<PAGE> 1
Northern Funds Prospectus July 31, 1997
[NORTHERN FUNDS LOGO]
The Northern Trust Company
50 S. LaSalle Street Investment Adviser,
Chicago, Illinois 60675 Transfer Agent and
1-800-595-9111 Custodian
The shares offered by this Prospectus represent interests in the Money Market
Fund, the U.S. Government Money Market Fund, the Municipal Money Market Fund,
the U.S. Government Select Money Market Fund and the California Municipal Money
Market Fund (the "Funds") of Northern Funds, a no-load management investment
company designed to meet the cash management and investment needs of investors.
Each Fund is advised by The Northern Trust Company ("Northern Trust"). Shares
are sold and redeemed without any purchase or redemption charge by Northern
Funds, although Northern Trust and other institutions may charge their customers
for their services in connection with investments.
Included in this Prospectus are the following Northern Funds:
Money Market Fund, which 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.
U.S. Government Money Market Fund, which seeks to maximize current income to
the extent consistent with the preservation of capital and maintenance of
liquidity by investing exclusively in obligations of the U.S. government, its
agencies and instrumentalities and related repurchase agreements.
Municipal Money Market Fund, which seeks, to the extent consistent with the
preservation of capital and prescribed portfolio standards, a high level of
income exempt from regular federal income tax by investing primarily in
municipal instruments.
U.S. Government Select Money Market Fund, which seeks to maximize current
income to the extent consistent with the preservation of capital and maintenance
of liquidity by investing solely in obligations of the U.S. government, its
agencies and instrumentalities.
California Municipal Money Market Fund, which seeks to provide to 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.
This Prospectus provides information about the Funds that you should know
before investing. It should be read and retained for future reference. Further
information is included in a statement of additional information dated July 31,
1997 (the "Additional Statement"), which is incorporated by reference herein.
For a free copy, write to Northern Funds' distributor, Sunstone Distribution
Services, LLC, at 207 E. Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202,
or call 1-414-271-5885. The Securities and Exchange Commission maintains a World
Wide Web site (http://www.sec.gov) that contains the Additional Statement and
other information regarding Northern Funds. The California Municipal Money
Market Fund is not available in certain states. Please call 1-800-595-9111 to
determine availability in your state.
SHARES OF NORTHERN FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED, ENDORSED OR OTHERWISE SUPPORTED BY, THE NORTHERN TRUST COMPANY, ITS
PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY
THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE. INVESTMENT IN THE FUNDS INVOLVES INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THE CALIFORNIA MUNICIPAL MONEY MARKET FUND MAY INVEST A SIGNIFICANT
PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER, AND THEREFORE, INVESTMENTS IN THIS
FUND MAY BE RISKIER THAN AN INVESTMENT IN OTHER TYPES OF MONEY MARKET FUNDS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is July 31, 1997.
<PAGE> 2
TABLE OF CONTENTS
PAGE
Expense Summary ............................ 1
Financial Highlights ....................... 2
Investment Information
Money Market Fund ....................... 4
U.S. Government Money Market Fund ....... 4
Municipal Money Market Fund ............. 5
U.S. Government Select Money Market Fund 5
California Municipal Money Market Fund .. 5
Other Information ....................... 6
California Municipal Money Market Fund-
Additional Risks and Considerations
Regarding California Investments ..... 7
Additional Investment Information,
Risks and Considerations
Description of Securities and
Investment Techniques ................ 8
Investment Restrictions ................. 16
Opening an Account and Purchasing Shares
Purchasing Shares Through Northern
Trust and Other Organizations ........ 17
Purchasing Shares Directly from the Funds 17
Additional Purchase Information ......... 19
Redeeming and Exchanging Shares
Redeeming and Exchanging Through
Northern Trust and Other Organizations 20
Redeeming and Exchanging
Directly from the Funds .............. 20
Additional Redemption and
Exchange Information ................. 23
Distributions and Taxes
Taxes ................................... 24
Tax Table ............................... 26
Management
Board of Trustees ....................... 27
Investment Adviser, Transfer
Agent and Custodian .................. 27
Administrator and Distributor ........... 28
Service Organizations ................... 28
Expenses ................................ 29
Further Information
Determining Share Price ................. 29
Advertising Performance ................. 29
Voting Rights ........................... 30
Shareholder Reports ..................... 31
Retirement Plans ........................ 31
Miscellaneous ........................... 31
<PAGE> 3
Northern Funds Prospectus July 31, 1997
EXPENSE SUMMARY
The following table will help you understand the expenses you will bear directly
or indirectly as a shareholder of the Funds. Shareholder Transaction Expenses
are charges you pay when buying or selling Fund shares. Annual Operating
Expenses are paid out of a Fund's assets and include fees for portfolio
management, maintenance of shareholder accounts, general Fund administration,
accounting and other services. Examples based on this information are also
provided.
<TABLE>
<CAPTION>
U.S. U.S. GOV'T. CALIFORNIA
GOV'T. MUNICIPAL SELECT MUNICIPAL
MONEY MONEY MONEY MONEY MONEY
MARKET MARKET MARKET MARKET MARKET
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases None None None None None
Sales Charge Imposed on Reinvested Distributions None None None None None
Deferred Sales Charge Imposed on Redemptions None None None None None
Redemption Fees(1) None None None None None
Exchange Fees None None None None None
Annual Operating Expenses
(as a percentage of average net assets)
Management Fees (after fee reductions and waivers) 0.40% 0.40% 0.40% 0.40% 0.40%
12b-1 Fees 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (after fee reductions and reimbursements) 0.15% 0.15% 0.15% 0.15% 0.15%
-------------------------------------------------------
Total Operating Expenses(2)
(After Fee Reductions, Waivers and Reimbursements) 0.55% 0.55% 0.55% 0.55% 0.55%
=======================================================
Example of Expenses(3)
Based on the foregoing table, you would pay the
following expenses on a $1,000 investment,
assuming a 5% annual return and redemption
at the end of each time period:
One Year $ 6 $ 6 $ 6 $ 6 $ 6
Three Years $ 18 $ 18 $ 18 $ 18 $ 18
Five Years $ 32 $ 32 $ 32 $ 32 $ 32
Ten Years $ 71 $ 71 $ 71 $ 71 $ 71
</TABLE>
(1) A fee of $15.00 may be applicable for each wire redemption.
(2) The table and example shown do not reflect any charges that may be imposed
by Northern Trust or other institutions on their customers.
(3) The example should not be considered a representation of past or future
expenses or rates of return. Actual operating expenses and investment return
may be more or less than those shown.
Except as noted in the next sentence, the above information reflects the
expenses the Funds incurred for Northern Funds' fiscal year ended March 31,
1997. The figures shown for the U.S. Government Select Money Market and
California Municipal Money Market Funds have been restated to reflect
anticipated fees during the next twelve months. Without voluntary fee
reductions, waivers and reimbursements, "Management Fees" would have been 0.60%
for each Fund; "Other Expenses" would have been 0.30%, 0.36%, 0.30%, 0.37% and
0.34%, respectively, for the Money Market, U.S. Government Money Market,
Municipal Money Market, U.S. Government Select Money Market and California
Municipal Money Market Funds; and "Total Operating Expenses" would have been
0.90%, 0.96%, 0.90%, 0.97% and 0.94%, respectively. In addition, during the last
fiscal year these Funds did not, and during the current fiscal year do not
expect to, pay any 12b-1 fees (otherwise payable at an annual rate of up to
0.25%) under Northern Funds' Distribution and Service Plan. For more expense
information, see "Management."
1
<PAGE> 4
FINANCIAL HIGHLIGHTS
The following financial information has been derived from the financial
statements included in, or incorporated by reference into, the Additional
Statement and has been audited by Northern Funds' independent accountant. This
financial information should be read together with those financial statements.
Further information about the performance of the Funds is contained in Northern
Funds' annual shareholder reports. Both the Additional Statement and the annual
shareholder reports may be obtained without charge by calling the Northern Funds
Center at 1-800-595-9111 or writing P.O. Box 75986, Chicago, Illinois
60690-6319.
<TABLE>
<CAPTION>
U.S. GOVERNMENT
MONEY MARKET MONEY MARKET
FUND FUND
----------------------------------------- ---------------------------------
YEAR YEAR PERIOD YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
SELECTED PER SHARE DATA 1997 1996 1995(1) 1997 1996 1995(1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from Investment Operations:
Net investment income 0.05 0.05 0.04 0.05 0.05 0.04
- ----------------------------------------------------------------------------------------------------------------------------
Less Distributions Paid:
From net investment income (0.05) (0.05) (0.04) (0.05) (0.05) (0.04)
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------------------------------------------------
Total Return(4) 5.05% 5.57% 4.55% 4.93% 5.46% 4.47%
Supplemental Data and Ratios:
Net assets, in thousands, end of period $1,607,187 $1,061,813 $894,279 $314,259 $207,105 $227,543
Ratio to average net assets of:(5)
Expenses, net of waivers and
reimbursements 0.55% 0.49% 0.45% 0.55% 0.49% 0.45%
Expenses, before waivers and
reimbursements 0.90% 0.91% 0.96% 0.96% 0.94% 1.01%
Net investment income, net of waivers
and reimbursements 4.94% 5.42% 4.94% 4.82% 5.33% 4.93%
Net investment income, before waivers
and reimbursements 4.59% 5.00% 4.43% 4.41% 4.88% 4.37%
</TABLE>
(1) Commenced investment operations on April 11, 1994.
(2) Commenced investment operations on December 12, 1994.
(3) Commenced investment operations on November 29, 1994.
(4) Total return is not annualized for periods less than a full year.
(5) Annualized for periods less than a full year.
2
<PAGE> 5
Northern Funds Prospectus July 31, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT CALIFORNIA
MUNICIPAL SELECT MUNICIPAL
MONEY MARKET MONEY MARKET MONEY MARKET
FUND FUND FUND
- ----------------------------------------- ---------------------------------- ---------------------------------
YEAR YEAR PERIOD YEAR YEAR PERIOD YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1997 1996 1995(1) 1997 1996 1995(2) 1997 1996 1995(3)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
0.03 0.03 0.03 0.05 0.05 0.02 0.03 0.04 0.01
- --------------------------------------------------------------------------------------------------------------------
(0.03) (0.03) (0.03) (0.05) (0.05) (0.02) (0.03) (0.04) (0.01)
- --------------------------------------------------------------------------------------------------------------------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------------------------------------
3.14% 3.54% 2.90% 5.07% 5.55% 1.75% 3.19% 3.63% 1.27%
$1,420,041 $1,102,789 $927,747 $168,128 $85,400 $82,162 $200,989 $165,087 $161,316
0.55% 0.49% 0.45% 0.40% 0.33% 0.30% 0.45% 0.39% 0.35%
0.90% 0.91% 0.95% 0.97% 1.00% 1.32% 0.94% 0.94% 1.07%
3.08% 3.46% 3.10% 4.95% 5.43% 5.84% 3.13% 3.55% 3.78%
2.73% 3.04% 2.60% 4.38% 4.76% 4.82% 2.64% 3.00% 3.06%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 6
INVESTMENT
INFORMATION
The investment objectives and policies of each of the Funds are described below.
