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As filed with the Securities and Exchange Commission on July 24, 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. 10 /x/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 10
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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, Intermediate Tax-
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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.
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This filing incorporates herein by reference Post-Effective
Amendment No. 9 to Northern Funds' Registration Statement on Form N-1A filed
with the Securities and Exchange Commission on June 12, 1996. The Prospectus 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 is
incorporated herein by reference to the Prospectus filed pursuant to Rule 497
with the Securities and Exchange Commission on December 28, 1995.
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33-73404
811-8236
PART B
STATEMENT OF ADDITIONAL INFORMATION
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
TECHNOLOGY FUND
NORTHERN FUNDS
(THE "TRUST")
This Statement of Additional Information (the "Additional Statement")
dated July 31, 1995 is not a prospectus. This Additional Statement should be
read in conjunction with the Prospectus dated July 31, 1995, as amended or
supplemented from time to time, 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 (collectively, the "Money Market
Funds"), 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 (collectively,
the "Non-Money Market Funds," and together with the Money Market Funds, the
"Funds") 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.
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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 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.
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INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
ADDITIONAL INVESTMENT INFORMATION...................................................................... 4
Investment Objectives and Policies............................................................ 4
Special Risk Factors Relating to California Municipal
Instruments ............................................................................. 25
Investment Restrictions....................................................................... 45
ADDITIONAL TRUST INFORMATION........................................................................... 49
Trustees and Officers......................................................................... 49
Investment Adviser, Transfer Agent and Custodian.............................................. 52
Administrator and Distributor................................................................. 61
Service Organizations......................................................................... 63
Counsel and Auditors.......................................................................... 65
In-Kind Purchases............................................................................. 65
Automatic Investing Plan...................................................................... 65
Redemptions and Exchanges..................................................................... 66
PERFORMANCE INFORMATION................................................................................ 67
Money Market Funds............................................................................ 67
Non-Money Market Funds........................................................................ 68
General Information........................................................................... 70
AMORTIZED COST VALUATION............................................................................... 70
TAXES.................................................................................................. 72
Federal - General Information................................................................. 72
Federal - Tax-Exempt Information.............................................................. 75
Taxation of Certain Financial Instruments ................................................... 76
Special State Tax Considerations Pertaining to the
California Municipal Money Market Fund................................................... 78
DESCRIPTION OF SHARES.................................................................................. 80
FINANCIAL STATEMENTS................................................................................... 83
OTHER INFORMATION...................................................................................... 84
APPENDIX A (DESCRIPTION OF SECURITIES RATINGS).........................................................A-1
APPENDIX B (DESCRIPTION OF FUTURES TRANSACTIONS)...................................................... B-1
</TABLE>
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ADDITIONAL INVESTMENT INFORMATION
INVESTMENT OBJECTIVES AND POLICIES
The following supplements the investment objectives and policies of the
Funds as set forth in the Prospectus.
MONEY MARKET FUNDS
Money Market Fund seeks to maximize current income to
the extent consistent with the preservation of
capital and maintenance of liquidity by investing
only in high-quality money market instruments.
U.S. Government Money Market Fund has the same
objective as the Money Market Fund but invests
primarily in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities
and related repurchase agreements.
Municipal Money Market Fund seeks high current income
exempt from regular federal tax to the extent
consistent with preserving capital by investing
mainly in short-term Municipal Instruments.
U.S. Government Select Money Market Fund seeks to
maximize current income to the extent consistent with
the preservation of capital and maintenance of
liquidity by investing exclusively in high quality
money market instruments.
California Municipal Money Market Fund seeks to
provide its shareholders to the extent consistent
with the preservation of capital and prescribed
portfolio standards, a high level of income exempt
from regular federal income tax and California state
personal income tax.
FIXED INCOME FUNDS
U.S. Government Fund seeks high current income from
U.S. government securities. The Fund's
dollar-weighted average maturity is anticipated to
range between one and ten years. It is designed for
investors who seek greater principal stability than
is generally available from higher yielding corporate
bonds.
Fixed Income Fund seeks high current income from a
broad range of bonds and other fixed income
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securities. It is designed for investors who seek
income and greater stability of principal than is
generally available from longer-term, higher yielding
bonds. The Fund's average maturity is anticipated to
range between seven and twelve years. This Fund
generally presents greater risk and reward potential
than the U.S. Government Fund.
International Fixed Income Fund seeks to maximize
total return consistent with reasonable risk while
investing in foreign securities markets. Total return
is comprised of current income and value fluctuations
from investing in bonds and other fixed income
securities of foreign issuers.
TAX-EXEMPT FUNDS
Intermediate Tax-Exempt Fund seeks high current
income exempt from regular federal income tax. The
Fund invests in a broad range of Municipal
Instruments with an expected average maturity of
three to ten years.
Tax-Exempt Fund also seeks high current income exempt
from regular federal income tax by investing in
Municipal Instruments with an expected average
maturity of ten to thirty years.
EQUITY FUNDS
Income Equity Fund seeks to achieve high current
income and, as a secondary objective, longer-term
capital appreciation. The Fund invests in convertible
and other equity securities. Because it emphasizes
high current income, this Fund is likely to have the
least price fluctuation of Northern Fund's equity
funds.
Growth Equity Fund seeks long-term capital
appreciation by investing mainly in the equity
securities of growth companies. It is designed for
investors willing to accept above-average price
volatility in search of long-term reward.
Select Equity Fund is also for the more aggressive
investor, seeking long-term capital appreciation by
investing principally in common stocks of companies
the adviser believes to have superior growth
characteristics. Any income is incidental to this
objective.
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Small Cap Growth Fund seeks long-term capital
appreciation; any income is incidental to this
objective. Because it invests principally in the
equity securities of smaller companies, this Fund is
likely to have more price volatility than the Growth
Equity and Select Equity Funds.
International Growth Equity Fund offers the potential
benefits of international diversification to
investors willing to accept above-average price
volatility while seeking long-term capital
appreciation. While subject to additional risks such
as currency fluctuations and the higher volatility of
foreign securities, this Fund uses diversification,
in an effort to control risk.
International Select Equity Fund seeks long-term
growth by investing principally in common stock of
foreign issuers that the adviser believes are growing
faster than their markets. Because fewer countries
and securities are generally represented in this Fund
than in the International Growth Equity Fund, it is
likely to experience more price volatility.
Technology Fund seeks long-term capital appreciation
by investing principally in equity securities and
securities convertible into common stock of companies
that develop, produce or distribute products and
services related to advances in technology.
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
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and pari passu with other senior, unsecured obligations of the bank. Bank notes
are classified as "other borrowings" on a bank's balance sheet, while deposit
notes and certificates of deposit are classified as deposits. Bank notes are not
insured by the Federal Deposit Insurance Corporation or any other insurer.
Deposit notes are insured by the Federal Deposit Insurance Corporation only to
the extent of $100,000 per depositor per bank.
A 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.
GUARANTEED INVESTMENT CONTRACTS. A Guaranteed Investment Contract
("GIC") is normally a general obligation of the issuing insurance company and
not a separate account. The purchase price paid for a GIC becomes part of the
general assets of the insurance company, and the contract is paid from the
company's general assets. The Money Market Fund and Fixed Income Fund will only
purchase GICs from insurance companies which, at the time of purchase, have
assets of $1 billion or more and meet quality and credit standards established
by The Northern Trust Company ("Northern Trust") pursuant to guidelines approved
by the Board of Trustees. Generally, GICs are not assignable or transferable
without the permission of the issuing insurance companies, and an active
secondary market in GICs does not currently exist. Therefore, GICs will normally
be considered illiquid investments, and will be acquired subject to the
limitation on illiquid investments.
REPURCHASE AGREEMENTS. Each Fund, other than the U.S. Government Select
Money Market 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
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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 a Fund to possible loss
because of adverse market action or delay in connection with the disposition of
the underlying obligations.
REVERSE REPURCHASE AGREEMENTS. A 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 a Fund may decline below the
repurchase price. A Fund will pay interest on amounts obtained pursuant to a
reverse repurchase agreement. While reverse repurchase agreements are
outstanding, a 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 Funds 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 a Fund can recover payment of principal as specified in the instrument.
Variable rate U.S. Government obligations held by the Funds, 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 a 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. Each 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
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the securities will be delivered and paid for (the settlement date) are fixed at
the time the transaction is negotiated. When-issued purchases and forward
commitment transactions are normally negotiated directly with the other party.
A 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, a Fund may dispose
of or negotiate a commitment after entering into it. A Fund also may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date.
When a Fund purchases securities on a when-issued, delayed-delivery or
forward commitment basis, the Fund's custodian (or subcustodian) 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.
UNITED STATES GOVERNMENT OBLIGATIONS. Examples of the types of U.S.
Government obligations that may be acquired by the Funds 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. A 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.
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STRIPPED GOVERNMENT OBLIGATIONS. Within the past several years, the
Treasury Department has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and principal payments on Treasury securities through the
Federal Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." The Funds may purchase
securities registered in the STRIPS program. Under the STRIPS program, the Funds
will be able to have their 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 Funds, other than the U.S. Government Select Money
Market 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 a Fund in these securities will not
exceed 5% of the value of the Fund's total assets.
The Prospectus discusses other types of stripped securities that may be
purchased by the Funds, including stripped mortgage-backed securities.
ASSET-BACKED SECURITIES. To the extent described in the Prospectus, the
Funds 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
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effect "passing through" monthly payments made by the individual borrowers on
the assets that underlie the securities, net of any fees paid to the issuer or
guarantor of the securities. The average life of asset-backed securities varies
with the maturities of the underlying instruments, and the average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities as a
result of mortgage prepayments. For this and other reasons, an asset-backed
security's stated maturity may be shortened, and the security's total return may
be difficult to predict precisely. Asset-backed securities acquired by the Funds
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.
MUNICIPAL INSTRUMENTS. Opinions relating to the validity of Municipal
Instruments (including California Municipal Instruments) and to the exemption of
interest thereon from regular federal
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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 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 adversely affect the availability of
Municipal Instruments for investment by the Intermediate Tax-Exempt, Tax-Exempt,
California Municipal Money Market and Municipal Money Market Funds and the
Funds' liquidity and value. In such an event the Board of Trustees would
reevaluate the Funds' investment objectives and policies and consider changes in
their structure or possible dissolution.
Certain of the Municipal Instruments held by a 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. A
Fund may, from time to time, invest more than 25% of its assets in Municipal
Instruments covered by insurance policies.
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Interest earned by the Intermediate Tax-Exempt Fund or Tax-Exempt 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 Tax-Exempt Funds 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 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 California Municipal Money Market, Municipal
Money Market, Intermediate Tax-Exempt and Tax-Exempt Funds may enter into
standby commitments with respect to Municipal Instruments held by them. Under a
standby commitment, a dealer agrees to purchase at a 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 a 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 Funds expect that standby commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Funds 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 a 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 Funds intend to enter into standby commitments only with dealers,
banks and broker-dealers which, in Northern Trust's opinion, present minimal
credit risks. The Funds will acquire standby commitments solely to facilitate
portfolio liquidity and do
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<PAGE> 17
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 which will continue to be valued in accordance
with the amortized cost method. The actual standby commitment will be valued at
zero in determining net asset value. Accordingly, where a 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.
WARRANTS. The Income Equity, Growth Equity, Select Equity, Small Cap
Growth, International Growth Equity, International Select Equity and Technology
Funds may purchase warrants and similar rights, which are privileges issued by
corporations enabling the owners to subscribe to and purchase a specified number
of shares of the corporation at a specified price during a specified period of
time. The purchase of warrants involves the risk that a Fund could lose the
purchase value of a warrant if the right to subscribe to additional shares is
not exercised prior to the warrant's expiration. Also, the purchase of warrants
involves the risk that the effective price paid for the warrant added to the
subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security. A Fund will not invest more than 5% of its
total assets, taken at market value, in warrants, or more than 2% of its total
assets, taken at market value, in warrants not listed on the New York or
American Stock Exchanges or a major foreign exchange. Warrants acquired by a
Fund in shares or attached to other securities are not subject to this
restriction. The Money Market Funds and the U.S. Government, Fixed Income,
Intermediate Tax-Exempt, Tax-Exempt and International Fixed Income Funds do not
intend to invest in warrants.
FOREIGN CURRENCY TRANSACTIONS. In order to protect against a possible
loss on investments resulting from a decline or appreciation in the value of a
particular foreign currency against the U.S. dollar or another foreign currency
or for other reasons, the Fixed Income, International Fixed Income, Income
Equity, Growth Equity, Select Equity, Small Cap Growth, International Growth
Equity, International Select Equity and Technology Funds are authorized to enter
into forward currency exchange contracts. These contracts involve an obligation
to purchase or sell a specified currency at a future date at a price set at the
time of the contract. Forward currency contracts do not eliminate fluctuations
in the values of portfolio securities but rather may allow a Fund to establish a
rate of exchange for a future point in time.
A Fund may enter into forward foreign currency exchange contracts in
several circumstances. When entering into a contract for the purchase or sale of
a security, a Fund may enter into a
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<PAGE> 18
contract for the amount of the purchase or sale price to protect against
variations, between the date the security is purchased or sold and the date on
which payment is made or received, in the value of the foreign currency relative
to the U.S. dollar or other foreign currency.
When Northern Trust anticipates that a particular foreign currency may
decline substantially relative to the U.S. dollar or other leading currencies,
in order to reduce risk, a Fund may enter into a forward contract to sell, for a
fixed amount, the amount of foreign currency approximating the value of some or
all of the Fund's securities denominated in such foreign currency. Similarly,
when the securities held by a Fund create a short position in a foreign
currency, a Fund may enter into a forward contract to buy, for a fixed amount,
an amount of foreign currency approximating the short position. With respect to
any forward foreign currency contract, it will not generally be possible to
match precisely the amount covered by that contract and the value of the
securities involved due to the changes in the values of such securities
resulting from market movements between the date the forward contract is entered
into and the date it matures. While forward contracts may offer protection from
losses resulting from declines or appreciation in the value of a particular
foreign currency, they also limit potential gains which might result from
changes in the value of such currency. A Fund will also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars. In addition, Northern Trust may purchase or
sell forward foreign currency exchange contracts for the International Fixed
Income Fund, International Growth Equity Fund and International Select Equity
Fund (collectively, the "International Funds") to seek to increase total return
when Northern Trust anticipates that the foreign currency will appreciate or
depreciate in value, but securities denominated in that currency do not in
Northern Trust's view present attractive investment opportunities and are not
held by a Fund.
A separate account consisting of cash, U.S. Government securities or
other liquid high grade debt obligations, equal to the amount of a Fund's assets
that could be required to consummate forward contracts will be established with
the Fund's Custodian except to the extent the contracts are otherwise "covered."
For the purpose of determining the adequacy of the securities in the account,
the deposited securities will be valued at market or fair value. If the market
or fair value of such securities declines, additional cash or securities will be
placed in the account daily so that the value of the account will equal the
amount of such commitments by the Fund. A forward contract to sell a foreign
currency is "covered" if a Fund owns the currency (or securities denominated in
the currency) underlying the contract, or holds a forward contract (or call
option) permitting the Fund to buy the same currency at a price no higher than
the Fund's price to sell the currency. A forward contract to buy a foreign
currency is
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<PAGE> 19
"covered" if a Fund holds a forward contract (or put option) permitting the Fund
to sell the same currency at a price as high as or higher than the Fund's price
to buy the currency.
