trust may also appoint an agent to carry out such of the provisions of the
Custody Agreement as Northern Trust may from time to time direct, provided that
the appointment of such an agent shall not relieve Northern Trust of any of its
responsibilities under the agreement.
As compensation for the services rendered to the Fund under the Custodian
Agreement, and the assumption by Northern Trust of certain related expenses,
Northern Trust is entitled to payment from the Fund as follows: (a) a basic
custodial fee of (i) $18,000 annually for the Fund, plus (ii) 1/100th of 1%
annually of the Fund's average daily net assets to the extent they exceed $100
million, plus (b) a basic accounting fee of (i) $25,000 annually for the Fund,
plus (ii) 1/100th of 1% annually of the Fund's average daily net assets to the
extent they exceed $50 million, plus (c) a fixed dollar fee for each trade in
portfolio securities, plus (d) a fixed dollar fee for each time that Northern
Trust as Custodian receives or transmits funds via wire, plus (e) reimbursement
of expenses incurred by Northern Trust as Custodian for telephone, postage,
courier fees, office supplies and duplicating. The fees referred to in clauses
(c) and (d) are subject to annual upward adjustments based on increases in the
Consumer Price Index for All Urban Consumers, provided that Northern Trust may
permanently or temporarily waive all or any portion of any upward adjustment.
Unless sooner terminated, each of the Advisory Agreement, Transfer Agency
Agreement and Custodian Agreement between Northern Trust and Northern Funds
will continue in effect with respect to a particular Fund until March 31, 1997,
and thereafter for successive 12-month periods, provided that the continuance
is approved at least annually (a) by the vote of a majority of the Trustees who
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<PAGE> 166
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 (b) by the Trustees or by
the vote of a majority of the outstanding shares of the Fund (as defined under
"Organization" in the Prospectus). Each agreement is terminable at any time
without penalty by Northern Funds (by specified Trustee or shareholder action)
on 60 days' written notice to Northern Trust and by Northern Trust on 60 days'
written notice to Northern Funds.
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company
continuously engaged in the issuance of its shares, but such banking laws and
regulations do not prohibit such a holding company or affiliate or banks
generally from acting as investment adviser, transfer agent or custodian to
such an investment company, or from purchasing shares of such a company as
agent for and upon the order of customers. Northern Trust believes that it may
perform the services contemplated by its agreements with Northern Funds without
violation of such banking laws or regulations, which are applicable to it. It
should be noted, however, that future changes in either federal or state
statutes and regulations relating to the permissible activities of banks and
their subsidiaries or affiliates, as well as future judicial or administrative
decisions or interpretations of current and future statutes and regulations,
could prevent Northern Trust from continuing to perform such services for
Northern Funds.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of Northern Trust in connection with the provision of
services on behalf of Northern Funds, Northern Funds might be required to alter
materially or discontinue its arrangements with Northern Trust and change its
method of operations. It is not anticipated, however, that any change in
Northern Funds' method of operations would affect the net asset value per share
of the Fund or result in a financial loss to any shareholder. Moreover, if
current restrictions preventing a bank from legally sponsoring, organizing,
controlling or distributing shares of an open-end investment company were
relaxed, Northern Funds expects that Northern Trust would consider the
possibility of offering to perform some or all of the services now provided by
Sunstone. It is not possible, of course, to predict whether or in what form
such restrictions might be relaxed or the terms upon which Northern Trust might
offer to provide services for consideration by the Trustees.
In the Advisory Agreement, Northern Trust agrees that the name "Northern"
may be used in connection with Northern Funds' business on a royalty-free
basis. Northern Trust has reserved to itself the right to grant the
non-exclusive right to use the name "Northern"
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<PAGE> 167
to any other person. The Advisory Agreement provides that at such time as the
Agreement is no longer in effect, Northern Funds will cease using the name
"Northern."
ADMINISTRATOR AND DISTRIBUTOR
Under its Administration Agreement, Sunstone has agreed, subject to the
direction and control of Northern Funds' Board of Trustees and utilizing
information provided by Northern Funds and its agents, to (1) provide office
space, facilities, equipment and personnel to carry out its services; (2)
compile data for and prepare with respect to the Funds timely Notices to the
Securities and Exchange Commission ("SEC") required pursuant to Rule 24f-2
under the 1940 Act and Semi-Annual Reports on Form N-SAR; (3) prepare for
execution by Northern Funds and file all federal income and excise tax returns
and state income tax returns (and such other required tax filings as may be
agreed to by the parties) other than those required to be made by Northern
Funds' custodian and transfer agent; (4) prepare compliance filings relating to
the registration of the securities of the Fund pursuant to state securities
laws with the advice of Northern Funds' counsel; (5) assist the Fund
accountants with preparing the Annual and Semi-Annual Reports required pursuant
to Section 30(d) under the 1940 Act; (6) assist to the extent requested by
Northern Funds with the preparation of the Registration Statement for the Fund
(on Form N-1A or any replacement therefor) and any amendments thereto, and
proxy materials; (7) prepare and monitor the Fund's expense accruals and cause
all appropriate expenses to be paid from Fund assets on proper authorization
from the Fund; (8) assist in the acquisition of the Fund's fidelity bond
required by the 1940 Act, monitor the amount of the bond and make the necessary
SEC filings related thereto; (9) from time to time as Northern Funds may
reasonably request or as Sunstone deems appropriate, check the Fund's
compliance with the policies and limitations relating to portfolio investments
as set forth in the Prospectus, Additional Statement and Declaration of Trust
and monitor the Fund's status as a regulated investment company under
Subchapter M of the Internal Revenue Code, as amended (but this function shall
not relieve the Fund's investment adviser of its primary day-to-day
responsibility for assuring such compliance); (10) maintain, and/or coordinate
with the other service providers the maintenance of, the accounts, books and
other documents required pursuant to Rule 31a-1(a) and (b) under the 1940 Act;
and (11) generally assist in the Fund's administrative operations. In
addition, Sunstone has agreed to monitor Northern Funds' arrangements with
respect to services provided by Service Organizations. Under the
Administration Agreement, Sunstone is not liable for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with the
performance of the Administration Agreement, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of Sunstone in
the performance of its duties or from
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<PAGE> 168
its reckless disregard of its duties and obligations under the Agreement.
Unless sooner terminated the Administration Agreement will continue in
effect with respect to the Fund until March 31, 1997, and thereafter for
successive 12-month periods, provided that the agreement is approved annually
(a) by the vote of a majority of the Trustees who are not parties to the
agreement or "interested persons" (as such term is defined by the 1940 Act) of
any party thereto, cast in person at a meeting called for the purpose of voting
on such approval, and (b) by the Trustees or by the vote of a majority of the
outstanding shares of the Fund (as defined under "Description of Shares").
Notwithstanding the foregoing, the Administration Agreement shall continue
automatically for an indefinite period unless the Board of Trustees shall have
provided Sunstone with at least 90 days' written notice of its determination
not to renew the Agreement. In addition, the Administration Agreement provides
that in the event Northern Funds terminates the Agreement during its initial
term for any reason other than mutual agreement of the parties or a material
breach by Sunstone that remains uncured after notice thereof, Northern Funds
shall pay Sunstone the administration fees that would otherwise be due under
the Agreement for the remaining unexpired initial term.
For its administration services, Sunstone is entitled to an administration
fee, computed daily and payable monthly, at the annual rate of .15% of the
Fund's average aggregate daily net assets.
Northern Funds has also entered into a Distribution Agreement under which
Sunstone, as agent, sells shares of the Fund on a continuous basis. Sunstone
pays the cost of printing and distributing prospectuses to persons who are not
shareholders of Northern Funds (excluding preparation and typesetting expenses)
and of certain other distribution efforts. No compensation is payable by
Northern Funds to Sunstone for such distribution services.
The Administration Agreement and the Distribution Agreement provide that
Sunstone may render similar services to others so long as its services under
the Agreements are not impaired thereby. The Administration and Distribution
Agreements provide that Northern Funds will indemnify Sunstone 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 such Agreements) under certain circumstances.
SERVICE ORGANIZATIONS
As stated in the Fund's Prospectus, the Fund may enter into agreements from
time to time with Service Organizations providing for support and/or
distribution services to customers of the
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<PAGE> 169
Service Organizations who are the beneficial owners of Fund shares. Under the
agreements, the Fund may pay Service Organizations up to .25% (on an annualized
basis) of the average daily net asset value of the shares beneficially owned by
their customers. Support services provided by Service Organizations under
their agreements may include: (a) processing dividend and distribution payments
from the Fund; (b) providing information periodically to customers showing
their share positions; (c) arranging for bank wires; (d) responding to customer
inquiries; (e) providing subaccounting with respect to shares beneficially
owned by customers or the information necessary for subaccounting; (f)
forwarding shareholder communications; (g) assisting in processing share
purchase, exchange and redemption requests from customers; (h) assisting
customers in changing dividend options, account designations and addresses; and
(i) other similar services requested by the Fund. In addition, Service
Organizations may provide assistance (such as the forwarding of sales
literature and advertising to their customers) in connection with the
distribution of Fund shares.
The Fund's arrangements with Service Organizations under the agreements are
governed by two Plans (a Service Plan and a Distribution and Service Plan),
which have been adopted by the Board of Trustees and (in the case of the
Distribution and Service Plan) by the initial shareholder of Northern Funds.
Because the Distribution and Service Plan contemplates the provision of
services related to the distribution of Fund shares (in addition to support
services), that Plan has been adopted in accordance with Rule 12b-1 under the
1940 Act. In accordance with the Plans, the Board of Trustees reviews, at
least quarterly, a written report of the amounts expended in connection with
the Fund's arrangements with Service Organizations and the purposes for which
the expenditures were made. In addition, the Fund's arrangements with Service
Organizations must be approved annually by a majority of the Trustees,
including a majority of the Trustees who are not "interested persons" of the
Fund as defined in the 1940 Act and have no direct or indirect financial
interest in such arrangements (the "Disinterested Trustees").
The Board of Trustees believes that there is a reasonable likelihood that
their arrangements with Service Organizations will benefit the Fund and its
shareholders. Any material amendment to the arrangements with Service
Organizations under the agreements must be approved by a majority of the Board
of Trustees (including a majority of the Disinterested Trustees), and any
amendment to increase materially the costs under the Distribution and Service
Plan with respect to the Fund must be approved by the holders of a majority of
the outstanding shares of the Fund. So long as the Distribution and Service
Plan is in effect, the selection and nomination of the members of the Board of
Trustees who are not "interested persons" (as defined in the 1940 Act) of
Northern Funds will be committed to the discretion of such disinterested
Trustees.
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<PAGE> 170
COUNSEL AND AUDITORS
Drinker Biddle & Reath, with offices at Suite 1100, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107, serve as counsel to Northern Funds.
Arthur Andersen LLP, independent accountants, 33 West Monroe Street,
Chicago, Illinois 60603-5385 serve as auditors for Northern Funds.
IN-KIND PURCHASES
Payment for shares of the Fund may, in the discretion of Northern Trust, be
made in the form of securities that are permissible investments for the Fund as
described in the Prospectus. For further information about this form of
payment, contact the Transfer Agent. In connection with an in-kind securities
payment, the Fund will require, among other things, that the securities be
valued on the day of purchase in accordance with the pricing methods used by
the Fund and that the Fund 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 Fund; and that adequate information be
provided concerning the basis and other tax matters relating to the securities.
In addition, so long as shares in the Fund are offered or sold in Texas, any
securities that are accepted as payment for the shares of the Fund will be
limited to securities that are issued in transactions that involve a bona fide
reorganization or statutory merger, or will be limited to other acquisitions of
portfolio securities (except for municipal debt securities issued by state
political subdivisions or their agencies or instrumentalities) that: (a) meet
the investment objective and policies of the Fund; (b) are acquired for
investment and not for resale; (c) are liquid securities that are not
restricted as to transfer either by law or liquidity of market; and (d) have a
value that is readily ascertainable (and not established only by evaluation
procedures) as evidenced by a listing on the American Stock Exchange, New York
Stock Exchange or Nasdaq or as evidenced by their status as U.S. Government
Securities, bank certificates of deposit, banker's acceptances, corporate and
other debt securities that are actively traded, money market securities and
other like securities with a readily ascertainable value.
AUTOMATIC INVESTING PLAN
The Automatic Investing Plan permits an investor to use "Dollar Cost
Averaging" in making investments. Instead of trying to time market
performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help investors reduce their average cost per share because
the agreed upon fixed investment amount allows more shares to be purchased
during periods of lower share prices and fewer shares during periods of higher
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<PAGE> 171
share prices. In order to be effective, Dollar Cost Averaging should usually
be followed on a sustained, consistent basis. Investors should be aware,
however, that shares bought using Dollar Cost Averaging are purchased without
regard to their price on the day of investment or to market trends. Dollar
Cost Averaging does not assure a profit and does not protect against losses in
a declining market. In addition, while investors may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if an investor
ultimately redeems his shares at a price which is lower than their purchase
price. An investor may want to consider his financial ability to continue
purchases through periods of low price levels.
REDEMPTIONS AND EXCHANGES
Exchange requests received on a Business Day prior to the time shares of
the Fund are priced will be processed on the date of receipt. "Processing" a
request means that shares in the fund from which the shareholder is withdrawing
will be redeemed at the net asset value per share next determined on the date
of receipt. Shares of the new fund into which the shareholder is investing will
also normally be purchased at the net asset value per share next determined
coincident to or after the time of redemption. Exchange requests received on a
Business Day after the time shares of the Fund are priced will be processed on
the next Business Day in the manner described above.
Northern Funds reserves the right to make payment for redemptions in
readily marketable securities. If this occurred, a shareholder would bear any
brokerage or other transaction costs incurred in converting the securities so
received to cash. Northern Funds also reserves the right to require a
shareholder to redeem involuntarily shares in the Fund if the balance held of
record by the shareholder drops below $750 and the shareholder does not
increase such balance to $1,000 or more upon 30 days' notice. Northern Funds
will not require a shareholder to redeem shares of the Fund if the balance held
of record by the shareholder is less than $750 solely because of a decline in
the net asset value of the Fund's shares or because the shareholder has made an
initial investment in a lower amount in accordance with the Automatic
Investment Plan. Northern Funds may also redeem shares involuntarily if the
redemption is appropriate to carry out Northern Funds' responsibilities under
the 1940 Act.
