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As filed with the Securities and Exchange Commission on January 16, 1998
Registration Nos. 33-73404
811-8236
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. ____ / /
Post-Effective Amendment No. 18 /x/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 18 /x/
Northern Funds
(Exact Name of Registrant as Specified in Charter)
207 E. Buffalo Street
Suite 400
Milwaukee, Wisconsin 53202
(Address of Principal Executive Offices)
Registrant's Telephone Number:
1-800-595-9111
Jeffrey A. Dalke, Esquire
Drinker Biddle & Reath LLP
1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[X] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of beneficial interest
<PAGE> 2
NORTHERN FUNDS
MID CAP GROWTH FUND
CROSS REFERENCE SHEET
Pursuant to Rule 485(a)
under the Securities Act of 1933
Form N-1A Item Number Location
Part A Prospectus Caption
1. Cover Page.......................... Cover Page
2. Synopsis............................ Expense Summary
3. Condensed Financial Information..... Not Applicable
4. General Description of Registrant... Cover Page; Investment
Information; Additional Investment
Information, Risks and
Considerations; Management;
Further Information
5. Management of the Fund.............. Management; Opening an
Account and Purchasing
Shares; Redeeming and
Exchanging Shares
5A. Management's Discussion of
Fund Performance................... Not Applicable
6. Capital Stock and Other Securities Opening an Account and Purchasing
Shares; Redeeming and Exchanging
Shares; Distributions and Taxes;
Further Information
7. Purchase of Securities Being Offered Opening an Account and Purchasing
Shares; Redeeming and Exchanging
Shares
8. Redemption or Repurchase............ Redeeming and Exchanging Shares
9. Pending Legal Proceedings........... Not Applicable
<PAGE> 3
NORTHERN FUNDS
PROSPECTUS
APRIL 1, 1998
MID CAP GROWTH FUND
<PAGE> 4
NORTHERN FUNDS
MID CAP GROWTH FUND
THE NORTHERN TRUST COMPANY Investment Adviser,
50 S. LaSalle Street Transfer Agent and
Chicago, Illinois 60675 Custodian
1-800-595-9111
The shares offered by this Prospectus represent interests in the
Mid Cap Growth Fund (the "Fund"). The Fund's investment objective is to seek
long-term capital appreciation. The Fund seeks to achieve its objective by
investing primarily in equity securities of companies with market
capitalizations that are within the capitalization range of the Standard &
Poor's MidCap 400 Stock Index at the time of investment. The Fund is one of 25
no-load mutual funds (the "Funds") comprising Northern Funds. Northern Funds is
a no-load management investment company designed to offer investors a range of
investment opportunities. Northern Funds also offers money market funds and
domestic and international fixed income and other equity funds, which are
described in separate Prospectuses.
The Fund is advised by The Northern Trust Company ("Northern Trust").
Shares are sold and redeemed without any purchase or redemption charge by
Northern Funds, although Northern Trust and other institutions may charge their
customers for their services in connection with investments.
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This Prospectus provides information about the Fund that you should
know before investing. It should be read and retained for future reference.
Further information is included in a statement of additional information dated
April 1, 1998 (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 1-800-595-9111. 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.
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.
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 April 1, 1998.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
HIGHLIGHTS............................................................... 1
EXPENSE SUMMARY.......................................................... 4
INVESTMENT INFORMATION................................................... 6
ADDITIONAL INVESTMENT INFORMATION, RISKS AND CONSIDERATIONS.............. 7
Description of Securities and Investment Techniques............. 7
Investment Restrictions......................................... 20
OPENING AN ACCOUNT AND PURCHASING SHARES................................. 20
Purchasing Shares Directly from the Fund........................ 21
Purchasing Shares Through Northern Trust and Other
Institutions........................................... 23
Additional Purchase Information................................. 23
REDEEMING AND EXCHANGING SHARES.......................................... 24
Redeeming and Exchanging Directly from the Fund................. 25
Redeeming and Exchanging Through Northern Trust and
Other Institutions..................................... 27
Additional Redemption and Exchange Information.................. 28
DISTRIBUTIONS AND TAXES.................................................. 29
Distributions................................................... 29
Taxes ....................................................... 29
MANAGEMENT............................................................... 32
Board of Trustees............................................... 32
Investment Adviser, Transfer Agent and Custodian................ 32
Administrator and Distributor................................... 33
Service Organizations........................................... 34
Expenses ....................................................... 35
FURTHER INFORMATION...................................................... 35
Determining Share Price......................................... 35
Advertising Performance......................................... 36
Voting Rights................................................... 37
Shareholder Reports............................................. 38
Retirement Plans................................................ 38
Miscellaneous................................................... 38
</TABLE>
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HIGHLIGHTS
Q. WHAT IS NORTHERN FUNDS?
A. Northern Funds is an open-end management investment company (commonly
known as a mutual fund) that offers investors the opportunity to invest
in different investment portfolios, each having separate investment
objectives and policies. Northern Funds presently consists of
twenty-five portfolios, including money market, domestic and
international fixed income and equity portfolios. This Prospectus
describes only the Mid-Cap Growth Fund, which seeks long-term capital
appreciation by investing primarily in equity securities of companies
with market capitalizations that are within the capitalization range of
the Standard & Poor's Mid-Cap 400 Stock Index at the time of
investment.
Q. WHO ADVISES THE FUND?
A. The Northern Trust Company ("Northern Trust"), the principal subsidiary
of Northern Trust Corporation, serves as investment adviser to Northern
Funds. Northern Trust also serves as the Fund's transfer agent and
custodian. Northern Trust and its affiliates administered $______
billion in assets as of December 31, 1997 in various capacities,
including $_____ billion for which Northern Trust had investment
management responsibility. See "Management."
Q. WHAT ARE THE POTENTIAL RISKS PRESENTED BY THE FUND'S INVESTMENT
PRACTICES?
A. Investing in the Fund involves the risks common to any investment in
mid-cap common stocks. Because medium capitalized companies normally
have more limited product lines, markets, distribution channels and
financial and managerial resources, investments in such companies
entail greater risk and portfolio price volatility than investments in
larger capitalized companies. The market value of fixed income
securities will generally vary inversely with changes in prevailing
interest rates. The Fund may invest up to 10% of its total assets in
convertible securities rated below investment grade. The Fund may
invest a substantial portion of its assets in foreign securities
directly, and indirectly through the purchase of European Depository
Receipts ("EDRs"), Global Depository Receipts ("GDRs") and American
Depository Receipts ("ADRs"). The Fund may also enter into foreign
currency exchange contracts. Foreign securities may be subject to
certain risks in addition to those inherent in U.S. investments,
including the possible imposition of exchange control regulations,
freezes on convertibility of currency and adverse changes in foreign
currency exchange rates.
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The Fund may also purchase "derivative" instruments. "Derivative"
instruments are instruments that derive value from the performance of
underlying assets, interest or currency exchange rates, or indices, and
include (but are not limited to) futures contracts, options, forward
currency contracts and structured debt obligations. Derivative
instruments present, to varying degrees, market risk that the
performance of the underlying assets, exchange rates or indices will
decline; credit risk that the dealer or other counterparty to the
transaction will fail to pay its obligations; volatility and leveraging
risk that, if interest or exchange rates change adversely, the value of
the "derivative" instrument will decline more than the assets, rates or
indices on which it is based; liquidity risk that the Fund will be
unable to sell a "derivative" instrument when it wants because of lack
of market depth or market disruption; pricing risk that the value of a
"derivative" instrument (such as an option) will not correlate exactly
to the value of the underlying assets, rates or indices on which it is
based; and operations risk that loss will occur as a result of
inadequate systems and controls, human error or otherwise. Some
"derivative" instruments are more complex than others, and for those
instruments that have been developed recently, complete information is
lacking regarding their actual performance over entire market cycles.
Northern Trust will evaluate the risks presented by the "derivative"
instruments purchased by the Fund, and will determine, in connection
with its day-to-day management of the Fund, how they will be used in
furtherance of the Fund's investment objective. It is possible,
however, that Northern Trust's evaluations will prove to be inaccurate
or incomplete and, even when accurate and complete, it is possible that
the Fund will, because of the risks discussed above, incur loss as a
result of its investments in "derivative" instruments.
The foregoing is a summary of certain of the potential risks presented
by the Fund's investment practices. Details regarding these and other
risks presented by the policies of the Fund are described under
"Additional Investment Information, Risks and Considerations."
Q. HOW DOES ONE BUY AND REDEEM SHARES?
A. Shares of the Fund are distributed by Sunstone Distribution Services,
LLC. Shares may be purchased directly from Northern Funds or through a
qualified account at Northern Trust or certain other institutions.
Shares are sold and redeemed without any purchase or redemption charge
by Northern Funds, although Northern Trust and other institutions may
charge their customers for their services in connection with
investments. The minimum initial
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investment for purchases directly with Northern Funds is $2,500 ($500
for an IRA and $250 under the Automatic Investment Plan). The minimum
for subsequent investments is $50. Northern Trust or other
organizations may impose particular customer account requirements such
as minimum account sizes.
Additional share purchase and redemption information for both purchases
and redemptions directly with Northern Funds or through qualified
accounts is provided below under "Opening an Account and Purchasing
Shares" and "Redeeming and Exchanging Shares."
Q. WHAT SHAREHOLDER SERVICES ARE AVAILABLE?
A. Northern Funds offers the advantage of automatic dividend reinvestment
in shares of the Fund or in another Northern Fund, exchange privileges
among Northern Funds should your investment goals change, telephone
exchange and redemption privileges, an Automatic Investment Plan (with
a reduced minimum initial investment) and a Systematic Withdrawal Plan.
See "Opening an Account and Purchasing Shares" and "Redeeming and
Exchanging Shares." Shares of Northern Funds may be purchased in
connection with a variety of tax-sheltered retirement plans. See
"Further Information -- Retirement Plans."
Q. WHEN ARE DISTRIBUTIONS MADE?
A. Dividends from the net investment income of the Fund will be declared
and paid quarterly. Net realized capital gains of the Fund will be
distributed at least annually. See "Distributions and Taxes."
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EXPENSE SUMMARY
The following table will help you understand the expenses you
will bear directly or indirectly as a shareholder of the Fund.
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or
selling Fund shares. ANNUAL OPERATING EXPENSES are paid out of the
Fund's assets and include the fees for portfolio management,
maintenance of shareholder accounts, general Fund administration,
accounting and other services that the Fund expects to pay during the
current fiscal year. An example based on this information is also
provided.
<TABLE>
<CAPTION>
MID-CAP GROWTH
EQUITY FUND
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases............................................... None
Sales Charge Imposed on Reinvested
Distributions........................................... None
Deferred Sales Charge Imposed on
Redemptions............................................. None
Redemption Fees(1)....................................... None
Exchange Fees............................................ None
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after fee
reductions and waivers)................................. 0.85%
12b-1 Fees............................................... 0.00%
Other Expenses (after fee
reductions and reimbursements).......................... 0.15%
------
TOTAL OPERATING EXPENSES(2)
(After Fee Reductions, Waivers
and Reimbursements)..................................... 1.00%
======
EXAMPLE OF EXPENSES(2)
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................................................. $ 10
Three Years.............................................. $ 33
</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.
"Other Expenses" is based on estimated amounts the Fund expects to pay
during the current fiscal year. Without fee reductions, waivers and
reimbursements, "Management Fees" would be 1.00%, "Other Expenses" for the
current fiscal year would be 0.61% and "Total Operating Expenses" would be 1.61%
for the Fund.
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In addition, Northern Funds does not expect to pay any 12b-1 fees (otherwise
payable at an annual rate of up to 0.25%) under its Distribution and Service
Plan for the current fiscal year. For more expense information, see
"Management."
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. THE FUND IS NEW AND ACTUAL OPERATING
EXPENSES AND INVESTMENT RETURN MAY BE MORE OR LESS THAN THOSE SHOWN. INFORMATION
ABOUT THE ACTUAL PERFORMANCE OF THE FUND WILL BE CONTAINED IN THE FUND'S FUTURE
ANNUAL REPORTS TO SHAREHOLDERS, WHICH MAY BE OBTAINED WITHOUT CHARGE WHEN THEY
BECOME AVAILABLE.
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INVESTMENT INFORMATION
The investment objective and policies of the Fund are described below.
Additional information regarding the securities, investment techniques and
restrictions of the Fund are described under "Additional Investment Information,
Risks and Considerations."
The investment objective of the Mid-Cap Growth Fund is to seek
long-term capital appreciation. Any income received is incidental to this
objective. The Fund seeks to achieve its objective by investing primarily (at
least 65% of the value of its total assets under normal market conditions) in
equity securities (i.e., common and preferred stocks and convertible securities)
of companies with market capitalizations that are within the capitalization
range of the Standard & Poor's MidCap 400 Stock Index (the "S&P 400 Index") at
the time of investment. The S&P 400 Index is a market-weighted index comprised
of 400 common stocks chosen by Standard & Poor's for market size, liquidity and
industry group representation. The purpose of the S&P 400 Index is to
represent the performance of the medium-capitalization sector of the U.S.
securities market. Medium capitalized stocks which are included in the
Standard & Poor's 500 Composite Stock Price Index are excluded from the S&P 400
Index. Except for a limited number of Canadian securities, the S&P 400 does not
include foreign securities. As of December 31, 1997, the approximate market
capitalization range of the companies included in the S&P 400 Index was between
$213 million and $14 billion. The stocks in which the Fund invests may or may
not be included in the S&P 400 Index.
The Fund will invest in companies with intermediate market
capitalizations which Northern Trust believes have demonstrated above average
sales and earnings growth and return on equity relative to their peers.
Investments are selected based on factors such as financial condition, market
share, product leadership, earnings growth rates as compared with those of
relevant competitors, market valuation in comparison to other stocks and the
stock's own historical norms, improving relative price trend and other
investment criteria. The Fund will have broad sector exposure and emphasis will
be on issue selection rather than sector rotation.
Because medium capitalized companies normally have more limited product
lines, markets, distribution channels and financial and managerial resources,
investments in such companies entail greater risk and portfolio price volatility
than investments in larger capitalized companies.
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ADDITIONAL INVESTMENT INFORMATION, RISKS AND CONSIDERATIONS
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities including
convertible bonds, debentures, and preferred stock. A convertible security may
be converted either at a stated price or rate within a specified period of time
into a specified number of shares of common stock. By investing in convertible
securities, the Fund seeks the opportunity, through the conversion feature, to
participate in a portion of the capital appreciation of the common stock into
which the securities are convertible, while earning higher current income than
is available from the common stock. Convertible securities acquired by the Fund
will usually be rated investment grade by Standard & Poor's Ratings Group
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co.
("Duff") or Fitch IBCA, Inc. ("Fitch") or, if unrated, will be of comparable
quality as determined by Northern Trust. The Fund may, however, acquire
convertible securities rated below investment grade when Northern Trust believes
that their investment characteristics make them desirable, so long as (a) under
normal market and economic conditions, less than 10% of the Fund's total assets
are invested in non-investment grade convertible securities and (b) any such
security is rated "B" or higher by at least one major rating agency. For a
description of applicable securities ratings, See Appendix A to the Additional
Statement.
Non-investment grade securities (those that are rated "Ba" or lower by
Moody's or "BB" or lower by S&P, Duff or Fitch) are commonly referred to as
"junk bonds." Particular risks associated with lower-rated convertible
securities are: (a) the relative youth and growth of the market for such
securities; (b) the sensitivity of such securities to interest rate and economic
changes; (c) the lower degree of protection of principal and interest payments;
(d) the relatively low trading market liquidity for the securities; (e) the
impact that legislation may have on the high yield bond market (and, in turn, on
the Fund's net asset value and investment practices); and (f) the
creditworthiness of the issuers of such securities. During an economic downturn
or substantial period of rising interest rates, leveraged issuers may experience
financial stress which would adversely affect their ability to service their
principal and interest payment obligations, to meet projected business goals,
and to obtain additional financing. An economic downturn could also disrupt the
market for lower-rated convertible securities and adversely affect the value of
outstanding securities and the ability of the issuers to repay principal and
interest. If the issuer of a convertible security held by the Fund defaulted,
the Fund could incur additional expenses to seek recovery. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity
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of lower-rated securities held by the Fund, especially in a thinly traded
market.
For purposes of determining the percentage of the Fund's assets that is
invested in equity securities, only that portion of the value of convertible
securities attributable to their fixed income characteristics will be deemed to
be a fixed income investment. The remaining value will be deemed to be an equity
investment.
WARRANTS. The Fund may invest up to 5% of its net assets at the time of purchase
in warrants and similar rights in addition to those that have been acquired in
units or are attached to other securities. Warrants represent rights to purchase
securities at a specific price for a specific period of time. The Fund may also
purchase bonds that are issued in tandem with warrants entitling the holder to
purchase common stock at a specified price during a specified period. The prices
of warrants do not necessarily correlate with the prices of the underlying
securities.
FOREIGN SECURITIES. The Fund may invest a portion of its assets in such
securities, including Eurodollar convertible securities, which are fixed income
securities that are issued in U.S. dollars outside the United States and are
convertible into or exchangeable for equity securities of the same or a
different issuer.
Investment in foreign securities involves special risks. These include
market risk, interest rate risk and the risks of investing in securities of
foreign issuers and of companies whose securities are principally traded outside
the United States and in investments denominated in foreign currencies. Market
risk involves the possibility that stock prices will decline over short or even
extended periods. The stock markets tend to be cyclical, with periods of
generally rising prices and periods of generally declining prices. These cycles
will affect the value of the Fund if it invests in foreign stocks. To the extent
that the Fund invests in fixed income securities, it will be sensitive to
changes in interest rates and the interest rate environment. Generally, the
prices of bonds and debt securities fluctuate inversely with interest rate
changes. In addition, the performance of investments in securities denominated
in a foreign currency will depend on the strength of the foreign currency
against the U.S. dollar and the interest rate environment in the country issuing
the currency. Absent other events which could otherwise affect the value of a
foreign security (such as a change in the political climate or an issuer's
credit quality), appreciation in the value of the foreign currency generally can
be expected to increase the value of a foreign currency-denominated security in
terms of U.S. dollars. A rise in foreign interest rates or decline in the value
of the foreign currency
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<PAGE> 15
relative to the U.S. dollar generally can be expected to depress the value of a
foreign currency-denominated security.
There are other risks and costs involved in investing in foreign
securities which are in addition to the usual risks inherent in domestic
investments. Investment in foreign securities involves higher costs than
investment in U.S. securities, including higher transaction and custody costs as
well as the imposition of additional taxes by foreign governments. Foreign
investments also involve risks associated with the level of currency exchange
rates, less complete financial information about the issuers, less market
liquidity, more market volatility and political instability. Future political
and economic developments, the possible imposition of withholding taxes on
dividend income, the possible seizure or nationalization of foreign holdings,
the possible establishment of exchange controls, or the adoption of other
governmental restrictions might adversely affect an investment in foreign
securities. Additionally, foreign banks and foreign branches of domestic banks
are subject to less stringent reserve requirements, and to different accounting,
auditing and recordkeeping requirements.
The 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.
Although the Fund may invest in securities denominated in foreign
currencies, its portfolio securities and other assets are valued in U.S.
dollars. Currency exchange rates may fluctuate significantly over short periods
of time causing, together with other factors, the Fund's net asset value to
fluctuate as well. Currency exchange rates can be affected unpredictably by the
intervention or the failure to intervene by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad. To the extent that the Fund's total assets, adjusted to reflect the
Fund's net position after giving effect to currency transactions, are
denominated in the currencies of foreign countries, the Fund will be more
susceptible to the risk of adverse economic and political developments within
those countries. The Fund is also subject to the possible imposition of exchange
control regulations or freezes on the convertibility of currency.
Dividends and interest payable on the Fund's foreign portfolio
securities may be subject to foreign withholding taxes. To the extent such taxes
are not offset by credits or deductions allowed to investors under U.S. federal
income tax law, they may
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<PAGE> 16
reduce the net return to the shareholders. See "Distributions and Taxes."
AMERICAN DEPOSITORY RECEIPTS. The Fund can invest in ADRs. ADRs are receipts
typically issued by a United States bank or trust company evidencing ownership
of the underlying foreign securities and are denominated in U.S. dollars. Some
institutions issuing ADRs may not be sponsored by the issuer.
A non-sponsored depository may not provide the same shareholder
information that a sponsored depository is required to provide under its
contractual arrangement with the issuer.