OPTIONS. Each Non-Money Market 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 or (in the case of the International Fixed Income Fund) the yield
differential between two securities ("yield curve options"), 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. 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 Funds will write call options only if they are "covered." In the
case of a call option on a security or currency, the option is "covered" if a
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 a
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 a 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
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(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 Funds will write put options only if they are "secured" by liquid
assets maintained in a segregated account by the Funds' custodian in an amount
not less than the exercise price of the option at all times during the option
period.
With respect to yield curve options, a call (or put) option is covered
if the International Fixed Income Fund holds another call (or put) option on the
spread between the same two securities and maintains in a segregated account
with its custodian cash or cash equivalents sufficient to cover the Fund's net
liability under the two options. Therefore, the Fund's liability for such a
covered option is generally limited to the difference between the amount of the
Fund's liability under the option written by the Fund less the value of the
option held by the Fund. Yield curve options may also be covered in such other
manner as may be in accordance with the requirements of the counterparty with
which the option is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter and because they have been only recently
introduced, established trading markets for these securities have not yet
developed.
A 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 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.
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<PAGE> 21
When a Fund purchases an option, the premium paid by it is recorded as
an asset of the Fund. When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by a 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 a Fund expires unexercised the Fund realizes a loss equal to the
premium paid. If a 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 a Fund expires on the
stipulated expiration date or if a 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 a 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 trades on that Exchange would continue to be
exercisable in accordance with their terms.
FUTURES CONTRACTS AND RELATED OPTIONS. The Funds (other than the Money
Market Funds) may purchase and sell futures contracts and may purchase and sell
call and put options on futures contracts.
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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 a Fund may consist of cash, securities issued or guaranteed by the U.S.
Government or its agencies or (except for the U.S. Government Money Market Fund,
U.S. Government Select Money Market Fund and U.S. Government Fund) irrevocable
bank letters of credit (or any combination thereof). The borrower of securities
will be required to maintain the market value of the collateral at not less than
the market value of the loaned securities, and such value will be monitored on a
daily basis. When a 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 a Fund if a material event
affecting the investment is to occur.
INTEREST RATE AND CURRENCY SWAPS. The U.S. Government, Fixed Income,
Intermediate Tax-Exempt, Tax-Exempt, International Fixed Income and Income
Equity Funds may enter into interest rate swaps for hedging purposes and not for
speculation. A Fund will typically use interest rate swaps to preserve a return
on a
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<PAGE> 23
particular investment or portion of its portfolio or to shorten the effective
duration of its portfolio investments. Interest rate swaps involve the exchange
by a 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 International Funds may also enter into currency swaps, which involve the
exchange of the rights of a Fund and another party to make or receive payments
in specific currencies.
A Fund will only enter into interest rate swaps on a net basis, i.e.
the two payment streams are netted out, with a Fund receiving or paying, as the
case may be, only the net amount of the two payments. In contrast, currency
swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency. Inasmuch as
these transactions are entered into for good faith hedging purposes, the Funds
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 Funds' borrowing
restrictions.
The net amount of the excess, if any, of the Funds' obligations over
their 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 Funds'
custodian.
A Fund will not enter into a currency or 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 ("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,
a 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.
CONVERTIBLE SECURITIES. Convertible securities entitle the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock
until the convertible securities mature or are redeemed, converted or exchanged.
Prior to conversion, convertible securities have characteristics similar to
ordinary debt securities in that they normally provide a stable stream of income
with generally higher yields than those of common stock of the same or similar
issuers. Convertible securities rank senior to
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<PAGE> 24
common stock in a corporation's capital structure and therefore generally entail
less risk than the corporation's common stock, although the extent to which such
risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security.
In selecting convertible securities for the Fixed Income, Income
Equity, Growth Equity, Select Equity, Small Cap Growth, International Growth
Equity, International Select Equity, International Fixed Income and Technology
Funds, Northern Trust will consider, among other factors, its evaluation of the
creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the securities and the underlying common stocks; the prices of the securities
relative to other comparable securities and to the underlying common stocks;
whether the securities are entitled to the benefits of sinking funds or other
protective conditions; diversification of the Fund's portfolio as to issuers;
and whether the securities are rated by a rating agency and, if so, the ratings
assigned.
The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
Capital appreciation for a Fund may result from an improvement in the
credit standing of an issuer whose securities are held in the Fund or from a
general lowering of interest rates, or a combination of both. Conversely, a
reduction in the credit standing of an issuer whose securities are held by a
Fund or a general increase in interest rates may be expected to result in
capital depreciation to the Fund.
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<PAGE> 25
In general, investments in non-investment grade convertible securities
are subject to a significant risk of a change in the credit rating or financial
condition of the issuing entity. Investments in convertible securities of medium
or lower quality are also likely to be subject to greater market fluctuation and
to greater risk of loss of income and principal due to default than investments
of higher rated fixed-income securities. Such lower-rated securities generally
tend to reflect short-term corporate and market developments to a greater extent
than higher rated securities, which react more to fluctuations in the general
level of interest rates. A Fund will generally reduce risk to the investor by
diversification, credit analysis and attention to current developments in trends
of both the economy and financial markets. However, while diversification
reduces the effect on a Fund of any single investment, it does not reduce the
overall risk of investing in lower rated securities.
RISKS RELATED TO LOWER-RATED SECURITIES. While any investment carries
some risk, certain risks associated with lower-rated securities are different
than those for investment-grade securities. The risk of loss through default is
greater because lower-rated securities are usually unsecured and are often
subordinate to an issuer's other obligations. Additionally, the issuers of these
securities frequently have high debt levels and are thus more sensitive to
difficult economic conditions, individual corporate developments and rising
interest rates. Consequently, the market price of these securities may be quite
volatile and may result in wider fluctuations of a Fund's net asset value per
share.
There remains some uncertainty about the performance level of the
market for lower-rated securities under adverse market and economic
environments. An economic downturn or increase in interest rates could have a
negative impact on both the markets for lower-rated securities (resulting in a
greater number of bond defaults) and the value of lower-rated securities held in
the portfolio of investments.
The economy and interest rates can affect lower-rated securities
differently than other securities. For example, the prices of lower-rated
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher-rated investments. In
addition, during an economic downturn or period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.
If an issuer of a security defaults, a Fund may incur additional
expenses to seek recovery. In addition, periods of economic uncertainty would
likely result in increased volatility
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<PAGE> 26
for the market prices of lower-rated securities as well as a Fund's net asset
value. In general, both the prices and yields of lower-rated securities will
fluctuate.
In certain circumstances it may be difficult to determine a security's
fair value due to a lack of reliable objective information. Such instances occur
where there is not an established secondary market for the security or the
security is lightly traded. As a result, a Fund's valuation of a security and
the price it is actually able to obtain when it sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower-rated
convertible securities held by a Fund, especially in a thinly traded market.
Illiquid or restricted securities held by a Fund may involve special
registration responsibilities, liabilities and costs, and could involve other
liquidity and valuation difficulties.
Current laws, such as those requiring federally-insured savings and
loan associations to remove investments in lower-rated securities from their
portfolios, as well as other pending proposals, may have a material impact on
the market for lower-rated securities.
The rating assigned by a rating agency evaluates the safety of a
lower-rated security's principal and interest payments, but does not address
market value risk. Because the ratings of the rating agencies may not always
reflect current conditions and events, in addition to using recognized rating
agencies and other sources, Northern Trust performs its own analysis of the
issuers whose lower-rated securities a Fund holds. Because of this, a Fund's
performance may depend more on its investment adviser's credit analysis than is
the case of mutual funds investing in higher-rated securities.
INVESTMENT COMPANIES. Each 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: (a) not more
than 5% of the value of the Fund's total assets will be invested in the
securities of any one investment company; (b) not more than 10% of the value of
its total assets will be invested in the aggregate in securities of investment
companies as a group; and (c) not more than 3% of the outstanding voting stock
of any one investment company will be owned by the Fund or by Northern Funds as
a whole.
YIELDS AND RATINGS. The yields on certain obligations, including the
money market instruments in which the Funds invest, are dependent on a variety
of factors, including general economic conditions, conditions in the particular
market for the obligation,
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<PAGE> 27
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.
TECHNOLOGY FUND - INDUSTRY CONCENTRATION. The Technology Fund will,
under normal market conditions, invest at least 65% of the value of its total
assets in securities of companies principally engaged in technology business
activities. An issuer is considered principally engaged in technology business
activities if such issuer is listed on the the Hambrecht and Quist Technology
Index, the SoundView Technology Index, the technology grouping of the S&P 500 or
any other comparable index.
The SoundView Technology Index includes approximately 111 companies
from the design, automation, communications, mainframe computer, microcomputer,
minicomputer, peripherals, semiconductor, software and related services
industries. The Hambrecht & Quist Technology Index (the "H&Q Index") is
comprised of publicly-traded stocks of approximately 200 technology companies.
The H&Q Index includes companies in the electronics, medical and related
technologies industries and is a market capitalization weighted index. Changes
in the indices may occur when SoundView or H&Q choose to modify their indices or
as mergers, acquisitions and failures dictate. Such changes may happen with some
regularity owing to the fast-changing nature of the technology industries.
CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio turnover rate for
the Funds 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. For the fiscal year ended
March 31, 1995, the turnover rates with respect to the 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 Equity Funds were 42.29%, 55.27%, 78.87%,
54.94%, 43.24%, 45.68%, 82.90%, 48.88%, 82.46%, 158.31% and 97.69%,
respectively. The Technology Fund had not commenced operations during the fiscal
year ended March 31, 1995.
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<PAGE> 28
MISCELLANEOUS. The Funds will not normally engage in the trading of
securities for short-term profits. However, the Funds are 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 Funds will not engage in selling securities short.
The Funds may, however, make short sales against the box although the Funds have
no current intention to do so in the coming year. "Selling short against the
box" involves selling a security that a Fund owns for delivery at a specified
date in the future.
SPECIAL RISK FACTORS RELATING TO CALIFORNIA MUNICIPAL INSTRUMENTS
The following information constitutes only a brief summary, does not purport to
be a complete description and is based on information drawn from official
statements and prospectuses relating to securities offerings of the State of
California and various local agencies in California, available as of the date of
the Prospectus and this Additional Statement. While Northern Funds has not
independently verified such information, it has no reason to believe that such
information is not correct in all material respects.
ECONOMIC FACTORS. The Governor's 1993-1994 Budget, introduced on
January 8, 1993, proposed general fund expenditures of $37.3 billion, with
projected revenues of $39.9 billion. To balance the budget in the face of
declining revenues, the Governor proposed a series of revenue shifts from local
government, reliance on increased federal aid, and reductions in state spending.
The Department of Finance of the State of California's May
Revision of General Fund Revenues and Expenditures (the "May Revision"),
released on May 20, 1993, projected the State would have an accumulated deficit
of about $2.75 billion by June 30, 1993, essentially unchanged from the prior
year. The Governor proposed to eliminate this deficit over an 18-month period.
Unlike previous years, the Governor's Budget and May Revision did not calculate
a "gap" to be closed, but rather set forth revenue and expenditure forecasts and
proposals designed to produce a balanced budget.
The 1993-1994 budget act (the "1993-94 Budget Act") was signed
by the Governor on June 30, 1993, along with implementing legislation. The
Governor vetoed about $71 million in spending.
The 1993-94 Budget Act was predicated on general fund revenues
and transfers estimated at $40.6 billion, $400 million below 1992-93 (and the
second consecutive year of actual decline). The principal reasons for declining
revenue were the continued weak
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economy and the expiration (or repeal) of three fiscal steps taken in 1991--a
half cent temporary sales tax, a deferral of operating loss carryforwards, and
repeal by initiative of a sales tax on candy and snack foods.
The 1993-94 Budget Act also assumed special fund revenues of
$11.9 billion, an increase of 2.9 percent over 1992-93.
The 1993-94 Budget Act includes general fund expenditures of
$38.5 billion (a 6.3 percent reduction from projected 1992-93 expenditures of
$41.1 billion), in order to keep a balanced budget within the available
revenues. The 1993-94 Budget Act also included special fund expenditures of
$12.1 billion, a 4.2 percent increase. The 1993-94 Budget Act reflected the
following major adjustments:
(1) Changes in local government financing to shift about $2.6
billion in property taxes from cities, counties, special districts and
redevelopment agencies to school and community college districts, thereby
reducing general fund support by an equal amount. About $2.5 billion is
permanent, reflecting termination of the State's "bailout" of local governments
following the property tax cuts of Proposition 13 in 1978 (See "Constitutional,
Legislative and Other Factors" below).
The property tax revenue losses for cities and counties were
offset in part by additional sales tax revenues and mandate relief.
(2) The 1993-94 Budget Act projected K-12 Proposition 98
funding on a cash basis at the same per-pupil level as 1992-93 by providing
schools a $609 million loan payable from future years' Proposition 98 funds.
(3) The 1993-94 Budget Act assumed receipt of about $692
million of aid to the State from the federal government to offset health and
welfare costs associated with foreign immigrants living in the State, which
would reduce a like amount of General Fund expenditures. About $411 million of
this amount was one-time funding. Congress ultimately appropriated only $450
million.
(4) Reductions of $600 million in health and welfare programs
and $400 million in support for higher education (partly offset by fee increases
at all three units of higher education) and various miscellaneous cuts
(totalling approximately $150 million) in State government services in many
agencies, up to 15 percent.
(5) A 2-year suspension of the renters' tax credit
($390 million expenditure reduction in 1993-94).
(6) Miscellaneous one-time items, including deferral of
payment to the Public Employees Retirement Fund ($339 million) and
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a change in accounting for debt service from accrual to cash basis, saving $107
million.
The 1993-94 Budget Act contained no general fund tax/revenue
increases other than a two year suspension of the renters' tax credit. The
1993-1994 Budget Act suspended the 4 percent automatic budget reduction trigger,
as was done in 1992-1993, so cuts could be focused.
Administration reports during the course of the 1993-1994
Fiscal Year indicated that while economic recovery appeared to have started in
the second half of the fiscal year, recessionary conditions continued longer
than had been anticipated when the 1993-1994 Budget Act was adopted. Overall,
revenues for the 1993-1994 Fiscal Year were about $800 million lower than
original projections, and expenditures were about $780 million higher, primarily
because of higher health and welfare caseloads, lower property taxes which
required greater State support for K-14 education to make up the shortfall, and
lower than anticipated federal government payments for immigration-related
costs. The reports in May and June, 1994, indicated that revenues in the second
half of the 1993-1994 Fiscal Year have been very close to the projections made
in the Governor's Budget of January 10, 1994, which is consistent with a slow
turnaround in the economy.