Additional information regarding the securities, investment techniques and
restrictions of each Fund are described under "Additional Investment
Information, Risks and Considerations."
MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek to maximize current
income to the extent consistent with the preservation of capital and the
maintenance of liquidity by investing exclusively in high-quality money market
instruments. In pursuing its investment objective, the Money Market Fund may
invest in a broad range of government, bank and commercial obligations that are
available in the money markets. In particular, the Fund may invest in:
A U.S. dollar-denominated obligations of U.S. banks with total assets in excess
of $1 billion (including obligations of foreign branches of such banks);
B U.S. dollar-denominated obligations of foreign commercial banks with total
assets in excess of $5 billion;
C high-quality commercial paper and other obligations issued or guaranteed by
U.S. and foreign corporations and other issuers rated (at the time of
purchase) A-2 or higher by Standard & Poor's Ratings Group ("S&P"), Prime-2
or higher by Moody's Investors Service, Inc. ("Moody's"), D-2 or higher by
Duff & Phelps Credit Co. ("Duff"), F-2 or higher by Fitch Investors Service,
Inc. ("Fitch") or TBW-2 or higher by Thomson BankWatch, Inc. ("TBW");
D rated and unrated corporate bonds, notes, paper and other instruments that
are of comparable quality to the commercial paper permitted to be purchased
by the Fund;
E asset-backed securities (including interests in pools of assets such as
mortgages, installment purchase obligations and credit card receivables);
F securities issued or guaranteed as to principal and interest by the U.S.
government or by its agencies or instrumentalities and custodial receipts
with respect thereto;
G dollar-denominated securities issued or guaranteed by one or more foreign
governments or political subdivisions, agencies or instrumentalities thereof;
H repurchase agreements relating to the above instruments; and
I securities issued or guaranteed by state or local governmental bodies.
U.S. GOVERNMENT MONEY MARKET FUND
The investment objective of the U.S. Government Money Market Fund is also to
seek to maximize current income to the extent consistent with the preservation
of capital and the maintenance of liquidity by investing exclusively in
high-quality money market instruments. The U.S. Government Money Market Fund
seeks to achieve its investment objective by investing in:
A securities issued or guaranteed as to principal and interest by the U.S.
government or by any of its agencies or instrumentalities (including the
International Bank for Reconstruction and Development);
B repurchase agreements relating to the above instruments; and
C custodial receipts with respect to securities issued or guaranteed as to
principal and interest by the U.S. government or by any of its agencies or
instrumentalities.
4
<PAGE> 7
Northern Funds Prospectus July 31, 1997
MUNICIPAL MONEY MARKET FUND
The investment objective of the Municipal Money Market Fund is to seek, to the
extent consistent with the preservation of capital and prescribed portfolio
standards, a high level of income exempt from regular federal income tax by
investing primarily in municipal instruments. The Municipal Money Market Fund
seeks to achieve its investment objective by investing in:
A fixed and variable rate notes and similar debt instruments rated MIG-2,
VMIG-2 or Prime-2 or higher by Moody's, SP-2 or A-2 or higher by S&P, D-2 or
higher by Duff or F-2 or higher by Fitch;
B tax-exempt commercial paper and similar debt instruments rated Prime-2 or
higher by Moody's, A-2 or higher by S&P, D-2 or higher by Duff or F-2 or
higher by Fitch;
C rated and unrated municipal bonds, notes, paper or other instruments that are
of comparable quality to the tax-exempt commercial paper permitted to be
purchased by the Fund; and
D municipal bonds and notes which are guaranteed as to principal and interest
by the U.S. government or an agency or instrumentality thereof or which
otherwise depend directly or indirectly on the credit of the United States.
U.S. GOVERNMENT SELECT MONEY MARKET FUND
The investment objective of the U.S. Government Select Money Market Fund is to
seek 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. The U.S. Government Select Money Market Fund seeks to
achieve its investment objective by investing solely in securities issued or
guaranteed as to principal and interest by the U.S. government or by any of its
agencies or instrumentalities.
In making investment decisions, Northern Trust will seek to acquire, during
normal market conditions, only those U.S. government securities the interest on
which is generally exempt from state income taxation. Securities generally
eligible for this exemption include those issued by the U.S. Treasury and
certain U.S. government agencies and instrumentalities, including the Tennessee
Valley Authority, Federal Home Loan Bank, Federal Farm Credit Bank Funding Corp.
and the Student Loan Marketing Association. The Fund intends to limit
investments to only the foregoing exempt U.S. government securities. However,
under extraordinary circumstances, such as when appropriate exempt securities
are unavailable, the Fund may make investments in non-exempt U.S. government
securities and cash equivalents, and may hold uninvested cash. See
"Distributions and Taxes" below for certain tax considerations.
CALIFORNIA MUNICIPAL MONEY MARKET FUND
The investment objective of the California Municipal Money Market Fund is to
seek to provide, 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. The California
Municipal Money Market Fund seeks to achieve its investment objective by
investing in:
A fixed and variable rate notes and similar debt instruments rated MIG-2,
VMIG-2 or Prime-2 or higher by Moody's, SP-2 or A-2 or higher by S&P, D-2 or
higher by Duff or F-2 or higher by Fitch;
B tax-exempt commercial paper and similar debt instruments rated Prime-2 or
higher by Moody's, A-2 or higher by S&P, D-2 or higher by Duff or F-2 or
higher by Fitch;
5
<PAGE> 8
C rated and unrated municipal bonds, notes, paper or other instruments that are
of comparable quality to the tax-exempt commercial paper permitted to be
purchased by the Fund; and
D municipal bonds and notes which are guaranteed as to principal and interest
by the U.S. government or an agency or instrumentality thereof or which
otherwise depend directly or indirectly on the credit of the United States.
Because the California Municipal Money Market Fund concentrates its
investments in obligations issued by California and its political subdivisions,
an investment in this Fund may be riskier than an investment in the other Funds.
OTHER INFORMATION
All securities acquired by the Funds will be determined at the time of purchase
by Northern Trust to present minimal credit risks and will be "Eligible
Securities" as defined by the Securities and Exchange Commission (the "SEC").
Eligible Securities are (a) securities that either (i) have short-term debt
ratings at the time of purchase in the two highest rating categories by at least
two unaffiliated nationally recognized statistical rating organizations
("NRSROs") (or one NRSRO if the security is rated by only one NRSRO), or (ii)
are comparable in priority and security with an instrument issued by an issuer
which has such ratings, and (b) securities that are unrated (including
securities of issuers that have long-term but not short-term ratings) but are of
comparable quality as determined by Northern Trust.
Each Fund is managed so that the average maturity of all instruments in a
Fund (on a dollar-weighted basis) will not exceed 90 days. In no event will the
Funds purchase any securities which mature more than 397 days from the date of
purchase (except for certain variable and floating rate instruments and
securities collateralizing repurchase agreements). Securities in which the Funds
invest may not earn as high a level of income as longer term or lower quality
securities, which generally have greater market risk and more fluctuation in
market value.
As a matter of fundamental policy, changeable only with the approval of the
holders of a majority of the outstanding shares of the Fund, at least 80% of the
annual gross income of the Municipal Money Market and the California Municipal
Money Market Funds will be derived from debt instruments, the interest on which
is, in the opinion of bond counsel or counsel for the issuers, exempt from
regular income tax ("Municipal Instruments"), except in extraordinary
circumstances such as when Northern Trust believes that market conditions
indicate that the Fund should adopt a temporary defensive posture by holding
uninvested cash or investing in taxable short-term securities ("Taxable
Investments"). In addition, as a non-fundamental policy, under normal market
conditions at least 65% of the value of the California Municipal Money Market
Fund's total assets will be invested in Municipal Instruments the interest on
which, in the opinion of bond counsel for the issuers, is exempt from California
state personal income tax ("California Municipal Instruments"). These opinions
may contain various assumptions, qualifications or exceptions that are
reasonably acceptable to Northern Trust. The Municipal Money Market and the
California Municipal Money Market Funds are not limited in the amount of their
assets that may be invested in "private activity bonds" the interest on which
may be treated as an item of tax preference to shareholders under the federal
alternative minimum tax. Taxable Investments will consist exclusively of
instruments that may be purchased by the Money Market Fund. Under normal market
conditions, Taxable Investments will not exceed 20% of the value of the total
assets of either Fund; during temporary defensive periods, however, all or any
portion of a Fund's assets may be invested in such instruments.
6
<PAGE> 9
Northern Funds Prospectus July 31, 1997
CALIFORNIA MUNICIPAL MONEY MARKET FUND --
ADDITIONAL RISKS AND CONSIDERATIONS
REGARDING CALIFORNIA INVESTMENTS
The investments of the California Municipal Money Market Fund in California
Municipal Instruments raise additional considerations. Payment of the interest
on and the principal of these instruments is dependent upon the continuing
ability of California issuers to meet their obligations.
The Fund's investments include obligations of California governmental issuers
which rely in whole or in part, directly or indirectly, on real property taxes
as a source of revenue. "Proposition Thirteen" and similar California
constitutional and statutory amendments and initiatives in recent years have
restricted the ability of California taxing entities to increase real property
tax revenues. Other initiative measures approved by California voters in recent
years, through limiting various other taxes, have resulted in a substantial
reduction in state revenues. Decreased state revenues may result in reductions
in allocations of state revenues to local governments.
Because of the complex nature of the various initiatives mentioned above and
certain possible ambiguities and inconsistencies in their terms and the scope of
various exemptions and exceptions, as well as the impossibility of predicting
the level of future appropriations for state and local California governmental
entities, the impact of these initiatives and related measures on the ability of
California governmental issuers to pay interest or repay principal on their
obligations is difficult to determine. There have, however, been certain adverse
developments with respect to California Municipal Instruments over the past
several years.
In addition to the various initiatives discussed above, economic factors such
as the reduction in defense spending, a decline in tourism and high levels of
unemployment have had an adverse impact on the economy of California. In recent
years, these economic factors reduced revenues to the state government at a time
when expenses of state government such as education costs, various welfare costs
and other expenses were rising. Such economic factors adversely impacted the
ability of state and local California governmental entities to repay debt, and
these factors, and others that cannot be predicted, may have an adverse impact
in the future.
In addition to the risk of nonpayment on California Municipal Instruments, if
these obligations decline in quality and are downgraded by the NRSROs, they may
become ineligible for purchase by the Fund. Since there are large numbers of
buyers of these instruments, the supply of California Municipal Instruments that
are eligible for purchase by the Fund could become inadequate at certain times.
Investors should consider the greater risk inherent in the California
Municipal Money Market Fund's concentration in such obligations versus the
safety that comes with a less geographically concentrated investment portfolio,
and should compare the yield available on a portfolio of California Municipal
Instruments with the yield of a more diversified portfolio including
non-California securities before making an investment decision.