EUROPEAN DEPOSITORY RECEIPTS. The Fund can also invest in EDRs and GDRs. EDRs
and GDRs are receipts issued by a non-U.S. financial institution evidencing
ownership of underlying foreign or U.S. securities and are usually denominated
in foreign currencies. EDRs and GDRs may not be denominated in the same currency
as the securities they represent. Generally, EDRs and GDRs are designed for use
in the foreign securities markets.
FORWARD CURRENCY EXCHANGE CONTRACTS. The Fund may enter into forward currency
exchange contracts in an effort to hedge all or any portion of its portfolio
positions. Specifically, foreign currency contracts may be used for this purpose
to reduce the level of volatility caused by changes in foreign currency exchange
rates or when such transactions are economically appropriate for the reduction
of risks in the ongoing management of the Fund.
A forward currency exchange contract is an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of contract. Although these contracts may be used to minimize the risk of
loss due to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the value of such
currency increase. Consequently, the Fund may choose to refrain from entering
into such contracts. In connection with its forward currency exchange contracts,
the Fund will create a segregated account of liquid assets, such as cash, U.S.
government securities or other liquid securities, or will otherwise cover its
position in accordance with applicable requirements of the SEC.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment
objective, the Fund may write covered call options, buy put options, buy call
options and write secured put options for the purpose of hedging or earning
additional income, which may be deemed speculative. These options may relate to
particular securities, financial instruments, foreign currencies, stock or bond
indices, and may or may not be issued by the
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<PAGE> 17
Options Clearing Corporation. The Fund will not purchase put and call options
where the aggregate premiums on outstanding options exceed 5% of its net assets
at the time of purchase, and will not write options on more than 25% of the
value of its net assets (measured at the time an option is written). Options
trading is a highly specialized activity that entails greater than ordinary
investment risks. In addition, unlisted options are not subject to the
protections afforded purchasers of listed options issued by the Options Clearing
Corporation, which performs the obligations of its members if they default.
To the extent consistent with its investment objective, the Fund may
also invest in futures contracts and options on futures contracts for hedging
purposes or to maintain liquidity to meet potential shareholder redemptions,
invest cash balances or dividends or minimize trading costs. The Fund may also
invest in futures contracts and options in futures contracts to increase total
return (i.e. for speculative purposes). The value of the Fund's futures
contracts may equal or exceed 100% of the Fund's total assets, although the Fund
will not purchase or sell a futures contract unless immediately afterwards the
aggregate amount of margin deposits on its existing futures positions plus the
amount of premiums paid for related futures options entered into for other than
bona fide hedging purposes is 5% or less of its total assets.
Futures contracts obligate the Fund, at maturity, to take or make
delivery of certain securities, the cash value of a securities index or a stated
quantity of a foreign currency. When used as a hedge, the Fund may sell a
futures contract in order to offset an expected decrease in the value of its
portfolio that might otherwise result from a market decline or currency exchange
fluctuation. The Fund may do so either to hedge the value of its securities
portfolio as a whole, or to protect against declines occurring prior to sales of
securities in the value of the securities to be sold. Conversely, the Fund may
purchase a futures contract as a hedge in anticipation of purchases of
securities. In addition, the Fund may utilize futures contracts in anticipation
of changes in the composition of its holdings or in currency exchange rates.
The Fund may purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When the Fund purchases an
option on a futures contract, it has the right to assume a position as a
purchaser or a seller of a futures contract at a specified exercise price during
the option period. When the Fund sells an option on a futures contract, it
becomes obligated to sell or buy a futures contract if the option is exercised.
In connection with the Fund's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.
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<PAGE> 18
The primary risks associated with the use of futures contracts and
options are: (a) the imperfect correlation between the change in market value of
the instruments held by the Fund and the price of the futures contract or
option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c) losses
caused by unanticipated market movements, which are potentially unlimited; and
(d) Northern Trust's ability to predict correctly the direction of securities
prices, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and
options, see "Futures Contracts and Related Options" and Appendix B in the
Additional Statement.
Northern Funds intends to comply with the regulations of the Commodity
Futures Trading Commission exempting the Fund from registration as a "commodity
pool operator."
UNITED STATES GOVERNMENT OBLIGATIONS. To the extent consistent with its
investment objective, the Fund may invest in a variety of U.S. Treasury
obligations consisting of bills, notes and bonds, which principally differ only
in their interest rates, maturities and time of issuance. The Fund may also
invest in other securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. Obligations of certain agencies and
instrumentalities, such as the Government National Mortgage Association
("GNMA"), are supported by the full faith and credit of the U.S. Treasury;
others, such as those of the Export-Import Bank 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
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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.
STRIPPED OBLIGATIONS. To the extent consistent with its investment objective,
the Fund may purchase Treasury receipts and other "stripped" securities that
evidence ownership in either the future interest payments or the future
principal payments on U.S. government and other domestic and foreign
obligations. These participations, which may be issued by the U.S. government
(or a U.S. government agency or instrumentality), foreign governments or 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 obligations experience greater
than anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment. The market value of the class consisting entirely of
principal payments can be extremely volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
are generally higher than prevailing market yields on other mortgage-backed
obligations because their cash flow patterns are also volatile and there is a
greater risk that the initial investment will not be fully recouped.
SMBS issued by the U.S. government (or a U.S. government agency or
instrumentality) may be considered liquid under guidelines established by
Northern Funds' Board of Trustees if they can be disposed of promptly in the
ordinary course of business at a value reasonably close to that used in the
calculation of the Fund's per share net asset value.
CUSTODIAL RECEIPTS FOR TREASURY SECURITIES. To the extent consistent with its
investment objective, the 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
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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.
ASSET-BACKED SECURITIES. The Fund 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. The Fund will not purchase
non-mortgage asset-backed securities that are not rated investment grade by S&P,
Duff, Fitch or Moody's.
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 Fund 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 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
Fund will not purchase "residual" CMO interests, which normally exhibit greater
price volatility.
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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. In calculating the average weighted maturity of the
Fund, the maturity of asset-backed securities will be based on estimates of
average life. There can be no assurance that these estimates will be accurate.
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. The Fund may invest in debt obligations of
domestic or foreign corporations and banks, and may acquire commercial
obligations issued by Canadian corporations and Canadian counterparts of U.S.
corporations, as well as Europaper, which is U.S. dollar-denominated commercial
paper of a foreign issuer. Bank obligations may include certificates of deposit,
notes, bankers' acceptances and fixed time deposits. These obligations may be
general obligations of the parent bank or may be limited to the issuing branch
or subsidiary by the terms of specific obligation or by government regulation.
For purposes of determining the permissibility of an investment in bank
obligations, the total assets of a bank are determined on the basis of the
bank's most recent annual financial statements.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Fund may purchase rated and unrated
variable and floating rate instruments. These instruments may include variable
amount master demand notes that permit the indebtedness to vary in addition to
providing for periodic adjustments in the interest rate 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
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specified date. The Fund may purchase variable and floating rate instruments
with stated maturities in excess of its maturity limitations provided that the
Fund may demand payment of the principal of the instrument at least once within
the applicable maturity limitation on not more than thirty days' notice (unless
the instrument is issued or guaranteed by the U.S. Government or an agency or
instrumentality thereof). Unrated instruments will be determined by Northern
Trust to be of comparable quality at the time of purchase to rated instruments
purchasable by the Fund.
The Fund may also invest in leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate of an inverse floater resets
in the opposite direction from the market rate of interest to which it is
indexed. An inverse floater may be considered to be leveraged to the extent that
its interest rate varies by a magnitude that exceeds the magnitude of the change
in the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in their market values.
The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for the Fund to
dispose of the instruments if the issuer defaulted on its payment obligation or
during periods that the Fund is not entitled to exercise demand rights, and the
Fund could, for these or other reasons, suffer a loss with respect to such
instruments. Variable and floating rate instruments (including inverse floaters)
will be subject to the Fund's limitation on illiquid investments when the Fund
may not demand payment of the principal amount within seven days and a reliable
trading market is absent. See "Illiquid Securities."
REPURCHASE AGREEMENTS. The Fund may agree to purchase portfolio securities from
financial institutions subject to the seller's agreement to repurchase them at a
mutually agreed upon date and price ("repurchase agreements"). Although the
securities subject to a repurchase agreement may bear maturities exceeding one
year, settlement for the repurchase agreement will never be more than one year
after the Fund's acquisition of the securities and normally will be within a
shorter period of time. Securities subject to repurchase agreements are held
either by Northern Funds' custodian or subcustodian (if any), or in the Federal
Reserve/Treasury Book-Entry System. The seller under a repurchase agreement will
be required to maintain the value of the securities subject to the agreement in
an amount exceeding the repurchase price (including accrued interest). Default
by the seller would, however, expose the Fund to possible loss because of
adverse market action or delay in connection with the disposition of the
underlying obligations.
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<PAGE> 23
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. The Fund is authorized to
make borrowings as described below under "Investment Restrictions." If the
securities held by the 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 the
Fund sells portfolio securities to financial institutions such as banks and
broker/dealers and agrees to repurchase them at a particular date and price. The
Fund may use the proceeds of reverse repurchase agreements to purchase other
securities either maturing, or under an agreement to resell, on a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement. Reverse repurchase agreements involve the risks that the interest
income earned in the investment of the proceeds will be less than the interest
expense, that the market value of the securities sold by the Fund may decline
below the price of the securities the Fund is obligated to repurchase and that
the securities may not be returned to the Fund. During the time a reverse
repurchase agreement is outstanding, the Fund will maintain a segregated account
with Northern Funds' custodian containing cash, U.S. government or other
appropriate liquid securities having a value at least equal to the repurchase
price. The Fund's reverse repurchase agreements, together with any other
borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total
assets. In addition, whenever borrowings exceed 5% of the Fund's total assets,
the Fund will not make any investments.
SECURITIES LENDING. The Fund may seek additional income from time to time by
lending securities on a short-term basis to banks, brokers and dealers. The
securities lending agreements will require that the loans be secured by
collateral in cash, cash equivalents, U.S. government securities or irrevocable
bank letters of credit maintained on a current basis equal in value to at least
the market value of the loaned securities. No portfolio securities loan shall be
made on behalf of the Fund if, as a result, the aggregate value of all
securities loaned by the Fund would exceed 33 1/3% of the value of its total
assets (including the value of the collateral for the loans) at the time of the
loan. Securities loans involve risks of delay in receiving additional collateral
or in recovering the loaned securities, or possibly loss of rights in the
collateral if the borrower of the securities becomes insolvent.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS.
The Fund may purchase or sell securities on a when-issued or delayed-delivery
basis and make contracts to purchase or sell securities for a fixed price at a
future date beyond customary settlement time. Securities purchased or sold on a
when-issued, delayed-delivery or forward commitment basis involve a risk of loss
if the value of the security to be
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<PAGE> 24
purchased declines, or the value of the security to be sold increases, before
the settlement date. Although the Fund will generally purchase securities with
the intention of acquiring them, the Fund may dispose of securities purchased on
a when-issued, delayed-delivery or a forward commitment basis before settlement
when deemed appropriate by Northern Trust.
INVESTMENT COMPANIES. In connection with the management of its daily cash
positions, the Fund may invest in securities issued by other investment
companies which invest in short-term, high-quality debt securities and which
determine their net asset value per share based on the amortized cost or
penny-rounding method of valuation. In addition, the Fund may invest in
securities issued by other investment companies if otherwise consistent with its
investment objective and policies. As a shareholder of another investment
company, the Fund will bear, along with other shareholders, its pro rata portion
of the other investment company's expenses including advisory fees. These
expenses would be in addition to the advisory fees and other expenses the Fund
bears directly in connection with its own operations. Investments in other
investment companies will be subject to the limits imposed by the 1940 Act.
ILLIQUID SECURITIES. The Fund may invest up to 15% of the value of its net
assets in illiquid securities. Illiquid securities generally include repurchase
agreements and time deposits with notice/termination dates in excess of seven
days, SMBS issued by private issuers, unlisted over-the-counter options 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, the
Fund may purchase commercial paper issued pursuant to Section 4(2) of the 1933
Act and securities that are not registered under the 1933 Act but can be sold to
"qualified institutional buyers" in accordance with Rule 144A under the 1933
Act. These securities will not be considered illiquid so long as Northern Trust
determines, under guidelines approved by Northern Funds' Board of Trustees, that
an adequate trading market exists. This practice could increase the level of
illiquidity during any period that qualified institutional buyers become
uninterested in purchasing these securities.
PORTFOLIO TRANSACTIONS AND TURNOVER. Northern Trust's Advisory Agreement
provides that in selecting brokers or dealers to place orders for transactions
(a) involving common and preferred stocks, Northern Trust shall use its best
judgment to obtain the best overall terms available and (b) involving bonds and
other fixed income obligations, Northern Trust shall attempt to obtain best net
price and execution. In assessing the best overall terms available for any
transaction, Northern Trust is to
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<PAGE> 25
consider all factors it deems relevant, including the breadth of the market in
the security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission, if
any, both for the specific transaction and on a continuing basis. In evaluating
the best overall terms available and in selecting the broker or dealer to
execute a particular transaction, Northern Trust may consider the brokerage and
research services provided to the Fund and/or other accounts over which Northern
Trust or an affiliate of Northern Trust exercises investment discretion. These
brokerage and research services may include industry and company analyses,
portfolio services, quantitative data, market information systems and economic
and political consulting and analytical services.
The portfolio turnover rates of the Fund will vary from year to year,
and may be affected by changes in the holdings of specific issuers. High
portfolio turnover (100% or more) may result in the realization of short-term
capital gains which are taxable to shareholders as ordinary income. In addition,
higher turnover rates can result in corresponding increases in commissions and
other transaction costs. Northern Trust will not consider turnover rate a
limiting factor in making investment decisions. Northern Funds expects that the
annual turnover rate of the Fund will generally not exceed 100%.
MISCELLANEOUS. After its purchase by the Fund, a rated security may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. Northern Trust will consider such an event in determining
whether the Fund should continue to hold the security. Except for the
convertible securities described above, Northern Trust expects to sell promptly
any fixed income securities that are non-investment grade which exceed 5% of the
Fund's net assets, 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. Investment grade securities rated BBB by S&P, Duff or
Fitch, or Baa by Moody's have certain speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
rated securities.
The 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 Fund does not intend to purchase certificates of deposit of
Northern Trust or its affiliate banks, commercial paper issued
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by Northern Trust's parent holding company or other securities issued or
guaranteed by Northern Trust, its parent holding company or their subsidiaries
or affiliates.
INVESTMENT RESTRICTIONS
The Fund's investment objective may be changed by Northern Funds' Board
of Trustees without shareholder approval. Shareholders will, however, be
notified of any changes. Any such change may result in the Fund having an
investment objective different from the objective which the shareholder
considered appropriate at the time of investment in the Fund. No assurance can
be provided that the Fund will achieve its investment objective.
The Fund has also adopted certain fundamental investment restrictions
that may be changed only with the approval of a majority of the Fund's
outstanding shares. The following description summarizes several of the Fund's
fundamental restrictions, which are set forth in full in the Additional
Statement.
The Fund may not:
1. invest 25% or more of its total assets at the time of purchase in
securities of issuers whose principal business activities are in the same
industry 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. make any investment inconsistent with the Fund's classification as a
diversified investment company under the 1940 Act; or
4. subject to the foregoing 25% exception, purchase more than 10% of
the outstanding voting securities of any issuer.
OPENING AN ACCOUNT AND PURCHASING SHARES
An investment account may be opened and shares purchased directly from
Northern Funds by following the instructions below under "Purchasing Shares
Directly from the Fund." If you maintain certain accounts at Northern Trust or
another institution (such as a bank or broker/dealer) that has entered into an
agreement with Northern Funds to provide services to its customers, you may
purchase shares through your institution in accordance with its procedures. See
"Purchasing Shares Through Northern Trust and Other Institutions" below for more
details.
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<PAGE> 27
If you have any questions or need any assistance in opening an investment
account or purchasing shares, call 1-800-595-9111.
PURCHASING SHARES DIRECTLY FROM THE FUND
For your convenience, there are a number of ways to invest directly
with Northern Funds. When establishing an investment account directly with
Northern Funds, the minimum initial investment in the Fund is $2,500 ($500 for
an IRA; $250 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
Fund reserves the right to waive these minimums.
BY MAIL. You may purchase shares by mail by sending a Purchase Application, a
copy of which accompanies this Prospectus, together with a check or money order
payable to Northern Funds in the envelope provided or by addressing your
envelope to Northern Funds at P.O. Box 75986, Chicago, Illinois 60690-6319.
Additional requirements may be imposed. If using overnight delivery use the
following address: 801 South Canal Street, Chicago, Illinois 60607, Attn:
Northern Funds. Your check must be drawn on a bank located in the U.S. and must
be payable in U.S. dollars. When making subsequent investments, enclose your
check with the return remittance portion of the confirmation of your previous
investment, or indicate on your check or a separate piece of paper your name,
address and account number.
A $20 fee will be charged by the Transfer Agent if any check used for
investment does not clear. In addition, you will be responsible for any loss
suffered by the Fund. If you purchase shares by check and subsequently request
the redemption of those shares, Northern Funds may delay the payment of
redemption proceeds until the Transfer Agent is satisfied that the check has
cleared, which may take up to 15 days from the purchase date. If you anticipate
redemptions soon after purchase, you may wish to wire funds to avoid delays.
Northern Funds will not accept payment in cash or third party checks for the
purchase of shares.
BY WIRE. You may make initial or subsequent investments in shares of the Fund by
wiring federal funds. If you are opening an account with a wire purchase, you
must call 1-800-595-9111 for instructions prior to wiring funds. You must
promptly complete a Purchase Application and forward it to the Transfer Agent in
the envelope provided herewith, or by addressing your envelope to Northern Funds
at P.O. Box 75986, Chicago, Illinois 60690-6319. Additional requirements may be
imposed. Redemptions will not be paid until your completed application has been
received by the Transfer Agent. If you wish to add to an existing account by
wire purchase, you may wire federal funds to:
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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 Fund reserves the right
to redeem the investor's account involuntarily, upon 60 days' written notice, if
the account's net asset value is $1,000 or less.
DIRECTED REINVESTMENTS. In addition to having your income dividends and/or
capital gains distributions reinvested in shares of the Fund, you may elect the
directed reinvestment option and have dividends and capital gains distributions
automatically invested in another investment portfolio offered by Northern
Funds. In addition, systematic withdrawals from one account and reinvestments in
another account may be established. See "Redeeming and Exchanging Directly from
the Fund -- 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
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<PAGE> 29
a qualified plan account to a regular account. Directed reinvestments from a
qualified plan account to a regular account may have adverse tax consequences
including imposition of a penalty tax and, therefore, you should consult your
own tax adviser before commencing these transactions.
BY EXCHANGE. You may open a new account or add to an existing account by
exchanging shares of the Fund for shares of any other investment portfolio
offered by Northern Funds. See "Redeeming and Exchanging Shares" for details.
PURCHASING SHARES THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
Northern Trust customers may purchase shares through their qualified
accounts and should consult with their account officer for additional
information and instructions. Customers of other institutions (together with
Northern Trust, "Service Organizations"), such as banks or broker-dealers that
have entered into agreements with Northern Funds, should contact their account
officers for appropriate purchase instructions. Northern Trust or another
Service Organization may impose particular customer account requirements in
connection with investments in the Fund, such as minimum account size or minimum
account thresholds above which excess cash balances may be invested in Fund
shares. To determine whether you may purchase shares through your institution,
contact your institution directly or call 1-800-595-9111. Purchases (and
redemptions) placed through Northern Trust or another Service Organization are
processed only on days that both Northern Funds and the particular institution
are open for business.
Depending on the terms of the particular account used to purchase Fund
shares, Northern Trust or other institutions may impose charges against the
account. These charges could include asset allocation fees, account maintenance
fees, sweep fees, compensating balance requirements or other charges based upon
account transactions, assets or income. The charges will reduce the net return
on an investment in the Fund. For further discussion of Service Organizations
and the procedures for purchasing (and redeeming) shares through them, see
"Management - - Service Organizations."
ADDITIONAL PURCHASE INFORMATION
EFFECTIVE TIME AND PRICE OF PURCHASES. A purchase order for Fund shares received
by the Transfer Agent by 3:00 p.m. (Chicago Time) on a Business Day (as defined
below under "Further Information -- Miscellaneous") will be priced at the net
asset value determined on that day, provided that either: (a) the order is
accompanied by payment of the purchase price; or (b) the order is placed by
Northern Trust or a Service Organization that is acting on behalf of itself or
its qualified customer accounts and undertakes to
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<PAGE> 30
make payment on the next Business Day in the form of federal funds or other
immediately available funds. If an order in proper form with proper payment is
not received by the Transfer Agent by such time, the order will be processed at
the next determined net asset value after the Transfer Agent has received both
an order in proper form and such payment.