Northern Funds may redeem shares involuntarily to reimburse the Fund for
any loss sustained by reason of the failure of a shareholder to make full
payment for shares purchased by the shareholder or to collect any charge
relating to a transaction effected for the benefit of a shareholder which is
applicable to Fund shares as provided in the Fund's Prospectus from time to
time.
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<PAGE> 172
PERFORMANCE INFORMATION
The Fund calculates its "average annual total 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:
ERV
T = [(-----) 1 - 1]
-
P n
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year (or other) periods at the end
of the applicable period (or a fractional
portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed
in years.
The Fund calculates its "aggregate total 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
Aggregate Total Return =[(-----) - 1]
P
The calculations are made assuming that (a) all dividends and capital gain
distributions are reinvested on the reinvestment dates at the price per share
existing on the reinvestment date, and (b) all recurring fees charged to all
shareholder accounts are included. The ending redeemable value (variable "ERV"
in the formula) is determined by assuming complete redemption of the
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<PAGE> 173
hypothetical investment after deduction of all nonrecurring charges at the end
of the measuring period.
GENERAL INFORMATION
The Fund may include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of the Fund, economic conditions, the
effects of inflation and historical performance of various asset classes,
including but not limited to, stocks, bonds and Treasury bills. From time to
time advertisements or communications to shareholders may summarize the
substance of information contained in shareholder reports (including the
investment composition of the Fund), as well as the views of Northern Trust as
to current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to the Fund. The Fund may also include in
advertisements charts, graphs or drawings which illustrate the potential risks
and rewards of investment in various investment vehicles, including but not
limited to, stocks, bonds, treasury bills and shares of the Fund. In addition,
advertisements or shareholder communications may include a discussion of
certain attributes or benefits to be derived by an investment in the Fund.
Such advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.
Any fees imposed by Northern Trust or other Service Organizations on their
customers in connection with investments in the Fund are not reflected in
Northern Funds' calculations of performance for the Fund.
The Fund's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates,
portfolio expenses and other factors. Performance is one basis investors may
use to analyze the Fund as compared to other funds and other investment
vehicles. However, performance of other funds and other investment vehicles
may not be comparable because of the foregoing variables, and differences in
the methods used in valuing their portfolio instruments, computing net asset
value and determining performance.
TAXES
The following summarizes certain additional tax considerations generally
affecting the Fund and its shareholders that are not
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<PAGE> 174
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its 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 federal income 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
The Fund 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, the Fund 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, the Fund 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 other income derived with respect to its business of
investing in such stock, securities, or currencies (the "Income Requirement")
and derive less than 30% of its gross income from the sale or other disposition
of securities and certain other investments held for less than three months
(the "Short-Short Test"). Interest (including original issue discount and
accrued market discount) received by the Fund at maturity or on disposition of
a security held for less than three months will not be treated as other income
which is attributable to realized market appreciation, but will be treated as
gross income from the sale or other disposition of securities for this purpose.
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of the Fund's assets must consist
of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and
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<PAGE> 175
securities of other issuers (as to which the Fund has not invested more than 5%
of the value of its total assets in securities of such issuer and as to which
the Fund does not hold more than 10% of the outstanding voting securities of
such issuer) and no more than 25% of the value of the Fund'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 the Fund controls and which are engaged in the same or
similar trades or businesses.
The Fund intends to distribute to shareholders any excess of net long-term
capital gain over net short-term capital loss ("net capital gain") for each
taxable year. Such gain is distributed as a capital gain dividend and is
taxable to shareholders as long-term capital gain, regardless of the length of
time the shareholder has held the shares, whether such gain was recognized by
the Fund prior to the date on which a shareholder acquired shares of the Fund
and whether the distribution was paid in cash or reinvested in shares. In
addition, investors should be aware that any loss realized upon the sale,
exchange or redemption of shares held for six months or less will be treated as
a long-term capital loss to the extent of any capital gain dividends that have
been paid with respect to such shares.
In the case of corporate shareholders, distributions of the Fund 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 Fund for the year. A dividend usually will be treated as a
"qualifying dividend" if it has been received from a domestic corporation.
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable
and the phase-out of personal exemptions, the maximum effective marginal rate
of tax for some taxpayers may be higher. An individual's long-term capital
gains are currently taxable at a maximum nominal rate of 28%. For
corporations, long-term capital gains and ordinary income are both taxable at a
maximum nominal rate of 35% (an effective marginal rate of 39% applies in the
case of corporations with taxable incomes between $100,000 and $335,000, and an
effective marginal rate of 38% applies in the case of corporations with taxable
incomes between $15 million and $18,333,333).
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If for any taxable year the Fund 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 (whether or not derived from exempt-interest income) would be
taxable as ordinary income to the extent of the Fund'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). The Fund 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 the Fund 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, the Fund may be
subject to the tax laws of such states or localities.
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Fund.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Special rules govern the federal income tax treatment of financial
instruments that may be held by the Fund. These rules may have a particular
impact on the amount of income or gain that the Fund must distribute to its
shareholders to comply with the Distribution Requirement, on the income or gain
qualifying under the Income Requirement and on its ability to comply with the
Short-Short Test described above.
Generally, futures contracts and options on futures contracts held by the
Fund (collectively, the "Instruments") at the close of its taxable year are
treated for federal income tax purposes as sold for their fair market value on
the last business day of such year, a process known as "mark-to-market." Forty
percent of any gain or loss resulting from such constructive sales is treated
as short-term capital gain or loss and 60% of such gain or loss is treated as
long-term capital gain or loss without regard to the period the Fund holds the
Instruments ("the 40%-60% rule"). The amount of any capital gain or loss
actually realized by the Fund in a subsequent sale or other disposition of
those Instruments is adjusted to reflect any capital gain or loss taken into
account by the Fund in a prior year as a result of the constructive sale of
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the Instruments. Losses with respect to Instruments that are regarded as parts
of a "mixed straddle" because their values fluctuate inversely to the values of
specific securities held by the Fund are subject to certain loss deferral rules
which limit the amount of loss currently deductible on either part of the
straddle to the amount thereof which exceeds the unrecognized gain (if any)
with respect to the other part of the straddle, and to certain wash sales
regulations. Under short sales rules, which are also applicable, the holding
period of the securities forming part of the straddle will (if they have not
been held for the long-term holding period) be deemed not to begin prior to
termination of the straddle. With respect to certain Instruments, deductions
for interest and carrying charges may not be allowed. Notwithstanding the
rules described above, with respect to Instruments that are part of a "mixed
straddle" and are properly identified as such, the Fund may make an election
which will exempt (in whole or in part) those identified Instruments from the
rules of Section 1256 of the Code including "the 40%-60% rule" and the
mark-to-market on gains and losses being treated for federal income tax
purposes as sold on the last business day of the Fund's taxable year, but gains
and losses will be subject to such short sales, wash sales and loss deferral
rules and the requirement to capitalize interest and carrying charges. Under
Temporary Regulations, the Fund would be allowed (in lieu of the foregoing) to
elect either (a) to offset gains or losses from portions which are part of a
mixed straddle by separately identifying each mixed straddle to which such
treatment applies, or (b) to establish a mixed straddle account for which gains
and losses would be recognized and offset on a periodic basis during the
taxable year. Under either election, "the 40%-60% rule" will apply to the net
gain or loss attributable to the Instruments, but in the case of a mixed
straddle account election, not more than 50% of any net gain may be treated as
long-term and no more than 40% of any net loss may be treated as short-term.
Options on futures contracts generally receive federal tax treatment similar to
that described above.
With respect to futures contracts and other financial instruments subject
to the mark-to-market rules, the Internal Revenue Service has ruled in private
letter rulings that a gain realized from such a futures contact or financial
instrument will be treated as being derived from a security held for three
months or more (regardless of the actual period for which the contract or
instrument is held) if the gain arises as a result of a constructive sale under
the mark-to-market rules, and will be treated as being derived from a security
held for less than three months only if the contract or instrument is
terminated (or transferred) during the taxable year (other than by reason of
mark-to-market) and less than three months have elapsed between the date the
contract or instrument is acquired and the termination date. In determining
whether the Short-Short Test is met for a taxable year, increases and decreases
in the value of the Fund's futures
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contacts and other investments that qualify as part of a "designated hedge," as
defined in the Code, may be netted.
DESCRIPTION OF SHARES
The Trust Agreement permits Northern Funds' 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 different investment portfolios.
Northern Funds may hereafter create series in addition to Northern Funds'
existing series, which represent interests in seventeen portfolios, each of
which is discussed in this Additional Statement. Under the terms of the Trust
Agreement, each share of the Fund has a par value of $.0001, represents a
proportionate interest in the Fund with each other share of its class and is
entitled to such dividends and distributions out of the income belonging to the
Fund as are declared by the Trustees. Upon any liquidation of the Fund,
shareholders 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 "Redeeming and
Exchanging Shares" in the Prospectus. Pursuant to the terms of the 1940 Act,
the right of a shareholder to redeem shares and the date of payment by a Fund
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 Fund 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 Fund 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 Fund. Northern Funds may also suspend or
postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions. In addition, Northern Funds reserves the
right to adopt, by action of the Trustees, a policy pursuant to which it may,
without shareholder approval, redeem upon not less than 30 days' notice all of
a Fund's shares if such shares have an aggregate value below a designated
amount and if the Trustees determine that it is not practical, efficient or
advisable to continue the operation of the Fund and that any applicable
requirements of the 1940 Act have been met. Shares when issued as described in
the Prospectus are validly issued, fully paid and nonassessable, except as
stated below.
The proceeds received by the Fund 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 the Fund. The underlying assets of the
Fund will be segregated on the books of account, and will be charged with the
liabilities in respect to the Fund and with a share of the general
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liabilities of Northern Funds. Expenses with respect to the portfolios of
Northern Funds 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 Northern Funds shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
shares of each investment portfolio affected by such matter. Rule 18f-2
further provides that an investment portfolio shall be deemed to be affected by
a matter unless the interests of each investment portfolio in the matter are
substantially identical or the matter does not affect any interest of the
investment portfolio. Under the Rule, the approval of an investment advisory
agreement, a distribution plan subject to Rule 12b-1 under the 1940 Act 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
may be effectively acted upon by shareholders of Northern Funds voting together
in the aggregate without regard to a particular investment portfolio.
The term "majority of the outstanding shares" of either Northern Funds or
the Fund or investment portfolio means, with respect to the approval of an
investment advisory agreement, a distribution plan or a change in a fundamental
investment policy, the vote of the lesser of (i) 67% or more of the shares of
Northern Funds or the Fund or portfolio present at a meeting, if the holders of
more than 50% of the outstanding shares of Northern Funds or the Fund or
portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of Northern Funds or the Fund or portfolio.
As of May 31, 1996 Northern and its affiliates held of record substantially
all of the outstanding shares of the Non-Money Market Funds as agent,
custodian, trustee or investment adviser on behalf of their customers. At such
date, The Northern Trust Company, 50 S. LaSalle Street, Chicago, Illinois
60657, and its affiliate banks held as beneficial owner five percent or more of
the outstanding shares of the Non-Money Market Funds because they possessed
sole voting or investment power with respect to such shares.
As of May 31, 1996, the name and share ownership of the entities of
individuals which held of record or beneficially more than 5% of the
outstanding shares of the Money Market Fund were as follows: Northern Trust
Bank FL M&I Sweep Account, 6.42%. As of
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May 31, 1996, the name and share ownership of the entities or individuals which
held of record or beneficially more than 5% of the outstanding shares of the
U.S. Government Money Market Fund were as follows: Sunstone Financial Group,
Inc. for Van Wagoner Funds, 28.51%; Northern Trust Bank FL M&I Sweep Account,
10.63%; and Sunstone Financial Group, Inc. for Wasatch Funds, 9.69%. As of May
31, 1996, the name and share ownership of the entities or individuals which
held of record or beneficially more than 5% of the outstanding shares of the
Municipal Money Market Fund were as follows: Northern Trust Bank FL M&I Sweep
Account, 10.65%; and Harve A. Ferrill TRST Harve A. Ferrill TR, 8.32%. As of
May 31, 1996, the name and share ownership of the entities or individuals which
held of record or beneficially more than 5% of the outstanding shares of the
U.S. Government Select Money Market Fund were as follows: Ilene S. Cole TRST
Ilene S. Cole Revocable Trust, 5.31%; Edith B. Jacobs TRST Edith B. Jacobs
TRUST DTD 4/8/76, 7.13%; Charles W. Matthews TRST Charles W. Matthews REV TR,
6.93%; and Tina R. Matthews TRST Tina R. Matthews REV TR, 5.55%. As of May 31,
1996, the name and share ownership of the entities or individuals which held of
record or beneficially more than 5% of the outstanding shares of the California
Municipal Money Market Fund were as follows: Linnae Anderson, 6.95%; Barbara
W. Folger, 5.09%; Rosalind K. Robbins TRST Rosalind K. Robbins 1987 Inter VIVDS
TR 12/27/87, 8.59%; and Brian S. Bean and Kathleen T. Bean JT TEN, 14.24%. As
of May 31, 1996, the name and share ownership of the entities or individuals
which held of record or beneficially more than 5% of the outstanding shares of
the Select Equity Fund were as follows: Donaldson Lufkin & Jenrette SECS Corp,
5.76%. As of May 31, 1996, the name and share ownership of the entities or
individuals which held of record or beneficially more than 5% of the
outstanding shares of the International Select Equity Fund were as follows:
James L. Knight 1969 TRST SUB ACCT TRUST CASH PROCESSING UNIT-MIAMI, 5.73%. As
of May 31, 1996, the name and share ownership of the entities or individuals
which held of record or beneficially more than 5% of the outstanding shares of
the Technology Fund were as follows: Paul T. Delaney, 7.14%. The address of
all of the above persons is c/o The Northern Trust Bank, 50 S. LaSalle Street,
Chicago, Illinois 60657.