The Department of Finance's July 1994 Bulletin, including the
final June receipts, reported that June revenues were $114 million (2.5 percent)
above projection, with final end-of-year results at $377 million (about 1
percent) above the May Revision projections. Part of this result was due to
end-of-year adjustments and reconciliations. Personal income tax and sales tax
continued to track projections very well. The largest factor in the higher than
anticipated revenues was from bank and corporation taxes, which were $140
million (18.4 percent) above projection in June. While the higher June receipts
are reflected in the actual 1993-94 Fiscal Year cash flow results, and help the
starting cash balance for the 1994-95 Fiscal Year, the Department of Finance has
not adjusted any of its revenue projections for the 1994-95 or 1995-96 Fiscal
Years.
During the 1993-94 Fiscal Year, the State implemented the
deficit retirement plan, which was part of the 1993-94 Budget Act, by issuing
$1.2 billion of revenue anticipation warrants in February 1994 maturing December
21, 1994. This borrowing reduced the cash deficit at the end of the 1993-94
Fiscal Year. Nevertheless, because of the $1.5 billion variance from the
original 1993-94 Budget Act assumptions, the General Fund ended the fiscal year
at June 30, 1994 carrying forward an accumulated deficit of approximately $2
billion.
Because of the revenue shortfall and the State's reduced
internal borrowable cash resources, in addition to the $1.2 billion
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of revenue anticipation warrants issued as part of the deficit retirement plan,
the State issued an additional $2.0 billion of revenue anticipation warrants,
maturing July 26, 1994, which were needed to fund the State's obligations and
expenses through the end of the 1993-94 Fiscal Year.
On January 17, 1994, a major earthquake measuring an estimated
6.8 on the Richter Scale struck Los Angeles. Significant property damage to
private and public facilities occurred in a four-county area including northern
Los Angeles County, Ventura County, and parts of Orange and San Bernardino
Counties, which were declared as State and federal disaster areas by January 18.
Current estimates of total property damage (private and public) are in the range
of $20 billion, but these estimates are still subject to change.
Despite such damage, on the whole, the vast majority of
structures in the areas, including large manufacturing and commercial buildings
and all modern high-rise offices, survived the earthquake with minimal or no
damage, validating the cumulative effect of strict building codes and thorough
preparation for such an emergency by the State and local agencies.
Damage to state-owned facilities included transportation
corridors and facilities such as Interstate Highways 5 and 10 and State Highways
14, 118 and 210. Major highways have now been reopened. The campus of California
State University at Northridge (very near the epicenter) suffered an estimated
$350 million damage, resulting in temporary closure of the campus. It has
reopened using borrowed facilities elsewhere in the area and many temporary
structures. There was also some damage to the University of California at Los
Angeles and to an office building in Van Nuys (now open after a temporary
closure). Overall, except for the temporary road and bridge closures, and
CSU-Northridge, the earthquake did not and is not expected to significantly
affect State government operations.
The State in conjunction with the federal government is
committed to providing assistance to local governments, individuals and
businesses suffering damage as a result of the earthquake, as well as to provide
for the repair and replacement of State-owned facilities. The federal government
will provide substantial earthquake assistance.
The President immediately allocated some available disaster
funds, and Congress has approved additional funds for a total of at least $9.5
billion of federal funds for earthquake relief, including assistance to
homeowners and small businesses, and costs for repair of damaged public
facilities. The Governor originally proposed that the State will have to pay
about $1.9 billion for earthquake relief costs, including a 10 percent match to
some of the federal funds, and costs for some programs not
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covered by the federal aid. The Governor proposed to cover $1.05 billion of
these costs from a general obligation bond issue which was on the June 1994
ballot, but it was not approved by the voters. The Governor subsequently
announced that the State's share for transportation projects would come from
existing Department of Transportation funds (thereby delaying other,
non-earthquake related projects), that the State's share for certain other costs
(including local school building repairs) would come from reallocating existing
bond funds, and that a proposed program for homeowner and small business aid
supplemental to federal aid would have to be abandoned. Some other costs will be
borrowed from the federal government in a manner similar to that used by the
State of Florida after Hurricane Andrew; pursuant to Senate Bill 2383, repayment
will have to be addressed in 1995-96 or beyond. The 1995-96 Governor's Budget
includes $60 million as the first repayment of an estimated $121.4 million in
loans prior to June 30, 1995.
The 1994-95 Fiscal Year represents the fourth consecutive year
the Governor and Legislature were faced with a very difficult budget environment
to produce a balanced budget. Many program cuts and budgetary adjustments have
already been made in the last three years. The Governor's Budget proposal, as
updated in May and June, 1994, recognized that the accumulated deficit could not
be repaid in one year, and proposed a two-year solution. The budget proposal
sets forth revenue and expenditure forecasts and revenue and expenditure
proposals which result in operating surpluses for the budget for both 1994-95
and 1995-96, and lead to the elimination of the accumulated budget deficit,
estimated at about $1.8 billion at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8,
1994, projects revenues and transfers of $41.9 billion, $2.1 billion higher than
revenues in 1993-94. This reflects the Administration's forecast of an improving
economy. Also included in this figure is a projected receipt of about $360
million from the federal government to reimburse the State's cost of
incarcerating undocumented immigrants. The State will not know how much the
federal government will actually provide until the Federal FY 1995 Budget is
completed. Completion of the federal budget is expected by October 1994. The
Legislature took no action on a proposal in the January 1994-95 Governor's
Budget to undertake an expansion of the transfer of certain programs to
counties, which would also have transferred to counties 0.5% of the State's
current sales tax.
The 1994-95 Budget Act projects Special Fund revenues of $12.1
billion, a decrease of 2.4% from 1993-94 estimated revenues.
The 1994-95 Budget Act projects General Fund expenditures
of $40.9 billion, an increase of $1.6 billion over 1993-94. The
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1994-95 Budget Act also projects Special Fund expenditures of $12.3 billion, a
4.7% decrease from 1993-94 estimated expenditures. The principal features of the
1994-95 Budget Act were the following:
1. Receipt of additional federal aid in 1994-95 of about $400
million for costs of refugee assistance and medical care for
undocumented immigrants, thereby offsetting a similar General Fund
cost. The State will not know how much of these funds it will receive
until the Federal FY 1995 Budget is passed.
2. Reductions of approximately $1.1 billion in health and
welfare costs. A 2.3% reduction in Aid to Family with Dependent
Children payments (equal to about $56 million for the entire fiscal
year) has been suspended by court order.
3. A General Fund increase of approximately $38 million in
support for the University of California and $65 million for California
State University. It is anticipated that student fees for both the
University of California and the California State University will
increase up to 10%.
4. Proposition 98 funding for K-14 schools is increased by
$526 million from 1993-94 levels, representing an increase for
enrollment growth and inflation. Consistent with previous budget
agreements, Proposition 98 funding provides approximately $4,217 per
student for K-12 schools, equal to the level in the past three years.
5. Legislation enacted with the Budget clarifies laws passed
in 1992 and 1993 which require counties and other local agencies to
transfer funds to local school districts, thereby reducing State aid.
Some counties had implemented a method of making such transfers which
provided less money for schools if there were redevelopment agency
projects. The new legislation bans this method of transfer. If all
counties had implemented this method, General Fund aid to K-12 schools
would have been $300 million higher in each of the 1994-95 and 1995-96
Fiscal Years.
6. The 1994-95 Budget Act provides funding for anticipated
growth in the State's prison inmate population, including provisions
for implementing recent legislation (the so-called "Three Strikes" law)
which requires mandatory life prison terms for certain third-time
felony offenders.
7. Additional miscellaneous cuts ($500 million) and
fund transfers ($255 million) totalling in the aggregate
approximately $755 million.
The 1994-95 Budget Act contains no tax increases. Under
legislation enacted for the 1993-94 Budget, the renters' tax credit
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was suspended for two years (1993 and 1994). A ballot proposition to permanently
restore the renters' tax credit after this year failed at the June, 1994
election. The Legislature enacted a further one-year suspension of the renters'
tax credit, for 1995, saving about $390 million in the 1995-96 Fiscal Year.
The 1994-95 Budget assumed that the State will use a cash flow
borrowing program in 1994-95 which combines one-year notes and two-year
warrants, which have now been issued. Issuance of warrants allows the State to
defer repayment of approximately $1.0 billion of its accumulated budget deficit
into the 1995-96 Fiscal Year.
The State's cash flow management plan for the 1994-95 fiscal
year included the issuance of $4.0 billion of revenue anticipation warrants on
July 26, 1994, to mature on April 25, 1996, as part of a two-year plan to retire
the accumulated State budget deficit.
Because preparation of cash flow estimates for the 1995-96
Fiscal Year necessarily entails greater risks of variance from assumptions, and
because the Governor's two-year budget plan assumes receipt of a large amount of
federal aid in the 1995-96 Fiscal Year for immigration-related costs which is
uncertain, the Legislature enacted a backup budget adjustment mechanism to
mitigate possible deviations from projected revenues, expenditures or internal
borrowable resources which might reduce available cash resources during the
two-year plan, so as to assure repayment of the warrants.
Pursuant to Section 12467 of the California Government Code,
enacted by Chapter 135, Statutes of 1994 (the "Budget Adjustment Law"), the
State Controller was required to make a report by November 15, 1994 on whether
the projected cash resources for the General Fund as of June 30, 1995 will
decrease more than $430 million from the amount projected by the State in its
official statement in July, 1994 for the sale of $4,000,000,000 of Revenue
Anticipation Warrants. On November 15, 1994, the State Controller issued the
report on the State's cash position required by the Budget Adjustment Law. The
report indicated that the cash position of the General Fund on June 30, 1995
would be $581 million better than was estimated in the July, 1994 cash flow
projections and therefore, no budget adjustment procedures will be invoked for
the 1994-95 Fiscal Year. As explained earlier, the Law would only be implemented
if the State Controller estimated that borrowable resources on June 30, 1995
would be at least $430 million lower than projected.
The State Controller's report identified a number of factors
which have led to the improved cash position of the State. Estimated revenues
and transfers for the 1994-95 Fiscal Year other than federal reimbursement for
immigration costs were up about $650
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million. The largest portion of this was in higher bank and corporation tax
receipts, but all major tax sources were above original projections. However,
most of the federal immigration aid revenues projected in connection with the
1994-95 Budget Act and in the July, 1994 cash flows will not be received, as
indicated above, leaving a net increase in revenues of $322 million.
On the expenditure side, the State Controller reported that
estimated reduced caseload growth in health and welfare programs, reduced school
enrollment growth, and an accounting adjustment reducing a transfer from the
General Fund to the Special Fund for Economic Uncertainties resulted in overall
General Fund expenditure reductions (again before adjusting for federal aid) of
$672 million. However, the July, 1994 cash flows projected that General Fund
health and welfare and education expenditures would be offset by the anticipated
receipt of $407 million in federal aid for illegal immigrant costs. The State
Controller now estimates that none of these funds will be received, so the net
reduction in General Fund expenditures is $265 million.
Finally, the State Controller indicated that a review of
balances in special funds available for internal borrowing resulted in an
estimated reduction of such borrowable resources of $6 million. The combination
of these factors results in the estimated improvement of the General Fund's cash
position of $581 million. The State Controller's revised cash flow projections
for 1994-95 have allocated this improvement to two line items: an increase from
$0 to $427 million in the estimated ending cash balance of the General Fund on
June 30, 1995, and an increase in unused borrowable resources of $154 million.
The State Controller's report indicated that there was no
anticipated cash impact in the 1994-95 Fiscal Year for recent initiatives on
"three strikes" criminal penalties and illegal immigration which were approved
by voters on November 8, 1994. At a hearing before a committee of the
Legislature on November 15, 1994, both the Legislative Analyst and the
Department of Finance concurred in the reasonableness of the State Controller's
report. (The Legislative Analyst had issued a preliminary analysis on November
1, 1994 which reached a conclusion very close to that of the State Controller.)
The State Controller's report makes no projections about whether the Law may
have to be implemented in 1995-96. However, both the State Controller and the
Legislative Analyst in the November 15 hearing noted that the July, 1994 cash
flows for the 1995-96 Fiscal Year place continued reliance on large amounts of
federal assistance for immigration costs, which did not materialize this year,
indicating significant budget pressures for next year. The Department of Finance
indicated that the budgetary issues identified in the hearing would be addressed
in the Governor's Budget proposal for the 1995-96 Fiscal Year, which will be
released in early January, 1995.
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The 1995-96 Governor's Budget, discussed below, contains a
reforecast of revenues and expenditures for the 1994-95 Fiscal Year. The
Department of Finance Bulletins for February and March 1995 report that combined
General Fund revenues for February, 1995 were about $356 million below forecast,
but combined revenues for January and February were only about $82 million (or
0.3 percent) below the 1995-96 Governor's Budget forecast. The largest component
of the decrease is attributable to personal income tax receipts, which were
about $131 million (or 1.1 percent) below the two months' forecast. This
decrease in personal income tax receipts appears to be largely attributable to
fourth quarter 1994 activity, probably in the anticipation of tax reform, with
some taxpayers shifting income into 1995 to the extent possible. The withholding
component comprised $77 million of this shortfall, but the Department of Finance
does not yet view this as significant. Additionally, sales and use tax receipts
were very close to forecast for the two-month period, while bank and corporation
tax receipts were about $42 million (or 1.5 percent) below the two months'
forecast. Miscellaneous revenues were about $117 million (or 6.2 percent) above
forecast for the two months, but the Department of Finance is not yet able to
determine whether this gain is real, or is instead attributable to cash flow
factors.
Initial analysis of the Federal FY 1995 budget by the
Department of Finance indicates that about $98 million was appropriated for
California to offset costs of incarceration of undocumented and refugee
immigrants, less than the $356 million which was assumed in the State's 1994-95
Budget Act. Because of timing considerations in applying for these federal
funds, the Department estimates that about $33 million of these funds will be
received during the State's 1994-95 Fiscal Year, with the balance received in
the following fiscal year. It does not appear that the federal budget contains
any of the additional $400 million in funding for refugee assistance and health
costs which were also assumed in the 1994-95 Budget Act, but the Department
expects the State to continue its efforts to obtain some or all of these federal
funds.
On January 10, 1995, the Governor presented his 1995-96 Fiscal
Year Budget Proposal (the "Proposed Budget"). The Proposed Budget estimates
General Fund revenues and transfers of $42.5 billion (an increase of 0.2 percent
over 1994-95). This nominal increase from the 1994-95 Fiscal Year reflects the
Governor's realignment proposal and the first year of his tax cut proposal (see
principal features of the Proposed Budget below for further discussions).
Without these two proposals, General Fund revenues would be projected at
approximately $43.8 billion, or an increase of 3.3 percent over 1994-95.
Expenditures are estimated at $41.7 billion (essentially unchanged from
1994-95). Special Fund revenues are estimated at $13.5 billion (10.7 percent
higher than 1994-95) and Special Fund expenditures are estimated at $13.8
billion (12.2 percent higher than 1994-95). The Proposed Budget
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projects that the General Fund will end the fiscal year at June 30, 1996 with a
budget surplus in the Special Fund for Economic Uncertainties of about $92
million, or less than 1 percent of General Fund expenditures, and will have
repaid all of the accumulated budget deficits.