A more detailed description of special factors affecting investments in
California Municipal Instruments is provided in the Additional Statement.
7
<PAGE> 10
ADDITIONAL INVESTMENT
INFORMATION, RISKS
AND CONSIDERATIONS
DESCRIPTION OF SECURITIES AND
INVESTMENT TECHNIQUES
MUNICIPAL INSTRUMENTS
The Municipal Money Market and California Municipal Money Market Funds (the
"Municipal Funds") intend to invest primarily in Municipal Instruments.
Municipal Instruments include debt obligations issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities.
Municipal Instruments include both "general" and "revenue" obligations.
General obligations are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue obligations
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source such as lease revenue payments from the user of
the facility being financed. Industrial development bonds are in most cases
revenue securities and are not payable from the unrestricted revenues of the
issuer. Consequently, the credit quality of an industrial revenue bond is
usually directly related to the credit standing of the private user of the
facility involved.
The Municipal Funds may also invest in "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of a moral
obligation bond is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund (if such a fund has been established),
the restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Within the principal classifications of Municipal Instruments described above
there are a variety of categories, including municipal bonds, municipal notes,
municipal leases, custodial receipts and participation certificates. Municipal
notes include tax, revenue and bond anticipation notes of short maturity, which
are issued to obtain temporary funds for various public purposes. Municipal
leases are obligations issued by state and local governments or authorities to
finance the acquisition of equipment and facilities. Certain municipal lease
obligations may include "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis.
Custodial receipts are underwritten by securities dealers or banks and evidence
ownership of future interest payments, principal payments or both on certain
municipal securities. Participation certificates are obligations issued by state
or local governments or authorities to finance the acquisition of equipment and
facilities. They may represent participations in a lease, an installment
purchase contract, or a conditional sales contract. Municipal leases (and
participations in such leases) present the risk that a municipality will not
appropriate funds for the lease payments. Northern Trust, under the supervision
of Northern Funds' Board of Trustees, will determine the credit quality of any
unrated municipal leases on an ongoing basis, including an assessment of the
likelihood that the leases will not be cancelled.
Each Municipal Fund may acquire "stand-by commitments" relating to the
Municipal Instruments it holds. Under a stand-by commitment, a dealer agrees to
purchase, at the Fund's option, specified Municipal Instruments at a specified
price. A stand-by commitment may increase the cost, and thereby reduce the
yield, of the Municipal Instruments to which the commitment relates. The
8
<PAGE> 11
Northern Funds Prospectus July 31, 1997
Municipal Funds will acquire stand-by commitments solely to facilitate portfolio
liquidity and do not intend to exercise their rights for trading purposes.
Municipal Instruments purchased by the Municipal Funds may be backed by
letters of credit or other forms of credit enhancement issued by domestic or
foreign banks and other financial institutions. The credit quality of these
banks and financial institutions could, therefore, cause loss to a Fund that
invests in Municipal Instruments and affect its share price. Foreign letters of
credit may involve certain risks in addition to those of domestic obligations.
Foreign banks and foreign branches of domestic banks may be subject to less
stringent reserve requirements, and to different accounting, auditing and
recordkeeping requirements than domestic banks.
The Municipal Funds do not intend to invest 25% or more of the value of their
total assets in industrial development bonds or similar obligations where the
non-governmental entities supplying the revenues from which such bonds or
obligations are to be paid are in the same industry. Each Fund may, however,
invest 25% or more of its total assets in Municipal Instruments the interest on
which is paid solely from revenues of similar projects. In addition, although
the Municipal Money Market Fund does not expect to do so during normal market
conditions, it may invest more than 25% of the value of its total assets in
Municipal Instruments whose issuers are in the same state. The California
Municipal Money Market Fund expects to invest principally in California
Municipal Instruments. When a substantial portion of a Fund's assets is invested
in instruments which are used to finance facilities involving a particular
industry, whose issuers are in the same state or which are otherwise related,
there is a possibility that an economic, business or political development
affecting one instrument would likewise affect the related instruments.
The Money Market and U.S. Government Money Market Funds may invest from time
to time in Municipal Instruments or other securities issued by state and local
governmental bodies when Northern Trust believes such an investment strategy is
in the best interest of Northern Funds' shareholders. Dividends paid by Funds
other than the Municipal Funds on such investments will be taxable to
shareholders.
FOREIGN SECURITIES
The Money Market Fund may invest in dollar-denominated obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities. These obligations may be issued by
supranational entities, including international organizations (such as the
European Coal and Steel Community) designated or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies.
There are risks and costs involved in investing in foreign securities which
are in addition to the usual risks inherent in domestic investments. Investment
in foreign securities involves higher costs than investment in U.S. securities,
including higher transaction and custody costs as well as the imposition of
additional taxes by foreign governments. Foreign investments also involve risks
associated with less complete financial information about the issuers, less
market liquidity, more market volatility and political instability. Future
political and economic developments, the possible imposition of withholding
taxes on dividend income, the possible seizure or nationalization of foreign
holdings, the possible establishment of exchange controls, or the adoption of
other governmental restrictions might adversely affect an investment in foreign
securities. Additionally, foreign banks and foreign branches of domestic banks
are subject to less stringent reserve requirements, and to different accounting,
auditing and recordkeeping requirements.
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The Money Market Fund may invest in foreign debt, including the securities of
foreign governments. Several risks exist concerning such investments, including
the risk that foreign governments may default on their obligations, may not
respect the integrity of such debt, may attempt to renegotiate the debt at a
lower rate, and may not honor investments by United States entities or citizens.
UNITED STATES GOVERNMENT OBLIGATIONS
To the extent consistent with their respective investment objectives, each Fund
may invest in a variety of U.S. Treasury obligations consisting of bills, notes
and bonds, which principally differ only in their interest rates, maturities and
time of issuance. The Funds may also invest in other securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities.
Obligations of certain agencies and instrumentalities, such as the Government
National Mortgage Association ("GNMA"), are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association
("FNMA"), are supported by the discretionary authority of the U.S. government to
purchase the agency's obligations; still others, such as those of the Student
Loan Marketing Association ("SLMA"), are supported only by the credit of the
instrumentalities. No assurance can be given that the U.S. government would
provide financial support to its agencies or instrumentalities if it is not
obligated to do so by law. Obligations of the International Bank for
Reconstruction and Development (also known as the World Bank) are supported by
subscribed, but unpaid, commitments of its member countries. There is no
assurance that these commitments will be undertaken or complied with in the
future.
Securities guaranteed as to principal and interest by the U.S. government,
its agencies or instrumentalities are deemed to include: (a) securities for
which the payment of principal and interest is backed by an irrevocable letter
of credit issued by the U.S. government or an agency or instrumentality thereof;
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed. The secondary market for certain of these participations
is limited. Such participations will therefore be regarded as illiquid. No
assurance can be given that the U.S. government would provide financial support
to its agencies or instrumentalities if it is not obliged to do so by law.
STRIPPED OBLIGATIONS
To the extent consistent with their respective investment objectives, the Funds
may purchase Treasury receipts and other "stripped" securities that evidence
ownership in either the future interest payments or the future principal
payments on U.S. government and other obligations. These participations, which
may be issued by the U.S. government (or a U.S. government agency or
instrumentality) or by private issuers such as banks and other institutions, are
issued at a discount to their "face value," and may include stripped
mortgage-backed securities ("SMBS") which are derivative multi-class mortgage
securities. Stripped securities, particularly SMBS, may exhibit greater price
volatility than ordinary debt securities because of the manner in which their
principal and interest are returned to investors.
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal.
However, in some cases, one class will receive some of the interest and most of
the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obliga-
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Northern Funds Prospectus July 31, 1997
tions experience greater than anticipated prepayments of principal, a Fund may
fail to fully recoup its initial investment. The market value of the class
consisting entirely of principal payments can be extremely volatile in response
to changes in interest rates. The yields on a class of SMBS that receives all or
most of the interest are generally higher than prevailing market yields on other
mortgage-backed obligations because their cash flow patterns are also volatile
and there is a greater risk that the initial investment will not be fully
recouped.
SMBS issued by the U.S. government (or a U.S. government agency or
instrumentality) may be considered liquid under guidelines established by
Northern Funds' Board of Trustees if they can be disposed of promptly in the
ordinary course of business at a value reasonably close to that used in the
calculation of a Fund's per share net asset value.
CUSTODIAL RECEIPTS FOR TREASURY SECURITIES
To the extent consistent with their respective investment objectives, the Funds,
other than the U.S. Government Select Money Market Fund, may also purchase
participations in trusts that hold U.S. Treasury securities (such as TIGRs and
CATs) or other obligations where the trust participations evidence ownership in
either the future interest payments or the future principal payments on the
obligations. Like other stripped obligations, these participations are also
normally issued at a discount to their "face value," and can exhibit greater
price volatility than ordinary debt securities because of the way in which their
principal and interest are returned to investors. Investments by the U.S.
Government Money Market Fund in such participations will not exceed 35% of the
value of that Fund's total assets.
ASSET-BACKED SECURITIES
The U.S. Government Money Market Fund may purchase securities that are secured
or backed by mortgages and that are issued by the U.S. government, its agencies
or instrumentalities. The other Funds may purchase asset-backed securities that
are secured or backed by mortgages or other assets (e.g., automobile loans,
credit card receivables and other financial assets) and are issued by the U.S.
government, GNMA, FNMA, Federal Home Loan Mortgage Corporation, and private
issuers such as commercial banks, financial companies, finance subsidiaries of
industrial companies, savings and loan associations, mortgage banks, investment
banks and certain special-purpose entities.
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the underlying collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed collateral may
not, in some cases, be able to support payments on these securities.
The Funds may acquire several types of mortgage-backed securities, including
guaranteed mortgage pass-through certificates, which provide the holder with a
pro rata interest in the underlying mortgages, and collateralized mortgage
11
<PAGE> 14
obligations ("CMOs"), which provide the holder with a specified interest in the
cash flow of a pool of underlying mortgages or other mortgage-backed securities.
Issuers of CMOs ordinarily elect to be taxed as pass-through entities known as
real estate mortgage investment conduits ("REMICs"). CMOs are issued in multiple
classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may be
structured in a variety of ways. The Funds will not purchase "residual" CMO
interests, which normally exhibit greater price volatility.
The yield characteristics of asset-backed securities differ from traditional
debt securities. A major difference is that the principal amount of the
obligations may be prepaid at any time because the underlying assets (i.e.,
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
decrease, yield to maturity.
Prepayments on asset-backed securities generally increase with falling
interest rates and decrease with rising interest rates; furthermore, prepayment
rates are influenced by a variety of economic and social factors. In general,
the collateral supporting non-mortgage asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. Like other fixed income securities, when interest rates rise the
value of an asset-backed security generally will decline; however, when interest
rates decline, the value of an asset-backed security with prepayment features
may not increase as much as that of other fixed income securities.