As a general matter, Northern Funds does not hold annual or other meetings
of shareholders. This is because the Trust Agreement provides for shareholder
voting only for the election or removal of one or more Trustees, if a meeting
is called for that purpose, and for certain other designated matters. Each
Trustee serves until the next meeting of shareholders, if any, called for the
purpose of considering the election or reelection of such Trustee or of a
successor to such Trustee, and until the election and qualification of his
successor, if any, elected at such meeting, or until such Trustee sooner dies,
resigns, retires or is removed by the shareholders or two-thirds of the
Trustees.
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Under Massachusetts law, there is a possibility that shareholders of a
business trust could, under certain circumstances, be held personally liable as
partners for the obligations of the trust. The Trust Agreement contains an
express disclaimer of shareholder (as well as Trustee and officer) liability
for acts or obligations of Northern Funds and requires that notice of such
disclaimer be given in each contract, undertaking or instrument entered into or
executed by Northern Funds or the Trustees. The Trust Agreement provides for
indemnification out of Trust property of any shareholder charged or held
personally liable for the obligations or liabilities of Northern Funds solely
by reason of being or having been a shareholder of Northern Funds and not
because of such shareholder's acts or omissions or for some other reason. The
Trust Agreement also provides that Northern Funds shall, upon proper and timely
request, assume the defense of any charge made against any shareholder as such
for any obligation or liability of Northern Funds and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which Northern Funds
itself would be unable to meet its obligations.
The Trust Agreement provides that each Trustee of Northern Funds will be
liable for his own wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee
("disabling conduct"), and for nothing else, and will not be liable for errors
of judgment or mistakes of fact or law. The Trust Agreement provides further
that Northern Funds will indemnify Trustees and officers of Northern Funds
against liabilities and expenses incurred in connection with litigation and
other proceedings in which they may be involved (or with which they may be
threatened) by reason of their positions with Northern Funds, except that no
Trustee or officer will be indemnified against any liability to Northern Funds
or its shareholders to which he would otherwise be subject by reason of
disabling conduct.
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.
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
1933 Act with respect to the securities offered by Northern Funds' 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
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therewith may be examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment
of the likelihood of timely payment of debt considered short-term in the
relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of
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the characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does 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 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 issue as 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 ensure against
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disruption in debt service. Operating factors and market access may be subject
to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
A-3
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"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment 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 the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for
timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
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CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest
and repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and
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economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal. The
"CCC" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments 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. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments 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 rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
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
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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 risks appear somewhat larger
than in "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to
be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered 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 some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a 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 operation 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.
(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
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.
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"AA" - Debt is considered 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 and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
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"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead
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to increased investment risk than for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within 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 represents the highest category assigned by
Thomson BankWatch to long-term debt and 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 Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, 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.
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PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A 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 very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"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" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of 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" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
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"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in the Prospectus, the Fund 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, the Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. 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.
The Fund 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 the Fund, by using
futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by the Fund, 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 the Fund, 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.
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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 Fund
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 Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Fund entering into a futures contract sale. If the offsetting
sale price exceeds the purchase price, the Fund realizes a gain, and if the
purchase price exceeds the offsetting sale price, the Fund 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 Fund 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.
With regard to the Fund, to the extent consistent with its investment
objective, Northern Trust anticipates engaging in transactions, from time to
time, in foreign stock index futures
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such as the ALL-ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the
FTSE-100 (United Kingdom).
The Fund 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, the Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Fund 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.
The Fund may also sell futures contracts in connection with this strategy, in
order to protect against the possibility that the value of the securities to be
sold as part of the restructuring of the portfolio will decline prior to the
time of sale.
III. Margin Payments
Unlike purchase or sales of portfolio securities, no price is
paid or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Custodian an amount of cash or cash equivalents,
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 Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when the Fund 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 Fund will be entitled to receive from the broker a
variation margin payment equal to that increase in value. Conversely, where
the Fund 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 Fund would be required to make a
variation margin payment to the broker. At any time prior to expiration of the
futures contract, Northern Trust 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 Fund's position in the futures contract. A final
determination
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of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or gain.
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures
by the Fund as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of the hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the
instruments which are the subject of the hedge, the hedge will not be fully
effective but, if the price of the instruments being hedged has moved in an
unfavorable direction, the Fund 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 Fund involved will experience either a loss or gain on the
futures which will not be completely offset by movements in the price of the
instruments which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of instruments being hedged and
movements in the price of futures contracts, the Fund 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 Northern Trust.
Conversely, the Fund 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 Northern Trust. It is also
possible that, where a Fund 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 Fund may decline. If this occurred, the Fund 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 the Fund is able to
invest its cash (or cash equivalents) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest
its cash at that time because of concern as to possible further market decline
or for other reasons, the Fund 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.
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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 adviser may still not result in a successful hedging
transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although
the Fund intends to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist for
any particular contract or at any particular time. In such event, it may not
be possible to close a futures investment position, and in the event of adverse
price movements, the Fund 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
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equipment failures, government intervention, insolvency of a brokerage firm or
clearing house or other disruptions of normal activity, which could at times
make it difficult or impossible to liquidate existing positions or to recover
excess variation margin payments.
Successful use of futures by the Fund is also subject to
Northern Trust's ability to predict correctly movements in the direction of the
market. For example, if the Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund 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 Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
V. Options on Futures Contracts
The Fund 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. The Fund 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. In anticipation of a decline in interest rates, the Fund 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 Fund intends to purchase. Similarly, if the value of the
securities held by the Fund is expected to decline as a result of an increase
in interest rates, the Fund 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
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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 Fund 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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PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements: None
The following exhibits are incorporated herein by
reference:
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1(a) - Agreement and Declaration of Trust dated October 12, 1993, filed as Exhibit 1 to Registrant's
Registration Statement on Form N-1A as initially filed on December 23, 1993 ("Initial Filing").
1(b) - Amendment No. 1 to Agreement and Declaration of Trust filed as Exhibit 1(b) to Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on Form N-1A, filed on March 9, 1994.
1(c) - Amendment No. 2 to Agreement and Declaration of Trust filed as Exhibit 1(c) to Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on Form N-1A, filed on March 9, 1994.
1(d) - Amendment No. 3 to Agreement and Declaration of Trust filed as Exhibit 1(d) to Post-Effective
Amendment No. 1 to Registrant's Registration Statement on Form N-1A, filed on September 16, 1994
("PEA No. 1").
1(e) Amendment No. 4 to Agreement and Declaration of Trust filed as Exhibit 1(e) to Post-Effective
Amendment No. 3 to Registrant's Registration Statement on Form N-1A, filed on November 25, 1994.
2 - By-Laws, filed as Exhibit 2 to Initial Filing.
2(a) - Amendment to the By-Laws dated August 4, 1994 filed as Exhibit 2(a) to Post-Effective Amendment
No. 4 to Registrant's Registration Statement on Form N-1A, filed on April 5, 1995 ("PEA No. 4").
3 - Not Applicable.
4 - Not Applicable.
5 - Investment Advisory and Ancillary Services Agreement between Registrant and The Northern Trust
Bank dated April 11, 1994 ("Investment Advisory Agreement") filed as Exhibit 5 to PEA No. 1.
5(a) - Addendum No. 1 to the Investment Advisory Agreement dated November 29, 1994 filed as Exhibit 5(b)
to PEA No. 4.
6 - Distribution Agreement between Registrant and Sunstone Financial Group, Inc. dated April 1, 1994
("Distribution Agreement") filed as Exhibit 6 to PEA No. 1.
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6(a) - Amended and Restated Schedule A to the Distribution Agreement dated November 28, 1994 filed as
Exhibit 6(b) to PEA No. 4.
7 - Not Applicable.
8(a) - Custodian Agreement between Registrant and The Northern Trust Bank dated April 1, 1994 ("Custodian
Agreement") filed as Exhibit 8(a) to PEA No. 1.
8(b) - Transfer Agency Agreement between Registrant and The Northern Trust Bank dated April 1, 1994
("Transfer Agency Agreement") filed as Exhibit 8(c) to PEA No. 1.
8(c) - Addendum No. 1 to the Transfer Agency Agreement dated November 29, 1994 filed as Exhibit 8(f) to
PEA No. 4.
8(d) - Addendum No. 1 to the Custodian Agreement dated November 29, 1994 filed as Exhibit 8(g) to PEA No.
4.
8(g) - Foreign Custody Agreement between the Registrant and The Northern Trust Bank dated April 1, 1994
filed as Exhibit 8(g) to Post-Effective Amendment No. 6 to Registrant's Registration Statement on
Form N-1A, filed on July 27, 1995 ("PEA No. 6").
9(a) - Administration Agreement between Registrant and Sunstone Financial Group, Inc. dated April 1, 1994
("Administration Agreement") filed as Exhibit 9(a) to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, filed on March 9, 1994.
9(c) - Amended and Restated Schedule A to the Administration Agreement dated November 28, 1994 filed as
Exhibit 9(d) to PEA No. 4.
(*) 10 - Opinion and Consent of Counsel.
12 - Not Applicable.
13(a) - Purchase Agreement between Registrant and The Northern Trust Bank dated March 31, 1994 filed as
Exhibit 13(b) to PEA No. 1.
13(b) - Purchase Agreement between Registrant and Miriam M. Allison dated March 14, 1994 filed as Exhibit
13(b) to PEA No. 6.
14 - Not Applicable.
16 - Schedule of Computation of Performance Quotations for the Money Market, U.S. Government Money
Market, Municipal Money Market, U.S. Government, Fixed Income, Intermediate Tax-Exempt,
Tax-Exempt, International Fixed Income, Income Equity, Growth Equity, Select Equity, Small Cap
Growth, International Growth Equity and International Select
</TABLE>
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* Filed under Rule 24f-2 as part of Registrant's Rule 24f-2 Notice.
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<TABLE>
<S> <C>
Equity Funds filed as Exhibit 16 to Post-Effective Amendment No. 2, filed on October 31,
1994.
16(a) - Schedule of Computation of Performance Quotations for the California Municipal Money Market and
U.S. Government Select Money Market Funds filed as Exhibit 16(a) to PEA No 4.
18 Not Applicable.
<CAPTION>
The following exhibits are filed herewith:
<S> <C>
1(f) - Amendment No. 5 to Agreement and Declaration of Trust dated May 26, 1995
1(g) - Form of Amendment No. 6 to Agreement and Declaration of Trust.
5(b) - Addendum No. 2 to Investment Advisory Agreement dated March 29, 1996.
5(c) - Form of Addendum No. 3 to Investment Advisory Agreement.
6(b) - Amended and Restated Schedule A to the Distribution Agreement dated March 29, 1996.
6(c) - Form of Amended and Restated Schedule A to the Distribution Agreement.
8(e) - Addendum No. 2 to the Transfer Agency Agreement dated March 29, 1996.
8(f) - Addendum No. 2 to the Custodian Agreement dated March 29, 1996.
8(h) - Form of Addendum No. 3 to the Transfer Agency Agreement.
8(i) - Form of Addendum No. 3 to the Custodian Agreement.
9(b) - Service Plan and Related Agreement.
9(d) - Amended and Restated Schedule A to the Administration Agreement dated March 29, 1996.
9(e) - Form of Amended and Restated Schedule A to the Administration Agreement.
11(a) - Consent of Drinker Biddle & Reath.
15 - Distribution and Service Plan and Related Agreement.
17 - Not Applicable.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Trustees.
-3-
<PAGE> 205
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AS OF
TITLE OF CLASS APRIL 30, 1996
-------------- ----------------
<S> <C>
Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . . 5270
U.S. Government Money Market Fund . . . . . . . . . . . . . . . . 903
Municipal Money Market Fund . . . . . . . . . . . . . . . . . . . 2817
U.S. Government Select Money Market Fund . . . . . . . . . . . . . 396
California Municipal Money Market Fund . . . . . . . . . . . . . . 597
U.S. Government Fund . . . . . . . . . . . . . . . . . . . . . . . 1535
Fixed Income Fund . . . . . . . . . . . . . . . . . . . . . . . . 1435
Intermediate Tax-Exempt Fund . . . . . . . . . . . . . . . . . . . 1507
Tax-Exempt Fund . . . . . . . . . . . . . . . . . . . . . . . . 993
International Fixed Income Fund . . . . . . . . . . . . . . . . . 831
Income Equity Fund . . . . . . . . . . . . . . . . . . . . . . . . 1279
Growth Equity Fund . . . . . . . . . . . . . . . . . . . . . . . . 3085
Select Equity Fund . . . . . . . . . . . . . . . . . . . . . . . . 1379
Small Cap Growth Fund . . . . . . . . . . . . . . . . . . . . . . 3556
International Growth Equity Fund . . . . . . . . . . . . . . . . . 3760
International Select Equity Fund . . . . . . . . . . . . . . . . . 2046
Technology Fund . . . . . . . . . . . . . . . . . . . . . . . . 195
</TABLE>
ITEM 27. INDEMNIFICATION
Section 7 of the Investment Advisory and Ancillary Services
Agreement between the Registrant and The Northern Trust Bank ("Northern")
provides for indemnification of Northern or, in lieu thereof, contribution by
Registrant, in connection with certain claims and liabilities to which
Northern, in its capacity as Registrant's Adviser, may be subject. A copy of
the Investment Advisory and Ancillary Services Agreement is incorporated by
reference as Exhibit 5.
Section 5 of the Administration Agreement and Section 2.8 of
the Distribution Agreement between the Registrant and Sunstone Financial Group,
Inc. ("Sunstone") provide for indemnification of Sunstone in connection with
certain claims and liabilities to which Sunstone, in its capacity as
Registrant's Administrator or Distributor, may be subject. Copies of the
Administration Agreement and the Distribution Agreement are incorporated by
reference as Exhibits 9(a) and 6, respectively.
In addition, Section 6.3 of Registrant's Agreement and
Declaration of Trust, a copy of which was filed as Exhibit 1 to the Initial
Filing, provides for indemnification of shareholders as follows:
6.3 Indemnification of Shareholders. No Shareholder shall be
subject to any personal liability whatsoever to any person in
connection with property of the Trust or the acts, obligations
or affairs of the Trust or any Series thereof. The Trust
shall indemnify and hold each Shareholder harmless from and
against all claims and liabilities, to which such Shareholder
may become subject by reason of his being or having been a
Shareholder, and shall reimburse such Shareholder or former
Shareholder (or his or her heirs, executors, administrators or
other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) out of
the property of the Trust for all legal and other expenses
-4-
<PAGE> 206
reasonably incurred by him in connection with any such claim
or liability. The indemnification and reimbursement required
by the preceding sentence shall be made only out of assets of
the one or more Series whose Shares were held by said
Shareholder at the time the act or event occurred which gave
rise to the claim against or liability of said Shareholder.