MISCELLANEOUS PURCHASE INFORMATION. You will be responsible for all losses and
expenses of the Fund as a result of a check that does not clear or an ACH
transfer that is rejected. Northern Funds may decline to accept a purchase order
when, in the judgment of Northern Funds or its investment adviser, it would not
be in the best interest of existing shareholders to accept the order. Federal
regulations require that you provide a social security number or other certified
taxpayer identification number upon opening or reopening an account. Purchase
Applications without such a number or an indication that a number has been
applied for will not be accepted. If a number has been applied for, the number
must be provided and certified within 60 days of the date of the Purchase
Application. Payment for shares of the Fund may, in the discretion of Northern
Trust, be made in the form of securities that are permissible investments for
the Fund. For further information, see the Additional Statement. Additions or
changes to any information in your account registration (for example, a change
in registration from a joint account to an individual account) may be made by
submitting a written request to the Transfer Agent accompanied by a signature
guarantee by a financial institution that is a participant in the Stock Transfer
Agency Medallion Program ("STAMP") or such other means or evidence of authority
as may be acceptable to the Transfer Agent. Additional requirements may be
imposed. In the interests of economy and convenience, certificates representing
shares of the Fund are not issued. Northern Funds may reproduce this Prospectus
in an electronic format which may be available on the Internet. If you have
received this Prospectus in its electronic format you, or your representative,
may contact the Transfer Agent for a free paper copy of this Prospectus by
writing to Northern Funds Center at P.O. Box 75986, Chicago, Illinois
60690-6319, 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 Fund by selling some
or all of your shares. This process is known as "redeeming" your shares. The
procedures for redeeming shares differ depending on whether you purchase your
shares directly from Northern Funds or through Northern Trust or another Service
Organization. If you purchase your shares through an account at Northern Trust
or another Service Organization, you will redeem
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them in accordance with the instructions pertaining to that account.
REDEEMING AND EXCHANGING DIRECTLY FROM THE FUND
When you purchase your shares directly from Northern Funds, you may
redeem or exchange shares by the methods described below. You may also use any
of these methods if you purchase your shares through an account at Northern
Trust or another Service Organization and you appear on Northern Funds' records
as the registered holder. You may call 1-800-595-9111 if you have any questions
regarding redemptions or exchanges.
Northern Funds imposes no charges when you redeem or exchange shares.
However, when shares of the Fund 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.
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SYSTEMATIC WITHDRAWALS. Northern Funds offers a Systematic Withdrawal Plan. If
you own shares of the Fund with a minimum value of $10,000, you may elect to
have a fixed sum redeemed at regular intervals ($250 minimum amount per
withdrawal) and distributed in cash or reinvested in one or more of the other
investment portfolios offered by Northern Funds. See "Purchasing Shares Directly
from the Fund -- Directed Reinvestments." An application form and additional
information may be obtained from the Transfer Agent by calling 1-800-595-9111.
EXCHANGE PRIVILEGE. Northern Funds offers an exchange privilege that permits you
to exchange shares of one Fund for shares of another investment 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
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the telephone privilege by calling the Transfer Agent at 1-800-595-9111.
The Transfer Agent has adopted procedures in an effort to establish
reasonable safeguards against fraudulent telephone transactions. The proceeds
for redemption orders will be sent by check, by wire transfer or by transfer to
an account maintained at Northern Trust or an affiliated bank. All checks will
be made payable to the shareholder of record and mailed only to the
shareholder's address of record. The address of record for redemption checks may
be changed only by a written request accompanied by signature guarantees by a
financial institution that participates in STAMP or such other means or evidence
of authority as may be acceptable to the Transfer Agent and sent to Northern
Funds, P.O. Box 75986, Chicago, Illinois 60690-6319. Additionally, the Transfer
Agent utilizes recorded lines for telephone transactions and will request a form
of personal identification if such identification has been furnished to the
Transfer Agent. Neither Northern Funds nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that are
reasonably believed to be genuine. To the extent that Northern Funds fails to
use reasonable procedures to verify the genuineness of telephone instructions,
it or its service providers may be liable for instructions that prove to be
fraudulent or unauthorized. In all other cases, you will bear the risk of loss.
Northern Funds reserves the right to refuse a telephone redemption if
it believes it is advisable to do so. Procedures for redeeming shares by
telephone may be modified or terminated by Northern Funds at any time without
notice. During periods of substantial economic or market change, telephone
redemptions may be difficult to place. If you are unable to contact the Transfer
Agent by telephone, shares may also be redeemed by mail as described above under
the discussion of redemptions by mail.
REDEEMING AND EXCHANGING THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
If you purchase your shares through an account at Northern Trust or
another Service Organization, you will redeem or exchange them in accordance
with the instructions pertaining to that account. If you are listed on the books
of Northern Funds as the shareholder of record, you may also redeem and exchange
your shares using any of the methods described above under "Redeeming and
Exchanging Directly from the Fund." Questions regarding these redemptions or
exchanges should be directed to your account representative at Northern Trust or
another Service Organization. Although Northern Funds imposes no charges when
you redeem, when shares are purchased through Northern Trust or another Service
Organization a fee may be charged by those
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institutions for providing services in connection with your account.
ADDITIONAL REDEMPTION AND EXCHANGE INFORMATION
EFFECTIVE TIME AND PRICE OF REDEMPTIONS AND EXCHANGES. Redemption orders for
shares of the Fund are processed at the net asset value next determined at 3:00
p.m. (Chicago Time) after receipt in good order by the Transfer Agent by 3:00
p.m. (Chicago Time) on a Business Day. Good order means that the request must
include the following information: the account number and Fund name; the amount
of the transaction (as specified in dollars or number of shares); the signatures
of all account owners exactly as they are registered on the account (except for
telephone and wire redemptions); required signature guarantees (if applicable);
and other supporting legal documents that might be required in the case of
estates, corporations, trusts and certain other accounts. Call 1-800-595-9111
for the additional documentation that may be required of these entities.
Exchange orders are likewise processed at the net asset value per share next
determined after receipt in good order by the Transfer Agent on a Business Day.
PAYMENT OF REDEMPTION PROCEEDS. The Fund will make payment for redeemed shares
typically within one or two Business Days, but no later than the seventh day
after receipt by the Transfer Agent of a request in good order on a Business
Day, except as otherwise provided by the rules of the SEC. However, if any
portion of the shares to be redeemed represents an investment made by check, the
Fund may delay the payment of the redemption proceeds until the Transfer Agent
is reasonably satisfied that the check has been collected, which could take up
to fifteen days from the purchase date. This procedure does not apply to shares
purchased by money order or wire payment.
MISCELLANEOUS REDEMPTION INFORMATION. All redemption proceeds will be sent by
check unless Northern Trust or the Transfer Agent is directed otherwise. The ACH
system may be utilized for payment of redemption proceeds. Redemptions may not
be processed if a shareholder has failed to submit a completed and signed
Purchase Application. Northern Funds may require any information reasonably
necessary to ensure that a redemption has been duly authorized.
To relieve Northern Funds of the cost of maintaining uneconomical
accounts, Northern Funds reserves the right to redeem the shares held in any
account if at the time of any redemption of shares in the account, the net asset
value of the remaining shares in the account falls below $1,000. Before such
involuntary redemption would occur, you would be given at least 60 days' written
notice and, during that period, you could make an additional investment to
restore the account to at least the
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minimum amount, in which case there would be no such redemption. Involuntary
redemptions will not be made because the value of shares in an account falls
below the minimum amount solely because of a decline in the Fund's net asset
value. 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.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Dividends from the net investment income of the Fund are declared and
paid quarterly. The net realized capital gains of the Fund are distributed at
least annually.
Dividends and capital gain distributions, if any, will reduce the net
asset value of the Fund by the amount of the dividend or capital gain
distribution. Dividends and capital gain distributions, if any, are
automatically reinvested (without any sales charge) in additional shares of the
Fund at their net asset value determined on the payment date. You may, however,
notify the Transfer Agent in writing that you elect instead to have dividends
and/or capital gain distributions paid in cash or reinvested in shares of
another investment portfolio offered by Northern Funds at their net asset value
determined on the payment date (provided you maintain an account in such fund).
This election will become effective for distributions paid two days after its
receipt by the Transfer Agent.
TAXES
As with any investment, you should consider the tax implications of an
investment in Northern Funds. The following is only a short summary of the
important tax considerations generally affecting the Fund and its shareholders.
You should consult your tax adviser with specific reference to your own tax
situation. Northern Funds will send written notices to shareholders annually
regarding the tax status of distributions made by the Fund.
FEDERAL TAXES. The Fund intends to qualify as a "regulated investment company"
under the Internal Revenue Code (the "Code"), meaning that to the extent the
Fund's earnings are distributed to shareholders as required by the Code, the
Fund itself is not required to pay federal income taxes.
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To qualify, the Fund will pay as dividends at least 90% of its
investment company taxable income and at least 90% of its net tax-exempt income
(if any) each year. Investment company taxable income includes, 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 or other qualified retirement account are
deferred under the Code.)
Any distribution based on the excess of long-term capital gain over net
short-term capital loss will be taxable as a long-term capital gain, no matter
how long you hold Fund shares. If you hold shares for six months or less, and
during that time receive a distribution that is taxable as a long-term capital
gain, any loss realized on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Before purchasing shares you should consider the effect of any capital
gain distributions and any net income dividends that are expected to be declared
or that have been declared but not yet paid. The per share price will be reduced
by the amount of the payment, so that a shareholder will, in effect, have paid
full price for the shares and then received a portion of the price back as a
taxable distribution. This is because at any given time the value of your shares
includes the undistributed net gains, if any, realized by the Fund on the sale
of portfolio securities, and undistributed dividends and interest received, less
the Fund's expenses. Because such gains and dividends are included in the price
of your shares, when they are distributed, the price of your shares is reduced
by the amount of the distribution. Accordingly, if your distribution is
reinvested in additional shares, the distribution has no effect on the value of
your investment; while you own more shares, the price of each share has been
reduced by the amount of the distribution. Likewise, if you take your
distribution in cash, the value of your shares after the record date will be
reduced by the cash received.
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
the Fund and received by shareholders on December 31, so long as the dividends
are actually paid, as expected, in January of the following year.
Shareholders may realize a taxable gain or loss when redeeming,
transferring or exchanging their shares (or in using
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the Systematic Withdrawal Plan to direct reinvestments), depending on the
difference in the prices at which the shares were originally purchased and when
redeemed, transferred or exchanged.
Northern Funds will be required in certain cases to withhold and remit
to the U.S. Treasury 31% of the 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 the state and local tax rules
applicable to an investment in Northern Funds may be different than the federal
tax rules described above, you should discuss your investment with your tax
adviser.
MANAGEMENT
BOARD OF TRUSTEES
The business and affairs of Northern Funds are managed under the
direction of its Board of Trustees. The Additional Statement contains the name
of each Trustee and other background information.
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern Trust, with offices at 50 S. LaSalle Street, Chicago, Illinois
60675, serves as Northern Funds' investment adviser, transfer agent and
custodian. As transfer agent, Northern Trust provides various administrative
servicing functions, and any shareholder inquiries may be directed to it.
Northern Trust'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 December 31, 1997, Northern Trust
Corporation had approximately $_____ billion in assets, $_____ billion in
deposits and employed approximately ________ persons.
Northern Trust and its affiliates administered in various capacities
(including as master trustee, investment manager or custodian) $________ billion
in assets as of December 31, 1997,
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including over $________ billion for which Northern Trust and its affiliates had
investment management responsibility.
Subject to the general supervision of Northern Funds' Board of
Trustees, Northern Trust is responsible for making investment decisions for the
Fund and placing purchase and sale orders for portfolio securities. Northern
Trust is also responsible for monitoring and preserving the records required to
be maintained under the regulations of the SEC (with certain exceptions
unrelated to its activities for Northern Funds). In making investment
recommendations for the Fund, investment advisory personnel must not inquire or
take into consideration whether issuers of securities proposed for purchase or
sale for the Fund's account are customers of Northern Trust's commercial banking
department. These requirements are designed to prevent investment advisory
personnel for the Fund from knowing which companies have commercial business
with Northern Trust and from purchasing securities where they know the proceeds
will be used to repay loans to the bank.
As compensation for its advisory services and its assumption of related
expenses, Northern Trust is entitled to a fee, computed daily and payable
monthly, at an annual rate of 1.00% of the average daily net assets of the Fund.
Northern Trust also receives compensation as Northern Funds' custodian
and transfer agent. The fees payable by the Fund for these services are
described in the Additional Statement.
Northern Trust may, at its own expense, provide compensation to certain
dealers and other institutions whose customers purchase shares of the 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 the
Fund and are attributable to shares held by such customers. Such compensation
will not represent an additional expense to the Fund or its shareholders, since
it will be paid from the assets of Northern Trust or its affiliates.
The Fund is advised by Northern Trust's Investment Services Group.
James M. Snyder, Vice President of Northern Trust since 1980, Senior Vice
President since 1991, Chief Investment Officer since 1995 and Executive Vice
President since 1996, oversees the management of all fixed income, equity and
money market assets managed by Northern Trust and is the head of Northern's
Investment Services Group. Mr. Snyder received his B.S. degree from Indiana
University and his M.B.A. degree from DePaul University. He is a Chartered
Financial Analyst and a member of the Investment Analysts Society of Chicago.
Primary responsibility for the management of the Mid Cap Growth Fund
lies with Theodore Breckel, Vice President in the Personal Investment
Management Division. Mr. Breckel has had such responsibility for the Fund
since April 1998. Mr. Breckel received his A.B. and M.B.A. degrees from
Indiana University and his M.S. degree from DePaul University. He is a
Chartered Financial Analyst and a member of the Investment Analysts Society of
Chicago and the Association for Investment Management and Research. He has
been with Northern Trust since 1968. He has served in the Personal Investment
Management Division since 1985.
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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 0.15% 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 institutions,
including Northern Trust, concerning the provision of support and/or
distribution services to their customers who own Fund shares. These services,
which are described more fully in the Additional Statement, may include support
services such as assisting investors in processing administrative purchase,
exchange and redemption requests; processing dividend and distribution payments
from the Fund; providing information to customers showing their positions in the
Fund; and providing subaccounting with respect to Fund shares beneficially owned
by customers or the information necessary for subaccounting. In addition,
Service Organizations may provide assistance, such as the forwarding of sales
literature and advertising to their customers, in connection with the
distribution of Fund shares. For their services, Service Organizations may
receive fees from the Fund at annual rates of up to 0.25% of the average daily
net asset value of the shares covered by their agreements.
Service Organizations may charge their customers fees for providing
administrative services in connection with investments in the Fund. Investors
should contact their Service Organization with respect to these fees and the
particular Service Organization's procedures for purchasing and redeeming
shares.
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It is the responsibility of Service Organizations to transmit purchase and
redemption orders and record those orders on a timely basis in accordance with
their agreements with their customers.
Conflict-of-interest restrictions may apply to the receipt of
compensation paid by Northern Funds in connection with the investment of
fiduciary funds in Fund shares. Institutions, including banks regulated by the
Comptroller of the Currency, Federal Reserve Board and state banking
commissions, and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult their legal counsel before entering into
agreements with Northern Funds.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting securities.
Accordingly, banks will be engaged under agreements with Northern Funds only to
perform the administrative and investor servicing functions described above, and
will represent that the services provided by them under the agreements will not
be primarily intended to result in the sale of Fund shares.
Agreements that contemplate the provision of distribution services by
Service Organizations are governed by a Distribution and Service Plan (the
"Plan") that has been adopted by Northern Funds pursuant to Rule 12b-1 under the
1940 Act. Payments to Service Organizations, including Northern Trust, under the
Plan are not tied directly to their own out-of-pocket expenses and therefore may
be used as they elect (for example, to defray their overhead expenses), and may
exceed their direct and indirect costs.
EXPENSES
Except as set forth above and in the Additional Statement, the Fund is
responsible for the payment of its expenses. These expenses include, without
limitation, the fees and expenses payable to Northern Trust and Sunstone,
brokerage fees and commissions, fees for the registration or qualification of
Fund shares under federal or state securities laws, expenses of the 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 Fund's shareholders and regulatory
authorities, compensation and expenses of its Trustees, payments
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to Service Organizations, fees of industry organizations such as the Investment
Company Institute, and miscellaneous and extraordinary expenses incurred by
Northern Funds.
Northern Trust and Sunstone intend to voluntarily reimburse a portion
of the Fund's expenses and/or reduce their advisory and administrative fees from
the Fund during the current fiscal year. The result of these reimbursements and
fee reductions will be to increase the performance of the Fund during the
periods for which the reductions and reimbursements are made.
FURTHER INFORMATION
DETERMINING SHARE PRICE
Net asset value per share for purposes of purchases and redemptions is
calculated by Northern Trust on each Business Day as of 3:00 p.m. (Chicago Time)
for the Net asset value is calculated by dividing the value of all securities
and other assets belonging to the Fund, less the liabilities charged to the
Fund, by the number of the Fund's outstanding shares.
Securities held by the Fund that are listed on a recognized U.S. or
foreign securities exchange are valued at the last quoted sales price on the
securities exchange on which the securities are primarily traded, except that
securities listed on an exchange in the United Kingdom are valued at the average
of the closing bid and ask prices. If securities listed on a U.S. exchange are
not traded on a valuation date, they will be valued at the last quoted bid
price. If securities traded on a foreign securities exchange are not traded on a
valuation date, they will be valued at the most recent quoted sales price.
Securities that are traded in the U.S. over-the-counter markets, absent a last
quoted sales price, are valued at the last quoted bid price. Securities which
are traded in the foreign over-the-counter markets are valued at the last sales
price, except that such securities traded in the United Kingdom are valued at
the average of the closing bid and ask prices. Any securities for which no
current quotations are readily available are valued at fair value as determined
in good faith by Northern Trust under the supervision of the Board of Trustees.
Temporary short-term investments are valued at amortized cost which Northern
Trust has determined, pursuant to Board authorization, approximates market
value. Securities may be valued on the basis of prices provided by independent
pricing services when those prices are believed to reflect the fair market value
of the securities.
ADVERTISING PERFORMANCE
The performance of the Fund may be compared to those of other mutual
funds with similar investment objectives and to stock, bond and other relevant
indices or to rankings prepared by
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independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, the performance of the Fund may be
compared to the S&P 400 Index, data prepared by Lipper Analytical Services, Inc.
or to the S&P 500 Index, the Consumer Price Index or the Dow Jones Industrial
Average.
The Fund calculates its total return on an "average annual total
return" basis for various periods from the date the Fund commences investment
operations and for other periods as permitted under SEC rules. Average annual
total return reflects the average annual percentage change in value of an
investment over the measuring period. Total return may also be calculated on an
aggregate total return basis for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return reflect changes in the price of the Fund's
shares and assume that any dividends and capital gain distributions are
reinvested. When considering average total return figures for periods longer
than one year, you should note that the annual total return for any one year may
be more or less than the average for the entire period. The Fund may also
advertise its total return on an aggregate, year-by-year or other basis for
various specified periods through charts, graphs, schedules or quotations.
Performance is based on historical earnings and is not intended to
indicate future performance. The investment return and principal value of an
investment in the Fund will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Performance data may not provide a
basis for comparison with bank deposits and other investments which provide a
fixed yield for a stated period of time. Changes in the net asset value should
be considered in ascertaining the total return to shareholders for a given
period. Total return data should also be considered in light of the risks
associated with the Fund's composition, quality, operating expenses and market
conditions. Any fees charged by Northern Trust or a Service Organization
directly to its customers in connection with investments in the Fund will not be
included in Northern Funds' calculations of performance data.
VOTING RIGHTS
Northern Funds was formed as a Massachusetts Business Trust on October
12, 1993 under an Agreement and Declaration of Trust (the "Trust Agreement").
The Trust Agreement permits the Board of Trustees to issue an unlimited number
of shares of beneficial interest of one or more separate series representing
interests in different investment portfolios. Northern Funds has established
twenty-five separate Funds.
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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 December 31, 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.
SHAREHOLDER REPORTS
Shareholders of record will be provided each year with a semi-annual
report showing portfolio investments and other information as of September 30
and, after the close of the Fund's fiscal year March 31, with an annual report
containing audited financial statements. To eliminate unnecessary duplication,
only one copy of shareholder reports will be sent to shareholders with the same
mailing address. Shareholders who desire a duplicate copy of shareholder reports
to be mailed to their residence should call 1-800-595-9111, or send an e-mail
to: [email protected].