CORPORATE AND BANK OBLIGATIONS
To the extent consistent with their respective investment objectives, the Funds,
other than the U.S. Government Select Money Market Fund, may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire
commercial obligations issued by Canadian corporations and Canadian counterparts
of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated
commercial paper of a foreign issuer. Bank obligations may include certificates
of deposit, notes, bankers' acceptances and fixed time deposits. These
obligations may be general obligations of the parent bank or may be limited to
the issuing branch or subsidiary by the terms of specific obligation or by
government regulation. For purposes of determining the permissibility of an
investment in bank obligations, the total assets of a bank are determined on the
basis of the bank's most recent annual financial statements.
GUARANTEED INVESTMENT CONTRACTS
The Money Market Fund may make limited investments in guaranteed investment
contracts ("GICs") issued by highly rated U.S. and foreign insurance companies.
Pursuant to these contracts, a Fund makes cash contributions to a deposit fund
of the insurance company's general account. The insurance company then credits
to the Fund, on a monthly basis, interest which is based on an index (such as
the Salomon Brothers CD Index), but is guaranteed not to be less than a certain
minimum rate. The Money Market 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 Northern Trust. 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 be subject to a
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Northern Funds Prospectus July 31, 1997
Fund's limitation on illiquid investments when the Fund may not demand payment
of the principal amount within seven days and a reliable trading market is
absent. See "Illiquid Securities."
VARIABLE AND FLOATING RATE INSTRUMENTS
In accordance with their respective investment objectives, the Funds may
purchase rated and unrated variable and floating rate instruments. These
instruments may include variable amount master demand notes that permit the
indebtedness to vary in addition to providing for periodic adjustments in the
interest rate and long-term variable and floating rate bonds (sometimes referred
to as "Put Bonds") where the Fund obtains at the time of purchase the right to
put the bond back to the issuer or a third party at par at a specified date. A
Fund may purchase variable and floating rate instruments with stated maturities
in excess of its maturity limitations provided that the Fund may demand payment
of the principal of the instrument at least once within the applicable maturity
limitation on not more than thirty days' notice (unless the instrument is issued
or guaranteed by the U.S. government or an agency or instrumentality thereof).
Unrated instruments will be determined by Northern Trust to be of comparable
quality at the time of purchase to rated instruments purchasable by the Funds.
The absence of an active secondary market with respect to particular variable
and floating rate instruments could make it difficult for a Fund to dispose of
the instruments if the issuer defaulted on its payment obligation or during
periods that the Fund is not entitled to exercise demand rights, and a Fund
could, for these or other reasons, suffer a loss with respect to such
instruments. Variable and floating rate instruments (including inverse floaters)
will be subject to a Fund's limitation on illiquid investments when the Fund may
not demand payment of the principal amount within seven days and a reliable
trading market is absent. See "Illiquid Securities."
REPURCHASE AGREEMENTS
Each 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"). Although the securities subject to a
repurchase agreement may bear maturities exceeding one year, settlement for the
repurchase agreement will never be more than one year after a Fund's acquisition
of the securities and normally will be within a shorter period of time.
Securities subject to repurchase agreements are held 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
AND OTHER BORROWINGS
Each Fund is authorized to make borrowings as described below under "Investment
Restrictions." If the securities held by a Fund should decline in value while
borrowings are outstanding, the market value of the Fund's portfolio will
decline proportionately more than the decline in value it would otherwise
suffer. Borrowings may be made through reverse repurchase agreements under which
a Fund sells portfolio securities to financial institutions such as banks and
broker/dealers and agrees to repurchase them at a particular date and price. The
Funds may use the proceeds of reverse repurchase agreements to purchase other
securities either maturing, or under an agreement to resell, on a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Money Market and U.S. Government
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<PAGE> 16
Money Market Funds may utilize reverse repurchase agreements when it is
anticipated that the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the
transaction. This use of reverse repurchase agreements may be regarded as
leveraging and, therefore, speculative. Reverse repurchase agreements involve
the risks that the interest income earned in the investment of the proceeds will
be less than the interest expense, that the market value of the securities sold
by a Fund may decline below the price of the securities the Fund is obligated to
repurchase and that the securities may not be returned to the Fund. During the
time a reverse repurchase agreement is outstanding, a Fund will maintain a
segregated account with Northern Funds' custodian containing cash, U.S.
government or other appropriate liquid securities having a value at least equal
to the repurchase price. A Fund's reverse repurchase agreements, together with
any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of
its total assets. In addition, whenever borrowings exceed 5% of the Fund's total
assets, the Fund will not make any investments.
SECURITIES LENDING
Each Fund may seek additional income from time to time by lending securities on
a short-term basis to banks, brokers and dealers. The securities lending
agreements will require that the loans be secured by collateral in cash, cash
equivalents, U.S. government securities or irrevocable bank letters of credit
maintained on a current basis equal in value to at least the market value of the
loaned securities. A Fund may not make such loans in excess of 33 1/3% of the
value of its total assets. Securities loans involve risks of delay in receiving
additional collateral or in recovering the loaned securities, or possibly loss
of rights in the collateral if the borrower of the securities becomes insolvent.
FORWARD COMMITMENTS, WHEN-ISSUED
SECURITIES AND DELAYED-DELIVERY TRANSACTIONS
Each Fund may purchase or sell securities on a when-issued or delayed-delivery
basis and make contracts to purchase or sell securities for a fixed price at a
future date beyond customary settlement time. Securities purchased or sold on a
when-issued, delayed-delivery or forward commitment basis involve a risk of loss
if the value of the security to be purchased declines, or the value of the
security to be sold increases, before the settlement date. Although a Fund will
generally purchase securities with the intention of acquiring them, a Fund may
dispose of securities purchased on a when-issued, delayed-delivery or a forward
commitment basis before settlement when deemed appropriate by Northern Trust.
INVESTMENT COMPANIES
In connection with the management of its daily cash positions, each Fund may
invest in securities issued by other investment companies which invest in
short-term, high-quality debt securities and which determine their net asset
value per share based on the amortized cost or penny-rounding method of
valuation. In addition, each Fund may invest in securities issued by other
investment companies if otherwise consistent with its investment objectives and
policies. As a shareholder of another investment company, a Fund will bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses including advisory fees. These expenses would be in addition
to the advisory fees and other expenses the Fund bears directly in connection
with its own operations. Investments in other investment companies will be
subject to the limits imposed by the Investment Company Act of 1940 (the "1940
Act").
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Northern Funds Prospectus July 31, 1997
ILLIQUID SECURITIES
Each Fund may invest up to 10% of the value of its net assets in illiquid
securities. Illiquid securities generally include repurchase agreements and time
deposits with notice/termination dates in excess of seven days, SMBS issued by
private issuers, interest rate and currency swaps, unlisted over-the-counter
options, certain GICs and other securities which are subject to trading
restrictions because they are not registered under the Securities Act of 1933
(the "1933 Act").
If otherwise consistent with its investment objective and policies, each Fund
may purchase commercial paper issued pursuant to Section 4(2) of the 1933 Act
and securities that are not registered under the 1933 Act but can be sold to
"qualified institutional buyers" in accordance with Rule 144A under the 1933
Act. These securities will not be considered illiquid so long as Northern Trust
determines, under guidelines approved by Northern Funds' Board of Trustees, that
an adequate trading market exists. This practice could increase the level of
illiquidity during any period that qualified institutional buyers become
uninterested in purchasing these securities.
PORTFOLIO TRANSACTIONS
Northern Trust's Advisory Agreement provides that in selecting brokers or
dealers to place orders for transactions (a) involving common and preferred
stocks, Northern Trust shall use its best judgment to obtain the best overall
terms available and (b) involving bonds and other fixed income obligations,
Northern Trust shall attempt to obtain best net price and execution. In
assessing the best overall terms available for any transaction, Northern Trust
is to consider all factors it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing basis.
In evaluating the best overall terms available and in selecting the broker or
dealer to execute a particular transaction, Northern Trust may consider the
brokerage and research services provided to the Funds and/or other accounts over
which Northern Trust or an affiliate of Northern Trust exercises investment
discretion. These brokerage and research services may include industry and
company analysis, portfolio services, quantitative data, market information
systems and economic and political consulting and analytical services.
MISCELLANEOUS
After its purchase by a Fund, a rated security may cease to be rated or its
rating may be reduced below the minimum rating required for purchase by the
Fund. Northern Trust will consider such an event in determining whether the Fund
should continue to hold the security. Northern Trust expects to sell promptly
any securities that are below "high quality" where it has determined that such
sale is in the best interest of the Fund.
For a description of applicable securities ratings, see Appendix A to the
Additional Statement.
Each Fund may also purchase other types of financial instruments, however
designated, whose investment and credit quality characteristics are determined
by Northern Trust to be substantially similar to those of any other investment
otherwise permitted by the investment policies discussed above.
The Funds do not intend to purchase certificates of deposit of Northern Trust
or its affiliate banks, commercial paper issued by Northern Trust's parent
holding company or other securities issued or guaranteed by Northern Trust, its
parent holding company or their subsidiaries or affiliates.
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INVESTMENT RESTRICTIONS
A Fund's investment objective may be changed by Northern Funds' Board of
Trustees without shareholder approval. Shareholders will, however, be notified
of any changes. Any such change may result in a Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund. No assurance can be provided
that a Fund will achieve its investment objective.
Each Fund has also adopted certain fundamental investment restrictions that
may be changed only with the approval of a majority of a Fund's outstanding
shares. The following description summarizes several of the Funds' fundamental
restrictions, which are set forth in full in the Additional Statement.
No Fund may:
1. invest 25% or more of its total assets at the time of purchase in
securities of issuers whose principal business activities are in the same
industry, with certain limited exceptions set forth in the Additional Statement;
2. borrow money except in amounts up to 33 1/3% of the value of its total
assets at the time of borrowing;
3. purchase securities (except U.S. government securities and repurchase
agreements collateralized by such securities) if more than 5% of its total
assets at the time of purchase will be invested in the securities of any one
issuer, except that up to 25% (50% for the California Municipal Money Market
Fund) of a Fund's total assets may be invested without regard to this 5%
limitation; or
4. subject to the foregoing 25% exception, purchase more than 10% of the
outstanding voting securities of any issuer.
In accordance with current SEC regulations (which are more restrictive than
the Funds' fundamental investment restrictions), the Funds intend, as a
non-fundamental policy, to limit investments in the securities of any single
issuer (other than securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities and repurchase agreements collateralized by such
securities) to not more than 5% of the value of their respective total assets at
the time of purchase, except that (a) 25% of the value of the total assets of
the California Municipal Money Market Fund may be invested in fewer than five
issuers; (b) 25% of the value of the total assets of the other Funds may be
invested in any one issuer for a period of up to three Business Days; and (c)
securities subject to certain unconditional demand features are subject to
different diversification requirements as described in the Additional Statement.