The rights accruing to a Shareholder under this Section shall
not impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained
restrict the right of the Trust or any Series thereof to
indemnify or reimburse a Shareholder in any appropriate
situation even though not specifically provided herein.
Section 6.4 of Registrant's Agreement and Declaration of
Trust, a copy of which was filed as Exhibit 1 to the Initial Filing, provides
for indemnification of Trustees and officers, as follows:
6.4 Indemnification of Trustees, Officers, etc. The Trust
shall indemnify each of its Trustees and officers and persons
who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any
interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person") against all liabilities,
including but not limited to amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and
expenses, including reasonable accountants' and counsel fees,
incurred by any Covered Person in connection with the defense
or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative
or legislative body, in which such Covered Person may be or
may have been involved as a party or otherwise or with which
such person may be or may have been threatened, while in
office or thereafter, by reason of being or having been such a
Trustee or officer, director or trustee, except that no
Covered Person shall be indemnified against any liability to
the Trust or its Shareholders to which such Covered Person
would otherwise be subject by reason of wilful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office
(such wilful misfeasance, bad faith, gross negligence or
reckless disregard being referred to herein as "Disabling
Conduct"). Expenses, including accountants' and counsel fees
so incurred by any such Covered Person (but excluding amounts
paid in satisfaction of judgments, in compromise or as fines
or penalties), may be paid from time to time by the Trust in
advance of the final disposition of any such action, suit or
proceeding upon receipt of (a) an undertaking by or on behalf
of such Covered Person to
-5-
<PAGE> 207
repay amounts so paid to the Trust if it is ultimately
determined that indemnification of such expenses is not
authorized under this Article VI and either (b) such Covered
Person provides security for such undertaking, (c) the Trust
is insured against losses arising by reason of such payment,
or (d) a majority of a quorum of disinterested, non-party
Trustees, or independent legal counsel in a written opinion,
determines, based on a review of readily available facts, that
there is reason to believe that such Covered Person ultimately
will be found entitled to indemnification.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to Trustees, officers and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a Trustee, officer or controlling person of
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such Trustee, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The Northern Trust Bank, Registrant's investment adviser, is a
full service commercial bank and also provides a full range of trust and
fiduciary services. Set forth below is a list of all of the directors, senior
officers and those officers primarily responsible for Registrant's affairs of
The Northern Trust Bank and, with respect to each such person, the name and
business address of the company (if any) with which such person has been
connected at any time since June 1, 1991, as well as the capacity in which such
person was connected.
-6-
<PAGE> 208
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ------------------ ---------------
<S> <C> <C>
Dolores E. Cross Northern Trust Corporation Director
Director
Chicago State University President
95th Street at King Drive
Chicago, IL 60643
Shorebank Corporation Former Director
7054 South Jeffrey Blvd.
Chicago, IL 60649
Student Loan Marketing Association Director
1025 Thomas Jefferson, N.W.
Washington, DC 20007
John R. Goodwin None
Vice President
Robert S. Hamada The University of Chicago Edward Eagle Brown
Director Graduate School of Business Distinguished Service
1101 East 58th Street Professor of Finance
Chicago, IL 60637 and Dean
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
A.M. Castle & Co. Director
3400 North Wolf Road
Franklin Park, IL 60131
Manville Corporation Former Director
P.O. Box 5108
Denver, CO 80217-5108
Chicago Board of Trade Director
141 West Jackson Boulevard
Chicago, IL 60604
Riverwood International Former Director
Corporation
3350 Cumberland Circle
Atlanta, GA 30339
Barry G. Hastings Northern Trust Corporation President and Chief
President, Chief 50 South LaSalle Street Operating Officer
Operating Officer Chicago, IL 60675 and Director
and Director and Former
Vice Chairman and Senior
Executive Vice
President
Northern Futures Corporation Former Director
50 South LaSalle Street
Chicago, IL 60675
The Northern Trust International Former Director
Banking Corporation
One World Trade Center
New York, NY 10048
</TABLE>
-7-
<PAGE> 209
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ------------------ ---------------
<S> <C> <C>
Northern Trust Securities, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Nortrust of Arizona Holding Chairman of the Board
Corporation and Director
2398 East Camelback Rd.
Phoenix, AZ 85016
Northern Trust of California Director
Corporation
355 South Grand Avenue
Los Angeles, CA 90017
Northern Trust of Florida Vice Chairman of the
Corporation Board and Director
700 Brickell Avenue
Miami, FL 33131
Northern Trust Bank of Texas N.A. Chairman of the Board
2020 Ross Avenue and Director
Dallas, TX 75201
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Robert A. Helman Mayer, Brown & Platt Partner
Director 190 South LaSalle Street
Chicago, IL 60603
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
LaSalle Street Fund, Former Director
Incorporated
11 South LaSalle Street
Chicago, IL 60603
The Shorebank Corporation Former Director
7054 South Jeffrey Boulevard
Chicago, IL 60649
Environmental Systems Company Former Director
333 Executive Court
Little Rock, AR 72205
The Horsham Corporation Director
24 Hazelton Avenue
Toronto, Ontario, Canada
M5R 2E2
</TABLE>
-8-
<PAGE> 210
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ------------------ ---------------
<S> <C> <C>
Brambles USA, Inc. Director
400 North Michigan Avenue
Chicago, IL 60611
Chicago Stock Exchange Governor
One Financial Plaza
440 South LaSalle Street
Chicago, IL 60605
Alberta Natural Gas Director
Company Ltd.
2900, 240 Fourth Avenue, NW
Calgary, Alberta, Canada
T2P4L7
Arthur L. Kelly KEL Enterprises L.P. Managing Partner
Director 135 South LaSalle Street
Chicago, IL 60603
Bayerische Motoren Werke (BMW) A.G. Director
BMW Haus
Petuelring 130
Postfach 40 02 40
D-8000
Munich 40 Germany
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198
Snap-on Incorporated Director
2801 80th Street
Kenosha, WI 53140
Tejas Gas Corporation Director
1301 McKinney Street
Houston, TX 77010
Twin Disc, Incorporated Former Director
1328 Racine Street
Racine, WI 53403
Deere & Company Director
John Deere Road
Moline, IL 61265
Ardis Krainik Lyric Opera General Director
Director 20 North Wacker Drive
Chicago, IL 60606
</TABLE>
-9-
<PAGE> 211
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ------------------ ---------------
<S> <C> <C>
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Robert D. Krebs Santa Fe Pacific Corporation Former Chairman,
Director 1700 East Gulf Road President and
Schaumburg, IL 60173-5860 Chief Executive
Officer and Director
Burlington Northern President and Chief
Santa Fe Corporation Executive Officer
777 Main Street and Director
Fort Worth, TX 76102
Burlington Northern Inc. Director
777 Main Street
Fort Worth, TX 76102
Burlington Northern Director
Railroad Company
777 Main Street
Fort Worth, TX 76102
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Santa Fe Pacific Gold Director
Corporation
6200 Uptown Boulevard
Albuquerque, NM 87110
Santa Fee Pacific Gold Director
Corporation
P.O. Box 27019
Albuquerque, NM 87125
Phelps Dodge Corporation Director
2600 North Central Avenue
Phoenix, AZ 85004-3014
Catellus Development Former Director
Corporation
201 Mission Street
San Francisco, CA 94105
Santa Fe Energy Resources Inc. Director
1616 South Voss Road
Houston, TX 77057
Santa Fe Pacific Pipelines, Inc. Director
888 South Figueroa Street
Los Angeles, CA 90017
The Atchison Topcka and Former Director
Santa Fe Railway Company
1700 E. Golf Road
Schaumburg, IL 60173-5860
</TABLE>
-10-
<PAGE> 212
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ------------------ ---------------
<S> <C> <C>
Frederick A. Krehbiel Molex Incorporated Chairman, Chief
Director 2222 Wellington Court Executive Officer
Lisle, IL 60532-1682 and Former Vice
Chairman
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198
Tellabs, Inc. Director
4951 Indiana Avenue
Lisle, IL 60532
A.M. Castle & Co. Former Director
3400 North Wolf Road
Franklin Park, IL 60131
Roger W. Kushla The Northern Trust Bank Director
Senior Vice President of New York
80 Broad Street
19th Floor
New York, NY 10004
Robert A. LaFleur None
Senior Vice President
Thomas L. Mallman None
Senior Vice President
James J. Mitchell, III Northern Trust Securities, Inc. Former Director
Executive Vice President 50 South LaSalle Street
Chicago, IL 60675
Northern Trust Bank of Former Director
Texas N.A.
2020 Ross Avenue
Dallas, TX 75201
The Northern Trust Bank Director
of New York
80 Broad Street
19th Floor
New York, NY 10004
William G. Mitchell Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
The Interlake Corporation Director
7701 Harger Road
Oak Brook, IL 60521-1488
Peoples Energy Corporation Director
122 South Michigan Avenue
Chicago, IL 60603
</TABLE>
-11-
<PAGE> 213
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ------------------ ---------------
<S> <C> <C>
The Sherwin-Williams Company Director
101 Prospect Avenue, N.W.
Cleveland, OH 44115-1075
Edward J. Mooney Nalco Chemical Company Chairman, Chief
Director One Nalco Center Executive Officer,
Naperville, IL 60563-1198 President and
Director
William A. Osborn Northern Trust Corporation Director
Chairman and Chief Securities, Inc.
Executive Officer, 50 South LaSalle Street
Former President Chicago, IL 60675
and Chief
Operating Officer,
Former Senior Executive
Vice President
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Nortrust of Arizona Former Director
Holding Corporation
2398 East Camelback Road
Phoenix, AZ 85016
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Northern Trust of Director and Former
California Corporation Chairman of the Board
355 South Grand Avenue
Los Angeles, CA 90017
Northern Trust Bank of Former Chairman
California N.A. of the Board
355 South Grand Avenue
Los Angeles, CA 90017
Northern Futures Corporation Director
50 South LaSalle Street
Chicago, IL 60675
The Northern Trust Former Director
International Banking Corp.
One World Trade Center
New York, NY 10048
Sheila A. Penrose RCB International Inc Director
Executive Vice President 29 Federal Street
Stamford, CT 06901
Perry R. Pero Northern Trust Corporation Director
Senior Executive Vice 50 South LaSalle Street
President, Chief Financial Chicago, IL 60675
Officer and Cashier
</TABLE>
-12-
<PAGE> 214
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ------------------ ---------------
<S> <C> <C>
Northern Futures Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Northern Investment Corporation Former Chairman,
50 South LaSalle Street President and
Chicago IL 60675 Director and
Former Treasurer
Tanglewood Bancshares, Inc. Treasurer
600 Bering Drive
Houston, TX 77057
RCB International Inc. Director
29 Federal Street
Stamford, CT 06901
Northern Trust Securities, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Peter L. Rossiter Schiff, Hardin & Waite Former Partner
Executive Vice President 7200 Sears Tower
General Counsel and Chicago, IL 60606
Secretary
Tanglewood Bancshares Inc. Vice President and
600 Bering Drive Director
Houston, TX 77057
Consolidated Communications, Inc. Director
Illinois Consolidated Telephone
Company
121 South 17th Street
Mattoon, IL 61938
Northern Trust Corporation Executive Vice
50 South LaSalle Street President, Secretary,
Chicago, IL 60675 and General Counsel
Harold B. Smith Illinois Tool Works Inc. Chairman of the
Director 3600 West Lake Avenue Executive Committee
Glenview, IL 60025-5811 and a Director
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
W. W. Grainger, Inc. Director
5500 West Howard Street
Skokie, IL 60077
Northwestern Mutual Life Trustee
Insurance Co.
720 East Wisconsin Avenue
Milwaukee, WI 53202
</TABLE>
-13-
<PAGE> 215
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ------------------ ---------------
<S> <C> <C>
William D. Smithburg The Quaker Oats Company Chairman, President
Director 321 North Clark Street and Chief Executive
Chicago, IL 60610 Officer and Director
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Abbott Laboratories Director
One Abbott Park Road
Abbott Park, IL 60064-3500
Corning Incorporated Director
Corning, NY 14831
Prime Capital Corporation Director
P.O. Box 8460
Rolling Meadows, IL 60008
James M. Snyder None
Senior Vice President
Bide L. Thomas Commonwealth Edison Company Former President and a
One First National Plaza Former Director
Chicago, IL 60603
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
R. R. Donnelley & Sons Company Director
77 West Wacker Drive
Chicago, IL 60601
MYR Group Inc. Director
*(formerly L.E. Myers Company)
2550 West Gulf Road
Rolling Meadows, IL 60008
* Name change
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITER
(a) Sunstone Financial Group, Inc. currently serves as
administrator and distributor of the shares of The Haven Capital Management
Trust, First Omaha Funds, Inc and Van Wagoner Funds, Inc.
(b) To the best of Registrant's knowledge, the directors
and executive officers of Sunstone Financial Group, Inc., distributor for
Registrant, are as follows:
<TABLE>
<S> <C> <C>
Miriam M. Allison President and Vice President
207 E. Buffalo Street Director and Treasurer
Suite 400
Milwaukee, WI 53202
Daniel S. Allison Secretary and None
207 E. Buffalo Street Director
</TABLE>
-14-
<PAGE> 216
<TABLE>
<CAPTION>
NAME AND POSITIONS AND
PRINCIPAL OFFICES WITH POSITIONS AND
BUSINESS SUNSTONE FINANCIAL OFFICES WITH
ADDRESS GROUP, INC. REGISTRANT
- --------- ------------------ --------------
<S> <C> <C>
Suite 400
Milwaukee, WI 53202
Mary M. Tenwinkel Senior Vice Vice President
207 E. Buffalo Street President
Suite 400
Milwaukee, WI 53202
Theresa A. Ladwig Vice President None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
Randy M. Pavlick Vice President None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
Anita M. Zagrodnik Vice President Assistant Treasurer
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
Fayez Akhras Vice President None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
</TABLE>
(c) None.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The Agreement and Declaration of Trust, By-laws and minute
books of the Registrant are in the physical possession of Drinker Biddle &
Reath, 1100 Philadelphia National Bank Building, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107. Records relating to Sunstone Financial
Group, Inc.'s functions as distributor and administrator for the Registrant are
located at 207 E. Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. All
other accounts, books and other documents required to be maintained under
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are in the physical possession of The Northern Trust Bank, 50 S.