RETIREMENT PLANS
Shares of the Fund may be purchased in connection with certain
tax-sheltered retirement plans, including profit-sharing plans, 401(k) plans,
money purchase pension plans, target benefit plans and individual retirement
accounts. Further information about how to participate in these plans, the fees
charged and the limits on contributions can be obtained from Northern Trust. To
invest through any of the tax-sheltered retirement plans, please call Northern
Trust for information and the required separate application. To determine
whether the benefits of a tax-sheltered retirement plan are available and/or
appropriate, a shareholder should consult with a tax adviser.
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MISCELLANEOUS
The address of Northern Funds is 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202 and the telephone number is 1-800-595-9111. Northern
Funds is registered as an open-end management investment company under the 1940
Act, and the Fund is classified under that Act as a diversified portfolio.
As used in this Prospectus, "Business Day" means each day Northern
Trust and the New York Stock Exchange (the "Exchange) are open, which is Monday
through Friday, except for holidays observed by Northern Trust and/or the
Exchange. [In 1998, these holidays are New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday (except for the Money Market Funds), 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 Fund reserves the right to cease or to
advance the deadline for accepting purchase and redemption orders for same
Business Day credit up to one hour before the PSA recommended closing time.
Purchase and redemption requests received after the advanced closing time will
be effected on the next Business Day. Northern Trust is not required to
calculate the net asset value of the Fund on days during which no shares are
tendered to the Fund for redemption and no orders to purchase or sell shares are
received by the Fund, or on days on which there is an insufficient degree of
trading in the Fund's portfolio securities for changes in the value of such
securities to 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 Fund. At various times, the distributor may implement programs
under which a broker's sales force may be eligible to win cash or non-cash
awards for sales efforts, and may finance broker sales contests or recognition
programs conforming to criteria established by the distributor. The distributor
may also provide marketing services to brokers consisting of written
informational material relating to sales incentive campaigns conducted by such
brokers for their representatives.
Northern Trust is sometimes referred to as "The Northern Trust Bank" in
advertisements and other literature.
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<PAGE> 45
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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<PAGE> 46
33-73404
811-8236
PART B
STATEMENT OF ADDITIONAL INFORMATION
MID CAP GROWTH FUND
NORTHERN FUNDS
(THE "TRUST)
This Statement of Additional Information (the "Additional Statement")
dated April 1, 1998 is not a prospectus. This Additional Statement should be
read in conjunction with the Prospectus dated April 1, 1998, as amended or
supplemented from time to time, for the Mid Cap Growth Fund of Northern Funds
(the "Prospectus"). Copies of the Prospectus may be obtained without charge from
the Transfer Agent by writing to the Northern Funds Center, P.O. Box 75986,
Chicago, Illinois 60690-9069 or by calling 1-800-595-9111. Capitalized terms not
otherwise defined have the same meaning as in the Prospectus.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS ADDITIONAL STATEMENT OR IN THE PROSPECTUS
IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY NORTHERN FUNDS OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY NORTHERN FUNDS OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
SHARES OF NORTHERN FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED, ENDORSED OR OTHERWISE SUPPORTED BY, THE NORTHERN TRUST BANK, ITS
PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY
THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
<PAGE> 47
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL INVESTMENT INFORMATION............................. 3
Investment Objective and Policies.................... 3
Investment Restrictions.............................. 17
ADDITIONAL TRUST INFORMATION.................................. 19
Trustees and Officers................................ 19
Investment Adviser, Transfer Agent and Custodian..... 22
Administrator and Distributor........................ 28
Service Organizations................................ 30
Counsel and Auditors................................. 31
In-Kind Purchases.................................... 31
Automatic Investing Plan............................. 31
Redemptions and Exchanges............................ 32
PERFORMANCE INFORMATION....................................... 32
General Information.................................. 33
TAXES......................................................... 36
Federal - General Information........................ 36
Taxation of Certain Financial Instruments .......... 38
DESCRIPTION OF SHARES......................................... 41
OTHER INFORMATION............................................. 44
APPENDIX A.................................................... 1
APPENDIX B.................................................... 1
</TABLE>
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<PAGE> 48
ADDITIONAL INVESTMENT INFORMATION
INVESTMENT OBJECTIVE AND POLICIES
The following supplements the investment objective and policies of the
Mid-Cap Growth Fund (the "Fund") as set forth in the Prospectus.
The Fund's investment objective is to seek long-term capital
appreciation. The Fund seeks to achieve its objective by investing primarily in
equity securities of companies with market capitalizations that are within the
capitalization range of the Standard & Poor's MidCap 400 Stock Index at the time
of investment.
COMMERCIAL PAPER, BANKERS' ACCEPTANCES, CERTIFICATES OF DEPOSIT, TIME
DEPOSITS AND BANK NOTES. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by banks or bank holding companies,
corporations and finance companies. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers' acceptances are
negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time
deposits may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties that vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party. Bank notes and bankers' acceptances rank junior to deposit liabilities of
the bank and pari passu with other senior, unsecured obligations of the bank.
Bank notes are classified as "other borrowings" on a bank's balance sheet, while
deposit notes and certificates of deposit are classified as deposits. Bank notes
are not insured by the Federal Deposit Insurance Corporation or any other
insurer. Deposit notes are insured by the Federal Deposit Insurance Corporation
only to the extent of $100,000 per depositor per bank.
The Fund may invest a portion of its net assets in the obligations of
foreign banks and foreign branches of domestic banks. Such obligations include
Eurodollar Certificates of Deposit ("ECDs"), which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits ("ETDs"), which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs"), which are essentially the same as ETDs
except they are issued by Canadian offices of major Canadian banks; Schedule Bs,
which are obligations
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<PAGE> 49
issued by Canadian branches of foreign or domestic banks; Yankee Certificates of
Deposit ("Yankee Cds"), which are U.S. dollar-denominated certificates of
deposit issued by a U.S. branch of a foreign bank and held in the United States;
and Yankee Bankers' Acceptances ("Yankee Bas"), which are U.S.
dollar-denominated bankers' acceptances issued by a U.S. branch of a foreign
bank and held in the United States.
REPURCHASE AGREEMENTS. The Fund may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Repurchase agreements are considered to be loans under the
Investment Company Act of 1940 (the "1940 Act"). Although the securities subject
to a repurchase agreement may bear maturities exceeding one year, settlement for
the repurchase agreement will never be more than one year after the Fund's
acquisition of the securities and normally will be within a shorter period of
time. Securities subject to repurchase agreements are held either by Northern
Funds' custodian or subcustodian (if any), or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement in an amount
exceeding the repurchase price (including accrued interest). Default by the
seller would, however, expose the Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations.
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds by selling
portfolio securities to financial institutions such as banks and broker/dealers
and agreeing to repurchase them at a mutually specified date and price ("reverse
repurchase agreements"). Reverse repurchase agreements are considered to be
borrowings under the 1940 Act. Reverse repurchase agreements involve the risk
that the market value of the securities sold by the Fund may decline below the
repurchase price. The Fund will pay interest on amounts obtained pursuant to a
reverse repurchase agreement. While reverse repurchase agreements are
outstanding, the Fund will maintain in a segregated account liquid assets in an
amount at least equal to the market value of the securities, plus accrued
interest, subject to the agreement.
VARIABLE AND FLOATING RATE INSTRUMENTS. With respect to the variable
and floating rate instruments that may be acquired by the Fund as described in
the Prospectus, Northern Trust will consider the earning power, cash flows and
other liquidity ratios of the issuers and guarantors of such instruments and, if
the instruments are subject to demand features, will monitor their financial
status and ability to meet payment on demand. In determining weighted average
portfolio maturity, an instrument may, subject to applicable Securities and
Exchange Commission ("SEC") regulations, be deemed to have a maturity shorter
than its nominal maturity based on the period remaining until the next interest
rate
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<PAGE> 50
adjustment or the time the Fund can recover payment of principal as specified in
the instrument. Where necessary to ensure that a variable or floating rate
instrument is of the minimum required credit quality for the Fund, the issuer's
obligation to pay the principal of the instrument will be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY
TRANSACTIONS. The Fund may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment (sometimes called delayed
delivery) basis. These transactions involve a commitment by the Fund to purchase
or sell securities at a future date. The price of the underlying securities
(usually expressed in terms of yield) and the date when the securities will be
delivered and paid for (the settlement date) are fixed at the time the
transaction is negotiated. When-issued purchases and forward commitment
transactions are normally negotiated directly with the other party.
The Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities. If
deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or negotiate a commitment after entering into it. The Fund also may
sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date.
When the Fund purchases securities on a when-issued, delayed-delivery
or forward commitment basis, the Fund's custodian (or subcustodian) will
maintain in a segregated account liquid assets having a value (determined daily)
at least equal to the amount of the Fund's purchase commitments. In the case of
a forward commitment to sell portfolio securities, the custodian or subcustodian
will hold the portfolio securities themselves in a segregated account while the
commitment is outstanding. These procedures are designed to ensure that the Fund
will maintain sufficient assets at all times to cover its obligations under
when-issued purchases, forward commitments and delayed-delivery transactions.
For purposes of determining the Fund's average dollar-weighted maturity, the
maturity of when-issued, delayed-delivery or forward commitment securities will
be calculated from the commitment date.
UNITED STATES GOVERNMENT OBLIGATIONS. Examples of the types of U.S.
Government obligations that may be acquired by the Fund include U.S. Treasury
Bills, Treasury Notes and Treasury Bonds and the obligations of Federal Home
Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Federal National Mortgage Association
("FNMA"), Government National Mortgage Association
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<PAGE> 51
("GNMA"), General Services Administration, Student Loan Marketing Association
("SLMA"), Central Bank for Cooperatives, Federal Home Loan Mortgage Corporation
("FHLMC"), Federal Intermediate Credit Banks and Maritime Administration.
SUPRANATIONAL BANK OBLIGATIONS. The Fund may invest in obligations of
supranational banks. Supranational banks are international banking institutions
designed or supported by national governments to promote economic
reconstruction, development or trade among nations (e.g., the International Bank
for Reconstruction and Development). Obligations of supranational banks may be
supported by appropriated but unpaid commitments of their member countries and
there is no assurance that these commitments will be undertaken or met in the
future.
STRIPPED OBLIGATIONS. The Treasury Department has facilitated transfers
of ownership of zero coupon securities by accounting separately for the
beneficial ownership of particular interest coupon and principal payments on
Treasury securities through the Federal Reserve book-entry record-keeping
system. The Federal Reserve program as established by the Treasury Department is
known as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities." The Fund may purchase securities registered in the STRIPS program.
Under the STRIPS program, the Fund is able to have its beneficial ownership of
zero coupon securities recorded directly in the book-entry record-keeping system
in lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities.
In addition, the Fund may acquire U.S. Government obligations and their
unmatured interest coupons that have been separated ("stripped") by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury
Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The underlying
U.S. Treasury bonds and notes themselves are held in book-entry form at the
Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are ostensibly owned by the bearer or holder), in trust on
behalf of the owners. Counsel to the underwriters of these certificates or other
evidences of ownership of U.S. Treasury securities have stated that, in their
opinion, purchasers of the stripped securities most likely will be deemed the
beneficial holders of the underlying U.S. Government obligations for federal tax
purposes. Northern Funds is
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<PAGE> 52
unaware of any binding legislative, judicial or administrative authority on this
issue.
The Prospectus discusses other types of stripped securities that may be
purchased by the Fund, including stripped mortgage-backed securities.
ASSET-BACKED SECURITIES. To the extent described in the Prospectus, the
Fund may purchase asset-backed securities, which are securities backed by
mortgages, installment contracts, credit card receivables or other assets.
Asset-backed securities represent interests in "pools" of assets in which
payments of both interest and principal on the securities are made periodically,
thus in effect "passing through" such payments made by the individual borrowers
on the assets that underlie the securities, net of any fees paid to the issuer
or guarantor of the securities. The average life of asset-backed securities
varies with the maturities of the underlying instruments, and the average life
of a mortgage-backed instrument, in particular, is likely to be substantially
less than the original maturity of the mortgage pools underlying the securities
as a result of mortgage prepayments. For this and other reasons, an asset-backed
security's stated maturity may be shortened, and the security's total return may
be difficult to predict precisely. Asset-backed securities acquired by the Fund
may include collateralized mortgage obligations ("CMOs") issued by private
companies.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
by GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes"), which are guaranteed as to the timely payment of principal and interest
by GNMA and backed by the full faith and credit of the United States. GNMA is a
wholly-owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA certificates also are supported by the authority of GNMA
to borrow funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes"), which are solely the
obligations of FNMA and are not backed by or entitled to the full faith and
credit of the United States, but are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by FHLMC include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress, which is owned entirely by
Federal Home Loan Banks. Freddie Macs are not guaranteed and do not constitute a
debt or obligation of the United States or of any Federal Home Loan
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<PAGE> 53
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
WARRANTS. The Fund may purchase warrants and similar rights, which are
privileges issued by corporations enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. The purchase of warrants involves the risk
that the Fund could lose the purchase value of a warrant if the right to
subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security.
FOREIGN CURRENCY TRANSACTIONS. In order to protect against a possible
loss on investments resulting from a decline or appreciation in the value of a
particular foreign currency against the U.S. dollar or another foreign currency
or for other reasons, the Fund is authorized to enter into forward currency
exchange contracts. These contracts involve an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Forward currency contracts do not eliminate fluctuations in the values of
portfolio securities but rather may allow the Fund to establish a rate of
exchange for a future point in time.
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. For example, when entering into a contract for the
purchase or sale of a security, the Fund may enter into a forward foreign
currency exchange contract for the amount of the purchase or sale price to
protect against variations, between the date the security is purchased or sold
and the date on which payment is made or received, in the value of the foreign
currency relative to the U.S. dollar or other foreign currency.
In addition, when Northern Trust anticipates that a particular foreign
currency may decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, the Fund may enter into a forward contract
to sell, for a fixed amount, the amount of foreign currency approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. Similarly, when the securities held by the Fund create a short
position in a foreign currency, the Fund may enter into a forward contract to
buy, for a fixed amount, an amount of foreign currency
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<PAGE> 54
approximating the short position. With respect to any forward foreign currency
contract, it will not generally be possible to match precisely the amount
covered by that contract and the value of the securities involved due to the
changes in the values of such securities resulting from market movements between
the date the forward contract is entered into and the date it matures. While
forward contracts may offer protection from losses resulting from declines or
appreciation in the value of a particular foreign currency, they also limit
potential gains which might result from changes in the value of such currency.
The Fund will also incur costs in connection with forward foreign currency
exchange contracts and conversions of foreign currencies and U.S. dollars.
A separate account consisting of liquid assets equal to the amount of
the Fund's assets that could be required to consummate forward contracts will be
established with the Fund's custodian except to the extent the contracts are
otherwise "covered." For the purpose of determining the adequacy of the
securities in the account, the deposited securities will be valued at market or
fair value. If the market or fair value of such securities declines, additional
cash or securities will be placed in the account daily so that the value of the
account will equal the amount of such commitments by the Fund. A forward
contract to sell a foreign currency is "covered" if the Fund owns the currency
(or securities denominated in the currency) underlying the contract, or holds a
forward contract (or call option) permitting the Fund to buy the same currency
at a price that is (i) no higher than the Fund's price to sell the currency or
(ii) greater than the Fund's price to sell the currency provided the difference
is maintained by the Fund in liquid assets in a segregated account with its
custodian. A forward contract to buy a foreign currency is "covered" if the Fund
holds a forward contract (or put option) permitting the Fund to sell the same
currency at a price that is (i) as high as or higher than the Fund's price to
buy the currency or (ii) lower than the Fund's price to buy the currency
provided the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian.
OPTIONS. The Fund may buy put options and buy call options and write
covered call and secured put options. Such options may relate to particular
securities, foreign and domestic securities indices, financial instruments or
foreign currencies, and may or may not be listed on a domestic or foreign
securities exchange and may or may not be issued by the Options Clearing
Corporation. Options trading is a highly specialized activity which entails
greater than ordinary investment risk. Options may be more volatile than the
underlying instruments, and therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying instruments themselves.
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<PAGE> 55
A call option for a particular security gives the purchaser of the
option the right to buy, and a writer the obligation to sell, the underlying
security at the stated exercise price prior to the expiration of the option,
regardless of the market price of the security. The premium paid to the writer
is in consideration for undertaking the obligation under the option contract. A
put option for a particular security gives the purchaser the right to sell the
security at the stated exercise price prior to the expiration date of the
option, regardless of the market price of the security. Options on indices and
yield curve options provide the holder with the right to make or receive a cash
settlement upon exercise of the option. With respect to options on indices, the
amount of the settlement will equal the difference between the closing price of
the index at the time of exercise and the exercise price of the option expressed
in dollars, times a specified multiple.
The Fund will write call options only if they are "covered." In the
case of a call option on a security or currency, the option is "covered" if the
Fund owns the instrument underlying the call or has an absolute and immediate
right to acquire that instrument without additional cash consideration (or, if
additional cash consideration is required, liquid assets in such amount are held
in a segregated account by its custodian) upon conversion or exchange of other
securities held by it. For a call option on an index, the option is covered if
the Fund maintains with its custodian securities comprising the index or liquid
assets equal to the contract value. A call option is also covered if the Fund
holds a call on the same instrument or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written
provided the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian. The Fund will write put options only if
they are "secured" by liquid assets maintained in a segregated account by the
Fund's custodian in an amount not less than the exercise price of the option at
all times during the option period.
The Fund's obligation to sell an instrument subject to a covered call
option written by it, or to purchase an instrument subject to a secured put
option written by it, may be terminated prior to the expiration date of the
option by the Fund's execution of a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e., same
underlying instrument, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize a
profit on an outstanding option, to prevent an underlying instrument from being
called, to permit the sale of the underlying instrument or to permit the writing
of a new option containing different terms on such underlying instrument. The
cost of such a liquidation purchase plus transaction costs may be greater than
the premium received
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<PAGE> 56
upon the original option, in which event the Fund will have incurred a loss in
the transaction. There is no assurance that a liquid secondary market will exist
for any particular option. An option writer, unable to effect a closing purchase
transaction, will not be able to sell the underlying instrument (in the case of
a covered call option) or liquidate the segregated account (in the case of a
secured put option) until the option expires or the optioned instrument or
currency is delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline or appreciation in
the instrument during such period.
When the Fund purchases an option, the premium paid by it is recorded
as an asset of the Fund. When the Fund writes an option, an amount equal to the
net premium (the premium less the commission) received by the Fund is included
in the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the current bid price. If an option
purchased by the Fund expires unexercised the Fund realizes a loss equal to the
premium paid. If the Fund enters into a closing sale transaction on an option
purchased by it, the Fund will realize a gain if the premium received by the
Fund on the closing transaction is more than the premium paid to purchase the
option, or a loss if it is less. If an option written by the Fund expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by the Fund is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in options. For
example, there are significant differences between the securities, currency and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In addition,
a liquid secondary market for particular options, whether traded
over-the-counter or on an exchange may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities or currencies; unusual or unforeseen circumstances may interrupt
normal operations on an exchange; the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
value; or one or more
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<PAGE> 57
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options that had been issued by the Options Clearing Corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may purchase and sell
futures contracts and may purchase and sell call and put options on futures
contracts. Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade, including
the execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the market may be liquidated by a transaction on
another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures or foreign options transaction
occurs. For these reasons, persons who trade foreign futures or foreign options
contracts may not be afforded certain of the protective measures provided by the
Commodity Exchange Act, the Commodity Futures Trading Commission's ("CFTC")
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the CFTC and
arbitration proceedings provided them by the National Futures Association or any
domestic futures exchange. In particular, the Fund's investments in foreign
futures or foreign options transactions may not be provided the same protections
in respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance in the foreign
exchange rate between the time an order is placed and the time it is liquidated,
offset or exercised. For a detailed description of futures contracts and related
options, see Appendix B to this Additional Statement.
SECURITIES LENDING. Collateral for loans of portfolio securities made
by the Fund may consist of cash, securities issued or guaranteed by the U.S.
Government or its agencies or irrevocable bank letters of credit (or any
combination thereof). The borrower of securities will be required to maintain
the market value of the collateral at not less than the market value of the
loaned securities, and such value will be monitored on a daily basis. When the
Fund lends its securities, it continues to receive dividends and interest on the
securities loaned and may simultaneously earn interest on the investment of the
cash collateral. Although voting rights, or rights to consent,
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<PAGE> 58
attendant to securities on loan pass to the borrower, such loans will be called
so that the securities may be voted by the Fund if a material event affecting
the investment is to occur.