The following are the principal features of the Proposed
Budget:
1. The principal feature of the Proposed Budget is a proposed
15 percent cut in personal income and corporate tax rates, which would
be phased in at 5 percent per year starting in 1996. Existing personal
income tax rates, which are scheduled to drop from 11 percent top rate
to 9.3 percent in 1996, would be continued during the time the overall
tax cut takes effect. This proposal would reduce General Fund revenues
by $225 million in 1995-96, but the revenue reduction would reach $3.6
billion by 1998-99.
2. The Governor has proposed an expansion of the realignment
program between the State and counties, so that counties will take on
greater responsibility for welfare and social services, while the State
will take on increased funding of trial court costs. The proposal
includes transfer of about $1 billion of State revenues, from sales
taxes and trial court funding moneys, to counties. The net effect of
the shifts, however, is estimated to save the General Fund about $240
million.
3. The Governor proposes further cuts in health and welfare
costs totaling about $1.4 billion. Some of these cuts would require
federal legislative approval.
4. Proposition 98 funding for schools and community colleges
will increase by about $1.2 billion, reflecting strong General Fund
revenue growth. Per-pupil expenditures are projected to increase by $61
to $4,292. For the first time in several years, a cost-of-living
increase (2.2 percent) is added to the enrollment growth factor. The
Governor proposes to set aside about $514 million of the Proposition 98
funding increase to repay prior years' loans from the General Fund to
schools. As the legality of these loans is currently being challenged
in a lawsuit, the Governor proposes to set the amount aside in escrow
until the litigation is resolved.
5. The Proposed Budget includes increases in funding for the
University of California ($63 million General Fund) and the California
State University system ($3 million General Fund). The Governor has
proposed a four-year funding "company" for the higher education units
which includes both annual increases in State funding and increases in
student fees.
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6. The Proposed Budget assumes receipt of $830 million in new
federal aid for costs of undocumented and refugee immigrants, above
commitments already made by the federal government. This amount is much
less than an estimated $2.8 billion which had been included in the
Governor's pro-forma two-year plan from last summer.
The Proposed Budget contains a cash flow projection (based on
all the assumptions described above) which shows about $1 billion of unused
borrowable resources at June 30, 1996, providing this amount of "cushion" before
the budget "trigger" would have to be invoked.
However, a report issued by the Legislative Analyst in
February, 1995 notes that the Proposed Budget is subject to a number of major
risks, including receipt of the expected federal immigration aid and other
federal actions to allow health and welfare costs, and the outcome of several
lawsuits concerning previous budget actions which the State has lost at the
trial court level, and which are under appeal. This Analyst's Report also
estimates that, despite more favorable revenues, the two-year budget estimates
made in July, 1994 are about $2 billion out of balance, principally because
federal immigration aid appears likely to be much lower than previously
estimated. This shortfall is much smaller than the State has faced in recent
years, and has been addressed in the Governor's Budget.
The Director of Finance is required to include updated
cash-flow statements for the 1994-95 and 1995-96 Fiscal Years in the May
revision to the 1995-96 Fiscal Year budget proposal. By June 1, 1995, the State
Controller must concur with these updated statements or provide a revised
estimate of the cash condition of the General Fund for the 1994-95 and the
1995-96 Fiscal Years. For the 1995-96 Fiscal Year, Chapter 135 prohibits any
external borrowing as of June 30, 1996, thereby requiring the State to rely
solely on internal borrowable resources, expenditure reductions or revenue
increases to eliminate any projected cash flow shortfall.
Commencing on October 15, 1995, the State Controller will, in
conjunction with the Legislative Analyst's Office, review the estimated cash
condition of the General Fund for the 1995-96 Fiscal Year. The "1996 cash
shortfall" shall be the amount necessary to bring the balance of unused
borrowable resources on June 30, 1996 to zero. On or before December 1, 1995,
legislation must be enacted providing for sufficient General Fund expenditure
reductions, revenue increases, or both, to offset any such 1996 cash shortfall
identified by the State Controller. If such legislation is not enacted, within
five days thereafter the Director of Finance must reduce all General Fund
appropriations for the 1995-96 Fiscal Year, except the Required Appropriations,
by the percentage equal to the ratio of said 1996 cash shortfall to total
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remaining General Fund appropriations for the 1995-96 Fiscal Year, excluding the
Required Appropriations.
On December 6, 1994, Orange County, California and its
Investment Pool (the "Pool") filed for bankruptcy under Chapter 9 of the United
States Bankruptcy Code. Approximately 187 California public entities,
substantially all of which are public agencies within the County, invested funds
in the Pool. Many of the agencies have various bonds, notes or other forms of
indebtedness outstanding, in some instances the proceeds of which were invested
in the Pool. Various investment advisors were employed by the County to
restructure the Pool. Such restructuring led to the sale of substantially all of
the Pool's portfolio, resulting in losses estimated to be approximately $1.7
billion or approximately 22% of amounts deposited by the Pool investors,
including the County. It is anticipated that such losses may result in delays or
failures of the County as well as investors in the Pool to make scheduled debt
service payments. Further, the County expects substantial budget deficits to
occur in Fiscal Year 1995 with possibly similar effects upon operations of
investors in the Pool.
Investor access to monies in the Pool subsequent to the filing
was pursuant to Court order only and severely limited. On May 2, 1995, the
Bankruptcy Court approved a comprehensive settlement agreement (the "CSA")
between the County and Pool investors which, among other things, (i) established
a formula for distribution of all available cash and securities from the Pool to
the Pool investors, including the County, (ii) established formulas for
distribution among certain settling Pool investors of several tranches of new
County obligations to be payable from, and in some instances secured by, certain
designated sources of potential recoveries on Pool related claims, and (iii)
designated certain outstanding short term note obligations of the County to be
senior to or on a parity with certain of the new County obligations. By order
dated May 22, 1995, following distribution of all available cash and securities
from the Pool to the Pool investors, including the County, the Bankruptcy Court
dismissed the bankruptcy filing of the Pool based upon the Court's finding that
the Pool was not eligible for relief under Chapter 9 of the Bankruptcy Code
because it is not a municipality and it has not been specifically authorized to
file under Chapter 9 as required by the Bankruptcy Code.
Following its bankruptcy filing, the County has, with
Bankruptcy Court approval, made payments of scheduled principal and interest on
its outstanding obligations where no alternative source of payment (such as
reserve funds on deposit with indenture trustees, letters of credit, municipal
bond insurance policies or other alternative payment sources) were available.
The County has not replenished such reserve funds or reimbursed the issuers of
such letters of credit or municipal bond insurance policies. In addition, the
County ceased making set aside deposits for repayment
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of certain of its short term indebtedness. The Bankruptcy Court subsequently
ruled that the rights of the holders of such short term indebtedness to require
the set aside deposits from County revenues received following the filing were
cut off by operation of the Bankruptcy Code. In addition, the County has failed
to satisfy its obligation to accept tenders of its $110,200,000 aggregate
principal amount of Taxable Pension Obligation Bonds, Series B used to finance
County pension obligations. Interest at a rate set pursuant to the bond
documents has been timely paid on such Pension Bonds. The failure to satisfy the
contractual obligations discussed above may constitute defaults under the
documents governing such securities.
To June 30, 1995 there had been no default in payment of
scheduled interest and principal (excluding the tender payment described above)
to holders of County securities, although certain note issues were scheduled to
mature at various times thereafter and the Trust is unable to predict whether or
to what extent such notes will be timely paid by the County. On June 27, 1995,
the Bankruptcy Court approved a Stipulation and an Extension Agreement, which
was accepted by noteholders on July 7, 1995; with the following provisions: (i)
extension of maturity dates to June 30, 1996; (ii) payment of monthly interest
at a rate below contract rates; (iii) accrual of monthly interest equal to the
difference between the amount paid and the contract rate, plus a settlement
adjustment of 0.95%; (iv) waiver of post-bankruptcy interest recapture or
disallowance; (v) waiver of defenses to repayment of the note debt claims based
on California limitations on municipal indebtedness; and (vi) allowance of the
note debt claims, subject to certain reserved rights.
On June 27, 1995, the voters of Orange County rejected, by a
substantial majority of those voting, an increase of 0.50% in the sales tax
imposed throughout the County. Prior to the election, spokespersons for the
County had indicated that passage of the sales tax increase was an important
factor in the County's ability to restructure its finances in a manner that
would permit eventual payment in full of all County securities. The Trust is
unable to predict the effect of the defeat of the sales tax increase on the
ability of the County to restructure its obligations and otherwise manage its
affairs.
Both Standard & Poor's and Moody's Investors Service have
suspended or downgraded ratings on various debt securities of the County and
certain of the investors in the Pool and, following the defeat of the
proposition submitted to the voters on June 27, announced their intention to
downgrade the County's debt to default status. Such suspensions or downgradings
could affect both price and liquidity of such securities. The Trust is unable to
predict (i) the occurrence of covenant and/or payment defaults with respect to
obligations of the County and/or investors in the Pool or (ii)
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the financial impact of any such defaults or credit rating suspensions or
downgradings upon the value of such securities.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS. Certain
California constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in the adverse
effects described below.
Certain California Municipal Instruments in the Fund may be
obligations of issuers which rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a portion
of the State's general fund surplus are distributed to counties, cities and
their various taxing entities and the State assumes certain obligations
theretofore paid out of local funds. Whether and to what extent a portion of the
State's general fund will be distributed in the future to counties, cities and
their various entities, is unclear.
In 1988, California enacted legislation providing for a
water's-edge combined reporting method if an election fee was paid and other
conditions met. On October 6, 1993, California Governor Pete Wilson signed
Senate Bill 671 (Alquist) which modifies the unitary tax law by deleting the
requirements that a taxpayer electing to determine its income on a water's-edge
basis pay a fee and file a domestic disclosure spreadsheet and instead requiring
an annual information return. Significantly, the Franchise Tax Board can no
longer disregard a taxpayer's election. The Franchise Tax Board is reported to
have estimated state revenue losses from the Legislation as growing from $27
million in 1993-94 to $616 million in 1999-2000, but others, including Assembly
Speaker Willie Brown, disagree with that estimate and assert that more revenue
will be generated for California, rather than less, because of an anticipated
increase in economic activity and additional revenue generated by the incentives
in the Legislation.
Certain California Municipal Instruments in the Fund may be
obligations of issuers who rely in whole or in part on ad valorem real property
taxes as a source of revenue. On June 6, 1978, California voters approved an
amendment to the California Constitution known as Proposition 13, which added
Article XIIIA to the California Constitution. The effect of Article XIIIA is to
limit ad valorem taxes on real property and to restrict the ability of taxing
entities to increase real property tax revenues. On November 7, 1978, California
voters approved Proposition 8, and on June 3, 1986, California voters approved
Proposition 46, both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax
on real property to 1% of full cash value (as defined in Section 2), to be
collected by the counties and apportioned according to law; provided that the 1%
limitation does not apply to ad valorem taxes or special assessments to pay the
interest and
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redemption charges on (i) any indebtedness approved by the voters prior to July
1, 1978, or (ii) any bonded indebtedness for the acquisition or improvement of
real property approved on or after July 1, 1978, by two-thirds of the votes cast
by the voters voting on the proposition. Section 2 of Article XIIIA defines
"full cash value" to mean "the County Assessor's valuation of real property as
shown on the 1975/76 tax bill under 'full cash value' or, thereafter, the
appraised value of real property when purchased, newly constructed, or a change
in ownership has occurred after the 1975 assessment." The full cash value may be
adjusted annually to reflect inflation at a rate not to exceed 2% per year, or
reduction in the consumer price index or comparable local data, or reduced in
the event of declining property value caused by damage, destruction or other
factors. The California State Board of Equalization has adopted regulations,
binding on county assessors, interpreting the meaning of "change in ownership"
and "new construction" for purposes of determining full cash value of property
under Article XIIIA.
Legislation enacted by the California Legislature to implement
Article XIIIA (Statutes of 1978, Chapter 292, as amended) provides that
notwithstanding any other law, local agencies may not levy any ad valorem
property tax except to pay debt service on indebtedness approved by the voters
prior to July 1, 1978, and that each county will levy the maximum tax permitted
by Article XIIIA of $4.00 per $100 assessed valuation (based on the former
practice of using 25%, instead of 100%, of full cash value as the assessed value
for tax purposes). The legislation further provided that, for the 1978/79 fiscal
year only, the tax levied by each county was to be apportioned among all taxing
agencies within the county in proportion to their average share of taxes levied
in certain previous years. The apportionment of property taxes for fiscal years
after 1978/79 has been revised pursuant to Statutes of 1979, Chapter 282 which
provides relief funds from State moneys beginning in fiscal year 1979/80 and is
designed to provide a permanent system for sharing State taxes and budget funds
with local agencies. Under Chapter 282, cities and counties receive more of the
remaining property tax revenues collected under Proposition 13 instead of direct
State aid. School districts receive a correspondingly reduced amount of property
taxes, but receive compensation directly from the State and are given additional
relief. Chapter 282 does not affect the derivation of the base levy ($4.00 per
$100 assessed valuation) and the bonded debt tax rate.
On November 6, 1979, an initiative known as "Proposition 4" or
the "Gann Initiative" was approved by the California voters, which added Article
XIIIB to the California Constitution. Under Article XIIIB, State and local
governmental entities have an annual "appropriations limit" and are not allowed
to spend certain moneys called "appropriations subject to limitation" in an
amount higher than the "appropriations limit." Article XIIIB does not affect the
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appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is required to be based on certain 1978/79 expenditures, and is to be
adjusted annually to reflect changes in consumer prices, population and certain
services provided by these entities. Article XIIIB also provides that if these
entities' revenues in any year exceed the amounts permitted to be spent, the
excess is to be returned by revising tax rates or fee schedules over the
subsequent two years.
At the November 8, 1988 general election, California voters
approved an initiative known as Proposition 98. This initiative amends Article
XIIIB to require that (i) the California Legislature establish a prudent state
reserve fund in an amount as it shall deem reasonable and necessary and (ii)
revenues in excess of amounts permitted to be spent and which would otherwise be
returned pursuant to Article XIIIB by revision of tax rates or fee schedules, be
transferred and allocated (up to a maximum of 4%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
No such transfer or allocation of funds will be required if certain designated
state officials determine that annual student expenditures and class size meet
certain criteria as set forth in Proposition 98. Any funds allocated to the
State School Fund shall cause the appropriation limits established in Article
XIIIB to be annually increased for any such allocation made in the prior year.
Proposition 98 also amends Article XVI to require that the
State of California provide a minimum level of funding for public schools and
community colleges. Commencing with the 1988-89 fiscal year, state monies to
support school districts and community college districts shall equal or exceed
the lesser of (i) an amount equalling the percentage of state general revenue
bonds for school and community college districts in fiscal year 1986-87, or (ii)
an amount equal to the prior year's state general fund proceeds of taxes
appropriated under Article XIIIB plus allocated proceeds of local taxes, after
adjustment under Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirement
for one year.
On June 30, 1989, the California Legislature enacted Senate
Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1, on the June 5, 1990 ballot as
Proposition 111, was approved by the voters and took effect on July 1, 1990.