LaSalle Street, Chicago, Illinois 60675.
ITEM 31. MANAGEMENT SERVICES
(a) Not Applicable.
ITEM 32. UNDERTAKINGS
(a) Registrant hereby undertakes to file a Post-Effective
Amendment, using financial statements which need not be certified within four
to six months from the effective date of Registrant's Post-Effective Amendment
No. 9 for the Florida Intermediate Tax-Exempt Bond Fund and Stock Index Fund.
-15-
<PAGE> 217
(b) Registrant undertakes to provide its Annual Report to
Shareholders upon request without charge to any recipient of a Prospectus for
the U.S. Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund,
Tax-Exempt Fund, International Fixed Income Fund, Income Equity Fund, Growth
Equity Fund, Select Equity Fund, Small Cap Growth Fund, International Growth
Equity Fund, International Select Equity Fund, Technology Fund, Stock Index
Fund and Florida Intermediate Tax-Exempt Bond Fund.
-16-
<PAGE> 218
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 9 to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Milwaukee and State of Wisconsin on the 10th day of June, 1996.
NORTHERN FUNDS
By:/s/ Miriam M. Allison
----------------------------
Miriam M. Allison
Treasurer
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment No. 9 to Registrants' Registration Statement has
been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/*/ Silas S. Cathcart* Trustee and June 10, 1996
- ------------------------------- President (Chief
Silas S. Cathcart Executive Officer)
/s/ Miriam M. Allison Treasurer June 10, 1996
- ------------------------------- (Chief Financial
Miriam M. Allison and Accounting
Officer)
/*/ James W. Cozad* Trustee June 10, 1996
- -------------------------------
James W. Cozad
/*/ Susan Crown* Trustee June 10, 1996
- -------------------------------
Susan Crown
/*/ Wesley M. Dixon, Jr.* Trustee June 10, 1996
- -------------------------------
Wesley M. Dixon, Jr.
/*/ William J. Dolan, Jr.* Trustee June 10, 1996
- -------------------------------
William J. Dolan, Jr.
/*/ Raymond E. George, Jr.* Trustee June 10, 1996
- -------------------------------
Raymond E. George, Jr.
*By:/s/ Miriam M. Allison June 10, 1996
--------------------------
Miriam M. Allison,
Attorney-in-fact
</TABLE>
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<PAGE> 219
NORTHERN FUNDS
(A Massachusetts Business Trust)
CERTIFICATE OF SECRETARY
The foregoing resolution was duly adopted by the
Board of Trustees of Northern Funds (the "Trust") at the First Organizational
Meeting of the Board of Trustees held on October 13, 1993, and remains in
effect on the date hereof:
RESOLVED, that the Trustees and officers of the Trust
who may be required to execute any amendments to the Trust's
Registration Statement on Form N-1A are authorized to execute
a power of attorney appointing Jeffrey A. Dalke and Miriam M.
Allison and either of them, their true and lawful attorney, to
execute in their name, place, and stead, in their capacity as
Trustee or officer, or both, of the Trust, the Registration
Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file
the same with the Securities and Exchange Commission; and each
of said attorneys shall have the power to act thereunder and
shall have full power of substitution and resubstitution; and
said attorney shall have full power and authority to do and
perform in the name and on behalf of each of said Trustees and
officers, or any or all of them, in any and all capacities,
every act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as each of
said Trustee or officers, or any or all of them, might or
could do in person, said acts of each of the said attorneys
being hereby ratified and approved.
IN WITNESS WHEREOF, I have hereunto set my hand this
10th day of June, 1996.
NORTHERN FUNDS
/s/Jeffrey A. Dalke
------------------------
Jeffrey A. Dalke
Secretary
<PAGE> 220
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned,
Miriam M. Allison, hereby constitutes and appoints Jeffrey A. Dalke her true
and lawful attorney, to execute in her name, place, and stead, in her capacity
as officer of the Trust, the Registration Statement and any amendments thereto
and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission; and said attorney
shall have full power of substitution and resubstitution; and said attorney
shall have full power and authority to do and perform in her name and on her
behalf, in any and all capacities, every act whatsoever requisite or necessary
to be done, as fully and to all intents and purposes as she might or could do
in person, said acts of said attorney being hereby ratified and approved.
DATED: March 7, 1994
/s/ Miriam M. Allison
- ------------------------
Miriam M. Allison
<PAGE> 221
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned,
Silas S. Cathcart, hereby constitutes and appoints Jeffrey A. Dalke and Miriam
M. Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and each of said attorneys
shall have full power of substitution and resubstitution; and each of said
attorneys shall have full power and authority to do and perform in his name and
on his behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, said acts of each of the said attorneys being hereby
ratified and approved.
DATED: October 13, 1993
/s/ Silas S. Cathcart
- ------------------------
Silas S. Cathcart
<PAGE> 222
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned,
James W. Cozad, hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and each of said attorneys
shall have full power of substitution and resubstitution; and each of said
attorneys shall have full power and authority to do and perform in his name and
on his behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, said acts of each of the said attorneys being hereby
ratified and approved.
DATED: October 13, 1993
/s/ James W. Cozad
- ------------------------
James W. Cozad
<PAGE> 223
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned,
Susan Crown, hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, her true and lawful attorney, to execute in her
name, place, and stead, in her capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and each of said attorneys
shall have full power of substitution and resubstitution; and each of said
attorneys shall have full power and authority to do and perform in her name and
on her behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as she might or
could do in person, said acts of each of the said attorneys being hereby
ratified and approved.
DATED: October 13, 1993
/s/ Susan Crown
- ------------------------
Susan Crown
<PAGE> 224
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned,
Wesley M. Dixon, Jr., hereby constitutes and appoints Jeffrey A. Dalke and
Miriam M. Allison and either of them, his true and lawful attorney, to execute
in his name, place, and stead, in his capacity as Trustee or officer, or both,
of the Trust, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and each of said attorneys
shall have full power of substitution and resubstitution; and each of said
attorneys shall have full power and authority to do and perform in his name and
on his behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, said acts of each of the said attorneys being hereby
ratified and approved.
DATED: February 24, 1994
/s/ Wesley M. Dixon, Jr.
- ------------------------
Wesley M. Dixon, Jr.
<PAGE> 225
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned,
William J. Dolan, Jr., hereby constitutes and appoints Jeffrey A. Dalke and
Miriam M. Allison and either of them, his true and lawful attorney, to execute
in his name, place, and stead, in his capacity as Trustee or officer, or both,
of the Trust, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and each of said attorneys
shall have full power of substitution and resubstitution; and each of said
attorneys shall have full power and authority to do and perform in his name and
on his behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, said acts of each of the said attorneys being hereby
ratified and approved.
DATED: February 28, 1994
/s/ William J. Dolan, Jr.
- -------------------------
William J. Dolan, Jr.
<PAGE> 226
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned,
Raymond E. George, Jr., hereby constitutes and appoints Jeffrey A. Dalke and
Miriam M. Allison and either of them, his true and lawful attorney, to execute
in his name, place, and stead, in his capacity as Trustee or officer, or both,
of the Trust, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and each of said attorneys
shall have full power of substitution and resubstitution; and each of said
attorneys shall have full power and authority to do and perform in his name and
on his behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, said acts of each of the said attorneys being hereby
ratified and approved.
DATED: February 23, 1994
/s/ Raymond E. George, Jr.
- --------------------------
Raymond E. George, Jr.
<PAGE> 227
NORTHERN FUNDS
EXHIBIT INDEX
EXHIBITS
<TABLE>
<S> <C> <C>
1(f) - Amendment No. 5 to Agreement and Declaration of Trust dated May 26, 1995.
1(g) - Form of Amendment No. 6 to Agreement and Declaration of Trust.
5(b) - Addendum No. 2 to Investment Advisory Agreement dated March 29, 1996.
5(c) - Form of Addendum No. 3 to Investment Advisory Agreement.
6(b) - Amended and Restated Schedule A to the Distribution Agreement by the Registrant and Sunstone
Financial Group, Inc. dated March 29, 1996.
6(c) - Form of Amended and Restated Schedule A to the Distribution Agreement by the Registrant and
Sunstone Financial Group, Inc.
8(e) - Addendum No. 2 to the Transfer Agency Agreement dated March 29, 1996.
8(f) - Addendum No. 2 to the Custodian Agreement dated March 29, 1996.
8(h) - Form of Addendum No. 3 to the Transfer Agency Agreement.
8(i) - Form of Addendum No. 3 to the Custodian Agreement.
9(b) - Service Plan and Related Agreement.
9(d) - Amended and Restated Schedule A to the Administration Agreement by the Registrant and Sunstone
Financial Group, Inc. dated March 29, 1996.
9(e) - Form of Amended and Restated Schedule A to the Administration Agreement by the Registrant and
Sunstone Financial Group, Inc.
</TABLE>
<PAGE> 228
EXHIBITS
<TABLE>
<S> <C> <C>
11(a) - Consent of Drinker Biddle & Reath.
15 - Distribution and Service Plan and Related Agreement.
</TABLE>
<PAGE> 1
EXHIBIT 1(f)
NORTHERN FUNDS
AMENDMENT NO. 5 TO AGREEMENT AND DECLARATION OF TRUST
WHEREAS, Section 4.1 of the Agreement and Declaration
of Trust dated October 12, 1993 (the "Declaration") of Northern Funds (the
"Trust") provides that the Declaration may be amended to establish and
designate new Series or Classes of Shares by an instrument in writing executed
by a majority of the Trustees of the Trust and setting forth such establishment
and designation and the relative rights and preferences of such Series or
Classes;
NOW THEREFORE, the undersigned, being a majority of
the Trustees of the Trust hereby:
(1) amend the Declaration by designating and
establishing one additional Series and Class of Shares
("Additional Series and Class") to be known as the Initial
Class of the "Technology Fund," such Additional Series and
Class to have the relative rights and preferences set forth in
Section 4.2(a) through (m) of the Declaration; and
(2) determine that pursuant to Section 7.3 of the
Declaration the foregoing amendment shall be effective as of
the date set forth below.
WITNESS our hands as of this 26th day of May, 1995.
/s/Silas S. Cathcart /s/Wesley M. Dixon, Jr.
- --------------------------- ----------------------------
Silas S. Cathcart Wesley M. Dixon, Jr.
/s/James W. Cozad /s/William J. Dolan, Jr.
- --------------------------- ----------------------------
James W. Cozad William J. Dolan, Jr.
/s/Susan Crown /s/Raymond E. George, Jr.
- --------------------------- ----------------------------
Susan Crown Raymond E. George, Jr.
<PAGE> 1
EXHIBIT 1(g)
[FORM]
NORTHERN FUNDS
AMENDMENT NO. 6 TO AGREEMENT AND DECLARATION OF TRUST
WHEREAS, Section 4.1 of the Agreement and Declaration
of Trust dated October 12, 1993 (the "Declaration") of Northern Funds (the
"Trust") provides that the Declaration may be amended to establish and
designate new Series or Classes of Shares by an instrument in writing executed
by a majority of the Trustees of the Trust and setting forth such establishment
and designation and the relative rights and preferences of such Series or
Classes;
NOW THEREFORE, the undersigned, being a majority of
the Trustees of the Trust hereby:
(1) amend the Declaration by designating and
establishing two additional Series and Classes of Shares
("Additional Series and Classes") to be known as the Initial
Classes of the "Stock Index Shares" and "Florida Intermediate
Tax-Exempt Bond Shares," each Additional Series and Class to
have the relative rights and preferences set forth in Section
4.2(a) through (m) of the Declaration; and
(2) determine that pursuant to Section 7.3 of the
Declaration the foregoing amendment shall be effective as of
the date set forth below.
WITNESS our hands as of this ____ day of ____, 1996.
- --------------------------- ----------------------------
Silas S. Cathcart Wesley M. Dixon, Jr.
- --------------------------- ----------------------------
James W. Cozad William J. Dolan, Jr.
- --------------------------- ----------------------------
Susan Crown Raymond E. George, Jr.
<PAGE> 1
EXHIBIT 5(b)
NORTHERN FUNDS
ADDENDUM NO. 2 TO THE INVESTMENT ADVISORY AGREEMENT
This Addendum, dated as of the 29th day of March,
1996, is entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts
business trust, and THE NORTHERN TRUST COMPANY (the "Investment Adviser"), an
Illinois state bank.
WHEREAS, the Trust and the Investment Adviser have
entered into an Investment Advisory Agreement dated as of April 1, 1994 as
amended by Addendum No. 1 dated November 29, 1994 (the "Advisory Agreement")
pursuant to which the Trust appointed the Investment Adviser to act as
investment adviser to the Trust for the Money Market Fund, U.S. Government
Money Market Fund, Municipal Money Market Fund, U.S. Government Select Money
Market Fund, California Municipal Money Market Fund, U.S. Government Fund,
Fixed Income Fund, Intermediate Tax-Exempt Fund, Tax-Exempt Fund, International
Fixed Income Fund, Income Equity Fund, Growth Equity Fund, Select Equity Fund,
Small Cap Growth Fund, International Growth Equity Fund and International
Select Equity Fund; and
WHEREAS, Section 1(b) of the Advisory Agreement
provides that in the event the Trust establishes one or more additional
investment portfolios with respect to which it desires to retain the Investment
Adviser to act as investment adviser under the Advisory Agreement, the Trust
shall so notify the Investment Adviser in writing and if the Investment Adviser
is willing to render such services it shall notify the Trust in writing, and
the compensation to be paid to the Investment Adviser shall be that which is
agreed to in writing by the Trust and the Investment Adviser; and
WHEREAS, pursuant to Section 1(b) of the Advisory
Agreement, the Trust has notified the Investment Adviser that it is
establishing the Technology Fund (the "Fund"), and that it desires to retain
the Investment Adviser to act as the investment adviser therefor, and the
Investment Adviser has notified the Trust that it is willing to serve as
investment adviser for the Fund;
NOW THEREFORE, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. Appointment. The Trust hereby appoints the
Investment Adviser to act as investment
adviser to the Trust for the Fund in
accordance with the terms set forth in the
Advisory Agreement. The
<PAGE> 2
Investment Adviser hereby accepts such
appointment and agrees to render the services
set forth in the Advisory Agreement for the
compensation herein provided.