CONVERTIBLE SECURITIES. Convertible securities entitle the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock
until the convertible securities mature or are redeemed, converted or exchanged.
Prior to conversion, convertible securities have characteristics similar to
ordinary debt securities in that they normally provide a stable stream of income
with generally higher yields than those of common stock of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure and therefore generally entail less risk than the
corporation's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security.
In selecting convertible securities, Northern Trust will consider,
among other factors: its evaluation of the creditworthiness of the issuers of
the securities; the interest or dividend income generated by the securities; the
potential for capital appreciation of the securities and the underlying common
stocks; the prices of the securities relative to other comparable securities and
to the underlying common stocks; whether the securities are entitled to the
benefits of sinking funds or other protective conditions; diversification of the
Fund's portfolio as to issuers; and whether the securities are rated by a rating
agency and, if so, the ratings assigned.
The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
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<PAGE> 59
Capital appreciation for the Fund may result from an improvement in the
credit standing of an issuer whose securities are held in the Fund or from a
general lowering of interest rates, or a combination of both. Conversely, a
reduction in the credit standing of an issuer whose securities are held by the
Fund or a general increase in interest rates may be expected to result in
capital depreciation to the Fund.
In general, investments in non-investment grade convertible securities
are subject to a significant risk of a change in the credit rating or financial
condition of the issuing entity. Investments in convertible securities of medium
or lower quality are also likely to be subject to greater market fluctuation and
to greater risk of loss of income and principal due to default than investments
of higher rated fixed-income securities. Such lower-rated securities generally
tend to reflect short-term corporate and market developments to a greater extent
than higher rated securities, which react more to fluctuations in the general
level of interest rates. The Fund will generally reduce risk to the investor by
diversification, credit analysis and attention to current developments in trends
of both the economy and financial markets. However, while diversification
reduces the effect on the Fund of any single investment, it does not reduce the
overall risk of investing in lower-rated securities.
RISKS RELATED TO LOWER-RATED SECURITIES. While any investment carries
some risk, certain risks associated with lower-rated securities are different
from those for investment-grade securities. The risk of loss through default is
greater because lower-rated securities are usually unsecured and are often
subordinate to an issuer's other obligations. Additionally, the issuers of these
securities frequently have high debt levels and are thus more sensitive to
difficult economic conditions, individual corporate developments and rising
interest rates. Consequently, the market price of these securities may be quite
volatile and may result in wider fluctuations of the Fund's net asset value per
share.
There remains some uncertainty about the performance level of the
market for lower-rated securities under adverse market and economic
environments. An economic downturn or increase in interest rates could have a
negative impact on both the markets for lower-rated securities (resulting in a
greater number of bond defaults) and the value of lower-rated securities held in
the portfolio of investments.
The economy and interest rates can affect lower-rated securities
differently than other securities. For example, the prices of lower-rated
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher-rated investments. In
addition, during an economic downturn or period in which interest rates are
rising
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<PAGE> 60
significantly, highly leveraged issuers may experience financial difficulties,
which, in turn, would adversely affect their ability to service their principal
and interest payment obligations, meet projected business goals and obtain
additional financing.
If an issuer of a security defaults, the Fund may incur additional
expenses to seek recovery. In addition, periods of economic uncertainty would
likely result in increased volatility for the market prices of lower-rated
securities as well as the Fund's net asset value. In general, both the prices
and yields of lower-rated securities will fluctuate.
In certain circumstances it may be difficult to determine a security's
fair value due to a lack of reliable objective information. Such instances occur
where there is not an established secondary market for the security or the
security is lightly traded. As a result, the Fund's valuation of a security and
the price it is actually able to obtain when it sells the security could differ.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower-rated
convertible securities held by the Fund, especially in a thinly traded market.
Illiquid or restricted securities held by the Fund may involve special
registration responsibilities, liabilities and costs, and could involve other
liquidity and valuation difficulties.
Current laws, such as those requiring federally-insured savings and
loan associations to remove investments in lower-rated securities from their
portfolios, as well as other pending proposals, may have a material impact on
the market for lower-rated securities.
The ratings assigned by a rating agency evaluates the safety of a
lower-rated security's principal and interest payments, but does not address
market value risk. Because the ratings of the rating agencies may not always
reflect current conditions and events, in addition to using recognized rating
agencies and other sources, Northern Trust performs its own analysis of the
issuers whose lower-rated securities the Fund holds. Because of this, the Fund's
performance may depend more on its adviser's credit analysis than is the case of
mutual funds investing in higher-rated securities.
INVESTMENT COMPANIES. To the extent required by the 1940 Act and the
regulations and orders of the SEC thereunder, the Fund currently intends to
limit its investments in securities issued by other investment companies so
that, as determined immediately after a purchase of such securities is made, not
more than 3% of the total outstanding stock of any one investment company will
be owned by the Fund, the Northern Funds as a whole and their affiliated
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<PAGE> 61
persons (as defined in the 1940 Act). An investment company whose securities are
purchased by the Fund or Northern Funds is not obligated to redeem such
securities in an amount exceeding 1% of the investment company's total
outstanding securities during any period of less than 30 days. Therefore, such
securities that exceed this amount may be illiquid. Notwithstanding the
foregoing, the Fund may adhere to more restrictive limitations with respect to
its investments in securities issued by other investment companies if required
by the SEC or deemed to be in the best interests of Northern Funds, and will
comply with any fundamental investment restriction that may otherwise be
applicable to such investments. To the extent required by the 1940 Act, the Fund
expects to vote the shares of other investment companies that are held by it in
the same proportion as the vote of all other holders of such securities.
YIELDS AND RATINGS. The yields on certain obligations, including the
money market instruments in which the Fund invests, are dependent on a variety
of factors, including general economic conditions, conditions in the particular
market for the obligation, financial condition of the issuer, size of the
offering, maturity of the obligation and ratings of the issue. The ratings of
Standard & Poor's, Moody's, Duff, Fitch and Thomson BankWatch, Inc. represent
their respective opinions as to the quality of the obligations they undertake to
rate. Ratings, however, are general and are not absolute standards of quality.
Consequently, obligations with the same rating, maturity and interest rate may
have different market prices.
CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio turnover rate for
the Fund is calculated by dividing the lesser of purchases or sales of portfolio
investments for the reporting period by the monthly average value of the
portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Portfolio turnover may vary
greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements which
enable the Fund to receive favorable tax treatment.
MISCELLANEOUS. The Fund will not normally engage in the trading of
securities for short-term profits. However, the Fund is not restricted by policy
with regard to portfolio turnover and will make changes in its investment
portfolio from time to time as business and economic conditions as well as
market prices may dictate. Securities may be purchased on margin only to obtain
such short-term credits as are necessary for the clearance of purchases and
sales of securities. The Fund will not engage in selling securities short. The
Fund may, however, make short sales against the box although the Fund has no
current intention to do so in the coming year. "Selling short against the box"
involves selling a
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<PAGE> 62
security that the Fund owns for delivery at a specified date in the future.
INVESTMENT RESTRICTIONS
The Fund is subject to the fundamental investment restrictions
enumerated below which may be changed with respect to the Fund only by a vote of
the holders of a majority of the Fund's outstanding shares.
The Fund may not:
(1) Make loans, except (a) through the purchase of debt
obligations in accordance with the Fund's investment objective and
policies, (b) through repurchase agreements with banks, brokers,
dealers and other financial institutions, and (c) loans of securities.
(2) Mortgage, pledge or hypothecate any assets (other than
pursuant to reverse repurchase agreements) except to secure permitted
borrowings.
(3) Purchase or sell real estate or real estate limited
partnerships, but this restriction shall not prevent the Fund from
investing directly or indirectly in portfolio instruments secured by
real estate or interests therein or acquiring securities of real estate
investment trusts or other issuers that deal in real estate.
(4) Purchase or sell commodities or commodity contracts or oil
or gas or other mineral exploration or development programs or leases,
except that the Fund may, to the extent appropriate to its investment
policies, purchase securities of companies engaging in whole or in part
in such activities, and may enter into futures contracts and related
options and forward currency exchange contracts in accordance with its
investment objective and policies.
(5) Invest in companies for the purpose of exercising control.
(6) Act as underwriter of securities, except as the Fund may
be deemed to be an underwriter under the Securities Act of 1933 (the
"1933 Act") in connection with the purchase and sale of portfolio
instruments in accordance with its investment objective and portfolio
management policies.
(7) Write puts, calls or combinations thereof, except for
transactions in options on securities, financial instruments,
currencies and indices of securities; futures contracts; options on
futures contracts; forward currency
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<PAGE> 63
exchange contracts; short sales against the box; interest rate and
currency swaps; and pair-off transactions.
In addition, as summarized in the Prospectus, the Fund may
not:
(8) Purchase securities (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements collateralized by such obligations) if such
purchase would cause 25% or more in the aggregate of the market value
of the total assets of the Fund to be invested in the securities of one
or more issuers having their principal business activities in the same
industry. For the purposes of this restriction, state and municipal
governments and their agencies and authorities are not deemed to be
industries; as to utility companies, the gas, electric, water and
telephone businesses are considered separate industries; personal
credit finance companies and business credit finance companies are
deemed to be separate industries; and wholly-owned finance companies
are considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their
parents.
(9) Borrow money (other than pursuant to reverse repurchase
agreements), except (a) as a temporary measure, and then only in
amounts not exceeding 5% of the value of the Fund's total assets or (b)
from banks, provided that immediately after any such borrowing all
borrowings of the Fund do not exceed one-third of the Fund's total
assets. The exceptions in (a) and (b) to this restriction are not for
investment leverage purposes but are solely for extraordinary or
emergency purposes or to facilitate management of the Fund by enabling
Northern Funds to meet redemption requests when the liquidation of
portfolio instruments is deemed to be disadvantageous or not possible.
If due to market fluctuations or other reasons the total assets of the
Fund fall below 300% of its borrowings, Northern Funds will reduce the
borrowings of the Fund in accordance with the 1940 Act. In addition, as
a matter of fundamental policy, the Fund may not enter into reverse
repurchase agreements exceeding in the aggregate one-third of their
respective total assets.
(10) Make any investment inconsistent with the Fund's
classification as a diversified investment company under the 1940 Act.
In addition, as a matter of fundamental policy, the Fund will not issue
senior securities except as stated in the Prospectus or this Additional
Statement.
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<PAGE> 64
Except as otherwise provided in Investment Restriction (8), for the
purpose of such restriction in determining industry classification with respect
to the Fund, Northern Funds intends to use the industry classification titles in
the Standard Industrial Classification Manual. Securities held in escrow or
separate accounts in connection with the Fund's investment practices described
in this Additional Statement and in the Prospectus are not deemed to be
mortgaged, pledged or hypothecated for purposes of the foregoing Investment
Restrictions.
A security is considered to be issued by the entity, or entities, whose
assets and revenues back the security. A guarantee of a security is not deemed
to be a security issued by the guarantor when the value of all securities issued
and guaranteed by the guarantor, and owned by the Fund, does not exceed 10% of
the value of the Fund's total assets.
Each Investment Restriction which involves a maximum percentage (other
than the restriction set forth above in Investment Restriction (9)) will not be
considered violated unless an excess over the percentage occurs immediately
after, and is caused by, an acquisition or encumbrance of securities or assets
of the Fund. The 1940 Act requires that if the asset coverage for borrowings at
any time falls below the limits described in Investment Restriction (9), the
Fund will, within three days thereafter (not including Sundays and holidays),
reduce the amount of its borrowings to an extent that the net asset coverage of
such borrowings shall conform to such limits.
ADDITIONAL TRUST INFORMATION
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of Northern Funds
is set forth below.
Mr. Silas S. Cathcart,*,** Chairman of the Board and
President, Age 72, 222 Wisconsin Avenue, Lake Forest, Illinois 60045. Chairman
of Kidder Peabody Inc. from May 1987 until his retirement in December 1989.
Director/Trustee of General Electric Co., Baxter International, Inc. (worldwide
development, distribution and manufacture of health care products, systems and
services), The Quaker Oats Co., Montgomery Ward, American Academics, Inc.
Retired Director and Trustee of Illinois Tool Works, Inc., and Bradley Trust,
respectively.
Mr. James W. Cozad, Trustee, Age 71, 1205 Central Road,
Glenview, Il 60025. Vice Chairman of Amoco Corporation from September 1983 to
December 1989 and Chairman and CEO of Whitman Corporation (holding company for
Pepsi-Cola General Bottlers, Inc.,
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<PAGE> 65
Midas International Corporation (automotive services) and Hussmann Corporation
(refrigeration systems and equipment) from January 1990 until his retirement in
May 1992. Director of Whitman Corporation, Eli Lilly and Company (life science
products), Inland Steel Company, Inland Steel Industries, Inc. and Sears,
Roebuck & Company. Retired Director of GATX Corporation (transportation,
distribution and warehousing).
Mr. Wesley M. Dixon, Jr.,* Trustee, Age 70, 400 Skokie Blvd.,
Suite 675, Northbrook, Illinois 60062. Director of Earl Kinship Capital
Corporation since 1985. Vice Chairman and Director of G.D. Searle & Co.
(manufacture and sale of food products and pharmaceuticals) from 1977 to 1983
and President of G.D. Searle & Co. prior thereto.
Mr. William J. Dolan, Jr., Trustee, Age 65, 1534 Basswood
Circle, Glenview, Illinois 60025. Partner of Arthur Andersen & Co. S.C.
(accounting firm) from 1966 until his retirement in December 1989. Financial
Consultant, Ernst & Young from 1992 to 1993, Director of Household Bank, Federal
Savings Bank.
Mr. Raymond E. George, Jr.,** Trustee, Age 67, 703 Prospect
Avenue, Winnetka, Illinois 60093. Senior Vice President and Senior Fiduciary
Officer of The Northern Trust Company from 1988 until his retirement in October
1993.
Miriam M. Allison, Vice President and Treasurer, Age 50, 207
E. Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. President and Director
of Sunstone Financial Group, Inc. since 1990, President and Member of Sunstone
Investor Services, LLC and Sunstone Distribution Services, LLC since August 1996
and October 1996 respectively, and Vice President of Firstar Trust Company prior
thereto.
Mary M. Tenwinkel, Vice President, Age 49, 207 E. Buffalo
Street, Suite 400, Milwaukee, Wisconsin 53202. Vice President of Sunstone
Financial Group, Inc. since August of 1993 and Senior Vice President since
January, 1996, Vice President of Sunstone Distribution Services, LLC since
October 1996, and First Vice President and head of Personal Services Group at
Firstar Trust Company prior thereto.
Anita M. Zagrodnik, Assistant Treasurer, Age 37, 207 E.
Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. Vice President,
Accounting and Tax Services of Sunstone Financial Group,
- --------
* Messrs. Cathcart and Dixon are first cousins.
** Messrs. Cathcart and George are considered to be "interested persons"
of Northern Funds as defined in the 1940 Act.
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<PAGE> 66
Inc. since 1994, Client Services Manager of Sunstone Financial Group, Inc. from
1990 to 1994, Vice President of Sunstone Investor Services, LLC since January
1997, and Senior Accountant at Price Waterhouse prior thereto.
Jeffrey A. Dalke, Secretary, Age 47, Philadelphia National
Bank Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107. Partner
in the law firm of Drinker Biddle & Reath LLP.
Certain of the Trustees and officers and the organizations with which
they are associated have had in the past, and may have in the future,
transactions with Northern Trust, Sunstone and their respective affiliates.
Northern Funds has been advised by such Trustees and officers that all such
transactions have been and are expected to be in the ordinary course of business
and the terms of
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such transactions, including all loans and loan commitments by such persons,
have been and are expected to be substantially the same as the prevailing terms
for comparable transactions for other customers. Ms. Allison holds similar
positions with one or more investment companies that are distributed by
Sunstone. As a result of the responsibilities assumed by Northern Trust under
its Advisory Agreement, Transfer Agency Agreement and Custodian Agreement and by
Sunstone under its Administration Agreement and Distribution Agreement, Northern
Funds itself requires no employees.
Each Trustee, except the Chairman, earns an annual fee of $25,000 and
an additional fee of $1,250 for each meeting attended, plus reimbursement of
expenses incurred as a Trustee. The Chairman of the Board earns an annual fee of
$30,000 and an additional fee of $1,250 for each meeting attended, plus
reimbursement of expenses incurred as a Trustee. Northern Funds' officers do not
receive fees from Northern Funds for services in such capacities, although
Sunstone, of which Mmes. Allison, Tenwinkel and Zagrodnik are also officers,
receives fees from Northern Funds for administrative services. Drinker Biddle &
Reath LLP, of which Mr. Dalke is a partner, receives legal fees as counsel to
Northern Funds.
For the fiscal year ended March 31, 1997, the Trustees received the
following compensation:
<TABLE>
<CAPTION>
========================================================================================
Pension or
Retirement
Benefits Total
Aggregate Accrued as Part Compensation
Compensation of Trust from the Trust
Name of Trustee from the Trust Expense Complex*
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Silas S. Cathcart $25,000 None $25,000
- ----------------------------------------------------------------------------------------
James W. Cozad $18,750 None $18,750
- ----------------------------------------------------------------------------------------
Wesley M. Dixon, Jr. $20,000 None $20,000
- ----------------------------------------------------------------------------------------
William J. Dolan, Jr. $20,000 None $20,000
- ----------------------------------------------------------------------------------------
Raymond E. George, Jr. $20,000 None $20,000
========================================================================================
</TABLE>
* This column presents the same information as the first column because none of
the Trustees served on a board of another mutual fund related to the Trust.
In addition, for the fiscal year ended March 31, 1997, the Trust paid $18,750 to
a former Trustee of the Trust.
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern Trust is a wholly-owned subsidiary of The Northern Trust
Corporation, a Chicago-based multi-bank holding company with
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<PAGE> 68
subsidiaries in Illinois, Florida, New York, Arizona, California and Texas.
Northern Trust has for more than 100 years managed the assets of individuals,
charitable organizations, foundations and large corporate investors. One of the
nation's leading providers of trust and investment management services, Northern
Trust first entered the mutual fund business in 1983 by offering money market
funds to institutional clients. As part of its investment advisory services,
Northern Trust offers extensive research services to its clients. As of the date
of this Additional Statement, nearly 300 financial institutions nationwide
purchase Northern Trust's economic advisory services. As of December 31, 1997,
Northern Trust Corporation had approximately $_____ billion in assets and $_____
billion in deposits. Northern Trust and its affiliates administered in various
capacities (including as master trustee, investment manager or custodian) $___
billion in assets as of December 31, 1997, including $___ billion for which
Northern Trust had management responsibility. Northern Trust is one of the
strongest banking organizations in the United States and its clients include
public and private retirement funds, endowments, foundations, trusts,
corporations and individuals. Northern Funds complements the banking and
personal trust services available through Northern Trust by allowing Northern
Trust's banking and trust clients to consolidate the management of their
finances and thereby move one step closer to one-stop financial shopping.
Northern Funds utilizes a state-of-the-art investor services center. Also,
trained investment representatives are available at Northern Trust's offices to
assist investors in allocating their investments. Northern Trust believes it has
built its organization by serving clients with integrity, a commitment to
quality, and personal attention. Its stated mission with respect to all its
financial products and services is to achieve unrivaled client satisfaction.
Northern Trust manages the Fund through a team of professionals, led by
portfolio managers who follow a disciplined process to develop investment
strategies. The purpose of this approach is to promote consistent management.
The portfolio managers draw upon the resources of Northern Trust's research
department with specialists in economic analysis, investment strategy, credit
quality and tax law, and which supplies information on interest rates, GNP
growth, corporate profits and other factors.
Subject to the general supervision of the Board of Trustees, Northern
Trust makes decisions with respect to and places orders for all purchases and
sales of portfolio securities for the Fund, and also provides certain ancillary
services. Northern Trust's Advisory Agreement with Northern Funds has been
approved by the Board of Trustees, including the "non-interested" Trustees, and
the initial shareholder of Northern Funds. The Advisory Agreement provides that
in executing portfolio transactions and in selecting brokers or dealers (a) with
respect to common and preferred stocks, Northern Trust shall use its best
judgment to obtain the best overall terms available, and (b) with respect to
other securities,
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<PAGE> 69
Northern Trust shall attempt to obtain best net price and execution.
Transactions on U.S. stock exchanges involve the payment of negotiated brokerage
commissions. On exchanges on which commissions are negotiated, the cost of
transactions may vary among different brokers.