Among a number of important provisions, Proposition 111 recalculates spending
limits for the State and for local governments, allows greater annual increases
in the limits, allows the averaging of two years' tax revenues before requiring
action
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regarding excess tax revenues, reduces the amount of the funding guarantee in
recession years for school districts and community college districts (but with a
floor of 40.9 percent of State general fund tax revenues), removes the provision
of Proposition 98 which included excess moneys transferred to school districts
and community college districts in the base calculation for the next year,
limits the amount of State tax revenue over the limit which would be transferred
to school districts and community college districts, and exempts increased
gasoline taxes and truck weight fees from the State appropriations limit.
Additionally, Proposition 111 exempts from the State appropriations limit
funding for capital outlays.
Article XIIIB, like Article XIIIA, may require further
interpretation by both the Legislature and the courts to determine its
applicability to specific situations involving the State and local taxing
authorities. Depending upon the interpretation, Article XIIIB may limit
significantly a governmental entity's ability to budget sufficient funds to meet
debt service on bonds and other obligations.
On November 4, 1986, California voters approved an initiative
statute known as Proposition 62. This initiative (i) requires that any tax for
general governmental purposes imposed by local governments be approved by
resolution or ordinance adopted by a two-thirds vote of the governmental
entity's legislative body and by a majority vote of the electorate of the
governmental entity, (ii) requires that any special tax (defined as taxes levied
for other than general governmental purposes) imposed by a local governmental
entity be approved by a two-thirds vote of the voters within that jurisdiction,
(iii) restricts the use of revenues from a special tax to the purposes or for
the service for which the special tax was imposed, (iv) prohibits the imposition
of ad valorem taxes on real property by local governmental entities except as
permitted by Article XIIIA, (v) prohibits the imposition of transaction taxes
and sales taxes on the sale of real property by local governments, (vi) requires
that any tax imposed by a local government on or after August 1, 1985 be
ratified by a majority vote of the electorate within two years of the adoption
of the initiative or be terminated by November 15, 1988, (vii) requires that, in
the event a local government fails to comply with the provisions of this
measure, a reduction in the amount of property tax revenue allocated to such
local government occurs in an amount equal to the revenues received by such
entity attributable to the tax levied in violation of the initiative, and (viii)
permits these provisions to be amended exclusively by the voters of the State of
California.
In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal.
Ct. App. 1988), held that Proposition 62 is unconstitutional to the extent that
it requires a general tax by a
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general law city, enacted on or after August 1, 1985 and prior to the effective
date of Proposition 62, to be subject to approval by a majority of voters. The
Court held that the California Constitution prohibits the imposition of a
requirement that local tax measures be submitted to the electorate by either
referendum or initiative. It is not possible to predict the impact of this
decision on charter cities, on special taxes or on new taxes imposed after the
effective date of Proposition 62.
On November 8, 1988, California voters approved Proposition
87. Proposition 87 amended Article XVI, Section 16, of the California
Constitution by authorizing the California Legislature to prohibit redevelopment
agencies from receiving any of the property tax revenue raised by increased
property tax rates levied to repay bonded indebtedness of local governments
which is approved by voters on or after January 1, 1989. It is not possible to
predict whether the California Legislature will enact such a prohibition nor is
it possible to predict the impact of Proposition 87 on redevelopment agencies
and their ability to make payments on outstanding debt obligations.
Certain California Municipal Instruments in the Fund may be
obligations which are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect these
revenues and, consequently, payment on those Municipal Instruments.
The federally sponsored Medicaid program for health care
services to eligible welfare beneficiaries in California is known as the
Medi-Cal program. Historically, the Medi-Cal program has provided for a
cost-based system of reimbursement for inpatient care furnished to Medi-Cal
beneficiaries by any hospital wanting to participate in the Medi-Cal program,
provided such hospital met applicable requirements for participation. California
law now provides that the State of California shall selectively contract with
hospitals to provide acute inpatient services to Medi-Cal patients. Medi-Cal
contracts currently apply only to acute inpatient services. Generally, such
selective contracting is made on a flat per diem payment basis for all services
to Medi-Cal beneficiaries, and generally such payment has not increased in
relation to inflation, costs or other factors. Other reductions or limitations
may be imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California,
only those hospitals which enter into a Medi-Cal contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal beneficiaries. The State may also terminate these contracts without
notice under certain circumstances and is obligated to make contractual payments
only to the extent the California legislature appropriates adequate funding
therefor.
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California enacted legislation in 1982 that authorizes private
health plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known as
"preferred provider organizations" ("PPOs"), which offer financial incentives
for subscribers who use only the hospitals which contract with the plan. Under
an exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
Some California Municipal Instruments may also be insured by
the State of California pursuant to an insurance program implemented by the
Office of Statewide Health Planning and Development for health facility
construction loans. If a default occurs on insured California Municipal
Instruments, the State Treasurer will issue debentures payable out of a reserve
fund established under the insurance program or will pay principal and interest
on an unaccelerated basis from unappropriated State funds. At the request of the
Office of Statewide Health Planning and Development, Arthur D. Little, Inc.
prepared a study in December 1983, to evaluate the adequacy of the reserve fund
established under the insurance program and based on certain formulations and
assumptions found the reserve fund substantially underfunded. In September of
1986, Arthur D. Little, Inc. prepared an update of the study and concluded that
an additional 10% reserve be established for "multi-level" facilities. For the
balance of the reserve fund, the update recommended maintaining the current
reserve calculation method. In March of 1990, Arthur D. Little, Inc. prepared a
further review of the study and recommended that separate reserves continue to
be established for "multi-level" facilities at a reserve level consistent with
those that would be required by an insurance company.
Certain California Municipal Instruments may be obligations
which are secured in whole or in part by a mortgage or deed of trust on real
property. California has five principal statutory provisions which limit the
remedies of a creditor secured by a mortgage or deed of trust. Two limit the
creditor's right to obtain a deficiency judgment, one limitation being based on
the method of foreclosure and the other on the type of debt secured. Under the
former, a deficiency judgment is barred when the
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foreclosure is accomplished by means of a nonjudicial trustee's sale. Under the
latter, a deficiency judgment is barred when the foreclosed mortgage or deed of
trust secures certain purchase money obligations. Another California statute,
commonly known as the "one form of action" rule, requires creditors secured by
real property to exhaust their real property security by foreclosure before
bringing a personal action against the debtor. The fourth statutory provision
limits any deficiency judgment obtained by a creditor secured by real property
following a judicial sale of such property to the excess of the outstanding debt
over the fair value of the property at the time of the sale, thus preventing the
creditor from obtaining a large deficiency judgment against the debtor as the
result of low bids at a judicial sale. The fifth statutory provision gives the
debtor the right to redeem the real property from any judicial foreclosure sale
as to which a deficiency judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect
to California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. Therefore, the
effective minimum period for foreclosing on a mortgage could be in excess of
seven months after the initial default. Such time delays in collections could
disrupt the flow of revenues available to an issuer for the payment of debt
service on the outstanding obligations if such defaults occur with respect to a
substantial number of mortgages or deeds of trust securing an issuer's
obligations.
In addition, a court could find that there is sufficient
involvement of the issuer in the nonjudicial sale of property securing a
mortgage for such private sale to constitute "state action," and could hold that
the private-right-of-sale proceedings violate the due process requirements of
the federal or state constitutions, consequently preventing an issuer from using
the nonjudicial foreclosure remedy described above.
Certain California Municipal Instruments may be obligations
which finance the acquisition of single family home mortgages for low and
moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to California's
statutory limitations described above applicable to obligations secured by
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real property. Under California antideficiency legislation, there is no personal
recourse against a mortgagor of a single family residence purchased with the
loan secured by the mortgage, regardless of whether the creditor chooses
judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and cannot in
any event exceed six months' advance interest on the amount prepaid in excess of
20% of the original principal amount of the mortgage loan. This limitation could
affect the flow of revenues available to an issuer for debt service on the
outstanding debt obligations which financed such home mortgages.
OTHER INVESTMENT INFORMATION. Northern Trust believes that it is likely
that sufficient California Municipal Instruments and certain specified federal
obligations should be available to satisfy the investment objective, policies
and limitations of the Fund and to enable the Fund to invest at least 50% of its
assets in California Municipal Instruments and such federal obligations at the
close of each of its fiscal quarters. If the Northern Funds' Board of Trustees,
after consultation with Northern Trust, should for any reason determine that it
is impracticable to invest at least 50% of the Fund's assets in these securities
at the close of each quarter of the Fund's taxable year, 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 Funds are subject to the fundamental investment restrictions
enumerated below which may be changed with respect to a particular Fund only by
a vote of the holders of a majority of such Fund's outstanding shares.
No Fund may:
(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 a Fund
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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 each Fund (other than the Money Market Funds) 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 a 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; provided
that this restriction does not apply to the International Fixed Income
Fund.
In addition, as summarized in the Prospectus, no Fund may:
(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,
except for the Technology Fund, 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, provided that with
respect to each Money Market Fund there is no limitation, and each
Money Market Fund reserves freedom of action, when otherwise consistent
with its investment policies, to concentrate its investments in
obligations (other than
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commercial paper) issued or guaranteed by U.S. banks (including foreign
branches of U.S. banks) and U.S. branches of foreign banks and
repurchase agreements and securities loans collateralized by such bank
obligations. 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. The Technology Fund may not, except during temporary defensive
periods, purchase the securities of any issuer, if, as a result of such
purchase, less than 25% of the assets of the Technology Fund would be
invested in the securities of issuers principally engaged in technology
business activities.
(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 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 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 such Fund in accordance with the 1940 Act. In addition,
as a matter of fundamental policy, the Funds 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 such Fund's total assets would be invested in such
issuer, except that: (a) up to 50% of the value of the California
Municipal Money Market Fund's total assets (so long as no more than 25%
of the value of its total assets are invested in the securities of any
one issuer) and up to 25% of the value of the total assets of each of
the other Funds may be invested in any securities without regard to
this 5% limitation; and (b) with respect to each Fund, such 5%
limitation shall not apply to repurchase agreements collateralized by
obligations of the U.S. Government, its
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agencies or instrumentalities. (This restriction does not
apply to the International Fixed Income Fund.)
In addition, as a matter of fundamental policy, the Funds will not
issue senior securities except as stated in the Prospectus or this Additional
Statement.
As a non-fundamental investment restriction, the International Fixed
Income 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).
Except as otherwise provided in Investment Restriction (9), for the
purpose of such restriction, in determining industry classification with respect
to the Funds other than the International Funds and the Technology Fund,
Northern Funds intends to use the industry classification titles in the Standard
Industrial Classification Manual. With respect to the International Funds,
Northern Funds intends to use the Morgan Stanley Capital International industry
classification titles. With respect to the Technology Fund, Northern Funds
intends to consider an issuer to be principally engaged in technology business
activities if such issuer is listed on the Hambrecht and Quist Technology Index,
the SoundView Technology Index, the technology grouping of the S&P 500 or any
other comparable index. The freedom of action reserved in Investment Restriction
(9) above with respect to U.S. branches of foreign banks is subject to the
requirement that they are subject to the same regulation as domestic branches of
U.S. banks, and such freedom with respect to foreign branches of U.S. banks is
subject to the requirement that the domestic parent be unconditionally liable in
the event that a foreign branch fails to pay on its instruments for any reason.
Securities held in escrow or separate accounts in connection with the Funds'
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 a 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
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immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by, the Fund.
Although the foregoing Investment Restrictions would permit the Money
Market Funds to acquire options, enter into forward currency contracts and
engage in short sales and interest rate and currency swaps, it is not currently
permitted to engage in these transactions under SEC regulations. In addition,
the U.S. Government Select Money Market Fund does not intend to engage in
repurchase transactions or purchase any bank or corporate obligation during the
current fiscal year.
In order to permit the sale of the Funds' shares in certain states,
Northern Funds may make commitments with respect to the Funds 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 a 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 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,*,** 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, Illinois Tool Works, Inc., Bradley Trust and American Academics, Inc.
Mr. James W. Cozad, 205 N. Michigan Avenue, Suite 4310,
Chicago, Illinois 60671. Vice Chairman of Amoco Corporation from January 1988 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), GATX Corporation (transportation,
distribution and warehousing), Inland Steel Company, Inland Steel Industries,
Inc., and Sears, Roebuck & Company.
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Ms. Susan Crown,** 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.,* 400 Skokie Blvd., Suite 675,
Northbrook, Illinois 60072. 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., 1534 Basswood Circle, Glenview,
Illinois 60025. Partner of Arthur Andersen & Co. S.C. (accounting firm) from
1966 until his retirement in December 1989. Director of Household Bank, Federal
Savings Bank.
Mr. Raymond E. George, Jr.,** 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, 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202. Vice President and Treasurer. President and Director
of Sunstone Financial Group, Inc. since 1990 and Vice President of First
Wisconsin Trust Company prior thereto.
Mary M. Tenwinkel, 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202. Vice President. 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, 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202. Assistant Treasurer. Client Services, Accounting and
Tax Manager of Sunstone Financial Group, Inc. since 1990 and Senior Accountant
at Price Waterhouse 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> 54
Jeffrey A. Dalke, 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 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, 1995, 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 $26,250 None $26,250
- -----------------------------------------------------------------------------------
James W. Cozad $21,250 None $21,250
- -----------------------------------------------------------------------------------
Susan Crown $21,250 None $21,250
- -----------------------------------------------------------------------------------
Wesley M. Dixon, Jr. $20,000 None $20,000
- -----------------------------------------------------------------------------------
William J. Dolan, Jr. $20,000 None $20,000
- -----------------------------------------------------------------------------------
Raymond E. George, Jr. $20,000 None $20,000
===================================================================================
</TABLE>
* Northern Funds' initial fiscal year was from April 1, 1994 through March 31,
1995.
** 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, 1995, Northern
Trust and its affiliates had approximately $18.7 billion in assets, $11.6
billion in deposits, and administered in various capacities (including as master
trustee, investment manager or custodian) over $500 billion in assets. As of
March 31, 1995, Northern Trust's investment management group had management
responsibility for approximately $88 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
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<PAGE> 56
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. During
the fiscal year ended March 31, 1995, the Income Equity, Growth Equity, Select
Equity, Small Cap Growth, International Growth Equity and International Select
Equity Funds paid $17,411, $237,069, $30,268, $329,741, $1,091,058 and $523,082,
respectively, in commissions. The Technology Fund had not commenced operations
during the fiscal year ended March 31, 1995. 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.
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<PAGE> 57
Northern Funds is required to identify any securities of its "regular
brokers or dealers" or their parents which Northern Funds acquired during its
most recent fiscal year.
During the fiscal year ended March 31, 1995, the Growth Equity Fund
acquired and sold securities of Morgan Stanley & Co., Lehman Brothers, Merrill
Lynch, Pierce, Fenner & Smith Inc., J.P. Morgan Securities, Inc., and Donaldson,
Lufkin & Jenrette Securities Corp., its regular broker-dealers. As of March 31,
1995, the Growth Equity Fund did not own securities issued by its regular
broker-dealers.