2. Compensation. For the services provided and
the expenses assumed pursuant to the Advisory
Agreement regarding the Fund, the Trust will
pay the Investment Adviser, and the
Investment Adviser will accept as full
compensation therefor from the Trust, a fee
at an annual rate of 1.20% of the Fund's
average daily net assets.
3. Capitalized Terms. From and after the date
hereof, the term "Current Funds" as used in
the Advisory Agreement shall be deemed to
include the Technology Fund. Capitalized
terms used herein and not otherwise defined
shall have the meanings ascribed to them in
the Advisory Agreement.
4. Miscellaneous. The initial term of the
Advisory Agreement with respect to the Fund
shall continue, unless sooner terminated in
accordance with the Advisory Agreement, until
March 31, 1997. Except to the extent
supplemented hereby, the Advisory Agreement
shall remain unchanged and in full force and
effect, and is hereby ratified and confirmed
in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed
this Addendum as of the date and year first above written.
NORTHERN FUNDS
Attest: By:/s/Miriam M. Allison
------------------- -----------------------
Miriam M. Allison
Title:Vice President
--------------------
THE NORTHERN TRUST COMPANY
Attest: By:/s/Lloyd A. Wennlund
------------------- -----------------------
Lloyd A. Wennlund
Title:Sr. Vice President
--------------------
<PAGE> 1
Exhibit 5(c)
[FORM]
NORTHERN FUNDS
ADDENDUM NO. 3 TO THE INVESTMENT ADVISORY AGREEMENT
This Addendum, dated as of the _______ day of
_______, 1996, is entered into between NORTHERN FUNDS (the "Trust"), a
Massachusetts business trust, and THE NORTHERN TRUST COMPANY (the "Investment
Adviser"), an Illinois state bank.
WHEREAS, the Trust and the Investment Adviser have
entered into an Investment Advisory Agreement dated as of April 1, 1994 as
amended by Addendum No. 1 dated November 29, 1994 and by Addendum No. 2 dated
March 29, 1996 (the "Advisory Agreement") pursuant to which the Trust appointed
the Investment Adviser to act as investment adviser to the Trust for the Money
Market Fund, U.S. Government Money Market Fund, Municipal Money Market Fund,
U.S. Government Select Money Market Fund, California Municipal Money Market
Fund, U.S. Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund,
Tax-Exempt Fund, International Fixed Income Fund, Income Equity Fund, Growth
Equity Fund, Select Equity Fund, Small Cap Growth Fund, International Growth
Equity Fund, International Select Equity Fund and Technology Fund; and
WHEREAS, Section 1(b) of the Advisory Agreement
provides that in the event the Trust establishes one or more additional
investment portfolios with respect to which it desires to retain the Investment
Adviser to act as investment adviser under the Advisory Agreement, the Trust
shall so notify the Investment Adviser in writing and if the Investment Adviser
is willing to render such services it shall notify the Trust in writing, and
the compensation to be paid to the Investment Adviser shall be that which is
agreed to in writing by the Trust and the Investment Adviser; and
WHEREAS, pursuant to Section 1(b) of the Advisory
Agreement, the Trust has notified the Investment Adviser that it is
establishing the Stock Index Fund and the Florida Intermediate Tax-Exempt Bond
Fund (each a "Fund"), and that it desires to retain the Investment Adviser to
act as the investment adviser for each Fund, and the Investment Adviser has
notified the Trust that it is willing to serve as investment adviser for each
Fund;
NOW THEREFORE, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. Appointment. The Trust hereby appoints the
Investment Adviser to act as investment
adviser to
<PAGE> 2
the Trust for each Fund in accordance with
the terms set forth in the Advisory
Agreement. The Investment Adviser hereby
accepts such appointment and agrees to render
the services set forth in the Advisory
Agreement for the compensation herein
provided.
2. Compensation. For the services provided and
the expenses assumed pursuant to the Advisory
Agreement regarding each Fund, the Trust will
pay the Investment Adviser, and the
Investment Adviser will accept as full
compensation therefor from the Trust, a fee
at an annual rate of __% of the Stock Index
Fund's average daily net assets and a fee at
an annual rate of ___ of the Intermediate
Florida Tax-Exempt Bond Fund's average net
assets.
3. Capitalized Terms. From and after the date
hereof, the term "Current Funds" as used in
the Advisory Agreement shall be deemed to
include each Fund. Capitalized terms used
herein and not otherwise defined shall have
the meanings ascribed to them in the Advisory
Agreement.
4. Miscellaneous. The initial term of the
Advisory Agreement with respect to each Fund
shall continue, unless sooner terminated in
accordance with the Advisory Agreement, until
March 31, 1997. Except to the extent
supplemented hereby, the Advisory Agreement
shall remain unchanged and in full force and
effect, and is hereby ratified and confirmed
in all respects as supplemented hereby.
All signatures need not appear on the same copy of
this Addendum.
IN WITNESS WHEREOF, the undersigned have executed
this Addendum as of the date and year first above written.
NORTHERN FUNDS
Attest: By:
------------------ -----------------------
Title:
--------------------
THE NORTHERN TRUST COMPANY
Attest: By:
------------------ -----------------------
Title:
--------------------
<PAGE> 1
EXHIBIT 6(b)
AMENDED AND RESTATED
SCHEDULE A
TO THE
DISTRIBUTION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
DATED APRIL 1, 1994
Intending to be legally bound, the undersigned hereby amend
and restate Schedule A to the aforesaid Agreement to include
the following investment portfolios:
<TABLE>
<S> <C>
Growth Equity Fund Fixed Income Fund
Income Equity Fund U.S. Government Fund
Small Cap Growth Fund Intermediate Tax-Exempt Fund
Select Equity Fund Tax-Exempt Fund
International Growth Equity Fund Money Market Fund
International Select Equity Fund U.S. Government Money Market Fund
Technology Fund International Fixed Income Fund
Municipal Money Market Fund California Municipal Money Market Fund
U.S. Government Select Money Market Fund
</TABLE>
NORTHERN FUNDS
By: /s/Silas S. Cathcart
------------------------
Silas S. Cathcart
Title: Chairman
---------------------
Date: March 29, 1996
----------------------
SUNSTONE FINANCIAL GROUP, INC.
By: /s/Miriam M. Allison
-------------------------
Miriam M. Allison
Title: President
----------------------
Date: March 29, 1996
-----------------------
<PAGE> 1
EXHIBIT 6(c)
[FORM]
AMENDED AND RESTATED
SCHEDULE A
TO THE
DISTRIBUTION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
DATED ________ __, 1996
Intending to be legally bound, the undersigned hereby amend
and restate Schedule A to the aforesaid Agreement to include
the following investment portfolios:
<TABLE>
<S> <C>
Growth Equity Fund Fixed Income Fund
Income Equity Fund U.S. Government Fund
Small Cap Growth Fund Intermediate Tax-Exempt Fund
Select Equity Fund Tax-Exempt Fund
International Growth Equity Fund Money Market Fund
International Select Equity Fund U.S. Government Money Market Fund
Technology Fund International Fixed Income Fund
Municipal Money Market Fund California Municipal Money Market Fund
U.S. Government Select Money Market Fund Stock Index Fund
Florida Intermediate Tax-Exempt Bond Fund
</TABLE>
All signatures need not appear on the same copy of this Amended and
Restated Schedule A.
NORTHERN FUNDS
By:
------------------------------
Title:
---------------------------
Date:
----------------------------
SUNSTONE FINANCIAL GROUP, INC.
By:
------------------------------
Title:
---------------------------
Date:
----------------------------
<PAGE> 1
EXHIBIT 8(e)
NORTHERN FUNDS
ADDENDUM NO. 2 TO THE TRANSFER AGENCY AGREEMENT
This Addendum, dated as of the 29th day of March, 1996, is
entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business
trust, and THE NORTHERN TRUST COMPANY, an Illinois state bank (the "Transfer
Agent").
WHEREAS, the Trust and the Transfer Agent have entered into a
Transfer Agency Agreement dated as of April 1, 1994 as amended by Addendum No.
1 dated November 29, 1994 (the "Transfer Agency Agreement") pursuant to which
the Trust appointed the Transfer Agent to act as transfer agent to the Trust
for the Money Market Fund, U.S. Government Money Market Fund, Municipal Money
Market Fund, U.S. Government Select Money Market Fund, California Municipal
Money Market Fund, U.S. Government Fund, Fixed Income Fund, Intermediate
Tax-Exempt Fund, Tax-Exempt Fund, International Fixed Income Fund, Income
Equity Fund, Growth Equity Fund, Select Equity Fund, Small Cap Growth Fund,
International Growth Equity Fund and International Select Equity Fund; and
WHEREAS, the Trust is establishing the Technology Fund (the
"Fund"), and the Trust desires to retain the Transfer Agent under the terms of
the Transfer Agency Agreement to render transfer agency and other services with
respect to the Fund and the record and/or beneficial owners thereof, and the
Transfer Agent is willing to render such services.
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Appointment. The Trust hereby appoints the
Transfer Agent as transfer agent with respect to the
Fund in accordance with the terms set forth in the
Transfer Agency Agreement. The Transfer Agent hereby
accepts such appointment and agrees to render the
services and perform the duties set forth in the
Transfer Agency Agreement for the compensation
therein provided.
2. Capitalized Terms. From and after the date hereof,
the term "Current Funds" as used in the Transfer
Agency Agreement shall be deemed to include the
Technology Fund. Capitalized terms used herein and
not otherwise defined shall have the meanings
ascribed to them in the Transfer Agency Agreement.
<PAGE> 2
3. Miscellaneous. The initial term of the Transfer
Agency Agreement with respect to the Fund shall
continue, unless sooner terminated in accordance with
the Transfer Agency Agreement, until March 31, 1997.
Except to the extent supplemented hereby, the
Transfer Agency Agreement shall remain unchanged and
in full force and effect, and is hereby ratified and
confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this
Addendum as of the date and year first above written.
NORTHERN FUNDS
Attest: By:/s/Miriam M. Allison
--------------------- -----------------------
Miriam M. Allison
Title: Vice President
--------------------
Attest: THE NORTHERN TRUST COMPANY
---------------------
By:/s/Lloyd A. Wennlund
-----------------------
Lloyd A. Wennlund
Title: Sr. Vice President
--------------------
<PAGE> 1
EXHIBIT 8(f)
NORTHERN FUNDS
ADDENDUM NO. 2 TO THE CUSTODIAN AGREEMENT
This Addendum, dated as of the 29th day of March,
1996, is entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts
business trust, and THE NORTHERN TRUST COMPANY, an Illinois state bank
("Northern").
WHEREAS, the Trust and Northern have entered into a
Custodian Agreement dated as of April 1, 1994 as amended by Addendum No. 1
dated November 29, 1994 (the "Custodian Agreement") pursuant to which the Trust
appointed Northern to act as custodian to the Trust for the Money Market Fund,
U.S. Government Money Market Fund, Municipal Money Market Fund, U.S. Government
Select Money Market Fund, California Municipal Money Market Fund, U.S.
Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Tax-Exempt
Fund, International Fixed Income Fund, Income Equity Fund, Growth Equity Fund,
Select Equity Fund, Small Cap Growth Fund, International Growth Equity Fund and
International Select Equity Fund; and
WHEREAS, the Trust is establishing the Technology
Fund (the "Fund"), and the Trust desires to retain Northern under the terms of
the Custodian Agreement to act as the custodian therefor, and Northern is
willing to so act.
NOW THEREFORE, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. Appointment. The Trust hereby appoints
Northern custodian to the Trust for the Fund
in accordance with the terms set forth in the
Custodian Agreement. Northern hereby accepts
such appointment and agrees to render the
services set forth in the Custodian Agreement
for the compensation therein provided.
2. Capitalized Terms. From and after the date
hereof, the term "Funds" as used in the
Custodian Agreement shall be deemed to
include the Technology Fund. Capitalized
terms used herein and not otherwise defined
shall have the meanings ascribed to them in
the Custodian Agreement.
3. Miscellaneous. The initial term of the
Custodian Agreement with respect to the Fund
shall continue, unless sooner terminated in
accordance with the Custodian Agreement,
until March 31, 1997. Except
<PAGE> 2
to the extent supplemented hereby, the
Custodian Agreement shall remain unchanged
and in full force and effect, and is hereby
ratified and confirmed in all respects as
supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed
this Addendum as of the date and year first above written.
NORTHERN FUNDS
Attest: By:/s/Miriam M. Allison
------------------ ------------------------
Miriam M. Allison
Title: Vice President
---------------------
THE NORTHERN TRUST COMPANY
Attest: By:/s/Lloyd A. Wennlund
------------------ -------------------------
Lloyd A. Wennlund
Title: Sr. Vice President
----------------------
<PAGE> 1
EXHIBIT 8(h)
[FORM]
NORTHERN FUNDS
ADDENDUM NO. 3 TO THE TRANSFER AGENCY AGREEMENT
This Addendum, dated as of the _____ day of _______, 1996, is
entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business
trust, and THE NORTHERN TRUST COMPANY, an Illinois state bank (the "Transfer
Agent").
WHEREAS, the Trust and the Transfer Agent have entered into a
Transfer Agency Agreement dated as of April 1, 1994 as amended by Addendum No.
1 dated November 29, 1994 and by Addendum No. 2 dated March 29, 1996 (the
"Transfer Agency Agreement") pursuant to which the Trust appointed the Transfer
Agent to act as transfer agent to the Trust for the Money Market Fund, U.S.