In assessing the best overall terms available for any transaction,
Northern Trust is to consider all factors it deems relevant, including the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. In evaluating the best overall terms available and in
selecting the broker or dealer to execute a particular transaction, Northern
Trust may consider the brokerage and research services provided to the Fund
and/or other accounts over which Northern Trust or an affiliate of Northern
Trust exercises investment discretion. These brokerage and research services may
include industry and company analyses, portfolio services, quantitative data,
market information systems and economic and political consulting and analytical
services.
Supplemental research information so received is in addition to, and
not in lieu of, services required to be performed by Northern Trust and does not
reduce the advisory fees payable to Northern Trust by the Fund. The Trustees
will periodically review the commissions paid by the Fund to consider whether
the commissions paid over representative periods of time appear to be reasonable
in relation to the benefits inuring to the Fund. It is possible that certain of
the supplementary research or other services received will primarily benefit one
or more other investment companies or other accounts for which investment
discretion is exercised. Conversely, the Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions effected
for such other account or investment company.
Transactions on foreign stock exchanges involve payment for brokerage
commissions which are generally fixed. Over-the-counter issues, including
corporate debt and government securities, are normally traded on a "net" basis
(i.e., without commission) through dealers, or otherwise involve transactions
directly with the issuer of an instrument. With respect to over-the-counter
transactions, Northern Trust will normally deal directly with dealers who make a
market in the instruments involved except in those circumstances where more
favorable prices and execution are available elsewhere. The cost of foreign and
domestic securities purchased from underwriters includes an underwriting
commission or concession, and the prices at which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down.
The Fund may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in
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<PAGE> 70
order to take advantage of the lower purchase price available to members of a
bidding group. The Fund will engage in this practice, however, only when
Northern Trust believes such practice to be in the Fund's interests.
Northern Trust's investment advisory duties for Northern Funds are
carried out through its Trust Department. On occasions when Northern Trust deems
the purchase or sale of a security to be in the best interests of the Fund as
well as other fiduciary or agency accounts managed by it (including any other
portfolio, investment company or account for which Northern Trust acts as
adviser), the Agreement provides that Northern Trust, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
accounts in order to obtain the best overall terms available with respect to
common and preferred stocks and the best net price and execution with respect to
other securities. In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by
Northern Trust in the manner it considers to be most equitable and consistent
with its fiduciary obligations to the Fund and other accounts involved. In some
instances, this procedure may adversely affect the size of the position
obtainable for the Fund or the amount of the securities that are able to be sold
for the Fund. To the extent that the execution and price available from more
than one broker or dealer are believed to be comparable, the Agreement permits
Northern Trust, at its discretion but subject to applicable law, to select the
executing broker or dealer on the basis of Northern Trust's opinion of the
reliability and quality of such broker or dealer.
The Advisory Agreement provides that Northern Trust may render similar
services to others so long as its services under such Agreement are not impaired
thereby. The Advisory Agreement also provides that Northern Funds will indemnify
Northern Trust against certain liabilities (including liabilities under the
federal securities laws relating to untrue statements or omissions of material
fact and actions that are in accordance with the terms of the Agreement) or, in
lieu thereof, contribute to resulting losses.
From time to time, Northern Trust may voluntarily waive a portion or
all of its fees otherwise payable to it with respect to the Fund.
Under its Transfer Agency Agreement with Northern Funds, Northern Trust
has undertaken, among other things, to perform the following services: (1)
answer shareholder inquiries and respond to requests for information regarding
Northern Funds; (2) process purchase and redemption transactions; (3) establish
and maintain shareholder accounts and subaccounts; (4) furnish confirmations in
accordance with applicable law, and provide periodic account statements to each
shareholder; (5) furnish proxy statements and proxies, annual and semi-annual
financial statements, and dividend,
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<PAGE> 71
distribution and tax notices to shareholders; (6) act as income disbursing
agent; and (7) maintain appropriate records relating to its services. Northern
Trust may appoint one or more sub-transfer agents in the performance of its
services.
As compensation for the services rendered by Northern Trust under the
Transfer Agency Agreement and the assumption by Northern Trust of related
expenses, Northern Trust is entitled to a fee from Northern Funds, payable
monthly, at an annual rate of .10% of the average daily net asset value of the
Fund.
Northern Trust maintains custody of the assets of the Fund pursuant to
the terms of its Custodian Agreement with Northern Funds. Under this agreement,
Northern Trust (l) holds the Fund's cash and securities, (2) maintains such cash
and securities in separate accounts in the name of the Fund, (3) makes receipts
and disbursements of funds on behalf of the Fund, (4) receives, delivers and
releases securities on behalf of the Fund, (5) collects and receives all income,
principal and other payments in respect of the Fund's investments held by
Northern Trust under the agreement, and (6) maintains the accounting records of
Northern Funds. Northern Trust may employ one or more subcustodians under the
Custody Agreement, provided that Northern Trust shall have no more
responsibility or liability to Northern Funds on account of any action or
omission of any subcustodian so employed than such subcustodian has to Northern
Trust and that the responsibility or liability of the subcustodian to Northern
Trust shall conform to the resolution of the Trustees of Northern Funds
authorizing the appointment of the particular subcustodian. Northern Trust may
also appoint an agent to carry out such of the provisions of the Custody
Agreement as Northern Trust may from time to time direct.
As compensation for the services rendered to the Fund under the
Custodian Agreement, and the assumption by Northern Trust of certain related
expenses, Northern Trust is entitled to payment from the Fund as follows: (a) a
basic custodial fee of (i) $18,000 annually for the Fund, plus (ii) 1/100th of
1% annually of the Fund's average daily net assets to the extent they exceed
$100 million, plus (b) a basic accounting fee of (i) $25,000 annually for the
Fund, plus (ii) 1/100th of 1% annually of the Fund's average daily net assets to
the extent they exceed $50 million, plus (c) a fixed dollar fee for each trade
in portfolio securities, plus (d) a fixed dollar fee for each time that Northern
Trust as Custodian receives or transmits funds via wire, plus (e) reimbursement
of expenses incurred by Northern Trust as Custodian for telephone, postage,
courier fees, office supplies and duplicating. The fees referred to in clauses
(c) and (d) are subject to annual upward adjustments based on increases in the
Consumer Price Index for All Urban Consumers, provided that Northern Trust may
permanently or temporarily waive all or any portion of any upward adjustment.
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Unless sooner terminated, each of the Advisory Agreement, Transfer
Agency Agreement and Custodian Agreement between Northern Trust and Northern
Funds will continue in effect with respect to the Fund until March 31, 1999, and
thereafter for successive 12-month periods, provided that the continuance is
approved at least annually (a) by the vote of a majority of the Trustees who are
not parties to the agreement or "interested persons" (as such term is defined in
the 1940 Act) of any party thereto, cast in person at a meeting called for the
purpose of voting on such approval and (b) by the Trustees or by the vote of a
majority of the outstanding shares of the Fund (as defined under "Description of
Shares"). Each agreement is terminable at any time without penalty by Northern
Funds (by specified Trustee or shareholder action) on 60 days' written notice to
Northern Trust and by Northern Trust on 60 days' written notice to Northern
Funds.
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company continuously
engaged in the issuance of its shares, but such banking laws and regulations do
not prohibit such a holding company or affiliate or banks generally from acting
as investment adviser, transfer agent or custodian to such an investment
company, or from purchasing shares of such a company as agent for and upon the
order of customers. Northern Trust believes that it may perform the services
contemplated by its agreements with Northern Funds without violation of such
banking laws or regulations, which are applicable to it. It should be noted,
however, that future changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as future judicial or administrative decisions or
interpretations of current and future statutes and regulations, could prevent
Northern Trust from continuing to perform such services for Northern Funds.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of Northern Trust in connection with the provision of
services on behalf of Northern Funds, Northern Funds might be required to alter
materially or discontinue its arrangements with Northern Trust and change its
method of operations. It is not anticipated, however, that any change in
Northern Funds' method of operations would affect the net asset value per share
of the Fund or result in a financial loss to any shareholder. Moreover, if
current restrictions preventing a bank from legally sponsoring, organizing,
controlling or distributing shares of an open-end investment company were
relaxed, Northern Funds expects that Northern Trust would consider the
possibility of offering to perform some or all of the services now provided by
Sunstone. It is not possible, of course, to predict whether or in what form such
restrictions might be relaxed or the terms upon which Northern Trust might offer
to provide services for consideration by the Trustees.
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In the Advisory Agreement, Northern Trust agrees that the name
"Northern" may be used in connection with Northern Funds' business on a
royalty-free basis. Northern Trust has reserved to itself the right to grant the
non-exclusive right to use the name "Northern" to any other person. The Advisory
Agreement provides that at such time as the Agreement is no longer in effect,
Northern Funds will cease using the name "Northern."
ADMINISTRATOR AND DISTRIBUTOR
Under its Administration Agreement, Sunstone has agreed, subject to the
direction and control of Northern Funds' Board of Trustees and utilizing
information provided by Northern Funds and its agents, to (1) provide office
space, facilities, equipment and personnel to carry out its services; (2)
compile data for and prepare with respect to the Fund timely Notices to the SEC
required pursuant to Rule 24f-2 under the 1940 Act and Semi-Annual Reports on
Form N-SAR; (3) prepare for execution by Northern Funds and file all federal
income and excise tax returns and state income tax returns (and such other
required tax filings as may be agreed to by the parties) other than those
required to be made by Northern Funds' custodian and transfer agent; (4) prepare
compliance filings relating to the registration of the securities of the Fund
pursuant to state securities laws with the advice of Northern Funds' counsel;
(5) assist the Fund accountants with preparing the Annual and Semi-Annual
Reports required pursuant to Section 30(d) under the 1940 Act; (6) assist to the
extent requested by Northern Funds with the preparation of the Registration
Statement for the Fund (on Form N-1A or any replacement therefor) and any
amendments thereto, and proxy materials; (7) prepare and monitor the Fund's
expense accruals and cause all appropriate expenses to be paid from Fund assets
on proper authorization from the Fund; (8) assist in the acquisition of the
Northern Funds' fidelity bond required by the 1940 Act, monitor the amount of
the bond and make the necessary SEC filings related thereto; (9) from time to
time as Northern Funds may reasonably request or as Sunstone deems appropriate,
check the Fund's compliance with the policies and limitations relating to
portfolio investments as set forth in the Prospectus, Additional Statement and
Declaration of Trust and monitor the Fund's status as a regulated investment
company under Subchapter M of the Internal Revenue Code, as amended (but this
function shall not relieve the Fund's investment adviser of its day-to-day
responsibility for such compliance); (10) maintain, and/or coordinate with the
other service providers the maintenance of, the accounts, books and other
documents required pursuant to Rule 31a-1(a) and (b) under the 1940 Act; and
(11) generally assist in the Fund's administrative operations. In addition,
Sunstone has agreed to monitor Northern Funds' arrangements with respect to
services provided by Service Organizations. Under the Administration Agreement,
Sunstone is not liable for any error of judgment or mistake of law or for any
loss suffered by the Fund in connection with the performance of the
Administration Agreement, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of Sunstone
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in the performance of its duties or from its reckless disregard of its duties
and obligations under the Agreement.
Unless sooner terminated the Administration Agreement will continue in
effect with respect to a particular Fund until March 31, 1999, and thereafter
for successive 12-month periods, provided that the agreement is approved
annually (a) by the vote of a majority of the Trustees who are not parties to
the agreement or "interested persons" (as such term is defined by the 1940 Act)
of any party thereto, cast in person at a meeting called for the purpose of
voting on such approval, and (b) by the Trustees or by the vote of a majority of
the outstanding shares of the Fund (as defined under "Description of Shares").
Notwithstanding the foregoing, the Administration Agreement shall continue
automatically for an indefinite period unless the Board of Trustees shall have
provided Sunstone with at least 90 days' written notice of its determination not
to renew the Agreement.
For its administrative services, Sunstone is entitled to an
administration fee, computed daily and payable monthly, at the annual rate of
0.15% of Northern Funds' average aggregate daily net assets.
Northern Funds has also entered into a Distribution Agreement under
which Sunstone Distribution Services, LLC, as agent, sells shares of the Fund on
a continuous basis. Sunstone Distribution Services, LLC pays the cost of
printing and distributing prospectuses to persons who are not shareholders of
Northern Funds (excluding preparation and typesetting expenses) and of certain
other distribution efforts. No compensation is payable by Northern Funds to
Sunstone Distribution Services, LLC for such distribution services. Sunstone
Distribution Services, LLC is an affiliate of Sunstone. Miriam M. Allison, Vice
President and Treasurer of Northern Funds, and Mary M. Tenwinkel, Vice President
of Northern Funds, have been President and Vice President, respectively, of
Sunstone Distribution Services, LLC since October 1996.
The Administration Agreement and the Distribution Agreement provide
that Sunstone and Sunstone Distribution Services, LLC, respectively, may render
similar services to others so long as their services under the respective
Agreements are not impaired thereby. The Administration and Distribution
Agreements provide that Northern Funds will indemnify Sunstone and Sunstone
Distribution Services, LLC, respectively, against certain liabilities (including
liabilities under the federal securities laws relating to untrue statements or
omissions of material fact and actions that are in accordance with the terms of
such Agreements) under certain circumstances.
SERVICE ORGANIZATIONS
As stated in the Fund's Prospectus, the Fund may enter into agreements
from time to time with Service Organizations providing
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for support and/or distribution services to customers of the Service
Organizations who are the beneficial owners of Fund shares. Under the
agreements, the Fund may pay Service Organizations up to .25% (on an annualized
basis) of the average daily net asset value of the shares beneficially owned by
their customers. Support services provided by Service Organizations under their
agreements may include: (a) processing dividend and distribution payments from
the Fund; (b) providing information periodically to customers showing their
share positions; (c) arranging for bank wires; (d) responding to customer
inquiries; (e) providing subaccounting with respect to shares beneficially owned
by customers or the information necessary for subaccounting; (f) forwarding
shareholder communications; (g) assisting in processing share purchase, exchange
and redemption requests from customers; (h) assisting customers in changing
dividend options, account designations and addresses; and (i) other similar
services requested by the Fund. In addition, Service Organizations may provide
assistance (such as the forwarding of sales literature and advertising to their
customers) in connection with the distribution of Fund shares.
The Fund's arrangements with Service Organizations under the agreements
are governed by two Plans (a Service Plan and a Distribution and Service Plan),
which have been adopted by the Board of Trustees and (in the case of the
Distribution and Service Plan) by the initial shareholder of Northern Funds.
Because the Distribution and Service Plan contemplates the provision of services
related to the distribution of Fund shares (in addition to support services),
that Plan has been adopted in accordance with Rule 12b-1 under the 1940 Act. In
accordance with the Plans, the Board of Trustees reviews, at least quarterly, a
written report of the amounts expended in connection with the Fund's
arrangements with Service Organizations and the purposes for which the
expenditures were made. In addition, the Fund's arrangements with Service
Organizations must be approved annually by a majority of the Trustees, including
a majority of the Trustees who are not "interested persons" of the Fund as
defined in the 1940 Act and have no direct or indirect financial interest in
such arrangements (the "Disinterested Trustees").
The Board of Trustees believes that there is a reasonable likelihood
that their arrangements with Service Organizations will benefit the Fund and its
shareholders. Any material amendment to the arrangements with Service
Organizations under the agreements must be approved by a majority of the Board
of Trustees (including a majority of the Disinterested Trustees), and any
amendment to increase materially the costs under the Distribution and Service
Plan with respect to the Fund must be approved by the holders of a majority of
the outstanding shares of the Fund. So long as the Distribution and Service Plan
is in effect, the selection and nomination of the members of the Board of
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Northern Funds will be committed to the discretion of such disinterested
Trustees.
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COUNSEL AND AUDITORS
Drinker Biddle & Reath LLP, with offices at 1345 Chestnut Street, Suite
1100, Philadelphia, Pennsylvania 19107, serve as counsel to Northern Funds.
Arthur Andersen LLP, independent accountants, 33 West Monroe Street,
Chicago, Illinois 60603-5385 serve as auditors for Northern Funds.
IN-KIND PURCHASES
Payment for shares of the Fund may, in the discretion of Northern
Trust, be made in the form of securities that are permissible investments for
the Fund as described in the Prospectus. For further information about this form
of payment, contact the Transfer Agent. In connection with an in-kind securities
payment, the Fund will require, among other things, that the securities be
valued on the day of purchase in accordance with the pricing methods used by the
Fund and that the Fund receive satisfactory assurances that it will have good
and marketable title to the securities received by it; that the securities be in
proper form for transfer to the Fund; and that adequate information be provided
concerning the basis and other tax matters relating to the securities.
AUTOMATIC INVESTING PLAN
The Automatic Investing Plan permits an investor to use "Dollar Cost
Averaging" in making investments. Instead of trying to time market performance,
a fixed dollar amount is invested in shares at predetermined intervals. This may
help investors reduce their average cost per share because the agreed upon fixed
investment amount allows more shares to be purchased during periods of lower
share prices and fewer shares during periods of higher share prices. In order to
be effective, Dollar Cost Averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that shares bought using
Dollar Cost Averaging are purchased without regard to their price on the day of
investment or to market trends. Dollar Cost Averaging does not assure a profit
and does not protect against losses in a declining market. In addition, while
investors may find Dollar Cost Averaging to be beneficial, it will not prevent a
loss if an investor ultimately redeems shares at a price which is lower than
their purchase price. An investor may want to consider his or her financial
ability to continue purchases through periods of low price levels.
REDEMPTIONS AND EXCHANGES
Exchange requests received on a Business Day prior to the time shares
of the investment portfolios involved in the request are priced will be
processed on the date of receipt. "Processing" a
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request means that shares in the investment portfolios from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new portfolio
into which the shareholder is investing will also normally be purchased at the
net asset value per share next determined coincident to or after the time of
redemption. Exchange requests received on a Business Day after the time shares
of the investment portfolios involved in the request are priced will be
processed on the next Business Day in the manner described above.
Northern Funds reserves the right to make payment for redemptions in
readily marketable securities. If this occurred, a shareholder would bear any
brokerage or other transaction costs incurred in converting the securities so
received to cash. Northern Funds also reserves the right to require a
shareholder to redeem involuntarily shares in the Fund if the balance held of
record by the shareholder drops below $750 and the shareholder does not increase
such balance to $1,000 or more upon 30 days' notice. Northern Funds will not
require a shareholder to redeem shares of the Fund if the balance held of record
by the shareholder is less than $750 solely because of a decline in the net
asset value of the Fund's shares or because the shareholder has made an initial
investment in a lower amount in accordance with the Automatic Investment Plan.
Northern Funds may also redeem shares involuntarily if the redemption is
appropriate to carry out Northern Funds' responsibilities under the 1940 Act.
Northern Funds may redeem shares involuntarily to reimburse the Fund
for any loss sustained by reason of the failure of a shareholder to make full
payment for shares purchased by the shareholder or to collect any charge
relating to a transaction effected for the benefit of a shareholder which is
applicable to Fund shares as provided in the Fund's Prospectus from time to
time.
PERFORMANCE INFORMATION
The Fund will calculate its "average annual total return" by
determining the average annual compounded rate of return during specified
periods that equates the initial amount invested to the ending redeemable value
of such investment according to the following formula:
ERV 1/n
T = [(-----)-1]
P
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of
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the 1, 5 or 10 year (or other) periods at
the end of the applicable period (or a
fractional portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed
in years.
The Fund will calculate its "aggregate total return" by determining the
aggregate compounded rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
ERV
Aggregate Total Return = [(-----) - 1]
P
The calculations are made assuming that (a) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date, and (b) all recurring fees charged to
all shareholder accounts are included. The ending redeemable value (variable
"ERV" in the formula) is determined by assuming complete redemption of the
hypothetical investment after deduction of all nonrecurring charges at the end
of the measuring period.
GENERAL INFORMATION
Any fees imposed by Northern Trust or other Service Organizations on
their customers in connection with investments in the Fund will not be reflected
in Northern Funds' calculations of performance for the Fund.
The Fund's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, the type of portfolio
instruments acquired, changes in interest rates, portfolio expenses and other
factors. Performance is one basis investors may use to analyze the Fund as
compared to other funds and other investment vehicles. However, performance of
other funds and other investment vehicles may not be comparable because of the
foregoing variables, and differences in the methods used in valuing their
portfolio instruments, computing net asset value and determining performance.