During the fiscal year ended March 31, 1995, the Income Equity Fund
acquired and sold securities of Morgan Stanley & Co., Lehman Brothers, Merrill
Lynch, Pierce, Fenner & Smith Inc., J.P. Morgan Securities Inc., and Donaldson,
Lufkin & Jenrette Securities Corp., its regular broker-dealers. As of March 31,
1995, the Income Equity Fund did not own securities issued by its regular
broker-dealers.
During the fiscal year ended March 31, 1995, the Small Cap Growth Fund
acquired and sold securities of Morgan Stanley & Co., Lehman Brothers, Merrill
Lynch, Pierce, Fenner & Smith Inc., J.P. Morgan Securities Inc., Donaldson,
Lufkin & Jenrette Securities Corp., its regular broker-dealers. As of March 31,
1995, the Small Cap Growth Fund did not own securities issued by its regular
broker-dealers.
During the fiscal year ended March 31, 1995, the Select Equity Fund
acquired and sold securities of Morgan Stanley & Co., Lehman Brothers, Merrill
Lynch, Pierce, Fenner & Smith, Inc., J.P. Morgan Securities Inc., and Donaldson,
Lufkin & Jenrette Securities Corp., its regular broker-dealers. As of March 31,
1995, the Select Equity Fund did not own securities issued by its regular
broker-dealers.
During the fiscal year ended March 31, 1995, the International Select
Equity Fund acquired and sold securities of Morgan Stanley & Co., Lehman
Brothers, Merrill Lynch, Pierce, Fenner & Smith, Inc., J.P. Morgan Securities
Inc., and Donaldson, Lufkin & Jenrette Securities Corp. its regular
broker-dealers. As of March 31, 1995, the International Select Equity Fund did
not own securities issued by its regular broker-dealers.
During the fiscal year ended March 31, 1995, the International Growth
Equity Fund acquired and sold securities of Morgan Stanley & Co., Lehman
Brothers, Merrill Lynch, Pierce, Fenner & Smith Inc., J.P. Morgan Securities
Inc., Donaldson, Lufkin & Jenrette Securities Corp. and Nomura Securities Co.
Ltd., its regular broker-dealers. As of March 31, 1995, the International Growth
Equity Fund owned securities of Nomura Securities Co. Ltd. in the amount of
$1,031,000.
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<PAGE> 58
During the fiscal year ended March 31, 1995, the International Fixed
Income Fund acquired and sold securities of Morgan Stanley & Co., Lehman
Brothers, Merrill Lynch, Pierce, Fenner & Smith Inc., J.P. Morgan Securities
Inc., and Donaldson, Lufkin & Jenrette Securities Corp., its regular
broker-dealers. As of March 31, 1995, the International Fixed Income Fund did
not own securities issued by its regular broker-dealers.
During the fiscal year ended March 31, 1995, the U.S. Government Fund
acquired and sold securities of Morgan Stanley & Co., Lehman Brothers, Merrill
Lynch, Pierce, Fenner & Smith, Inc., J.P. Morgan Securities Inc., and Donaldson,
Lufkin & Jenrette Securities Corp., its regular broker-dealers. As of March 31,
1995, the U.S. Government Fund did not own securities issued by its regular
broker-dealers.
During the fiscal year ended March 31, 1995, the Fixed Income Fund
acquired and sold securities of Morgan Stanley & Co., Lehman Brothers, Merrill
Lynch, Pierce, Fenner & Smith, Inc., J.P. Morgan Securities Inc., and Donaldson,
Lufkin & Jenrette Securities Corp., its regular broker-dealers. As of March 31,
1995, the Fixed Income Fund did not own securities issued by its regular
broker-dealers.
During the fiscal year ended March 31, 1995, the Tax Exempt Fund did not
acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 1995, the Intermediate Tax Exempt
Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 1995, the California Municipal
Money Market Fund did not acquire or sell securities of its regular
broker-dealers.
During the fiscal year ended March 31, 1995, the Municipal Money Market
Fund did not acquire or sell securities of its regular broker-dealers.
During the fiscal year ended March 31, 1995, the U.S. Government Select
Money Market Fund did not acquire or sell securities of its regular
broker-dealers.
During the fiscal year ended March 31, 1995, the Money Market Fund
acquired and sold securities of Morgan Stanley & Co., Lehman Brothers, Merrill
Lynch, Pierce, Fenner & Smith, Inc., J.P. Morgan Securities Inc., First Boston
Corp., Goldman Sachs and Donaldson, Lufkin & Jenrette Securities Corp., its
regular broker-dealers. As of March 31, 1995, the Money Market Fund owned
securities of Lehman Brothers in the amount of $17,942,833.
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<PAGE> 59
During the fiscal year ended March 31, 1995, the U.S. Government Money
Market Fund acquired and sold securities of Morgan Stanley & Co., Lehman
Brothers, Merrill Lynch, Pierce, Fenner & Smith, Inc., J.P. Morgan Securities
Inc., First Boston Corp., Goldman Sachs, Donaldson, Lufkin & Jenrette Securities
Corp. and UBS Securities, its regular broker-dealers. As of March 31, 1995, the
U.S. Government Money Market Fund owned securities of J.P. Morgan Securities
Inc. in the amount of $25,000,000 and UBS Securities in the amount of
$45,000,000.
During the fiscal year ended March 31, 1995, the Technology Fund had not
yet commenced operations.
During the fiscal year ending March 31, 1995, Northern Funds directed
brokerage transactions to brokers because of research services provided. The
amount of such transactions and related commissions were as follows: for the
Income Equity Fund, $8,847,353 in research commission transactions and $26,211
in research commissions; for the Growth Equity Fund, $109,704,518 in research
commission transactions and $193,353 in research commissions; for the Select
Equity Fund, $15,748,942 in research commission transactions and $26,211 in
research commissions; for the Small Cap Growth Fund, $11,883,316 in research
commission transactions and $20,438 in research commissions; for the
International Growth Equity Fund, $152,887,871 in research commission
transactions and $514,040 in research commissions; and for the International
Select Equity Fund, $54,542,911 in research commission transactions and $222,146
in research commissions.
The Funds 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 Funds will engage in this practice, however, only when Northern Trust
believes such practice to be in the Funds' 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 a 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
such 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
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<PAGE> 60
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 Funds. For the period
from each Fund's commencement of operations* to March 31, 1995, Northern Trust
earned advisory fees, after waivers as follows: Money Market Fund, $1,679,646;
U.S. Government Money Market Fund, $428,631; Municipal Money Market Fund,
$1,985,324; U.S. Government Select Money Market Fund, $33,404; California
Municipal Money Market Fund, $102,198; U.S. Government Fund, $808,240; Fixed
Income Fund, $473,782; Intermediate Tax-Exempt Fund, $1,586,107; Tax-Exempt
Fund, $903,489; International Fixed Income Fund, $79,136; Income Equity Fund,
$285,142; Growth Equity Fund, $742,399; Select Equity Fund, $70,398; Small Cap
Growth Fund, $472,444; International Growth Equity Fund, $910,038; and
International Select Equity Fund, $666,020.
* The U.S. Government, Fixed Income, Intermediate Tax-Exempt, International
Fixed Income, Income Equity, Growth Equity, Small Cap Growth and International
Growth Equity Funds commenced operations on April 1, 1994; the International
Select Equity and Select Equity Funds commenced operations on April 5, and April
6, 1994, respectively; the Money Market, U.S. Government Money Market, Municipal
Money Market Funds commenced operations on April 11, 1994; and the U.S.
Government Select Money Market and California Municipal Money Market Funds
commenced operations on December 12, and December 29, 1994, respectively.
For the period from each Fund's commencement of operations to March 31,
1995, Northern Trust voluntarily waived and reimbursed advisory fees for each of
the Funds as follows: Money Market Fund, $1,499,610; U.S. Government Money
Market Fund, $421,351; Municipal Money Market Fund, $1,743,115; U.S. Government
Select Money Market Fund, $119,739; California Municipal Money Market Fund,
$192,882; U.S. Government Fund, $18,482; Fixed Income Fund, $31,397;
Intermediate Tax-Exempt Fund, $115,115; Tax-Exempt Fund, $82,456; International
Fixed Income Fund, $31,208; Income Equity Fund,
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<PAGE> 61
$85,791; Growth Equity Fund, $158,096; Select Equity Fund, $69,751; Small Cap
Growth Fund, $231,924; International Growth Equity Fund, $184,206; and
International Select Equity Fund, $135,054. The Technology Fund had not
commenced operations during the fiscal year ended March 31, 1995.
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 Northern Funds, payable
monthly, at an annual rate of .10% of the average daily net asset value of each
of the Funds.
For the fiscal period ended March 31, 1995 the amount of transfer agency
fees incurred by each of the Funds was as follows: Money Market Fund, $478,656;
U.S. Government Money Market Fund, $122,466; Municipal Money Market Fund,
$567,232; U.S. Government Select Money Market Fund, $16,702; California
Municipal Money Market Fund, $40,879; U.S. Government Fund, $107,766; Fixed
Income Fund, $63,170; Intermediate Tax-Exempt Fund, $226,584; Tax-Exempt Fund,
$129,068; International Fixed Income Fund, $8,793; Income Equity Fund, $33,546;
Growth Equity Fund, $87,340; Select Equity Fund, $8,282; Small Cap Growth Fund,
$55,371; International Growth Equity Fund, $91,003; and International Select
Equity Fund, $66,601. For the same period, Northern reimbursed all transfer
agency fees for each of the Funds, except for the International Growth Equity
and International Select Equity Funds, which Northern reimbursed in the amounts
of $35,042 and $34,608, respectively. The Technology Fund had not commenced
operations during the fiscal year ended March 31, 1995.
Northern Trust maintains custody of the assets of the Funds (other than
the International Funds) pursuant to the terms of its Custodian Agreement with
Northern Funds. Northern Trust maintains custody of the assets of the
International Funds pursuant to the terms of its Foreign Custody Agreement with
Northern Funds. Under each of these agreements, Northern Trust (l) holds each
Fund's cash and securities, (2) maintains such cash and securities in separate
accounts in the name of the Fund, (3) makes receipts and
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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 agreements. Under its Foreign Custody Agreement,
Northern Trust has entered into agreements with financial institutions and
depositories located in foreign countries with respect to the custody of the
International Funds' foreign securities.
As compensation for the services rendered to each Fund (other than the
International Funds) under the Custodian Agreement, and the assumption by
Northern Trust of certain related expenses, Northern Trust is entitled to
payment from each of the Funds as follows: (a) a basic custodial fee of (i)
$18,000 annually for each Fund, plus (ii) 1/100th of 1% annually of each 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 each Fund, plus (ii) 1/100th of
1% annually of each 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.
As compensation for the services rendered to the International Funds under
the Foreign Custody Agreement, and the assumption by Northern Trust of certain
related expenses, Northern Trust is entitled to payment from each of those Funds
as follows: (i) $35,000 annually for each Fund, plus (ii) 9/100th of 1% annually
of each Fund's average daily net assets, plus (iii) reimbursement for fees
incurred by Northern Trust as foreign Custodian for telephone, postage, courier
fees, office supplies and duplicating. As compensation for basic accounting
services rendered to the International Funds by Northern Trust, Northern Trust
is entitled
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to receive $25,000 for the first $50 million of each of those Fund's average
daily net assets and 1/100th of 1% of each Fund's average daily net assets in
excess of $50 million.
For the fiscal period ended March 31, 1995 the amount of custody and fund
accounting fees incurred by each of the Funds was as follows: Money Market Fund,
$147,500; U.S. Government Money Market Fund, $69,155; Municipal Money Market
Fund, $157,767; U.S. Government Select Money Market Fund, $16,895; California
Municipal Money Market Fund, $20,111; U.S. Government Fund, $54,735; Fixed
Income Fund, $50,201; Intermediate Tax-Exempt Fund, $82,728; Tax- Exempt Fund,
$62,415; International Fixed Income Fund, $69,688; Income Equity Fund, $49,607;
Growth Equity Fund, $57,187; Select Equity Fund, $52,479; Small Cap Growth Fund,
$105,362; International Growth Equity Fund, $147,708; and International Select
Equity Fund, $123,823. For the same period, Northern reimbursed all of the
custody and fund accounting fees for each of the Funds. The Technology Fund had
not commenced operations during the fiscal year ended March 31, 1995.
Unless sooner terminated, each of the Advisory Agreement, Transfer Agency
Agreement, Custodian Agreement and Foreign Custody Agreement between Northern
Trust and Northern Funds will continue in effect with respect to a particular
Fund until March 31, 1996, 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
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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 any 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" 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 Funds 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 Funds (on Form N-1A or any
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replacement therefor) and any amendments thereto, and proxy materials; (7)
prepare and monitor each 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 each 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 each 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 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 Funds 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 a particular Fund until March 31, 1996, 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.
Sunstone is entitled to an administration fee, computed daily and payable
monthly, at the annual rate of 0.15% of the
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Funds' average aggregate daily net assets. For the period from each Fund's
commencement of operations to March 31, 1995, Sunstone earned, after waivers,
administrative fees as follows: Money Market Fund, $414,361; U.S. Government
Money Market Fund, $105,624; Municipal Money Market Fund, $509,356; U.S.
Government Select Money Market Fund, $8,192; California Municipal Money Market
Fund, $19,336; U.S. Government Fund, $105,568; Fixed Income Fund, $63,582;
Intermediate Tax-Exempt Fund, $230,585; Tax-Exempt Fund, $130,624; International
Fixed Income Fund, $10,062; Income Equity Fund, $33,207; Growth Equity Fund,
$82,540; Select Equity Fund, $9,581; Small Cap Growth Fund, $52,182;
International Growth Equity Fund, $86,317; and International Select Equity Fund,
$63,788. For the same periods, Sunstone waived administrative fees with respect
to each Fund as follows: Money Market Fund, $305,490; U.S. Government Money
Market Fund, $78,076; Municipal Money Market Fund, $341,501; U.S. Government
Select Money Market Fund, $16,860; California Municipal Money Market Fund,
$41,983; U.S. Government Fund, $56,080; Fixed Income Fund, $31,175; Intermediate
Tax-Exempt Fund, $109,298; Tax-Exempt Fund, $62,980; International Fixed Income
Fund, $3,274; Income Equity Fund, $17,111; Growth Equity Fund, $48,472; Select
Equity Fund, $2,842; Small Cap Growth Fund, $31,190; International Growth Equity
Fund, $51,702; and International Select Equity Fund, $37,502. The Technology
Fund had not commenced operations during the fiscal year ended March 31, 1995.
Northern Funds has entered into a Distribution Agreement under which
Sunstone, as agent, sells shares of each 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 Funds' Prospectuses, the Funds 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 Funds may pay
Service Organizations up to .25% (on an annualized basis) of the average daily
net asset value
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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 a 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 Funds. 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 Funds' 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 Funds'
arrangements with Service Organizations and the purposes for which the
expenditures were made. In addition, the Funds' 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 Funds 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 each 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 a 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 the
Funds will be committed to the discretion of such disinterested Trustees.
For the fiscal period ended March 31, 1995, none of the Funds paid fees
with respect to either of the Plans.