Government Money Market Fund, Municipal Money Market Fund, U.S. Government
Select Money Market Fund, California Municipal Money Market Fund, U.S.
Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Tax-Exempt
Fund, International Fixed Income Fund, Income Equity Fund, Growth Equity Fund,
Select Equity Fund, Small Cap Growth Fund, International Growth Equity Fund,
International Select Equity Fund and Technology Fund; and
WHEREAS, the Trust is establishing the Stock Index Fund and
the Florida Intermediate Tax-Exempt Bond Fund (each a "Fund"), and the Trust
desires to retain the Transfer Agent under the terms of the Transfer Agency
Agreement to render transfer agency and other services with respect to each
Fund and the record and/or beneficial owners of each Fund, and the Transfer
Agent is willing to render such services.
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Appointment. The Trust hereby appoints the
Transfer Agent as transfer agent with respect to each
Fund in accordance with the terms set forth in the
Transfer Agency Agreement. The Transfer Agent hereby
accepts such appointment and agrees to render the
services and perform the duties set forth in the
Transfer Agency Agreement for the compensation
therein provided.
2. Capitalized Terms. From and after the date hereof,
the term "Current Funds" as used in the Transfer
Agency Agreement shall be deemed to include each
Fund. Capitalized terms used herein and not
otherwise defined
<PAGE> 2
shall have the meanings ascribed to them in the
Transfer Agency Agreement.
3. Miscellaneous. The initial term of the Transfer
Agency Agreement with respect to each Fund shall
continue, unless sooner terminated in accordance with
the Transfer Agency Agreement, until March 31, 1997.
Except to the extent supplemented hereby, the
Transfer Agency Agreement shall remain unchanged and
in full force and effect, and is hereby ratified and
confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this
Addendum as of the date and year first above written.
All signatures need not appear on the same copy of this
Addendum.
NORTHERN FUNDS
Attest: By:
--------------------- ---------------------
Title:
------------------
Attest: THE NORTHERN TRUST COMPANY
---------------------
By:
---------------------
Title:
------------------
<PAGE> 1
EXHIBIT 8(i)
[FORM]
NORTHERN FUNDS
ADDENDUM NO. 3 TO THE CUSTODIAN AGREEMENT
This Addendum, dated as of the ____ day of _______,
1996, is entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts
business trust, and THE NORTHERN TRUST COMPANY, an Illinois state bank
("Northern").
WHEREAS, the Trust and Northern have entered into a
Custodian Agreement dated as of April 1, 1994 as amended by Addendum No. 1
dated November 29, 1994 and by Addendum No. 2 dated March 29, 1996 (the
"Custodian Agreement") pursuant to which the Trust appointed Northern to act as
custodian to the Trust for the Money Market Fund, U.S. Government Money Market
Fund, Municipal Money Market Fund, U.S. Government Select Money Market Fund,
California Municipal Money Market Fund, U.S. Government Fund, Fixed Income
Fund, Intermediate Tax-Exempt Fund, Tax-Exempt Fund, International Fixed Income
Fund, Income Equity Fund, Growth Equity Fund, Select Equity Fund, Small Cap
Growth Fund, International Growth Equity Fund, International Select Equity Fund
and Technology Fund; and
WHEREAS, the Trust is establishing the Stock Index
Fund and the Florida Intermediate Tax-Exempt Bond Fund (each a "Fund"), and the
Trust desires to retain Northern under the terms of the Custodian Agreement to
act as the custodian for each Fund, and Northern is willing to so act.
NOW THEREFORE, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. Appointment. The Trust hereby appoints
Northern custodian to the Trust for each Fund
in accordance with the terms set forth in the
Custodian Agreement. Northern hereby accepts
such appointment and agrees to render the
services set forth in the Custodian Agreement
for the compensation therein provided.
2. Capitalized Terms. From and after the date
hereof, the term "Funds" as used in the
Custodian Agreement shall be deemed to
include each Fund. Capitalized terms used
herein and not otherwise
<PAGE> 2
defined shall have the meanings ascribed to
them in the Custodian Agreement.
3. Miscellaneous. The initial term of the
Custodian Agreement with respect to each Fund
shall continue, unless sooner terminated in
accordance with the Custodian Agreement,
until March 31, 1997. Except to the extent
supplemented hereby, the Custodian Agreement
shall remain unchanged and in full force and
effect, and is hereby ratified and confirmed
in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed
this Addendum as of the date and year first above written.
All signatures need not appear on the same copy of
this Addendum.
NORTHERN FUNDS
Attest By:
------------------ -----------------------
Title:
--------------------
THE NORTHERN TRUST COMPANY
Attest: By:
------------------ -----------------------
Title:
--------------------
<PAGE> 1
EXHIBIT 9(b)
NORTHERN FUNDS
SERVICE PLAN
Section 1. Upon the recommendation of
Sunstone, Financial Group, Inc. ("Sunstone"), the administrator of Northern
Funds, any officer of Northern Funds is authorized to execute and deliver, in
the name and on behalf of Northern Funds, written agreements based on the form
attached hereto as Appendix A or any other form duly approved by the Board of
Trustees ("Agreements") with securities dealers, financial institutions and
other industry professionals that are shareholders or dealers of record or
which have a servicing relationship with the beneficial owners of Shares of
Northern Funds ("Service Organizations"). Pursuant to such Agreements, Service
Organizations shall provide support services as set forth therein to their
clients who beneficially own Shares of any Fund offered by Northern Funds in
consideration of a fee, computed monthly in the manner set forth in the
Agreements, at an annual rate of up to .25% of the average daily net asset
value of the Shares beneficially owned by such clients. The Northern Trust
Company and its affiliates are eligible to become Service Organizations and to
receive fees under this Plan.
Section 2. Sunstone shall monitor the
arrangements pertaining to Northern Funds' Agreements with Service
Organizations in accordance with the terms of Sunstone's administration
agreement with Northern Funds. Sunstone shall not, however, be obliged by this
Plan to recommend, and Northern Funds shall not be obliged to execute, any
Agreement with any qualifying Service Organization.
Section 3. So long as this Plan is in
effect, Sunstone shall provide to Northern Funds' Board of Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended pursuant to this Plan and the purposes for which such expenditures
were made.
Section 4. This Plan shall become
effective immediately with respect to each particular Fund upon the approval of
the Plan (and the form of Agreement attached hereto) by a majority of the Board
of Trustees, including a majority of the Trustees who are not "interested
persons," as defined in the Act, of Northern Funds and have no direct or
indirect financial interest in the operation of this Plan or in any Agreement
related to this Plan (the "Disinterested Trustees"), pursuant to a vote cast in
person at a meeting called for the purpose of voting on the approval of this
Plan (and form of Agreement).
<PAGE> 2
Section 5. Unless sooner terminated,
this Plan shall continue until February 22, 1995 and thereafter shall continue
automatically for successive annual periods provided such continuance is
approved at least annually in the manner set forth in Section 4.
Section 6. This Plan may be amended at
any time with respect to any Fund by the Board of Trustees, provided that any
material amendment of the terms of this Plan shall become effective only upon
the approvals set forth in Section 4.
Section 7. This Plan is terminable at
any time with respect to any Fund by vote of a majority of the Disinterested
Trustees.
Section 8. All expenses incurred by
Northern Funds with respect to the Shares of a particular Fund in connection
with Agreements and the implementation of this Plan shall be borne entirely by
such Fund.
Section 9. Northern Funds originally
adopted this Plan as of February 22, 1994.
-2-
<PAGE> 3
Appendix A
SERVICING AGREEMENT
Gentlemen:
We wish to enter into this Servicing Agreement with
you concerning the provision of support services to your clients ("Clients")
who may from time to time beneficially own shares of any Fund ("Shares")
offered by Northern Funds.
The terms and conditions of this Servicing Agreement
are as follows:
Section 1. You agree to provide the
following support services to Clients who may from time to time beneficially
own Shares:(1) (i) processing dividend and distribution payments from us on
behalf of Clients; (ii) providing information periodically to Clients showing
their positions in Shares; (iii) arranging for bank wires; (iv) responding to
Client inquiries relating to the services performed by you; (v) providing
subaccounting with respect to Shares beneficially owned by Clients or the
information to us necessary for subaccounting; (vi) if required by law,
forwarding shareholder communications from us (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to Clients; (vii) processing exchange and redemption requests
from Clients and placing net exchange and redemption orders with our service
contractors; (viii) assisting Clients in changing dividend options, account
designations and addresses; and (ix) providing such other similar services as
we may reasonably request to the extent you are permitted to do so under
applicable statutes, rules and regulations.
Section 2. You will provide such office
space and equipment, telephone facilities and personnel (which may be any part
of the space, equipment and facilities currently used in your business, or any
personnel employed by you) as may be reasonably necessary or beneficial in
order to provide the aforementioned services and assistance to Clients.
Section 3. Neither you nor any of your
officers, employees or agents are authorized to make any representations
concerning us or the Shares except those contained in our then
- ----------------------------
(1) Services may be modified of omitted in the particular
case and items renumbered.
A-1
<PAGE> 4
current prospectuses and statements of additional information for Shares,
copies of which will be supplied by us to you, or in such supplemental
literature or advertising as may be authorized by us in writing.
Section 4. For all purposes of this
Agreement you will be deemed to be an independent contractor, and will have no
authority to act as agent for us in any matter or in any respect. By your
written acceptance of this Agreement, you agree to and do release, indemnify
and hold us harmless from and against any and all direct or indirect
liabilities or losses resulting from requests, directions, actions or inactions
of or by you or your officers, employees or agents regarding your
responsibilities hereunder or the purchase, redemption, transfer or
registration of Shares by or on behalf of Clients. You and your employees
will, upon request, be available during normal business hours to consult with
us or our designees concerning the performance of your responsibilities under
this Agreement.
Section 5. In consideration of the
services and facilities provided by you hereunder, we will pay to you, and you
will accept as full payment therefor, a fee at the annual rate of .____ of 1%
of the average daily net asset value of the Shares beneficially owned by your
Clients for whom you are the dealer of record or holder of record or with whom
you have a servicing relationship (the "Clients Shares"), which fee will be
computed daily and payable monthly. For purposes of determining the fees
payable under this Section 5, the average daily net asset value of the Clients'
Shares will be computed in the manner specified in our Registration Statement
(as the same is in effect from time to time) in connection with the computation
of the net asset value of Shares for purposes of purchases and redemptions.
The fee rate stated above may be prospectively increased or decreased by us, in
our sole discretion, at any time upon notice to you. Further, we may, in our
discretion and without notice, suspend or withdraw the sale of Shares,
including the sale of Shares to you for the account of any Client or Clients.
All fees payable by Northern Funds under this Agreement with respect to the
Shares of a particular Fund shall be borne by, and be payable entirely out of
the assets allocable to, said Shares; and no other class of Shares of any other
Fund offered by Northern Funds shall be responsible for such fees.
Section 6. Any person authorized to
direct the disposition of monies paid or payable by us pursuant to this
Agreement will provide to our Board of Trustees, and our Trustees will review,
at least quarterly, a written report of the amounts so expended and the
purposes for which such expenditures were made. In addition, you will furnish
us or our designees with such information as we or they may reasonably request
(including, without limitation, periodic certifications confirming the
provision to Clients of the services described herein), and will
A-2
<PAGE> 5
otherwise cooperate with us and our designees (including, without limitation,
any auditors designated by us), in connection with the preparation of reports
to our Board of Trustees concerning this Agreement and the monies paid or
payable by us pursuant hereto, as well as any other reports or filings that may
be required by law.
Section 7. We may enter into other
similar Servicing Agreements with any other person or persons without your
consent.
Section 8. By your written acceptance
of this Agreement, you represent, warrant and agree that: (i) the compensation
payable to you hereunder, together with any other compensation you receive from
Clients for services contemplated by this Agreement, will not be excessive or
unreasonable under the laws and instruments governing your relationships with
Clients; (ii) you will provide to Clients a schedule of any fees that you may
charge to them relating to the investment of their assets in Shares; and (iii)
the services provided by you under this Agreement will in no event be primarily
intended to result in the sale of Shares.
Section 9. This Agreement will become
effective on the date a fully executed copy of this Agreement is received by us
or our designee. Unless sooner terminated, this Agreement will continue until
February 22, 1995, and thereafter will continue automatically for successive
annual periods provided such continuance is specifically approved at least
annually by us in the manner described in Section 12. This Agreement is
terminable with respect to the Shares of any Fund, without penalty, at any time
by us (which termination may be by a vote of a majority of the Disinterested
Trustees as defined in Section 12) or by you upon notice to the other party
hereto.
Section 10. All notices and other
communications to either you or us will be duly given if mailed, telegraphed,
telexed or transmitted by similar telecommunications device to the appropriate
address stated herein.
Section 11. This Agreement will be
construed in accordance with the laws of the State of Illinois.
Section 12. This Agreement has been
approved by vote of a majority of (i) our Board of Trustees and (ii) those
Trustees who are not "interested persons" (as defined in the Investment Company
Act of 1940) of us and have no direct or indirect financial interest in the
operation of the Service Plan adopted by us or in any agreement related thereto
cast in person at a meeting called for the purpose of voting on such approval
("Disinterested Trustees"). This Agreement is executed by or on behalf of the
Trust and the obligations hereunder are not binding
A-3
<PAGE> 6
upon any of the Trustees, Officers or Shareholders of the Trust individually
but are binding only upon the Trust and its assets and property. All
obligations of the Trust under this Agreement shall apply only on a Fund by
Fund basis, and the assets of one Fund shall not be liable for the obligations
of another Fund. The Trust's Agreement and Declaration of Trust is on file with
the Secretary of the Commonwealth of Massachusetts.
If you agree to be legally,bound by the provisions of
this Agreement, please sign a copy of this letter where indicated below and
promptly return it to us, c/o Sunstone Financial Group, Inc., 207 E. Buffalo
Street, Suite 315, Milwaukee, Wisconsin 53202.