From time to time, the Fund's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example, the Fund may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk- adjusted performance. Rankings that compare the performance of
the
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Fund to other portfolios offered by Northern Funds in appropriate categories
over specific periods of time may also be quoted in advertising.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides
historical returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the Consumer Price Index), and combinations
of various capital markets. The performance of these capital markets is based on
the returns of different indices. The Fund may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Fund. The Fund may also compare performance to that of other compilations
or indices that may be developed and made available in the future.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on the Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only of
the original investment in the Fund, but also of the additional Fund shares
received through reinvestment.
The Fund may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification, risk
tolerance, and goal setting, questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of the Fund (such as value investing, market timing,
dollar cost averaging, asset allocation, constant ratio transfer, automatic
account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments), economic and political conditions, the
relationship between sectors of the economy and the economy as a whole, the
effects of inflation and historical performance of various asset classes,
including but not limited to, stocks, bonds and Treasury bills. From time to
time advertisements, sales literature, communications to shareholders or other
materials may summarize the substance of information contained in shareholder
reports (including the investment composition of the Fund), as well as the views
of Northern Trust as to current market, economic, trade and interest rate
trends,
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legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to the Fund. In addition, selected
indices may be used to illustrate historic performance of selected asset
classes. The Fund may also include in advertisements, sales literature,
communications to shareholders or other materials, charts, graphs or drawings
which illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to, stocks, bonds, treasury bills
and shares of the Fund. In addition, advertisements, sales literature,
communications to shareholders or other materials may include a discussion of
certain attributes or benefits to be derived by an investment in the Fund and/or
other mutual funds, shareholder profiles and hypothetical investor scenarios,
timely information on financial management, tax and retirement planning and
investment alternative to certificates of deposit and other financial
instruments. Such sales literature, communications to shareholders or other
materials may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail therein.
Materials may include lists of representative clients of Northern
Trust. Materials may refer to the CUSIP number of the Fund and may illustrate
how to find the listings of the Fund in newspapers and periodicals. Materials
may also include discussions of other investment portfolios offered by Northern
Funds, products, and services.
The Fund may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Fund may compare these measures to
those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data.
The Fund may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in the Fund at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when prices
are low. While such a strategy does not assure a profit or guard against loss in
a declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
Advertisements and sales materials relating to the Fund may include
information regarding the background and experience of its portfolio managers.
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TAXES
The following summarizes certain additional tax considerations
generally affecting the Fund and their shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisers with specific reference to their own
tax situations.
The discussions of federal and state tax consequences in the Prospectus
and this Additional Statement are based on the Code and the laws and regulations
issued thereunder as in effect on the date of this Additional Statement. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
FEDERAL - GENERAL INFORMATION
The Fund intends to qualify as a regulated investment company under
Part I of Subchapter M of Subtitle A, Chapter 1 of the Internal Revenue Code of
1986, as amended (the "Code"). As a regulated investment company, the Fund is
generally exempt from federal income tax on its net investment income and
realized capital gains which it distributes to shareholders, provided that it
distributes an amount equal to at least the sum of 90% of its tax-exempt income
and 90% of its investment company taxable income (net investment income and the
excess of net short-term capital gain over net long-term capital loss), if any,
for the year (the "Distribution Requirement") and satisfies certain other
requirements of the Code that are described below.
In addition to satisfaction of the Distribution Requirement, the Fund
must derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement").
In addition to the foregoing requirements, at the close of each quarter
of its taxable year, at least 50% of the value of the Fund's assets must consist
of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to which the
Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Fund does not hold more than 10%
of the outstanding voting securities of such issuer) and no more than 25% of the
value of the Fund's total assets may be invested in the
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securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Fund controls and which are engaged in the same or similar trades or
businesses.
The Fund intends to distribute to shareholders any excess of net
long-term capital gain (including mid-term gain) over net short-term capital
loss ("net capital gain") for each taxable year. Such gain is distributed as a
capital gain dividend and is taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held the shares, whether
such gain was recognized by the Fund prior to the date on which a shareholder
acquired shares of the Fund and whether the distribution was paid in cash or
reinvested in shares. In addition, investors should be aware that any loss
realized upon the sale, exchange or redemption of shares held for six months or
less will be treated as a long-term capital loss to the extent of any capital
gain dividends that have been paid with respect to such shares.
In the case of corporate shareholders, distributions of the Fund for
any taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" from domestic corporations
received by the Fund for the year. A dividend usually will be treated as a
"qualifying dividend" if it has been received from a domestic corporation. A
portion of the dividends paid by the Fund may constitute "qualifying dividends."
Ordinary income of individuals is taxable at a maximum marginal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. Under the Taxpayer Relief Act of 1997, for
capital gains on securities recognized after July 28, 1997, the maximum tax rate
for individuals is 20% if the property was held more than 18 months
("long-term"); for property held for more than 12 months, but no longer than 18
months ("mid-term"), the maximum tax rate on capital gains continues to be 28%.
For corporations, long-term capital gains and ordinary income are both taxable
at a maximum marginal rate of 35% although surtaxes apply to ordinary income at
specified levels.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders. In such
event, all distributions (whether or not derived from exempt-interest income)
would be taxable as ordinary income to the extent of the Fund's current and
accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders.
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The Code imposes a non-deductible 4% excise tax on regulated investment
companies that fail to distribute currently an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
Although the Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, the Fund
may be subject to the tax laws of such states or localities.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Special rules govern the federal income tax treatment of financial
instruments that may be held by the Fund. These rules may have a particular
impact on the amount of income or gain that the Fund must distribute to their
respective shareholders to comply with the Distribution Requirement and on the
income or gain qualifying under the Income Requirement.
Generally, futures contracts, options on futures contracts and certain
foreign currency contracts held by the Fund (collectively, the "Instruments") at
the close of its taxable year are treated for federal income tax purposes as
sold for their fair market value on the last business day of such year, a
process known as "mark-to-market." Forty percent of any gain or loss resulting
from such constructive sales is treated as short-term capital gain or loss and
60% of such gain or loss is treated as long-term capital gain or loss without
regard to the period the Fund holds the Instruments ("the 40-60 rule"). The
amount of any capital gain or loss actually realized by the Fund in a subsequent
sale or other disposition of those Instruments is adjusted to reflect any
capital gain or loss taken into account by the Fund in a prior year as a result
of the constructive sale of the Instruments. Losses with respect to Instruments
that are regarded as parts of a "mixed straddle" because their values fluctuate
inversely to the values of specific securities held by the Fund are subject to
certain loss deferral rules which limit the amount of loss currently deductible
on either part of the straddle to the amount thereof which exceeds the
unrecognized gain (if any) with respect to the other part of the straddle, and
to certain wash sales regulations. Under short sales rules, which are also
applicable, the holding period of the securities forming part of the straddle
will (if they have not been held for the long-term holding period) be deemed not
to begin prior to termination of the straddle. With respect to certain
Instruments, deductions for interest and carrying charges may not
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be allowed. Notwithstanding the rules described above, with respect to
Instruments that are part of a "mixed straddle" and are properly identified as
such, the Fund may make an election which will exempt (in whole or in part)
those identified Instruments from the rules of Section 1256 of the Code
including "the 40-60 rule" and the mark-to-market rule on gains and losses being
treated for federal income tax purposes as sold on the last business day of the
Fund's taxable year, but gains and losses will be subject to such short sales,
wash sales and loss deferral rules and the requirement to capitalize interest
and carrying charges. Under Temporary Regulations, the Fund would be allowed (in
lieu of the foregoing) to elect either (a) to offset gains or losses from
portions which are part of a mixed straddle by separately identifying each mixed
straddle to which such treatment applies, or (b) to establish a mixed straddle
account for which gains and losses would be recognized and offset on a periodic
basis during the taxable year. Under either election, "the 40-60 rule" will
apply to the net gain or loss attributable to the Instruments, but in the case
of a mixed straddle account election, not more than 50% of any net gain may be
treated as long-term and no more than 40% of any net loss may be treated as
short-term. Options on futures contracts generally receive federal tax treatment
similar to that described above.
With respect to futures contracts and other financial instruments
subject to the mark-to-market rules, the Internal Revenue Service has ruled in
private letter rulings that a gain realized from such a futures contact or
financial instrument will be treated as being derived from a security held for
three months or more (regardless of the actual period for which the contract or
instrument is held) if the gain arises as a result of a constructive sale under
the mark-to-market rules, and will be treated as being derived from a security
held for less than three months only if the contract or instrument is terminated
(or transferred) during the taxable year (other than by reason of
mark-to-market) and less than three months have elapsed between the date the
contract or instrument is acquired and the termination date.
A foreign currency contract must meet the following conditions in order
to be subject to the mark-to-market rules described above: (1) the contract must
require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under the provisions respecting foreign currency contracts. As
of the date of this Additional Statement, the Treasury Department has not issued
any such regulations. Other foreign currency contracts entered into by the Fund
may result in the creation of one or more straddles for federal income tax
purposes, in which case certain loss deferral,
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short sales, and wash sales rules and the requirement to capitalize interest and
carrying charges may apply.
Some of the non-U.S. dollar denominated investments that the Fund may
make, such as foreign debt securities and foreign currency contracts, may be
subject to the provisions of Subpart J of the Code, which govern the federal
income tax treatment of certain transactions denominated in terms of a currency
other than the U.S. dollar or determined by reference to the value of one or
more currencies other than the U.S dollar. The types of transactions covered by
these provisions include the following: (1) the acquisition of, or becoming the
obligor under, a bond or other debt instrument (including, to the extent
provided in Treasury regulations, preferred stock); (2) the accruing of certain
trade receivables and payables; and (3) the entering into or acquisition of any
forward contract, futures contract, option and similar financial instrument. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer also is
treated as a transaction subject to the special currency rules. However,
regulated futures contracts and nonequity options are generally not subject to
the special currency rules if they are or would be treated as sold for their
fair market value at year-end under the marking-to-market rules, unless an
election is made to have such currency rules apply. With respect to transactions
covered by the special rules, foreign currency gain or loss is calculated
separately from any gain or loss on the underlying transaction and is normally
taxable as ordinary gain or loss. A taxpayer may elect to treat as capital gain
or loss foreign currency gain or loss arising from certain identified forward
contracts, futures contracts and options that are capital assets in the hands of
the taxpayer and which are not part of a straddle. In accordance with Treasury
regulations, certain transactions that are part of a "Section 988 hedging
transaction" (as defined in the Code and Treasury regulations) may be integrated
and treated as a single transaction or otherwise treated consistently for
purposes of the Code. "Section 988 hedging transactions" are not subject to the
marking-to-market or loss deferral rules under the Code. Gain or loss
attributable to the foreign currency component of transactions engaged in by the
Fund which are not subject to the special currency rules (such as foreign equity
investments other than certain preferred stocks) is treated as capital gain or
loss and is not segregated from the gain or loss on the underlying transaction.
The Fund may be subject to U.S. federal income tax on a portion of any
"excess distribution" from or a gain from the disposition of shares of a passive
foreign investment company.
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DESCRIPTION OF SHARES
The Trust Agreement permits Northern Funds' Board of Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of one
or more separate series representing interests in different investment
portfolios. Northern Funds may hereafter create series in addition to Northern
Funds' existing series, which represent interests in twenty-five portfolios.
Under the terms of the Trust Agreement, each share of the Fund has a par value
of $.0001, represents a proportionate interest in the Fund with each other share
of its class and is entitled to such dividends and distributions out of the
income belonging to the Fund as are declared by the Trustees. Upon any
liquidation of the Fund, shareholders of each class of the Fund are entitled to
share pro rata in the net assets belonging to that class available for
distribution. Shares do not have any preemptive or conversion rights. The right
of redemption is described under "Redeeming and Exchanging Shares" in the
Prospectus. Pursuant to the terms of the 1940 Act, the right of a shareholder to
redeem shares and the date of payment by the Fund may be suspended for more than
seven days (a) for any period during which the New York Stock Exchange is
closed, other than the customary weekends or holidays, or trading in the markets
the Fund normally utilizes is closed or is restricted as determined by the SEC,
(b) during any emergency, as determined by the SEC, as a result of which it is
not reasonably practicable for the Fund to dispose of instruments owned by it or
fairly to determine the value of its net assets, or (c) for such other period as
the SEC may by order permit for the protection of the shareholders of the Fund.
Northern Funds may also suspend or postpone the recordation of the transfer of
its shares upon the occurrence of any of the foregoing conditions. In addition,
Northern Funds reserves the right to adopt, by action of the Trustees, a policy
pursuant to which it may, without shareholder approval, redeem upon not less
than 30 days' notice all of the Fund's shares if such shares have an aggregate
value below a designated amount and if the Trustees determine that it is not
practical, efficient or advisable to continue the operation of the Fund and that
any applicable requirements of the 1940 Act have been met. Shares when issued as
described in the Prospectus are validly issued, fully paid and nonassessable,
except as stated below.
The proceeds received by the Fund for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of the Fund. The underlying assets of
the Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to the Fund and with a share of the general
liabilities of Northern Funds. Expenses with respect to the portfolios of
Northern Funds are normally allocated in proportion to the net asset value of
the respective portfolios except where allocations of direct expenses can
otherwise be fairly made.
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Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as Northern Funds shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
shares of each investment portfolio affected by such matter. Rule 18f-2 further
provides that an investment portfolio shall be deemed to be affected by a matter
unless the interests of each investment portfolio in the matter are
substantially identical or the matter does not affect any interest of the
investment portfolio. Under the Rule, the approval of an investment advisory
agreement, a distribution plan subject to Rule 12b-1 under the 1940 Act or any
change in a fundamental investment policy would be effectively acted upon with
respect to an investment portfolio only if approved by a majority of the
outstanding shares of such investment portfolio. However, the Rule also provides
that the ratification of the appointment of independent accountants, the
approval of principal underwriting contracts and the election of Trustees may be
effectively acted upon by shareholders of Northern Funds voting together in the
aggregate without regard to a particular investment portfolio.
The term "majority of the outstanding shares" of either Northern Funds
or the Fund or investment portfolio means, with respect to the approval of an
investment advisory agreement, a distribution plan or a change in a fundamental
investment policy, the vote of the lesser of (i) 67% or more of the shares of
Northern Funds or the Fund or portfolio present at a meeting, if the holders of
more than 50% of the outstanding shares of Northern Funds or the Fund or
portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of Northern Funds or the Fund or portfolio.
As a general matter, Northern Funds does not hold annual or other
meetings of shareholders. This is because the Trust Agreement provides for
shareholder voting only for the election or removal of one or more Trustees, if
a meeting is called for that purpose, and for certain other designated matters.
Each Trustee serves until the next meeting of shareholders, if any, called for
the purpose of considering the election or reelection of such Trustee or of a
successor to such Trustee, and until the election and qualification of his
successor, if any, elected at such meeting, or until such Trustee sooner dies,
resigns, retires or is removed by the shareholders or two-thirds of the
Trustees. In addition, the Trustees have adopted a by-law (changeable without
shareholder approval) that provides that a Trustee will cease to serve as a
Trustee effective as of the last calendar day in the semi-annual fiscal period
of Northern Funds in which the earlier of the following events occurs: (a) the
date such Trustee attains the age of seventy-three years; and (b) the twelfth
anniversary of the date of such Trustee's written acceptance to serve as a
Trustee.
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Under Massachusetts law, there is a possibility that shareholders of a
business trust could, under certain circumstances, be held personally liable as
partners for the obligations of the trust. The Trust Agreement contains an
express disclaimer of shareholder (as well as Trustee and officer) liability for
acts or obligations of Northern Funds and requires that notice of such
disclaimer be given in each contract, undertaking or instrument entered into or
executed by Northern Funds or the Trustees. The Trust Agreement provides for
indemnification out of Trust property of any shareholder charged or held
personally liable for the obligations or liabilities of Northern Funds solely by
reason of being or having been a shareholder of Northern Funds and not because
of such shareholder's acts or omissions or for some other reason. The Trust
Agreement also provides that Northern Funds shall, upon proper and timely
request, assume the defense of any charge made against any shareholder as such
for any obligation or liability of Northern Funds and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which Northern Funds itself
would be unable to meet its obligations.
The Trust Agreement provides that each Trustee of Northern Funds will
be liable for his own wilful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office of
Trustee ("disabling conduct"), and for nothing else, and will not be liable for
errors of judgment or mistakes of fact or law. The Trust Agreement provides
further that Northern Funds will indemnify Trustees and officers of Northern
Funds against liabilities and expenses incurred in connection with litigation
and other proceedings in which they may be involved (or with which they may be
threatened) by reason of their positions with Northern Funds, except that no
Trustee or officer will be indemnified against any liability to Northern Funds
or its shareholders to which he would otherwise be subject by reason of
disabling conduct.
The Trust Agreement provides that each shareholder, by virtue of
becoming such, will be held to have expressly assented and agreed to the terms
of the Trust Agreement and to have become a party thereto.
OTHER INFORMATION
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectus. Certain
portions of the Registration Statement have been omitted from the Prospectus and
this Additional Statement pursuant to the rules and regulations of the SEC. The
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Registration Statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Additional Statement
as to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement of
which the Prospectus and this Additional Statement form a part, each such
statement being qualified in all respects by such reference.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - The highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
"A-3" - Issues carrying this designation have adequate
capacity for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
"B" - Issues are regarded as having only a speculative
capacity for timely payment.
"C" - This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
"D" - Issues are in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers or related supporting institutions have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will often be evidenced by the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuers or related supporting institutions have a
strong ability for repayment of senior short-term promissory
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obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
"Prime-3" - Issuers or related supporting institutions have an
acceptable ability for repayment of senior short-term promissory obligations.
The effects of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issue as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
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"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F-1+" and "F-1" ratings.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-
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dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation
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and "C" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating and is
currently highly vulnerable to nonpayment.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
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PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a
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general lack of characteristics of desirable investment; "Caa" represents a poor
standing; "Ca" represents obligations which are speculative in a high degree;
and "C" represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds
may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may be
revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to
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timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB" - Bonds considered to be speculative. The obligor's
ability to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its debt service
requirements.
"B" - Bonds are considered highly speculative. While
securities in this class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest reflects the
obligor's limited margin of
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safety and the need for reasonable business and economic activity throughout the
life of the instrument.
"CCC" - Bonds have certain identifiable characteristics that,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
"CC" - Bonds are minimally protected. Default in payments of
interest seems probable over time.
"C" - Bonds are in imminent default in payment of interest or
principal.
"DDD," "DD" and "D" - Bonds are in default on interest and/or
principal payments. Such securities are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest potential for
recovery on these securities, and "D" represents the lowest potential for
recovery.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.
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APPENDIX B
As stated in the Prospectus, the Fund may enter into certain
futures transactions. Such transactions are described in this Appendix.
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within three business days after the trade.
In the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes. As
described below, this would include the use of futures contract sales to protect
against expected increases in interest rates and futures contract purchases to
offset the impact of interest rate declines.
The Fund presently could accomplish a similar result to that
which it hopes to achieve through the use of futures contracts by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market,
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by the Fund, by using futures
contracts.
Interest rate future contracts can also be used by the Fund
for non-hedging (speculative) purposes to increase total return.
Description of Interest Rate Futures Contracts. An interest
rate futures contract sale would create an obligation by the Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with
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the rules of the exchange on which the futures contract sale or purchase was
made.
Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and realizes
a loss. Similarly, the closing out of a futures contract purchase is effected by
the Fund entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the purchase price
exceeds the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges -- principally, the Chicago Board
of Trade, the Chicago Mercantile Exchange and the New York Futures Exchange.
Each exchange guarantees performance under contract provisions through a
clearing corporation, a nonprofit organization managed by the exchange
membership.
A public market now exists in futures contracts covering
various financial instruments including long-term U.S. Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities; three-month U.S. Treasury Bills; and ninety-day commercial
paper. The Fund may trade in any interest rate futures contracts for which there
exists a public market, including, without limitation, the foregoing
instruments.
II. Index Futures Contracts
General. A stock or bond index assigns relative values to the
stocks or bonds included in the index, which fluctuates with changes in the
market values of the stocks or bonds included. Some stock index futures
contracts are based on broad market indexes, such as Standard & Poor's 500 or
the New York Stock Exchange Composite Index. In contrast, certain exchanges
offer futures contracts on narrower market indexes, such as the Standard &
Poor's 100 or indexes based on an industry or market indexes, such as Standard &
Poor's 100 or indexes based on an industry or market segment, such as oil and
gas stocks. Futures contracts are traded on organized exchanges regulated by the
Commodity Futures Trading Commission. Transactions on such exchanges are cleared
through a clearing corporation, which guarantees the performance of the parties
to each contract. To the extent consistent with its investment objective, the
Fund may also engage in transactions,
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from time to time, in foreign stock index futures such as the ALL-ORDS
(Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United Kingdom).