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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. The financial
statements dated March 31, 1995, incorporated by reference into this Additional
Statement have been incorporated in reliance on the report of Arthur Andersen
LLP given on the authority of said firm as experts in auditing and accounting.
IN-KIND PURCHASES
Payment for shares of a 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, a
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 a 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 Portfolio; (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
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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 Funds involved in the request 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 an investment 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 Funds involved in the request 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 a 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 a 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
(see, e.g., "Amortized Cost Valuation").
Northern Funds may redeem shares involuntarily to reimburse a Fund for any
loss sustained by reason of the failure of a
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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 Funds'
Prospectuses from time to time.
PERFORMANCE INFORMATION
MONEY MARKET FUNDS
From time to time Northern Funds may advertise quotations of "yields" and
"effective yields" with respect to each Money Market Fund, and "tax-equivalent
yields" with respect to shares of the Municipal Money Market Fund and the
California Municipal Money Market Fund, computed in accordance with a
standardized method based upon the seven-day period ended on the date of
calculation. In arriving at quotations as to "yield," Northern Funds first
determines the net change during the period in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period (such net change being inclusive of the value of any additional shares
issued in connection with distributions of net investment income as well as net
investment income accrued on both the original share and any such additional
shares, but exclusive of realized gains and losses from the sale of securities
and unrealized appreciation and depreciation), then divides such net change by
the value of the account at the beginning of the period to obtain the base
period return, and then multiplies the base period return by 365/7. Based on the
foregoing calculations, for the period ended March 31, 1995, the 7-day yields
for the Money Market Funds, after fee waivers, were as follows: Money Market
Fund, 5.77%; U.S. Government Money Market Fund, 5.72%; Municipal Money Market
Fund, 3.75%; U.S. Government Select Money Market Fund, 5.87%; and California
Municipal Money Market Fund, 3.86%. For the period ended March 31, 1995, the
7-day yields for the Money Market Funds, absent fee waivers, were as follows:
Money Market Fund, 5.49%; U.S. Government Money Market Fund, 5.33%; Municipal
Money Market Fund, 3.48%; U.S. Government Select Money Market Fund, 4.99%; and
California Municipal Money Market Fund, 3.05%.
The "effective yield" with respect to the shares of a Money Market Fund is
computed by adding 1 to the base period return (calculated as above), raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the result.
Based on the foregoing calculations, for the period ended March 31, 1995, the 7-
day effective yields for the Money Market Funds, after fee waivers, were as
follows: Money Market Fund, 5.93%; U.S. Government Money Market Fund, 5.88%; and
Municipal Money Market Fund, 3.82%; U.S. Government Select Money Market Fund,
6.04%; and California Municipal Money Market Fund, 3.94%.
"Tax-equivalent yield" is computed by dividing the tax-exempt portion of
the yield by 1 minus a stated income tax rate and then adding the product to the
taxable portion of the yield, if any. There may be more than one tax-equivalent
yield if more than one stated income tax rate is used. For the period ended
March 31,
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1995, and using a federal income tax rate of 31%, the 7-day tax-equivalent
yields, after fee waivers, were 5.43% and 5.59% for the Municipal Money Market
and California Municipal Money Market Funds, respectively.
NON-MONEY MARKET FUNDS
A Non-Money Market 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 1/n
T = [(-----) - 1]
P
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.
A Non-Money Market 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. Based on the foregoing calculations, for the period
from the respective commencement of operations to March 31, 1995, the aggregate
total returns for the Non-Money Market Funds were follows: U.S. Government Fund,
3.49%; Fixed Income Fund, 4.16%; Intermediate Tax-Exempt Fund, 4.38%; Tax-Exempt
Fund, 5.78%; International Fixed Income Fund, 12.77%; Income
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Equity Fund, 2.21%; Growth Equity Fund, 6.90%; Select Equity Fund, 8.18%; Small
Cap Growth Fund, 0.57%; International Growth Equity Fund, (2.65)%; and
International Select Equity Fund, (1.95)%. The Technology Fund had not commenced
operations during the fiscal year ended March 31, 1995. During this period,
Northern Trust and Sunstone waived a portion of their fees.
A Non-Money Market 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]
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.
Based on the foregoing calculations, for the 30-day period ended March 31,
1995, the yields for the U.S Government, Fixed Income, Intermediate Tax-Exempt,
Tax-Exempt and International Fixed Income Funds, after fee waivers, were 5.91%,
6.87%, 4.21%, 4.99% and 6.32%, respectively. Also for the 30-day period ended
March 31, 1995, the yields for the U.S Government, Fixed Income, Intermediate
Tax-Exempt, Tax-Exempt and International Fixed Income Funds, absent fee waivers,
were 5.83%, 6.79%, 4.17%, 4.96% and 5.19%, respectively.
A Non-Money Market 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; (b)
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 (c)
adding the quotient to that portion, if any, of the Fund's yield that is not
exempt from federal income tax. For the period ended March 31, 1995, and using a
federal income tax rate of 31%, the 30-day tax-
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equivalent yields, after fee waivers, were 6.10% and 7.23% for the Intermediate
Tax-Exempt and Tax-Exempt Funds, respectively.
GENERAL INFORMATION
The Funds may include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a 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 a 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 a Fund. The Funds 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 a Fund. In addition, advertisements or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in a 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 Funds are not reflected in
Northern Funds' calculations of performance for the Funds.
Each 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 a 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.
AMORTIZED COST VALUATION
As stated in the Prospectus, each Money Market Fund seeks to maintain a
net asset value of $1.00 per share and, in this connection, values its
instruments on the basis of amortized cost
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pursuant to Rule 2a-7 under the 1940 Act. This method values a security at its
cost on the date of purchase and thereafter assumes a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price a Fund would
receive if the Fund sold the instrument. During such periods the yield to
investors in the Fund may differ somewhat from that obtained in a similar entity
which uses available indications as to market value to value its portfolio
instruments. For example, if the use of amortized cost resulted in a lower
(higher) aggregate Fund value on a particular day, a prospective investor in the
Fund would be able to obtain a somewhat higher (lower) yield and ownership
interest than would result from investment in such similar entity and existing
investors would receive less (more) investment income and ownership interest.
However, Northern Funds expects that the procedures and limitations referred to
in the following paragraphs of this section will tend to minimize the
differences referred to above.
Under Rule 2a-7, Northern Funds' Board of Trustees, in supervising the
Funds' operations and delegating special responsibilities involving portfolio
management to Northern Trust, has established procedures that are intended,
taking into account current market conditions and the Funds' investment
objectives, to stabilize the net asset value of each Money Market Fund, as
computed for the purposes of purchases and redemptions, at $1.00 per share. The
Trustees' procedures include periodic monitoring of the difference (the "Market
Value Difference") between the amortized cost value per share and the net asset
value per share based upon available indications of market value. Available
indications of market value consist of actual market quotations or appropriate
substitutes which reflect current market conditions and include (a) quotations
or estimates of market value for individual portfolio instruments and/or (b)
values for individual portfolio instruments derived from market quotations
relating to varying maturities of a class of money market instruments. In the
event the Market Value Difference exceeds 1/2 of 1%, the Trustees' procedures
provide that the Trustees will take such steps as they consider appropriate
(e.g., selling portfolio instruments to shorten average portfolio maturity or to
realize capital gains or losses, reducing or suspending shareholder income
accruals, redeeming shares in kind, or utilizing a net asset value per share
based upon available indications of market value which under such circumstances
would vary from $1.00) to eliminate or reduce to the extent reasonably
practicable any material dilution or other unfair results to investors or
existing shareholders which might arise from Market Value Differences. In
particular, if losses were sustained by a Fund, the number of outstanding shares
might be reduced in order to maintain a net asset value per share of $1.00. Such
reduction would be effected by having each shareholder
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proportionately contribute to the Fund's capital the necessary shares to restore
such net asset value per share. Each shareholder will be deemed to have agreed
to such contribution in these circumstances by investing in the Fund.
Rule 2a-7 requires that each Money Market Fund limit its investments to
instruments which Northern Trust determines (pursuant to guidelines established
by the Board of Trustees) to present minimal credit risks and which are
"Eligible Securities" as defined by the SEC and described in the Prospectus. The
Rule also requires that each Money Market Fund maintain a dollar-weighted
average portfolio maturity (not more than 90 days) appropriate to its policy of
maintaining a stable net asset value per share and precludes the purchase of any
instrument deemed under the Rule to have a remaining maturity of more than 397
days. Should the disposition of a portfolio security result in a dollar-weighted
average portfolio maturity of more than 90 days, the Rule requires a Money
Market Fund to invest its available cash in such a manner as to reduce such
maturity to the prescribed limit as soon as reasonably practicable.
TAXES
The following summarizes certain additional tax considerations generally
affecting the Funds and their shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussions here and in
the Prospectus are not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisers with specific reference to
their own tax situations.
The discussions of federal and California (pertaining to the California
Municipal Money Market Fund) 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
Each 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, each 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
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tax-exempt income and 90% of its investment company taxable income (net
investment income and the excess of net short-term capital gain over net
long-term capital loss), if any, for the year (the "Distribution Requirement")
and satisfies certain other requirements of the Code that are described below.
In addition to satisfaction of the Distribution Requirement, each 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 a 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 each 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 a
Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a 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 such Fund controls and
which are engaged in the same or similar trades or businesses.
Each 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.
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In the case of corporate shareholders, distributions of a 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. A
portion of the dividends paid by the Income Equity Fund, Growth Equity Fund,
Select Equity Fund and Small Cap Growth Fund may constitute "qualifying
dividends." The other Funds, however, are not expected to pay qualifying
dividends.
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 any 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 such 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). Each 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 each 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, each Fund may be subject
to the tax laws of such states or localities.
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FEDERAL - TAX-EXEMPT INFORMATION
As described in the Prospectus, the Municipal Money Market, California
Municipal Money Market, Intermediate Tax-Exempt and Tax-Exempt Funds are
designed to provide investors with tax-exempt interest income. The Funds are 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 Funds 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 Funds may not be an appropriate investment for persons or entities
that are "substantial users" of facilities financed by private activity bonds or
"related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person which regularly uses a part of such
facilities in its trade or business and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds are more than 5% of
the total revenues derived by all users of such facilities, or which occupies
more than 5% of the usable area of such facilities or for which such facilities
or a part thereof were specifically constructed, reconstructed or acquired.
"Related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S corporation and its
shareholders.
In order for the Municipal Money Market, California Municipal Money
Market, Intermediate Tax-Exempt or Tax-Exempt Funds 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 a 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 a 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 a 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.
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A percentage of the interest on indebtedness incurred by a shareholder to
purchase or carry Fund shares equal to the percentage of the total non-capital
gain dividends distributed during the shareholder's taxable year that is
exempt-interest dividends, 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 Funds. These rules may have a particular
impact on the amount of income or gain that the Funds must distribute to their
respective shareholders to comply with the Distribution Requirement, on the
income or gain qualifying under the Income Requirement and on their ability to
comply with the Short-Short Test described above.
Generally, futures contracts, options on futures contracts and certain
foreign currency contracts held by a 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 "marking-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
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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, a 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, a 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.
A foreign currency contract must meet the following conditions in order to
be subject to the marking-to-market rules described above: (1) the contract must
require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under the provisions respecting foreign currency contracts. As
of the date of this Additional Statement, the Treasury Department has not issued
any such regulations. Other foreign currency contracts entered into by a Fund
may result in the creation of one or more straddles for federal income tax
purposes, in which case certain loss deferral, short sales, and wash sales rules
and the requirement to capitalize interest and carrying charges may apply.
Some of the non-U.S. dollar denominated investments that certain Funds may
make, such as foreign debt securities and foreign currency contracts, may be
subject to the provisions of Subpart J of the Code, which govern the federal
income tax treatment of certain transactions denominated in terms of a currency
other than the U.S. dollar or determined by reference to the value of one or
more currencies other than the U.S dollar. The types of transactions covered by
these provisions include the following: (1) the acquisition of, or becoming the
obligor under, a bond or other debt instrument (including, to the extent
provided in
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Treasury regulations, preferred stock); (2) the accruing of certain trade
receivables and payables; and (3) the entering into or acquisition of any
forward contract, futures contract, option and similar financial instrument. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer also is
treated as a transaction subject to the special currency rules. However,
regulated futures contracts and nonequity options are generally not subject to
the special currency rules if they are or would be treated as sold for their
fair market value at year-end under the marking-to-market rules, unless an
election is made to have such currency rules apply. With respect to transactions
covered by the special rules, foreign currency gain or loss is calculated
separately from any gain or loss on the underlying transaction and is normally
taxable as ordinary gain or loss. A taxpayer may elect to treat as capital gain
or loss foreign currency gain or loss arising from certain identified forward
contracts, futures contracts and options that are capital assets in the hands of
the taxpayer and which are not part of a straddle. In accordance with Treasury
regulations, certain transactions that are part of a "Section 988 hedging
transaction" (as defined in the Code and Treasury regulations) may be integrated
and treated as a single transaction or otherwise treated consistently for
purposes of the Code. "Section 988 hedging transactions" are not subject to the
marking-to-market or loss deferral rules under the Code. Gain or loss
attributable to the foreign currency component of transactions engaged in by the
Fund which are not subject to the special currency rules (such as foreign equity
investments other than certain preferred stocks) is treated as capital gain or
loss and is not segregated from the gain or loss on the underlying transaction.
Certain of the Funds may be subject to U.S. federal income tax on a
portion of any "excess distribution" from or a gain from the disposition of
shares of a passive foreign investment company.
SPECIAL STATE TAX CONSIDERATIONS PERTAINING TO THE CALIFORNIA MUNICIPAL MONEY
MARKET FUND
Assuming the California Municipal Money Market Fund qualifies as a
regulated investment company, it will be relieved of liability for California
state franchise and corporate income tax to the extent its earnings are
distributed to its shareholders. The Fund may be taxed on its undistributed
taxable income. If for any year the Fund does not qualify for the special tax
treatment afforded regulated investment companies, all of the Fund's taxable
income (including interest income on California Municipal Instruments for
franchise tax purposes only) may be subject to California state franchise or
income tax at regular corporate rates.
If, at the close of each quarter of its taxable year, at least 50% of the
value of the total assets of a regulated investment company, or series thereof,
consists of (i) obligations the interest on which is exempt from taxation under
the California
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Constitution or any California statute ("California Municipal Instruments") and
(ii) obligations of the United States the interest on which is exempt from state
income taxation under the United States Constitution or the laws of the United
States ("Federal Obligations"), then a regulated investment company, or series
thereof, will be qualified to pay dividends exempt from California state
personal income tax to its non-corporate shareholders (hereinafter referred to
as "California exempt-interest dividends"). "Series" of a regulated investment
company is defined as a segregated portfolio of assets, the beneficial interest
in which is owned by the holders of an exclusive class or series of stock of the
company. The California Municipal Money Market Fund intends to qualify under the
above requirements so that it can pay California exempt-interest dividends. If
the Fund fails to so qualify, no part of its dividends to shareholders will be
exempt from the California state personal income tax. The Fund may reject
purchase orders for shares if it appears desirable to avoid failing to so
qualify.