In addition, the Money Market, U.S. Government Money Market and U.S. Government
Select Money Market Funds will limit their investments in all securities, and
the Municipal Money Market and California Municipal Money Market Funds will
limit investments in certain conduit securities as described in the Additional
Statement, that are not in the highest rating category as determined by two
NRSROs (or one NRSRO if the security is rated by only one NRSRO) or, if unrated,
are not of comparable quality, to 5% of their total assets, with investments in
any one such issuer being limited to no more than 1% of its total assets or $1
million, whichever is greater, measured at the time of purchase.
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Northern Funds Prospectus July 31, 1997
OPENING AN ACCOUNT
AND PURCHASING SHARES
An investment account may be opened and shares purchased directly from Northern
Funds by following the instructions below under "Purchasing Shares Directly from
the Funds." If you maintain certain accounts at Northern Trust or another
organization (such as a bank or broker/dealer) that has entered into a
distribution or servicing agreement with Northern Funds, you may purchase shares
through that organization in accordance with its procedures. See "Purchasing
Shares Through Northern Trust and Other Organizations" below for more details.
If you have any questions or need any assistance in opening an investment
account or purchasing shares, call 1-800-595-9111.
PURCHASING SHARES THROUGH
NORTHERN TRUST AND OTHER ORGANIZATIONS
Northern Trust customers may purchase shares through their qualified accounts
and should consult with their account officer for additional information and
instructions. Customers of other organizations (together with Northern Trust,
"Service Organizations") that have entered into agreements with Northern Funds,
should contact their account officer or other designated representative for
appropriate purchase instructions. Northern Trust or another Service
Organization may impose particular customer account requirements in connection
with investments in the Funds, such as minimum account size or minimum account
thresholds above which excess cash balances may be invested in Fund shares. To
determine whether you may purchase shares through another organization, contact
that organization directly or call 1-800-595-9111. Purchases (and redemptions)
placed through Northern Trust or another Service Organization are processed only
on days that both Northern Funds and the particular organization are open for
business. Service Organizations may make alternative arrangements for their
clients in Northern Funds related to fund options and shareholder services which
are listed as available in this Prospectus. For more information on which Funds
and shareholder services are available through your program, contact your
organization directly.
Depending on the terms of the particular account used to purchase Fund
shares, Northern Trust or other organizations may impose charges against the
account. These charges could include asset allocation fees, account maintenance
fees, sweep fees, compensating balance requirements or other charges based upon
account transactions, assets or income. The charges will reduce the net return
on an investment in a Fund. For further discussion of Service Organizations and
the procedures for purchasing (and redeeming) shares through them, see
"Management - Service Organizations."
PURCHASING SHARES DIRECTLY
FROM THE FUNDS
For your convenience, there are a number of ways to invest directly with
Northern Funds. When establishing an investment account directly with Northern
Funds, the minimum initial investment in a Fund is $2,500 ($500 for an IRA; $250
under the Automatic Investment Plan; and $500 for employees of Northern Trust
and its affiliates). The minimum subsequent investment is $50 (except for
reinvestments of distributions for which there is no minimum). The Funds reserve
the right to waive these minimums.
BY MAIL
You may purchase shares by mail by sending a Purchase Application together with
a check or money order payable to Northern Funds by addressing your envelope to
Northern Funds at P.O. Box 75986, Chicago, Illinois 60690-6319. Additional
requirements may be imposed. If using overnight delivery use the following
address: 801 South Canal Street, Chicago, Illinois 60607, Attn: Northern Funds.
Your
17
<PAGE> 20
check must be drawn on a bank located in the U.S. and must be payable in U.S.
dollars. When making subsequent investments, enclose your check with the return
remittance portion of the confirmation of your previous investment, or indicate
on your check or a separate piece of paper your name, address and account
number.
A $20 fee will be charged by the Transfer Agent if any check used for
investment does not clear. In addition, you will be responsible for any loss
suffered by a Fund. If you purchase shares by check and subsequently request the
redemption of those shares, Northern Funds may delay the payment of redemption
proceeds until the Transfer Agent is satisfied that the check has cleared, which
may take up to 15 days from the purchase date. If you anticipate redemptions
soon after purchase, you may wish to wire funds to avoid delays. Northern Funds
will not accept payment in cash or third party checks for the purchase of
shares.
BY WIRE
You may make initial or subsequent investments in shares of the Funds by wiring
federal funds. If you are opening an account with a wire purchase, you must call
1-800-595-9111 for instructions prior to wiring funds. You must promptly
complete a Purchase Application and forward it to the Transfer Agent by
addressing your envelope to Northern Funds at P.O. Box 75986, Chicago, Illinois
60690-6319. Additional requirements may be imposed. Redemptions will not be paid
until your completed application has been received by the Transfer Agent. If you
wish to add to an existing account by wire purchase, you may wire federal funds
to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152
(Reference 10 Digit Fund Account Number)
(Reference Shareholder's Name)
DIRECT DEPOSIT
You may purchase additional shares through the Direct Payroll Deposit Plan
offered by Northern Funds. Through this plan, periodic investments (minimum $50)
are made automatically from your payroll check into your existing Fund account.
In order to participate in the plan, your employer must have direct deposit
capabilities through the Automated Clearing House ("ACH") available to its
employees. The plan may be used for other direct deposits, such as social
security checks, military allotments, and annuity payments. Further details
about this service may be obtained from the Transfer Agent by calling
1-800-595-9111. Northern Funds reserves the right, at any time and without prior
notice, to limit or terminate the Direct Payroll Deposit privilege or its use in
any manner by any person.
AUTOMATIC INVESTMENT
Northern Funds offers an Automatic Investment Plan that allows you to
automatically purchase shares on a regular, monthly basis ($250 initial minimum,
$50 monthly minimum additions). Under this plan the Transfer Agent originates an
ACH request to your financial institution which forwards funds periodically to
the Transfer Agent to purchase shares. The plan can be established with any
financial institution that participates in the ACH funds transfer system. No
service fee is currently charged by Northern Funds for participation in the
plan. You may establish the plan by completing the appropriate section on the
Purchase Application when opening an account. You may also establish the plan
after an account is opened by completing an Automatic Investment Plan
Application which may be obtained by calling 1-800-595-9111. If an investor
discontinues participation in the plan, the Funds reserve the right to redeem
the investor's account involuntarily, upon 60 days' written notice, if the
account's net asset value is $1,000 or less.
18
<PAGE> 21
Northern Funds Prospectus July 31, 1997
DIRECTED REINVESTMENTS
In addition to having your income dividends and/or capital gains distributions
reinvested in shares of the Fund from which such distributions are paid, you may
elect the directed reinvestment option and have dividends and capital gains
distributions automatically invested in another Northern Fund. In addition,
systematic withdrawals from one account and reinvestments in another account may
be established. See "Redeeming and Exchanging Directly from the Funds -
Systematic Withdrawals." Reinvestments can only be directed to an existing
Northern Funds account (which must meet the minimum investment requirement).
Directed reinvestments may be used to invest funds from a regular account to
another regular account, from a qualified plan account to another qualified plan
account, or from a qualified plan account to a regular account. Directed
reinvestments from a qualified plan account to a regular account may have
adverse tax consequences including imposition of a penalty tax and, therefore,
you should consult your own tax adviser before commencing these transactions.
BY EXCHANGE
You may open a new account or add to an existing account by exchanging shares of
one Fund for shares of any other Fund offered by Northern Funds. See "Redeeming
and Exchanging Shares" for details.
ADDITIONAL PURCHASE INFORMATION
EFFECTIVE TIME AND PRICE OF PURCHASES
A purchase order for Fund shares received by the Transfer Agent by 1:00 p.m.
(Chicago Time) on a Business Day will be executed that day, provided immediately
available funds have been received by the Transfer Agent by that time. If your
purchase order or immediately available funds are not received by the Transfer
Agent by 1:00 p.m. (Chicago Time), then your purchase order will be executed on
the next Business Day following the Business Day on which your order and
immediately available funds are received by the Transfer Agent. Purchase orders
that are accompanied by payment in any form other than immediately available
funds will be executed on the next Business Day after the Business Day on which
both the order and payment in proper form are received by the Transfer Agent.
Certain Service Organizations which use a centralized purchase method for fund
shares may have an earlier cutoff time for same-day purchase orders than stated
above to facilitate purchase orders by bulk wire. For more information on
transaction cutoffs, contact your organization directly.
MISCELLANEOUS PURCHASE INFORMATION
You will be responsible for all losses and expenses of the Funds as a result of
a check that does not clear or an ACH transfer that is rejected. Northern Funds
may decline to accept a purchase order when, in the judgment of Northern Funds
or its investment adviser, it would not be in the best interest of existing
shareholders to accept the order. Federal regulations require that you provide a
social security number or other certified taxpayer identification number upon
opening or reopening an account. Purchase Applications without such a number or
an indication that a number has been applied for will not be accepted. If a
number has been applied for, the number must be provided and certified within 60
days of the date of the Purchase Application. 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 respective Fund. For further information, see
the Additional Statement. Additions or changes to any information in your
account registration
19
<PAGE> 22
(for example, a change in registration from a joint account to an individual
account) may be made by submitting a written request to the Transfer Agent
accompanied by a signature guarantee by a financial institution that is a
participant in the Stock Transfer Agency Medallion Program ("STAMP") or such
other means or evidence of authority as may be acceptable to the Transfer Agent.
Additional requirements may be imposed. In the interests of economy and
convenience, certificates representing shares of the Funds are not issued.
Northern Funds may reproduce this Prospectus in an electronic format which may
be available on the Internet. If you have received this Prospectus in its
electronic format you, or your representative, may contact the Transfer Agent
for a free paper copy of this Prospectus by writing to the Northern Funds Center
at P.O. Box 75986, Chicago, Illinois 60690-6319, calling 1-800-595-9111, or
sending an e-mail to: [email protected].
REDEEMING AND
EXCHANGING SHARES
You can arrange to withdraw your investment in the Funds by selling some or all
of your shares. This process is known as "redeeming" your shares. The procedures
for redeeming shares differ depending on whether you purchase your shares
directly from Northern Funds or through Northern Trust or another Service
Organization. If you purchase your shares through an account at Northern Trust
or another Service Organization, you will redeem them in accordance with the
instructions pertaining to that account.
REDEEMING AND EXCHANGING THROUGH
NORTHERN TRUST AND OTHER ORGANIZATIONS
If you purchase your shares through an account at Northern Trust or another
Service Organization, you will redeem or exchange them in accordance with the
instructions pertaining to that account. If you are listed on the books of
Northern Funds as the shareholder of record, you may also redeem and exchange
your shares using any of the methods described below under "Redeeming and
Exchanging Directly from the Funds." Questions regarding these redemptions or
exchanges should be directed to your account representative at Northern Trust
or, if you purchased shares through a Service Organization, contact that
organization directly for redemption instructions. Some organizations will hold
shares of Northern Funds in nominee or street name as agent for their clients.
In such instances, Northern Funds will have no information with respect to, or
control over individual shareholder accounts. Although Northern Funds imposes no
charges when you redeem, when shares are purchased through Northern Trust or
another Service Organization a fee may be charged by those organizations for
providing services in connection with your account.