Very truly yours,
NORTHERN FUNDS
Date: By:
----------------------- -------------------------------
(Authorized Officer)
Accepted and Agreed to:
[Service organization]
By:
Date: -------------------------------
(Authorized Officer)
A-4
<PAGE> 1
EXHIBIT 9(d)
AMENDED AND RESTATED
SCHEDULE A
TO THE
ADMINISTRATION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
DATED APRIL 1, 1994
Intending to be legally bound, the undersigned hereby amend
and restate Schedule A to the aforesaid Agreement to include
the following investment portfolios:
<TABLE>
<S> <C>
Growth Equity Fund Fixed Income Fund
Income Equity Fund U.S. Government Fund
Small Cap Growth Fund Intermediate Tax-Exempt Fund
Select Equity Fund Tax-Exempt Fund
International Growth Equity Fund Money Market Fund
International Select Equity Fund U.S. Government Money Market Fund
Technology Fund International Fixed Income Fund
Municipal Money Market Fund California Municipal Money Market Fund
U.S. Government Select Money Market Fund
</TABLE>
NORTHERN FUNDS
By: /s/Silas S. Cathcart
------------------------
Silas S. Cathcart
Title: Chairman
---------------------
Date: March 29, 1996
----------------------
SUNSTONE FINANCIAL GROUP, INC.
By: /s/Miriam M. Allison
------------------------
Miriam M. Allison
Title: President
---------------------
Date: March 29, 1996
----------------------
<PAGE> 1
EXHIBIT 9(e)
[FORM]
AMENDED AND RESTATED
SCHEDULE A
TO THE
ADMINISTRATION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
DATED _______ __, 1996
Intending to be legally bound, the undersigned hereby amend
and restate Schedule A to the aforesaid Agreement to include
the following investment portfolios:
<TABLE>
<S> <C>
Growth Equity Fund Fixed Income Fund
Income Equity Fund U.S. Government Fund
Small Cap Growth Fund Intermediate Tax-Exempt Fund
Select Equity Fund Tax-Exempt Fund
International Growth Equity Fund Money Market Fund
International Select Equity Fund U.S. Government Money Market Fund
Technology Fund International Fixed Income Fund
Municipal Money Market Fund California Municipal Money Market Fund
U.S. Government Select Money Market Fund Stock Index Fund
Florida Intermediate Tax-Exempt Bond Fund
</TABLE>
All signatures need not appear on the same copy of this Amended and
Restated Schedule A.
NORTHERN FUNDS
By:
-------------------------------
Title:
-----------------------------
Date:
-----------------------------
SUNSTONE FINANCIAL GROUP, INC.
By:
-------------------------------
Title:
-----------------------------
Date:
-----------------------------
<PAGE> 1
EXHIBIT 11(a)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the
references to our Firm under the caption "Additional Trust Information -
Counsel and Auditors" in the Statements of Additional Information included in
Post-Effective Amendment No. 9 to the Registration Statement (1933 Act No.
33-73404; 1940 Act No. 811-8236) on Form N-1A under the Securities Act of 1933,
as amended, of Northern Funds. This consent does not constitute a consent
under section 7 of the Securities Act of 1933, and in consenting to the use of
our name and the references to our Firm under such caption we have not
certified any part of the Registration Statement and do not otherwise come
within the categories of persons whose consent is required under said section 7
or the rules and regulations of the Securities and Exchange Commission
thereunder.
/s/ Drinker Biddle & Reath
----------------------------
Drinker Biddle & Reath
Philadelphia, Pennsylvania
June 10, 1996
<PAGE> 1
EXHIBIT 15
NORTHERN FUNDS
DISTRIBUTION AND SERVICE PLAN
This Distribution and Service Plan (the "Plan") has
been adopted by the Board of Trustees of Northern Funds in accordance with Rule
12b-1 under the Investment Company Act of 1940 (the "Act").
Section 1. Upon the recommendation of
Sunstone Financial Group, Inc. ("Sunstone"), the distributor and administrator
of Northern Funds, any officer of Northern Funds is authorized to execute and
deliver, in the name and on behalf of Northern Funds, written agreements based
on the form attached hereto as Appendix A or any other form duly approved by
the Board of Trustees ("Agreements") with securities dealers, financial
institutions and other industry professionals that are shareholders or dealers
of record or which have a servicing relationship with the beneficial owners of
Shares of Northern Funds ("Shareholder Organizations"). Pursuant to such
Agreements, Shareholder Organizations shall provide distribution and support
services as set forth therein to their clients who acquire and beneficially own
Shares of any Fund offered by Northern Funds in consideration of a fee,
computed monthly in the manner set forth in the Agreements, at an annual rate
of up to .25% of the average daily net asset value of the Shares beneficially
owned by such clients. The Northern Trust Company and its affiliates are
eligible to become Shareholder Organizations and to receive fees under this
Plan.
Section 2. Sunstone shall monitor the
arrangements pertaining to Northern Funds' Agreements with Shareholder
Organizations in accordance with the terms of Sunstone's administration
agreement with Northern Funds. Sunstone shall not, however, be obliged by this
Plan to recommend, and Northern Funds shall not be obliged to execute, any
Agreement with any qualifying Shareholder Organization.
Section 3. So long as this Plan is in
effect, Sunstone shall provide to Northern Funds' Board of Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended pursuant to this Plan and the purposes for which such expenditures
were made.
Section 4. This Plan shall become
effective immediately with respect to each particular Fund upon the approval of
the Plan (and the form of Agreement attached hereto) by (a) a majority of the
Board of Trustees, including a majority of the Trustees who are not "interested
persons," as defined in
<PAGE> 2
the Act, of Northern Funds and have no direct or indirect financial interest in
the operation of this Plan or in any Agreement related to this Plan (the
"Disinterested Trustees"), pursuant to a vote cast in person at a meeting
called for the purpose of voting on the approval of this Plan (and form of
Agreement), and (b) a majority (as defined in the Act) of the outstanding
Shares of such Fund.
Section 5. Unless sooner terminated,
this Plan shall continue until February 22, 1995 and thereafter shall continue
automatically for successive annual periods provided such continuance is
approved at least annually in the manner set forth in Section 4(a).
Section 6. This Plan may be amended at
any time with respect to any Fund by the Board of Trustees, provided that (a)
any amendment to increase materially the costs (whether for distribution or any
other purpose) which such Fund may bear pursuant to this Plan shall be
effective only upon the favorable vote of a majority (as defined in the Act) of
the outstanding Shares of such Fund, and (b) any material amendment of the
terms of this Plan shall become effective only upon the approvals set forth in
Section 4(a).
Section 7. This Plan is terminable at
any time with respect to any Fund by (a) vote of a majority of the
Disinterested Trustees, or (b) vote of a majority (as defined in the Act) of
the Shares of such Fund.
Section 8. While this Plan is in
effect, the selection and nomination of those Trustees who are not "interested
persons" (as defined in the Act) of Northern Funds shall be committed to the
discretion of such non-interested Trustees.
Section 9. All expenses incurred by
Northern Funds with respect to the Shares of a particular Fund in connection
with Agreements and the implementation of this Plan shall be borne entirely by
such Fund.
Section 10. This Plan was originally
adopted by Northern Funds as of February 22, 1994.
-2-
<PAGE> 3
Appendix A
DISTRIBUTION AND SERVICING AGREEMENT
Gentlemen:
We wish to enter into this Distribution and Servicing
Agreement ("Agreement") with you concerning the provision of distribution
services (and, to the extent provided below, support services) to your clients
("Clients") who may from time to time acquire and beneficially own shares of
any Fund ("Shares") offered by Northern Funds.
The terms and conditions of this Agreement are as follows:
Section 1. You will provide reasonable
assistance in connection with the distribution of Shares to Clients as
requested from time to time by our distributor, which assistance may include
forwarding sales literature and advertising provided by our distributor for
Clients. In addition, you agree to provide the following support services to
Clients who may from time to time acquire and beneficially own Shares:(1)
processing dividend and distribution payments from us on behalf of Clients;
(ii) providing information periodically to Clients showing their positions in
Shares; (iii) arranging for bank wires; (iv) responding to Client inquiries
relating to the services performed by you; (v) providing subaccounting with
respect to Shares beneficially owned by Clients or the information to us
necessary for subaccounting; (vi) if required by law, forwarding shareholder
communications from us (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
Clients; (vii) assisting in processing purchase, exchange and redemption
requests from Clients and in placing such orders with our service contractors;
(viii) assisting Clients in changing dividend options, account designations and
addresses; and (ix) providing such other similar services as we may reasonably
request to the extent you are permitted to do so under applicable statutes,
rules and regulations.
Section 2. You will provide such office
space and equipment, telephone facilities and personnel (which may be any part
of the space, equipment and facilities currently used in your business, or any
personnel employed by you) as may be
- --------------------------
1. Services may be modified or omitted in the particular case and
items renumbered.
A-1
<PAGE> 4
reasonably necessary or beneficial in order to provide the aforementioned
assistance and services to Clients.
Section 3. Neither you nor any of your
officers, employees or agents are authorized to make any representations
concerning us or the Shares except those contained in our then current
prospectuses and statements of additional information for Shares, copies of
which will be supplied by us to you, or in such supplemental literature or
advertising as may be authorized by us in writing.
Section 4. For all purposes of this
Agreement you will be deemed to be an independent contractor, and will have no
authority to act as agent for us in any matter or in any respect. By your
written acceptance of this Agreement, you agree to and do release, indemnify
and hold us harmless from and against any and all direct or indirect
liabilities or losses resulting from requests, directions, actions or inactions
of or by you or your officers, employees or agents regarding your
responsibilities hereunder or the purchase, redemption, transfer or
registration of Shares (or orders relating to the same) by or on behalf of
Clients. You and your employees will, upon request, be available during normal
business hours to consult with us or our designees concerning the performance
of your responsibilities under this Agreement.
Section 5. In consideration of the
services and facilities provided by you hereunder, we will pay to you, and you
will accept as full payment therefor, a fee at the annual rate of ____% of the
average daily net asset value of the Shares beneficially owned by your Clients
for whom you are the dealer of record or holder of record or with whom you have
a servicing relationship (the "Clients' Shares"), which fee will be computed
daily and payable monthly. For purposes of determining the fees payable under
this Section 5, the average daily net asset value of the Clients' Shares will
be computed in the manner specified in our Registration Statement (as the same
is in effect from time to time) in connection with the computation of the net
asset value of Shares for purposes of purchases and redemptions. The fee rate
stated above may be prospectively increased or decreased by us, in our sole
discretion, at any time upon notice to you. Further, we may, in our discretion
and without notice, suspend or withdraw the sale of Shares, including the sale
of Shares to you for the account of any Client or Clients. All fees payable by
Northern Funds under this Agreement with respect to the Shares of a particular
Fund shall be borne by, and be payable entirely out of the assets allocable to,
said Shares; and no other class of Shares of any other Fund offered by Northern
Funds shall be responsible for such fees.
Section 6. Any person authorized to
direct the disposition of monies paid or payable by us pursuant to this
A-2
<PAGE> 5
Agreement will provide to our Board of Trustees, and our Trustees will review,
at least quarterly, a written report of the amounts so expended and the
purposes for which such expenditures were made. In addition, you will furnish
us or our designees with such information as we or they may reasonably request
(including, without limitation, periodic certifications confirming the
provision to Clients of the services described herein), and will otherwise
cooperate with us and our designees (including, without limitation, any
auditors designated by us), in connection with the preparation of reports to
our Board of Trustees concerning this Agreement and the monies paid or payable
by us pursuant hereto, as well as any other reports or filings that may be
required by law.
Section 7. We may enter into other
similar Agreements with any other person or persons without your consent.
Section 8. By your written acceptance
of this Agreement, you represent, warrant and agree that: (i) the compensation
payable to you hereunder, together with any other compensation you receive from
Clients for services contemplated by this Agreement, will not be excessive or
unreasonable under the laws and instruments governing your relationships with
Clients; and (ii) you will provide to Clients a schedule of any fees that you
may charge to them relating to the investment of their assets in Shares. In
addition, you understand that this Agreement has been entered into pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act"), and is subject
to the provisions of said Rule, as well as any other applicable rules or
regulations promulgated by the Securities and Exchange Commission.
Section 9. This Agreement will become
effective on the date a fully executed copy of this Agreement is received by us
or our designee. Unless sooner terminated, this Agreement will continue until
February 22, 1995, and thereafter will continue automatically for successive
annual periods provided such continuance is specifically approved at least
annually by us in the manner described in Section 12. This Agreement is
terminable with respect to the Shares of any Fund, without penalty, at any time
by us (which termination may be by a vote of a majority of the Disinterested
Trustees as defined in Section 12 or by vote of the holders of a majority of
the outstanding Shares of such Fund) or by you upon notice to the other party
hereto. This Agreement will also terminate automatically in the event of its
assignment as defined in the Act).
Section 10. All notices and other
communications to either you or us will be duly given if mailed, telegraphed,
telexed or transmitted by similar telecommunications device to the appropriate
address stated herein.
A-3
<PAGE> 6
Section 11. This Agreement will be
construed in accordance with the laws of the State of Illinois.
Section 12. This Agreement has been
approved by vote of a majority of (i) our Board of Trustees and (ii) those
Trustees who are not "interested persons" (as defined in the Investment Company
Act of 1940) of us and have no direct or indirect financial interest in the
operation of the Distribution and Service Plan adopted by us or in any
agreement related thereto cast in person at a meeting called for the purpose of
voting on such approval ("Disinterested Trustees"). This Agreement is executed
by or on behalf of the Trust and the obligations hereunder are not binding upon
any of the Trustees, Officers or Shareholders of the Trust individually but are
binding only upon the Trust and its assets and property. All obligations of
the Trust under this Agreement shall apply only on a Fund by Fund basis, and
the assets of one Fund shall not be liable for the obligations of another Fund.
The Trust's Agreement and Declaration of Trust is on file with the Secretary of
the Commonwealth of Massachusetts.
If you agree to be legally bound by the provisions of
this Agreement, please sign a copy of this letter where indicated below and
promptly return it to us, c/o Sunstone Financial Group, Inc., 207 E. Buffalo
Street, Suite 315, Milwaukee, Wisconsin 53202.
Very truly yours,
NORTHERN FUNDS
Date: By:
-------------------------------
(Authorized Officer)
Accepted and Agreed to:
[Shareholder Organization]
Date: By:
-------------------------------
(Authorized Officer)
A-4