Within 60 days after the close of its taxable year, the California
Municipal Money Market Fund will notify each shareholder of the portion of the
dividends paid by the Fund to the shareholder with respect to such taxable year
which is exempt from California state personal income tax. The total amount of
California exempt-interest dividends paid by the Fund to all of its
non-corporate shareholders with respect to any taxable year cannot exceed the
excess of the amount of interest received by the Fund for such year on
California Municipal Instruments and Federal Obligations over any amounts that,
if the Fund were treated as an individual, would be considered expenses related
to tax-exempt income and would thus not be deductible under federal income or
California state personal income tax law. The percentage of total dividends paid
by the Fund with respect to any taxable year which qualifies as California
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Fund with respect to such year.
In cases where shareholders are "substantial users" or "related persons"
with respect to California Municipal Instruments held by the California
Municipal Money Market Fund, such shareholders should consult their tax advisers
to determine whether California exempt-interest dividends paid by the Fund with
respect to such obligations retain California state personal income tax
exclusion. In this connection, rules similar to those regarding the possible
unavailability of federal exempt-interest dividend treatment to "substantial
users" are applicable for California state tax purposes. See "Federal -
Tax-Exempt Information" above.
To the extent any dividends paid to shareholders are derived from the
excess of net long-term capital gains over net short-term capital losses, such
dividends will not constitute California exempt-interest dividends and will
generally be taxed as long-term capital gains under rules similar to those
regarding the treatment
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of capital gain dividends for federal income tax purposes. See "Federal -
General Information" above. Moreover, interest on indebtedness incurred by a
shareholder to purchase or carry California Municipal Money Market Fund shares
is not deductible for California state personal income tax purposes if the Fund
distributes California exempt-interest dividends during the taxable year.
The foregoing is only a summary of some of the important California state
personal income tax considerations generally affecting the California Municipal
Money Market Fund and its shareholders. No attempt is made to present a detailed
explanation of the California state personal income tax treatment of the Fund or
its shareholders, and this discussion is not intended as a substitute for
careful planning. Further, it should be noted the portion of the Fund's
dividends constituting California exempt-interest dividends is excludable from
income for California state personal income tax purposes only. Any dividends
paid to shareholders subject to California state franchise tax or California
state corporate income tax may therefore be taxed as ordinary dividends to such
purchasers notwithstanding that all or a portion of such dividends is exempt
from California state personal income tax. Accordingly, potential investors in
the Fund, including, in particular, corporate investors which may be subject to
either California franchise tax or California corporate income tax, should
consult their tax advisers with respect to the application of such taxes to the
receipt of Fund dividends and as to their own California state tax situation, in
general.
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 each Fund has a par value of $.0001, represents a
proportionate interest in the particular 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 a Fund,
shareholders of each class of a 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 a Fund may be suspended for more than seven days (a) for any period
during which the New York Stock Exchange is closed,
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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 such 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 each 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 that Fund. The underlying assets of
each Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to that 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
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together in the aggregate without regard to a particular investment portfolio.
The term "majority of the outstanding shares" of either Northern Funds or
a particular 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 such Fund or portfolio present at a meeting, if the
holders of more than 50% of the outstanding shares of Northern Funds or such
Fund or portfolio are present or represented by proxy, or (ii) more than 50% of
the outstanding shares of Northern Funds or such Fund or portfolio.
As of June 30, 1995 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 June 30, 1995, 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: Bunting LLC-II
Short Proceeds, 5.01%; and Peat Marwick, 8.08%. As of June 30, 1995, 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: Wolf Family Investment Partnership,
14.56%; and Trane Rev. Tr. Frank Hood -PA, 10.96%. As of June 30, 1995, 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: Leatherby Tr. Ralph & Eleanor, 10.33%; and
Goodhew Fam Trust Eloise -D-, 6.80%. As of June 30, 1995, 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, 6.97%. The address of all of the above
persons is c/o The Northern Trust Company, 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
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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.
FINANCIAL STATEMENTS
The audited financial statements and related report of the Trust's
independent auditors, contained in the annual report to shareholders for the
fiscal year ended March 31, 1995 (the "Annual Report") are hereby incorporated
herein by reference. No other
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part of the Annual Report is incorporated by reference herein. Copies of the
Annual Report may be obtained by writing to 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.
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
S&P's Rating Group ("S&P") 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 S&P
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.
Principal 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
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promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample 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 for investment grade commercial
paper are "D-1," "D-2" and "D-3." Duff employs three designations, "Duff 1+,"
"Duff 1" and "Duff 1-," within the highest rating category. The following
summarizes the rating categories used by D&P 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.
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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 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 carrying 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, Inc. ("TBW") commercial paper ratings assess the
likelihood of an untimely payment of principal or interest of unsecured
instruments having a maturity of one year or less. The following summarizes the
ratings used by TBW:
"TBW-1" - This designation represents TBW's highest rating category
and indicates a very high 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
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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.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by S&P for corporate and
municipal debt:
"AAA" - This designation represents the highest rating assigned by
S&P 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," "C" - Debt that possesses one of these
ratings 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 rated "BB" 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
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category is also used for debt subordinated to senior debt that is assigned an
actual or implied "BB" or "BBB -" rating.
"B" debt rated "B" 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 rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and 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" The rating "CC" is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
"C" The rating "C" 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" The rating "CI" is reserved for income bonds on which no
interest is being paid.
"D" Debt rated "D" is in payment default. The "D" rating category 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. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
"Plus (+) or Minus (-)": The ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major categories.
"NR" indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation a matter of policy.
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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 edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term 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.
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Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from, "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic ranking
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of the generic ranking
category.
The following summarizes the ratings used by D&P for corporate and
municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered 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 may be in default or have 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.
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"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.
"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.
Municipal Note Ratings
S&P municipal note rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by S&P for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit 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.
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"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.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
D&P uses the ratings described under Corporate and Municipal
Long-Term Debt Ratings for tax-exempt notes and other short-term obligations.
Fitch uses the short-term ratings described under Commercial Paper
Ratings for municipal notes.
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APPENDIX B
As stated in the Prospectus, the Funds (other than the Money Market
Funds) 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.
A 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 a 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 a 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. With regard to each Fund, to the extent consistent with its investment
objective, the Adviser anticipates engaging in transactions, from time to time,
in foreign stock index futures such as the ALL-ORDS (Australia), CAC-40
(France), TOPIX (Japan) and the FTSE-100 (United Kingdom).
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A 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. A Fund may do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, a 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, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a 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. A 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. Futures Contracts on Foreign Currencies
A futures contract on foreign currency creates a binding obligation
on one party to deliver, and a corresponding obligation on another party to
accept delivery of, a stated quantity of foreign currency, for an amount fixed
in U.S. dollars. Foreign currency futures may be used by a Fund to hedge against
exposure to fluctuations in exchange rates between the U.S. dollar and other
currencies arising from multinational transactions.
IV. Margin Payments
Unlike purchase or sales of portfolio securities, no price is paid
or received by a Fund upon the purchase or sale of a futures contract.
Initially, a 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 a particular Fund has purchased a
futures contract and the
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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 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.
V. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by a
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, a 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, a 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
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lose money on the futures and also experience a decline in value in its
portfolio securities.
When futures are purchased to hedge against a possible increase in
the price of securities or a currency before a 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.
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 Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a 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
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described above, there is no guarantee that the price of the securities will in
fact correlate with the price movements in the futures contract and thus provide
an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by a Fund is also subject to Northern
Trust's ability to predict correctly movements in the direction of the market.
For example, if a particular 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. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
VI. Options on Futures Contracts
A 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. A 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
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margin deposits. In anticipation of a decline in interest rates, a 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 a 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 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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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. 10 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 23rd day of July, 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. 10 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 July 23, 1996
- ---------------------------- President (Chief
Silas S. Cathcart Executive Officer)
/s/ Miriam M. Allison Treasurer July 23, 1996
- ---------------------------- (Chief Financial
Miriam M. Allison and Accounting
Officer)
/*/ James W. Cozad* Trustee July 23, 1996
- ---------------------------
James W. Cozad
/*/ Susan Crown* Trustee July 23, 1996
- ---------------------------
Susan Crown
/*/ Wesley M. Dixon, Jr.* Trustee July 23, 1996
- ---------------------------
Wesley M. Dixon, Jr.
/*/ William J. Dolan, Jr.* Trustee July 23, 1996
- ---------------------------
William J. Dolan, Jr.
/*/ Raymond E. George, Jr.* Trustee July 23, 1996
- ---------------------------
Raymond E. George, Jr.
*By:/s/ Miriam M. Allison July 23, 1996
-----------------------
Miriam M. Allison,
Attorney-in-fact
</TABLE>
<PAGE> 105
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 23rd day of
July, 1996.
NORTHERN FUNDS
/s/Jeffrey A. Dalke
-------------------------
Jeffrey A. Dalke
Secretary
<PAGE> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
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.
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 6
<NAME> NORTHERN INTERMEDIATE TAX EXEMPT
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
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<ACCUMULATED-NET-GAINS> (1112)
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<APPREC-INCREASE-CURRENT> 1619
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<NUMBER-OF-SHARES-SOLD> 29847
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<SHARES-REINVESTED> 11
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<GROSS-EXPENSE> 2459
<AVERAGE-NET-ASSETS> 229077
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.40
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<PER-SHARE-NAV-END> 10.03
<EXPENSE-RATIO> 0.85
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 7
<NAME> NORTHERN TAX EXEMPT
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> MAR-31-1995
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<INVESTMENTS-AT-VALUE> 116910
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<PAID-IN-CAPITAL-COMMON> 118200
<SHARES-COMMON-STOCK> 11778
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<ACCUMULATED-NET-GAINS> (1023)
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<ACCUM-APPREC-OR-DEPREC> 1513
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<DIVIDEND-INCOME> 0
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<REALIZED-GAINS-CURRENT> (1023)
<APPREC-INCREASE-CURRENT> 1513
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<NUMBER-OF-SHARES-SOLD> 15920
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<SHARES-REINVESTED> 7
<NET-CHANGE-IN-ASSETS> 118689
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<PER-SHARE-NAV-BEGIN> 10.00
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<EXPENSE-RATIO> 0.85
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 8
<NAME> NORTHERN INTERNATIONAL FIXED INCOME
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 11421
<INVESTMENTS-AT-VALUE> 12518
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<PAYABLE-FOR-SECURITIES> 0
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<PAID-IN-CAPITAL-COMMON> 12166
<SHARES-COMMON-STOCK> 1224
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 19
<ACCUMULATED-NET-GAINS> (211)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1092
<NET-ASSETS> 13028
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 625
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<EXPENSES-NET> 101
<NET-INVESTMENT-INCOME> 524
<REALIZED-GAINS-CURRENT> (211)
<APPREC-INCREASE-CURRENT> 1092
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<NUMBER-OF-SHARES-SOLD> 1291
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<SHARES-REINVESTED> 1
<NET-CHANGE-IN-ASSETS> 13027
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<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 213
<AVERAGE-NET-ASSETS> 8902
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.58
<PER-SHARE-GAIN-APPREC> 0.64
<PER-SHARE-DIVIDEND> (0.58)
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<PER-SHARE-NAV-END> 10.64
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 9
<NAME> NORTHERN INCOME EQUITY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-1-1994
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 37200
<INVESTMENTS-AT-VALUE> 37998
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<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28
<TOTAL-LIABILITIES> 28
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 39029
<SHARES-COMMON-STOCK> 3915
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 109
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (982)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 798
<NET-ASSETS> 38954
<DIVIDEND-INCOME> 475
<INTEREST-INCOME> 893
<OTHER-INCOME> 0
<EXPENSES-NET> 335
<NET-INVESTMENT-INCOME> 1033
<REALIZED-GAINS-CURRENT> (982)
<APPREC-INCREASE-CURRENT> 798
<NET-CHANGE-FROM-OPS> 849
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 924
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 4811
<NUMBER-OF-SHARES-REDEEMED> 897
<SHARES-REINVESTED> 1
<NET-CHANGE-IN-ASSETS> 38953
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 335
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 519
<AVERAGE-NET-ASSETS> 33931
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.29
<PER-SHARE-GAIN-APPREC> (0.08)
<PER-SHARE-DIVIDEND> (0.26)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.95
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 10
<NAME> NORTHERN GROWTH EQUITY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 105704
<INVESTMENTS-AT-VALUE> 113288
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<SENIOR-LONG-TERM-DEBT> 0
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<TOTAL-LIABILITIES> 386
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 107721
<SHARES-COMMON-STOCK> 10664
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 79
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<ACCUMULATED-NET-GAINS> (2199)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7584
<NET-ASSETS> 113185
<DIVIDEND-INCOME> 1309
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<EXPENSES-NET> 872
<NET-INVESTMENT-INCOME> 753
<REALIZED-GAINS-CURRENT> (2199)
<APPREC-INCREASE-CURRENT> 7584
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<NUMBER-OF-SHARES-SOLD> 11656
<NUMBER-OF-SHARES-REDEEMED> 995
<SHARES-REINVESTED> 3
<NET-CHANGE-IN-ASSETS> 113184
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 1223
<AVERAGE-NET-ASSETS> 88378
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> 0.60
<PER-SHARE-DIVIDEND> (0.07)
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<PER-SHARE-NAV-END> 10.61
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 11
<NAME> NORTHERN SELECT EQUITY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-06-1994
<PERIOD-END> MAR-31-1995
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14218
<SHARES-COMMON-STOCK> 1404
<SHARES-COMMON-PRIOR> 7
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<ACCUMULATED-NET-GAINS> (240)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1123
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<DIVIDEND-INCOME> 98
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<NET-INVESTMENT-INCOME> 68
<REALIZED-GAINS-CURRENT> (240)
<APPREC-INCREASE-CURRENT> 1123
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<NUMBER-OF-SHARES-SOLD> 1810
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<SHARES-REINVESTED> 2
<NET-CHANGE-IN-ASSETS> 15053
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<GROSS-EXPENSE> 216
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<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.06
<PER-SHARE-GAIN-APPREC> 0.75
<PER-SHARE-DIVIDEND> (0.04)
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<PER-SHARE-NAV-END> 10.77
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000916620
<NAME> NORTHERN FUNDS
<SERIES>
<NUMBER> 12
<NAME> NORTHERN SMALL CAP GROWTH
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> MAR-31-1995
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<INVESTMENTS-AT-VALUE> 76856
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<TOTAL-LIABILITIES> 582
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75861
<SHARES-COMMON-STOCK> 7681
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<ACCUMULATED-NII-CURRENT> 254
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<ACCUMULATED-NET-GAINS> (169)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 681
<NET-ASSETS> 76627
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<NET-INVESTMENT-INCOME> 759
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000916620
<NAME> NORTHERN FUNDS
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<NAME> NORTHERN INTERNATIONAL GROWTH EQUITY
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<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000916620
<NAME> NORTHERN FUNDS
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<NAME> NORTHERN INTERNATIONAL SELECT EQUITY
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<S> <C>
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<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> (0.23)
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.78
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