REDEEMING AND EXCHANGING
DIRECTLY FROM THE FUNDS
When you purchase your shares directly from Northern Funds, you may redeem or
exchange shares by the methods described below. You may also use any of these
methods if you purchase your shares through an account at Northern Trust or
another Service Organization and you appear on Northern Funds' records as the
registered holder. You may call 1-800-595-9111 if you have any questions
regarding redemptions or exchanges.
20
<PAGE> 23
Northern Funds Prospectus July 31, 1997
Northern Funds imposes no charges when you redeem or exchange shares.
Remember, however, when shares are purchased through Northern Trust or another
Service Organization, a fee may be charged by those institutions for providing
services in connection with your investment.
BY MAIL
You may redeem shares in any number or dollar amount by sending a written
request to Northern Funds, P.O. Box 75986, Chicago, Illinois 60690-6319. The
redemption request must state the number of shares or the dollar amount to be
redeemed and identify the Fund account number. If the redemption proceeds are to
be sent elsewhere than the address of record, each request must be accompanied
by a signature guarantee by a financial institution that participates in STAMP
or such other means or evidence of authority as may be acceptable to the
Transfer Agent. In addition, written requests for redemptions exceeding $50,000
must be accompanied by a signature guarantee by a financial institution that
participates in STAMP or such other means or evidence of authority as may be
acceptable to the Transfer Agent. Additional requirements may be imposed. A
signature notarized by a notary public is unacceptable. Northern Funds reserves
the right to require signature guarantees in other circumstances based on the
amount of the redemption request or other factors, and may impose additional
requirements.
BY WIRE
If you authorize wire redemptions on your Purchase Application, shares can be
redeemed and the proceeds sent by federal wire transfer to a previously
designated account. You will be charged $15 for each wire redemption unless the
designated account is maintained at Northern Trust or an affiliated bank. The
minimum amount that may be redeemed by this method is $250. Northern Funds
reserves the right to change this minimum or to terminate the wire redemption
privilege at any time without notice. To change bank instructions, a written
request accompanied by a signature guarantee by a financial institution that
participates in STAMP, or such other means or evidence of authority acceptable
to the Transfer Agent, must be sent to Northern Funds, P.O. Box 75986, Chicago,
Illinois 60690-6319. Additional requirements may be imposed.
BY CHECK
You may also redeem shares of the Funds by redemption check in amounts of $250
or more once the checkwriting privilege has been established. When the check is
presented to the Transfer Agent for payment, the Transfer Agent, as your agent,
will cause the particular Fund involved to redeem a sufficient number of your
shares to cover the amount of the check. Dividends are earned until the check
clears the Transfer Agent. You can establish the checkwriting privilege by
checking the appropriate box on the Purchase Application, or if your Fund
account is already opened, by completing the appropriate form which may be
obtained by calling the Transfer Agent at 1-800-595-9111. When establishing
checkwriting for an account that is already opened, the form must be signed by
each person whose name appears on the account accompanied by signature
guarantees by a financial institution that participates in STAMP or such other
means or evidence of authority as may be acceptable to the Transfer Agent.
Additional requirements may be imposed.
You may place stop payment requests on checks by calling the Transfer Agent
at 1-800-595-9111. A $20 fee will be charged for each stop payment request. If
there are insufficient shares in your account to cover the amount of your
redemption by check, the check will be returned, marked
21
<PAGE> 24
"insufficient funds," and a fee of $20 will be charged to the account. You may
not use checks to close an account or redeem shares purchased within the past
fifteen days. Checks you write will not be returned to you, although copies are
available upon request. Northern Funds reserves the right, at any time without
prior notice, to suspend, limit or terminate the checkwriting privilege or its
use in any manner by any person.
SYSTEMATIC WITHDRAWALS
Northern Funds offers a Systematic Withdrawal Plan. If you own shares of a Fund
with a minimum value of $10,000, you may elect to have a fixed sum redeemed at
regular intervals ($250 minimum amount per withdrawal) and distributed in cash
or reinvested in one or more of the other Funds offered by Northern Funds. See
"Purchasing Shares Directly from the Funds - Directed Reinvestments." An
application form and additional information may be obtained from the Transfer
Agent by calling 1-800-595-9111.
EXCHANGE PRIVILEGE
Northern Funds offers an exchange privilege that permits you to exchange shares
of one Fund or portfolio for shares of another Fund or portfolio offered by
Northern Funds. To establish the exchange privilege, you must check the
appropriate box on the Purchase Application or, if your Fund account is already
opened, you may send a written request to the Transfer Agent, and must establish
or maintain accounts with an identical title in each Fund involved in an
exchange transaction. In addition, the shares being exchanged must have a value
of at least $1,000 ($2,500 if a new account is being established by the
exchange).
Since an excessive number of exchanges may be disadvantageous to Northern
Funds, Northern Funds reserves the right, at any time without prior notice, to
suspend, limit or terminate the exchange privilege of any shareholder who makes
more than eight exchanges of shares in a year and/or two exchanges of shares in
a calendar quarter. A shareholder may continue making exchanges until notified
that the exchange privilege has been suspended, limited or terminated. Northern
Funds reserves the right to modify or terminate the exchange privilege at any
time and to reject any exchange request. Questions regarding the exchange
privilege may be directed to 1-800-595-9111 or to your account officer at your
Service Organization. Exchanges will be processed only when the shares being
acquired can be legally sold in the state of the investor's residence.
Exchanges may have tax consequences. No exchange fee is currently imposed by
Northern Funds on exchanges. Northern Funds reserves, however, the right to
impose a charge in the future.
TELEPHONE PRIVILEGE
This privilege permits you to redeem or exchange shares by telephone. To
establish the telephone privilege, you must check the appropriate box on the
Purchase Application, or if your Fund account is already opened, you may send a
written request to the Transfer Agent. The request must be signed by each owner
of the account and accompanied by signature guarantees as provided below or such
other means or evidence of authority as may be acceptable to the Transfer Agent.
Once you have established the telephone privilege, you may use the telephone
privilege by calling the Transfer Agent at 1-800-595-9111.
The Transfer Agent has adopted procedures in an effort to establish
reasonable safeguards against fraudulent telephone transactions. The proceeds
for redemption orders will be sent by check, by wire transfer or by transfer to
an account maintained at Northern Trust or an affiliated bank. All checks will
be made payable to the shareholder of record and mailed only to the
shareholder's address of record. The address of record for redemption checks may
be changed only by a written request accompanied by signature
22
<PAGE> 25
guarantees by a financial institution that participates in STAMP or such other
means or evidence of authority as may be acceptable to the Transfer Agent and
sent to Northern Funds, P.O. Box 75986, Chicago, Illinois 60690-6319.
Additionally, the Transfer Agent utilizes recorded lines for telephone
transactions and will request a form of personal identification if such
identification has been furnished to the Transfer Agent. Neither Northern Funds
nor its Transfer Agent will be responsible for the authenticity of instructions
received by telephone that are reasonably believed to be genuine. To the extent
that Northern Funds fails to use reasonable procedures to verify the genuineness
of telephone instructions, it or its service providers may be liable for
instructions that prove to be fraudulent or unauthorized. In all other cases,
you will bear the risk of loss.
Northern Funds reserves the right to refuse a telephone redemption if it
believes it is advisable to do so. Procedures for redeeming shares by telephone
may be modified or terminated by Northern Funds at any time without notice.
During periods of substantial economic or market change, telephone redemptions
may be difficult to place. If you are unable to contact the Transfer Agent by
telephone, shares may also be redeemed by mail as described above under the
discussion of redemptions by mail.
ADDITIONAL REDEMPTION AND
EXCHANGE INFORMATION
EFFECTIVE TIME AND PRICE
OF REDEMPTIONS AND EXCHANGES
Redemption orders for shares of a Fund are processed at the net asset value next
determined at 1:00 p.m. (Chicago Time) after receipt in good order by the
Transfer Agent by 1:00 p.m. (Chicago Time) on a Business Day. Good order means
that the request must include the following information: the account number and
Fund name; the amount of the transaction (as specified in dollars or number of
shares); the signatures of all account owners exactly as they are registered on
the account (except for telephone and wire redemptions); required signature
guarantees (if applicable); and other supporting legal documents that might be
required in the case of estates, corporations, trusts and certain other
accounts. Call 1-800-595-9111 for the additional documentation that may be
required of these entities. Exchange orders are likewise processed at the net
asset value per share next determined after receipt in good order by the
Transfer Agent on a Business Day.
PAYMENT OF REDEMPTION PROCEEDS
If received by the Transfer Agent by 1:00 p.m. (Chicago Time) on a Business Day,
a redemption request normally will result in proceeds being sent on the next
Business Day, unless payment in immediately available funds on the same Business
Day is specifically requested. Proceeds for redemption orders received on a
non-Business Day will normally be sent on the second Business Day after receipt
in good order. However, if any portion of the shares to be redeemed represents
an investment made by check, Northern Funds may delay the payment of the
redemption proceeds until the Transfer Agent is reasonably satisfied that the
check has been collected, which could take up to fifteen days from the purchase
date. Northern Funds reserves the right to defer crediting, sending or wiring
redemption proceeds for up to seven days after receiving the redemption order
if, in its judgment, an earlier payment could adversely affect a Fund.
MISCELLANEOUS REDEMPTION INFORMATION
All redemption proceeds will be sent by check unless Northern Trust or the
Transfer Agent is directed otherwise. The ACH system may be utilized for payment
of redemp-
23
<PAGE> 26
tion proceeds. Redemptions may not be processed if a shareholder has failed to
submit a completed and signed Purchase Application. Northern Funds may require
any information reasonably necessary to ensure that a redemption has been duly
authorized.
To relieve Northern Funds of the cost of maintaining uneconomical accounts,
Northern Funds reserves the right to redeem the shares held in any account if at
the time of any redemption of shares in the account, the net asset value of the
remaining shares in the account falls below $1,000. Before such involuntary
redemption would occur, you would be given at least 60 days' written notice and,
during that period, you could make an additional investment to restore the
account to at least the minimum amount, in which case there would be no such
redemption. Involuntary redemptions will not be made because the value of shares
in an account falls below the minimum amount solely because of a decline in a
Fund's net asset value. Northern Funds also reserves the right to redeem the
shares held by any shareholder who provides incorrect or incomplete account
information or when such involuntary redemptions are necessary to avoid adverse
consequences to Northern Funds and its shareholders. Any involuntary redemption
would be at net asset value. Northern Funds also reserves the right to redeem
shares involuntarily if it is otherwise appropriate to do so under the 1940 Act
(see "Amortized Cost Valuation" in the Additional Statement).
DISTRIBUTIONS AND TAXES
Each Fund's net investment income is declared as a dividend on each Business Day
on the shares that are outstanding at 1:00 p.m. (Chicago Time) on the
declaration date. Net investment income includes interest accrued on the Fund's
assets less the Fund's estimated expenses. Dividends from net investment income
are paid monthly. Net realized short-term capital gains, after reduction for
capital loss carry-forwards, if any, of a Fund may be distributed from time to
time during Northern Funds' fiscal year (but not less frequently than annually).
The Funds do not expect to realize net long-term capital gains.
Dividends and capital gain distributions, if any, are automatically
reinvested (without any sales charge or portfolio transaction fee) in additional
shares of the same Fund at their net asset value determined on the payment date.
You may, however, notify the Transfer Agent in writing that you elect to have
dividends and/or capital gain distributions paid in cash or reinvested in shares
of another Fund offered by Northern Funds at their net asset value determined on
the payment date (provided you maintain an account in such Fund). This election
will become effective for distributions paid two days after its receipt by the
Transfer Agent.
TAXES
As with any investment, you should consider the tax implications of an
investment in Northern Funds. The following is only a short summary of the
important tax considerations generally affecting the Funds and their
shareholders. You should consult your tax adviser with specific reference to
your own tax situation. Northern Funds will send written notices to shareholders
annually regarding the tax status of distributions made by the Funds. The Funds
will determine annually the percentages of their respective net investment
income which are exempt from tax, which constitute an item of tax preference for
purposes of the federal alternative minimum tax, and which are fully taxable and
will apply these percentages uniformly to all dividends declared from net
investment income during that year. These percentages may differ significantly
from the actual percentages for any particular day.
24
<PAGE> 27
FEDERAL TAXES
Each Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code (the "Code"), meaning that to the extent a Fund's earnings
are distributed to shareholders as required by the Code, the Fund itself is not
required to pay federal income taxes.
To qualify, a Fund will pay as dividends at least 90% of its investment
company taxable income and at least 90% of its net tax-exempt income (if any)
each year. Investment company taxable income includes, but is not limited to,
taxable interest, dividends and short-term capital gains less expenses.
Dividends based on either investment company taxable income (which includes
income resulting from investments in options and futures contracts) or the
excess of net short-term capital gain over net long-term capital loss are
treated as ordinary income in determining gross income for tax purposes, whether
or not the dividends are received in cash or additional shares. (Federal income
taxes for distributions to an IRA other qualified retirement account are
deferred under the Code.)
Dividends paid by the Municipal Funds (but not the other Funds) that are
derived from interest on Municipal Instruments ("exempt-interest dividends") may
be excludable from your federal taxable income (unless because of your
particular situation exclusion would be disallowed). You should note that income
that is not subject to federal income taxes may nevertheless have to be
considered along with other adjusted gross income in determining whether any
Social Security payments received by you are subject to federal income taxes.
You should also note that a portion of the exempt-interest dividends paid by the
Municipal Funds generally will be an item of tax preference for both corporate
and individual taxpayers in determining federal alternative minimum and
environmental tax liability. (Corporate taxpayers will be required to take into
account all exempt-interest dividends from the Municipal Funds in determining
certain adjustments for alternative minimum tax and environmental tax purposes.)
Any distribution based on the excess of long-term capital gain over net
short-term capital loss will be taxable as a long-term capital gain, no matter
how long you hold Fund shares.
Any dividends declared in October, November or December and payable to
shareholders of record during those months will be deemed to have been paid by a
Fund and received by shareholders on December 31, so long as the dividends are
actually paid, as expected, in January of the following year.
Northern Funds will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of the dividends and distributions payable to any investor (i)
who has provided either an incorrect Social Security Number or Taxpayer
Identification Number or no number at all, (ii) who is subject to withholding by
the Internal Revenue Service for failure to properly include on his return
payments of interest or dividends, or (iii) who has failed to certify to
Northern Funds, when required to do so, that he is not subject to backup
withholding or is an "exempt recipient."
STATE AND LOCAL TAXES GENERALLY
Because your state and local taxes may be different than the federal taxes
described above, you should see your tax adviser. In particular, dividends may
be taxable under state or local law as dividend income even though all or part
of those dividends come from interest on obligations that, if held by you
directly, would be free of such income taxes.
Additionally, although the U.S. Government Select Money Market Fund intends
to invest principally in U.S. government securities the interest on which is
generally exempt from state income taxation, you should see your tax adviser to
determine whether distributions from the Fund are exempt in light of your
particular circumstances.
25
<PAGE> 28
STATE AND LOCAL TAXES --
CALIFORNIA MUNICIPAL MONEY MARKET FUND
If, at the close of each quarter of the California Municipal Money Market Fund's
taxable year, at least 50% of the value of its total assets consists of
California Municipal Instruments and certain specified federal obligations, and
if the Fund qualifies as a regulated investment company for federal tax
purposes, then the Fund will be qualified to pay dividends exempt from
California state personal income tax to its shareholders. If the Fund so
qualifies, dividends derived from interest attributable to California Municipal
Instruments and such federal obligations will be exempt from California state
personal income tax. (Such treatment may not apply, however, to investors who
are "substantial users" or "related persons" with respect to facilities financed
by portfolio securities held by the Fund.) Any dividends paid to shareholders
subject to California state franchise tax or California state corporate income
tax may be taxed as ordinary dividends to such shareholders notwithstanding that
all or a portion of such dividends are exempt from California state personal
income tax.
Except as noted with respect to the California state personal income tax,
dividends paid by the California Municipal Money Market Fund may be taxable
under state or local law as dividend income even though all or part of those
dividends come from interest on obligations that, if held by you directly, would
be free of such income taxes. Moreover, to the extent, if any, that dividends
paid by the Fund to its shareholders are derived from taxable interest or from
capital gains, such dividends will be subject to federal income tax and
California state personal income tax, if applicable, whether or not such
dividends are reinvested. Future legislative or administrative changes or court
decisions may materially affect the tax consequences of investing in the Fund.
TAX TABLE
You may find it particularly useful to compare the tax-free yields of the
Municipal Funds to the equivalent yields from taxable investments. For an
investor in a low tax bracket, it may not be helpful to invest in a tax-exempt
investment if a higher after-tax yield can be achieved from a taxable
instrument.
The table below illustrates the difference between hypothetical tax-free
yields and tax-equivalent yields for different tax brackets. You should be
aware, however, that tax brackets can change over time and that your tax adviser
should be consulted for specific yield calculations.
<TABLE>
<CAPTION>
FEDERAL
MARGINAL TAX-EXEMPT YIELDS
TAXABLE INCOME TAX RATE 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00%
- --------------------------------------------------------------------------------------------------------------------
SINGLE RETURN JOINT RETURN EQUIVALENT TAXABLE YIELDS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $ 24,650 $ 0 - $ 41,200 15% 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 24,651 - $ 59,750 $ 41,201 - $ 99,600 28% 2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11%
$ 59,751 - $124,650 $ 99,601 - $151,750 31% 2.90% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59%
$124,651 - $271,050 $151,751 - $271,050 36% 3.13% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50%
Over $271,050 Over $271,050 39.6% 3.31% 4.97% 6.62% 8.28% 9.93% 11.59% 13.25%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax-exempt yields used here are hypothetical and no assurance can be made
that the Funds will attain any particular yield. A Fund's yield fluctuates as
market conditions change. The tax brackets and related yield calculations are
based on the 1997 federal marginal tax rates indicated in the table. The table
does not reflect the phase out of personal exemptions and itemized deductions
which will apply to certain higher income taxpayers. In addition, the brackets
do not take into consideration the California state personal income tax.
26
<PAGE> 29
MANAGEMENT
BOARD OF TRUSTEES
The business and affairs of Northern Funds are managed under the direction of
its Board of Trustees. The Additional Statement contains the name of each
Trustee and other background information.
INVESTMENT ADVISER, TRANSFER AGENT
AND CUSTODIAN
Northern Trust, with offices at 50 S. LaSalle Street, Chicago, Illinois 60675,
serves as Northern Funds' investment adviser, transfer agent and custodian. As
transfer agent, Northern Trust provides various administrative servicing
functions, and any shareholder inquiries may be directed to it. Northern Trust's
transfer agency offices are located at 801 S. Canal Street, Chicago, Illinois
60607
Northern Trust, a member of the Federal Reserve System, is an Illinois
state-chartered commercial bank and the principal subsidiary of Northern Trust
Corporation, a bank holding company. Northern Trust was formed in 1889 with
capitalization of $1 million. As of June 30, 1997 Northern Trust Corporation had
approximately $23.9 billion in assets, $15.9 billion in deposits and employed
approximately 7,200 persons.
Northern Trust and its affiliates administered in various capacities
(including as master trustee, investment manager or custodian) $889.2 billion in
assets as of June 30, 1997 including $149.4 billion for which Northern Trust had
investment management responsibility.
Subject to the general supervision of Northern Funds' Board of Trustees,
Northern Trust is responsible for making investment decisions for the Funds and
placing purchase and sale orders for portfolio securities. Northern Trust is
also responsible for monitoring and preserving the records required to be
maintained under the regulations of the SEC (with certain exceptions unrelated
to its activities for Northern Funds). In making investment recommendations for
the Funds, investment advisory personnel must not inquire or take into
consideration whether issuers of securities proposed for purchase or sale for
the Funds' accounts are customers of Northern Trust's commercial banking
department. These requirements are designed to prevent investment advisory
personnel for the Funds from knowing which companies have commercial business
with Northern Trust and from purchasing securities where they know the proceeds
will be used to repay loans to the bank.
As compensation for its advisory services and its assumption of related
expenses, Northern Trust is entitled to a fee, computed daily and payable
monthly, at an annual rate of 0.60% of the average daily net assets of each of
the Funds.
During Northern Funds' fiscal year ended March 31, 1997, Northern Trust
received investment management fees (after waivers) at the annualized rates of
0.25% and 0.30% of the average daily net assets of the U.S. Government Select
Money Market and California Municipal Money Market Funds, respectively, and at
the annualized rates set forth above under "Expense Summary" with respect to the
other Funds.
Northern Trust also receives compensation as Northern Funds' custodian and
transfer agent. The fees payable by the Funds for these services are described
in the Additional Statement.
Northern Trust may, at its own expense, provide compensation to certain
dealers and other institutions whose customers purchase shares of a Fund. The
amount of such compensation may be made on a one-time and/or periodic basis, and
may equal or exceed the annual fees that are earned by Northern Trust from a
Fund and are attributable to shares held by such customers. Such compensation
will not represent an additional expense to the Funds or their shareholders,
since it will be paid from the assets of Northern Trust or its affiliates.
27
<PAGE> 30
ADMINISTRATOR AND DISTRIBUTOR
Sunstone Financial Group, Inc. ("Sunstone"), 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202, acts as administrator and prior to January 1, 1997,
acted as distributor for Northern Funds. As compensation for its administrative
services (which include clerical, compliance, regulatory and other services) and
the assumption of related expenses, Sunstone is entitled to a fee, computed
daily and payable monthly, at an annual rate of .15% of Northern Funds' average
net assets. No compensation was payable by Northern Funds to Sunstone for its
distribution services.
Effective January 1, 1997, Sunstone Distribution Services, LLC, 207 E.
Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202, an affiliate of Sunstone,
replaced Sunstone as distributor of the shares of Northern Funds. Miriam M.
Allison and Mary M. Tenwinkel, officers of Northern Funds, are also officers of
Sunstone Distribution Services, LLC. Shares of Northern Funds are sold by
Sunstone Distribution Services, LLC as distributor on a continuous basis. No
compensation is payable by Northern Funds to Sunstone Distribution Services, LLC
for its distribution services.
SERVICE ORGANIZATIONS
Northern Funds may enter into agreements with Service Organizations such as
banks, corporations, brokers, dealers and other financial organizations,
including Northern Trust, concerning the provision of support and/or
distribution services to their customers who own Fund shares. These services,
which are described more fully in the Additional Statement, may include support
services such as assisting investors in processing administrative purchase,
exchange and redemption requests; processing dividend and distribution payments
from the Funds; providing information to customers showing their positions in
the Funds; and providing subaccounting with respect to Fund shares beneficially
owned by customers or the information necessary for subaccounting. In addition,
Service Organizations may provide assistance, such as the forwarding of sales
literature and advertising to their customers, in connection with the
distribution of Fund shares. For their services, Service Organizations may
receive fees from a Fund at annual rates of up to .25% of the average daily net
asset value of the shares covered by their agreements.
Service Organizations may charge their customers fees for providing
administrative services in connection with investments in a Fund. Investors
should contact their Service Organization with respect to these fees and the
particular Service Organization's procedures for purchasing and redeeming
shares. It is the responsibility of Service Organizations to transmit purchase
and redemption orders and record those orders on a timely basis in accordance
with their agreements with their customers.
Conflict-of-interest restrictions may apply to the receipt of compensation
paid by Northern Funds in connection with the investment of fiduciary funds in
Fund shares. Organizations, including banks regulated by the Comptroller of the
Currency, Federal Reserve Board and state banking commissions, and investment
advisers and other money managers subject to the jurisdiction of the SEC, the
Department of Labor or state securities commissions, are urged to consult their
legal counsel before entering into agreements with Northern Funds.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting securities.
Accordingly, banks will be engaged under agreements with Northern Funds only to
perform the administrative and investor servicing functions described above, and
will represent that the services provided by them under the agreements will not
be primarily intended to result in the sale of Fund shares.
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Agreements that contemplate the provision of distribution services by Service
Organizations are governed by a Distribution and Service Plan (the "Plan") that
has been adopted by Northern Funds pursuant to Rule 12b-1 under the 1940 Act.
Payments to Service Organizations, including Northern Trust, under the Plan are
not tied directly to their own out-of-pocket expenses and therefore may be used
as they elect (for example, to defray their overhead expenses), and may exceed
their direct and indirect costs.
EXPENSES
Except as set forth above and in the Additional Statement, each Fund is
responsible for the payment of its expenses. These expenses include, without
limitation, the fees and expenses payable to Northern Trust and Sunstone,
brokerage fees and commissions, fees for the registration or qualification of
Fund shares under federal or state securities laws, expenses of the organization
of Northern Funds, taxes, interest, costs of liability insurance, fidelity
bonds, indemnification or contribution, any costs, expenses or losses arising
out of any liability of, or claim for damages or other relief asserted against
Northern Funds for violation of any law, legal, tax and auditing fees and
expenses, expenses of preparing and printing prospectuses, statements of
additional information, proxy materials, reports and notices and the printing
and distributing of the same to the Funds' shareholders and regulatory
authorities, compensation and expenses of its Trustees, payments to Service
Organizations, fees of industry organizations such as the Investment Company
Institute, and miscellaneous and extraordinary expenses incurred by Northern
Funds.
Northern Trust and Sunstone intend to voluntarily reimburse a portion of the
Funds' expenses and/or reduce their advisory and administrative fees from the
Funds during the current fiscal year. The result of these reimbursements and fee
reductions will be to increase the performance of the Funds during the periods
for which the reductions and reimbursements are made.
FURTHER INFORMATION
DETERMINING SHARE PRICE
Net asset value per share for purposes of purchases and redemptions is
calculated by Northern Trust on each Business Day as of 1:00 p.m. (Chicago Time)
for each Fund. Net asset value is calculated by dividing the value of all
securities and other assets belonging to a Fund, less the liabilities charged to
a Fund, by the number of the Fund's outstanding shares.
In seeking to maintain a net asset value of $1.00 per share with respect to
each Fund for purposes of purchases and redemptions, Northern Funds values the
portfolio securities held by each of the Funds pursuant to the amortized cost
method of valuation described in the Additional Statement under "Amortized Cost
Valuation."
ADVERTISING PERFORMANCE
The performance of each Fund may be compared to those of other mutual funds with
similar investment objectives and to other relevant indices or to rankings
prepared by independent services or other financial or industry publications
that monitor the performance of mutual funds. For example, the performance of a
Fund may be compared to data prepared by Lipper Analytical Services, Inc.
Performance data as reported in national financial publications such as Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times, or
in publications of a local or regional nature, may also be used in comparing the
performance of a Fund.
The yield of a Fund is computed based on the Fund's net
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income during a specified seven-day period. The net investment income is then
"annualized." That is, the amount of net investment income generated by the
investment during the period is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The "effective" yield of
a Fund is calculated similarly but, when annualized, the net investment income
generated by the investment is assumed to be reinvested. The "effective" yield
will be slightly higher than the "yield" because of the compounding effect of
this assumed reinvestment.
The tax-equivalent yield for the Municipal Funds shows the amount of taxable
yield needed to produce an after-tax equivalent of a tax-free yield, and is
calculated by increasing the yield (as calculated above) by the amount necessary
to reflect the payment of federal and/or state income taxes at a stated rate.
The tax-equivalent yield for the Municipal Funds will always be higher than
their yields.
Performance is based on historical earnings and is not intended to indicate
future performance. The investment return of an investment in a Fund will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost. Performance data may not provide a basis for comparison with bank
deposits and other investments which provide a fixed yield for a stated period
of time. Changes in the net asset value should be considered in ascertaining the
total return to shareholders for a given period. Total return data should also
be considered in light of the risks associated with a Fund's composition,
quality, operating expenses and market conditions. Any fees charged by Northern
Trust or a Service Organization directly to its customers in connection with
investments in the Funds will not be included in Northern Funds' calculations of
performance data.
VOTING RIGHTS
Northern Funds was formed as a Massachusetts Business Trust on October 12, 1993
under an Agreement and Declaration of Trust (the "Trust Agreement"). The Trust
Agreement permits the Board of Trustees to issue an unlimited number of shares
of beneficial interest of one or more separate series representing interests in
different investment portfolios. Northern Funds currently offers twenty-four
separate Funds, five of which are described in this Prospectus.
Shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held. Each series entitled
to vote on a matter will vote in the aggregate and not by series, except as
required by law or when the matter to be voted on affects only the interests of
shareholders of a particular series. The Additional Statement gives examples of
situations where the law requires voting by series. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate
shares of Northern Funds may elect all of the Trustees.
Northern Funds does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law.
Pursuant to the Trust Agreement, the Trustees will promptly call a meeting of
shareholders to vote upon the removal of any Trustee when so requested in
writing by the record holders of 10% or more of the outstanding shares. To the
extent required by law, Northern Funds will assist in shareholder communications
in connection with the meeting.
As of July 15, 1997, Northern Trust possessed sole or shared voting or
investment power for its customer accounts with respect to more than 50% of the
outstanding shares of Northern Funds.
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SHAREHOLDER REPORTS
Shareholders of record will be provided each year with a semi-annual report
showing portfolio investments and other information as of September 30 and,
after the close of the Funds' fiscal year March 31, with an annual report
containing audited financial statements. To eliminate unnecessary duplication,
only one copy of shareholder reports will be sent to shareholders with the same
mailing address. Shareholders who desire a duplicate copy of shareholder reports
to be mailed to their residence should call 1-800-595-9111, or send an e-mail
to: [email protected].
RETIREMENT PLANS
Shares of the Funds may be purchased in connection with certain tax-sheltered
retirement plans, including profit-sharing plans, 401(k) plans, money purchase
pension plans, target benefit plans and individual retirement accounts. Further
information about how to participate in these plans, the fees charged and the
limits on contributions can be obtained from Northern Trust. To invest through
any of the tax-sheltered retirement plans, please call Northern Trust for
information and the required separate application. To determine whether the
benefits of a tax-sheltered retirement plan are available and/or appropriate, a
shareholder should consult with a tax adviser.
MISCELLANEOUS
The address of Northern Funds is 207 E. Buffalo Street, Suite 400, Milwaukee,
Wisconsin 53202 and the telephone number is 1-800-595-9111. Northern Funds is
registered as an open-end management investment company under the 1940 Act, and
each of the Funds (other than the California Municipal Money Market Fund) is
classified under that Act as a diversified portfolio.
As used in this Prospectus, "Business Day" means each day Northern Trust and
the New York Stock Exchange (the "Exchange") are open, which is Monday through
Friday, except for holidays observed by Northern Trust and/or the Exchange. In
1997, these holidays are New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving and Christmas. On days when Northern Trust or the
Exchange closes early as a result of unusual weather or other conditions, the
right is reserved to advance the time by which purchase and redemption requests
must be received. In addition, on any Business Day when the Public Securities
Association ("PSA") recommends that the securities markets close early, the
Funds reserve the right to cease or to advance the deadline for accepting
purchase and redemption orders for same Business Day credit up to one hour
before the PSA recommended closing time. Purchase and redemption requests
received after the advanced closing time will be effected on the next Business
Day. Northern Trust is not required to calculate the net asset value of a Fund
on days during which no shares are tendered to a Fund for redemption and no
orders to purchase or sell shares are received by a Fund, or on days on which
there is an insufficient degree of trading in the Fund's portfolio securities
for changes in the value of such securities to affect materially the net asset
value per share.
From time to time, Northern Funds' distributor may provide promotional
incentives to brokers whose representatives have sold or are expected to sell
shares of the Funds. At various times, the distributor may implement programs
under which a broker's sales force may be eligible to win cash or non-cash
awards for sales efforts, and may finance broker sales contests or recognition
programs conforming to criteria established by the distributor. The distributor
may also provide marketing services to brokers consisting of written
informational material
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relating to sales incentive campaigns conducted by such brokers for their
representatives.
Northern Trust is sometimes referred to as "The Northern Trust Bank" in
advertisements and other literature.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus or in Northern Funds'
Additional Statement in connection with the offering made by this Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by Northern Funds or its distributor. This
Prospectus does not constitute an offering by Northern Funds or by the
distributor in any jurisdiction in which such offering may not lawfully be
made.
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Northern Funds
MONEY MARKET FUND
NORTHERN U.S. GOVERNMENT MONEY MARKET FUND
FUNDS MUNICIPAL MONEY MARKET FUND U.S.
GOVERNMENT SELECT MONEY MARKET FUND
P.O. Box 75986 CALIFORNIA MUNICIPAL MONEY MARKET FUND
Chicago, Illinois 60690-6319
Prospectus
[GRAPHICS]
July 31, 1997