The Fund may sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. The Fund may do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, the Fund
will purchase index futures contracts in anticipation of purchases of
securities. A long futures position may be terminated without a corresponding
purchase of securities.
In addition, the Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Fund expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
The Fund may also sell futures contracts in connection with this strategy, in
order to protect against the possibility that the value of the securities to be
sold as part of the restructuring of the portfolio will decline prior to the
time of sale.
Index futures contracts may also be used by the Fund for
non-hedging (speculative) purposes to increase total return.
III. Futures Contracts on Foreign Currencies
A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of foreign currency, for an
amount fixed in U.S. dollars. Foreign currency futures may be used by the Fund
to hedge against exposure to fluctuations in exchange rates between the U.S.
dollar and other currencies arising from multinational transactions.
IV. Margin Payments
Unlike purchases or sales of portfolio securities, no price is
paid or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with a custodian or sub-custodian an amount of liquid assets,
known as initial margin, based on the value of the contract. The nature of
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is
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returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when the Fund has purchased a futures
contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the Fund
will be entitled to receive from the broker a variation margin payment equal to
that increase in value. Conversely, where the Fund has purchased a futures
contract and the price of the future contract has declined in response to a
decrease in the underlying instruments, the position would be less valuable and
the Fund would be required to make a variation margin payment to the broker.
Prior to expiration of the futures contract, Northern Trust may elect to close
the position by taking an opposite position, subject to the availability of a
secondary market, which will operate to terminate the Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.
V. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures
by the Fund. One risk arises because of the imperfect correlation between
movements in the price of the futures and movements in the price of the
instruments which are the subject of the hedge. The price of the future may move
more than or less than the price of the instruments being hedged. If the price
of the futures moves less than the price of the instruments which are the
subject of the hedge, the hedge will not be fully effective but, if the price of
the instruments being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it had not hedged at all. If the price of
the instruments being hedged has moved in a favorable direction, this advantage
will be partially offset by the loss on the futures. If the price of the futures
moves more than the price of the hedged instruments, the Fund will experience
either a loss or gain on the futures which will not be completely offset by
movements in the price of the instruments which are the subject of the hedge. To
compensate for the imperfect correlation of movements in the price of
instruments being hedged and movements in the price of futures contracts, the
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of instruments being hedged if the volatility over a particular
time period of the prices of such instruments has been greater than the
volatility over such time period of the futures, or if otherwise deemed to be
appropriate by Northern Trust. Conversely, the Fund may buy or sell fewer
futures contracts if the volatility over a particular time period of the
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prices of the instruments being hedged is less than the volatility over such
time period of the futures contract being used, or if otherwise deemed to be
appropriate by Northern Trust. It is also possible that, where the Fund has sold
futures to hedge its portfolio against a decline in the market, the market may
advance and the value of instruments held in the Fund may decline. If this
occurred, the Fund would lose money on the futures and also experience a decline
in value in its portfolio securities.
When futures are purchased to hedge against a possible
increase in the price of securities or a currency before the Fund is able to
invest its cash (or cash equivalents) in an orderly fashion, it is possible that
the market may decline instead; if the Fund then concludes not to invest its
cash at that time because of concern as to possible further market decline or
for other reasons, the Fund will realize a loss on the futures contract that is
not offset by a reduction in the price of the instruments that were to be
purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Fund intends to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Fund would continue to
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be required to make daily cash payments of variation margin. However, in the
event futures contracts have been used to hedge portfolio securities, such
securities will not be sold until the futures contract can be terminated. In
such circumstances, an increase in the price of the securities, if any, may
partially or completely offset losses on the futures contract. However, as
described above, there is no guarantee that the price of the securities will in
fact correlate with the price movements in the futures contract and thus provide
an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by the Fund is also subject to
Northern Trust's ability to predict correctly movements in the direction of the
market. For example, if the Fund has hedged against the possibility of a decline
in the market adversely affecting securities held by it and securities prices
increase instead, the Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the Fund
has insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not necessarily
be, at increased prices which reflect the rising market. The Fund may have to
sell securities at a time when it may be disadvantageous to do so.
VI. Options on Futures Contracts
The Fund may purchase and write options on the futures
contracts described above. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period of
the option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing
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an option of the same series, at which time the person entering into the closing
transaction will realize a gain or loss. The Fund will be required to deposit
initial margin and variation margin with respect to put and call options on
futures contracts written by it pursuant to brokers' requirements similar to
those described above. Net option premiums received will be included as initial
margin deposits. As an example, in anticipation of a decline in interest rates,
the Fund may purchase call options on futures contracts as a substitute for the
purchase of futures contracts to hedge against a possible increase in the price
of securities which the Fund intends to purchase. Similarly, if the value of the
securities held by the Fund is expected to decline as a result of an increase in
interest rates, the Fund might purchase put options or sell call options on
futures contracts rather than sell futures contracts.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not correspond to changes
in the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar to
those risks relating to the sale of futures contracts.
VII. Other Matters
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
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PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements (as filed in Post-Effective Amendment
Nos. 16 and 17):
(1) Included in Part A: Audited Financial Highlights with
respect to the Money Market, U.S. Government Money
Market, Municipal Money Market, U.S. Government
Select Money Market, California Municipal Money
Market, U.S. Government, Fixed Income, Intermediate
Tax-Exempt, Tax-Exempt, Florida Intermediate
Tax-Exempt, International Fixed Income, Income
Equity, Stock Index, Growth Equity, Select Equity,
Small Cap, International Growth Equity, International
Select Equity and Technology Funds for the fiscal
year ended March 31, 1997 and unaudited Financial
Highlights with respect to the California Tax-Exempt
Fund for the period ended September 30, 1997.
(2) Included in Part B are the following Financial
Statements for the California Tax-Exempt Fund:
Unaudited
- Statement of Assets and Liabilities as of
September 30, 1997;
- Statement of Operations for the fiscal
period ended September 30, 1997;
- Statement of Changes in Net Assets for the
period ended September 30, 1997;
- Financial Highlights for the period ended
September 30, 1997;
- Schedule of Investments as of September 30,
1997; and
- Notes to financial statements.
Incorporated by reference into Part B: The
Registrant's March 31, 1997 Annual Report to
Shareholders has been filed with the Commission and
the financial statements included therein are
incorporated into the Part B for the other Funds by
reference.
(b) Exhibits:
The following exhibits are incorporated herein by reference:
1(a) - Agreement and Declaration of Trust dated October 12,
1993 filed as Exhibit 1(a) to Post-Effective
Amendment No. 11 to Registrant's Registration
Statement on Form N-1A, filed on July 29, 1996 ("PEA
No. 11").
1(b) - Amendment No. 1 to Agreement and Declaration of Trust
filed as Exhibit 1(b) to PEA No. 11.
1(c) - Amendment No. 2 to Agreement and Declaration of Trust
filed as Exhibit 1(c) to PEA No. 11.
1(d) - Amendment No. 3 to Agreement and Declaration of Trust
filed as Exhibit 1(d) to PEA No. 11.
<PAGE> 107
1(e) - Amendment No. 4 to Agreement and Declaration of Trust
filed as Exhibit 1(e) to PEA No. 11.
1(f) - Amendment No. 5 to Agreement and Declaration of Trust
dated May 26, 1995 filed as Exhibit 1(f) to
Post-Effective Amendment No. 9 to Registrant's
Registration Statement on Form N-1A, filed on June
12, 1996 ("PEA No. 9").
1(g) - Amendment No. 6 to Agreement and Declaration of Trust
dated August 6, 1996 filed as Exhibit 1(g) to
Post-Effective Amendment No. 12 to Registrant's
Registration Statement on Form N-1A, filed on October
30, 1996 ("PEA No. 12").
1(h) - Amendment No. 7 to Agreement and Declaration of Trust
dated August 6, 1996 filed as Exhibit 1(h) to PEA No.
12.
1(i) - Amendment No. 8 to Agreement and Declaration of Trust
dated February 12, 1996 filed as Exhibit 1(i) to
Post-Effective Amendment No. 15 to Registrant's
Registration Statement on Form N-1A, filed on
February 26, 1997 ("PEA No. 15").
1(j) - Amendment No. 9 to Agreement and Declaration of Trust
dated February 12, 1997 filed as Exhibit 1(j) to
Post-Effective Amendment No. 16 to Registrant's
Registration Statement on Form N-1A, filed on July
31, 1997 ("PEA No. 16").
2 - By-Laws filed as Exhibit 2 to PEA No. 11.
2(a) - Amendment to the By-Laws dated August 4, 1994 filed
as Exhibit 2(a) to PEA No. 11.
2(b) - Amendment No. 2 to the By-Laws dated May 22, 1997
filed as Exhibit 2(b) to PEA No. 16.
3 - Not Applicable.
4 - Not Applicable.
5 - Investment Advisory and Ancillary Services Agreement
between Registrant and The Northern Trust Company
dated April 1, 1994 ("Investment Advisory Agreement")
filed as Exhibit 5 to PEA No. 11.
5(a) - Addendum No. 1 to the Investment Advisory Agreement
dated November 29, 1994 filed as Exhibit 5(a) to PEA
No. 11.
5(b) - Addendum No. 2 to the Investment Advisory Agreement
dated March 29, 1996 filed as Exhibit 5(b) to PEA No.
9.
5(c) - Addendum No. 3 to the Investment Advisory Agreement
dated August 7, 1996 filed as Exhibit 5(c) to PEA No.
12.
5(d) - Addendum No. 4 to the Investment Advisory Agreement
dated March 24, 1997 filed as Exhibit 5(d) to PEA No.
16.
5(e) - Form of Addendum No. 5 to the Investment Advisory
Agreement filed as Exhibit 5(e) to PEA No. 15.
6 - Distribution Agreement between Registrant and
Sunstone Distribution Services, LLC dated January 1,
1997 ("Distribution Agreement") filed as Exhibit 6(e)
to Post-Effective Amendment No. 14 to Registrant's
Registration Statement on Form N-1A, filed on January
27, 1997 ("PEA No. 14").
6(a) - Form of Amended and Restated Schedule A to the
Distribution Agreement between Registrant and
Sunstone Distribution Services, LLC filed as Exhibit
6(f) to PEA No. 15.
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6(b) - Amended and Restated Schedule A to Distribution
Agreement between Registrant and Sunstone
Distribution Services, LLC dated March 24, 1997 filed
as Exhibit 6(b) to PEA No. 16.
7 - Not Applicable.
8(a) - Custodian Agreement between Registrant and The
Northern Trust Company dated April 1, 1994
("Custodian Agreement") filed as Exhibit 8(a) to PEA
No. 11.
8(b) - Transfer Agency Agreement between Registrant and The
Northern Trust Company dated April 1, 1994 ("Transfer
Agency Agreement") filed as Exhibit 8(b) to PEA No.
11.
8(c) - Addendum No. 1 to the Transfer Agency Agreement dated
November 29, 1994 filed as Exhibit 8(c) to PEA No.
11.
8(d) - Addendum No. 1 to the Custodian Agreement dated
November 29, 1994 filed as Exhibit 8(d) to PEA No.
11.
8(e) - Addendum No. 2 to the Transfer Agency Agreement dated
March 29, 1996 filed as Exhibit 8(e) to PEA No. 9.
8(f) - Addendum No. 2 to the Custodian Agreement dated March
29, 1996 filed as Exhibit 8(f) to PEA No. 9.
8(g) - Foreign Custody Agreement between the Registrant and
The Northern Trust Company dated April 1, 1994 filed
as Exhibit 8(g) to PEA No. 11.
8(h) - Addendum No. 3 to the Transfer Agency Agreement dated
August 7, 1996 filed as Exhibit 8(h) to PEA No. 12.
8(i) - Addendum No. 3 to the Custodian Agreement dated
August 7, 1996 filed as Exhibit 8(i) to PEA No. 12.
8(j) - Addendum No. 4 to the Custodian Agreement dated
August 7, 1996 filed as Exhibit 8(j) to PEA No. 12.
8(k) - Form of Addendum No. 5 to the Transfer Agency
Agreement filed as Exhibit 8(m) to PEA No. 15.
8(l) - Form of Addendum No. 6 to the Custodian Agreement
filed as Exhibit 8(n) to PEA No. 15.
8(m) - Addendum No. 4 to the Transfer Agency Agreement dated
March 24, 1997 filed as Exhibit 8(m) to PEA No. 16.
8(n) - Addendum No. 5 to the Custodian Agreement dated March
24, 1997 filed as Exhibit 8(n) to PEA No. 16.
9(a) - Administration Agreement between Registrant and
Sunstone Financial Group, Inc. dated April 1, 1994
("Administration Agreement") filed as Exhibit 9(a) to
PEA No. 11.
9(b) - Service Plan and Related Agreement filed as Exhibit
9(b) to PEA No. 9.
9(c) - Form of Amended and Restated Schedule A to the
Administration Agreement filed as Exhibit 9(g) to PEA
No. 15.
9(d) - Amended and Restated Schedule A to the Administration
Agreement dated March 24, 1997 filed as Exhibit 9(d)
to PEA No. 16.
12 - Not Applicable.
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<PAGE> 109
13(a) - Purchase Agreement between Registrant and The
Northern Trust Company dated March 31, 1994 filed as
Exhibit 13(a) to PEA No. 11.
13(b) - Purchase Agreement between Registrant and Miriam M.
Allison dated March 14, 1994 filed as Exhibit 13(b)
to PEA No. 11.
14 - Not Applicable.
15 - Distribution and Service Plan and Related Agreement
filed as Exhibit 15 to PEA No. 9.
16 - Schedule of Computation of Performance Quotations for
the Money Market, U.S. Government Money Market,
Municipal Money Market, U.S. Government, Fixed
Income, Intermediate Tax-Exempt, Tax-Exempt,
International Fixed Income, Income Equity, Growth
Equity, Select Equity, Small Cap Growth,
International Growth Equity and International Select
Equity Funds filed as Exhibit 16 to PEA No. 11.
16(a) - Schedule of Computation of Performance Quotations for
the California Municipal Money Market and U.S.
Government Select Money Market Funds filed as Exhibit
16(a) to PEA No. 11.
16(b) - Schedule for Computation of Performance Quotations
for the Technology Fund filed as Exhibit 16(b) to PEA
No. 12.
16(c) - Schedule for Computation of Performance Quotations
for the Florida Intermediate Tax-Exempt and Stock
Index Funds filed as Exhibit 16(c) to PEA No. 14.
16(d) - Schedule of Computation of Performance Quotations for
the California Tax-Exempt Fund filed as Exhibit 16(d)
to Post-Effective Amendment No. 17 to Registrant's
Registration Statement on Form N-1A, filed on October
30, 1997.
18 - Not Applicable.
24 - Registrant's Annual Report dated March 31, 1997 is
incorporated herein by reference to Registrant's
filing including such Annual Report and filed on May
___, 19997 (Accession No. __________).
The following exhibits are filed herewith:
1(k) - Amendment No. 10 to Agreement and Declaration of
Trust dated November 18, 1997.
5(f) - Form of Addendum No. 6 to the Investment Advisory
Agreement.
6(c) - Form of Amended and Restated Schedule A to the
Distribution Agreement.
8(o) - Form of Addendum No. 7 to the Custodian Agreement.
8(p) - Form of Addendum No. 1 to the Foreign Custody
Agreement.
8(q) - Form of Addendum No. 6 to the Transfer Agency
Agreement.
9(e) - Form of Amended and Restated Schedule A to the
Administration Agreement.
10 - Filed under Rule 24f-2 as part of Registrant's Rule
24f-2 Notice.
11 - Consent of Drinker Biddle & Reath LLP.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
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Registrant is controlled by its Board of Trustees.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AS OF
TITLE OF CLASS DECEMBER 31, 1997
-------------- -----------------
<S> <C>
Money Market Fund............................... 9,096
U.S. Government Money Market Fund............... 1,055
Municipal Money Market Fund..................... 3,922
U.S. Government Select Money Market Fund........ 1,010
California Municipal Money Market Fund.......... 898
U.S. Government Fund............................ 2,255
Fixed Income Fund............................... 2,449
Intermediate Tax-Exempt Fund.................... 2,022
Florida Intermediate Tax-Exempt Fund............ 171
California Tax-Exempt Fund...................... 187
Tax-Exempt Fund................................. 1,406
International Fixed Income Fund................. 890
Income Equity Fund.............................. 2,386
Stock Index Fund................................ 1,316
Growth Equity Fund.............................. 5,267
Select Equity Fund.............................. 3,104
Small Cap Fund.................................. 6,442
International Growth Equity Fund................ 4,469
International Select Equity Fund................ 2,591
Technology Fund................................. 3,014
</TABLE>
ITEM 27. INDEMNIFICATION
Section 7 of the Investment Advisory and Ancillary Services
Agreement between the Registrant and The Northern Trust Company ("Northern")
provides for indemnification of Northern or, in lieu thereof, contribution by
Registrant, in connection with certain claims and liabilities to which Northern,
in its capacity as Registrant's Adviser, may be subject. A copy of the
Investment Advisory and Ancillary Services Agreement is incorporated by
reference herein as Exhibit 5.
Section 5 of the Administration Agreement between the
Registrant and Sunstone Financial Group, Inc. ("Sunstone") provides for
indemnification of Sunstone in connection with certain claims and liabilities to
which Sunstone, in its capacity as Registrant's Administrator, may be subject. A
copy of the Administration Agreement is incorporated by reference herein as
Exhibit 9(a).
Section 2.8 of the Distribution Agreement between the
Registrant and Sunstone Distribution Services, LLC provides for indemnification
of Sunstone Distribution Services, LLC, an affiliate of Sunstone, in connection
with certain claims and liabilities to which Sunstone Distribution Services,
LLC, in its capacity as Registrant's Distributor, may be subject. A copy of the
Distribution Agreement is incorporated by reference herein as Exhibit 6.
In addition, Section 6.3 of Registrant's Agreement and
Declaration of Trust, a copy of which is incorporated by reference herein as
Exhibit 1(a), provides for indemnification of shareholders as follows:
6.3 Indemnification of Shareholders. No Shareholder shall be
subject to any personal liability whatsoever to any person in
connection with property of the Trust or the acts, obligations
or affairs of the Trust or any Series thereof. The Trust shall
indemnify and hold each Shareholder harmless from and against
all claims and liabilities, to which such Shareholder may
become subject by reason of his being or having been a
Shareholder, and shall reimburse such Shareholder or former
Shareholder (or his or her heirs, executors, administrators or
other legal representatives or in
-5-
<PAGE> 111
the case of a corporation or other entity, its corporate or
other general successor) out of the property of the Trust for
all legal and other expenses reasonably incurred by him in
connection with any such claim or liability. The
indemnification and reimbursement required by the preceding
sentence shall be made only out of assets of the one or more
Series whose Shares were held by said Shareholder at the time
the act or event occurred which gave rise to the claim against
or liability of said Shareholder. The rights accruing to a
Shareholder under this Section shall not impair any other
right to which such Shareholder may be lawfully entitled, nor
shall anything herein contained restrict the right of the
Trust or any Series thereof to indemnify or reimburse a
Shareholder in any appropriate situation even though not
specifically provided herein.
Section 6.4 of Registrant's Agreement and Declaration of
Trust, a copy of which is incorporated by reference herein as Exhibit 1(a),
provides for indemnification of Trustees and officers, as follows:
6.4 Indemnification of Trustees, Officers, etc. The Trust
shall indemnify each of its Trustees and officers and persons
who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any
interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person") against all liabilities,
including but not limited to amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and
expenses, including reasonable accountants' and counsel fees,
incurred by any Covered Person in connection with the defense
or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative
or legislative body, in which such Covered Person may be or
may have been involved as a party or otherwise or with which
such person may be or may have been threatened, while in
office or thereafter, by reason of being or having been such a
Trustee or officer, director or trustee, except that no
Covered Person shall be indemnified against any liability to
the Trust or its Shareholders to which such Covered Person
would otherwise be subject by reason of wilful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office
(such wilful misfeasance, bad faith, gross negligence or
reckless disregard being referred to herein as "Disabling
Conduct"). Expenses, including accountants' and counsel fees
so incurred by any such Covered Person (but excluding amounts
paid in satisfaction of judgments, in compromise or as fines
or penalties), may be paid from time to time by the Trust in
advance of the final disposition of any such action, suit or
proceeding upon receipt of (a) an undertaking by or on behalf
of such Covered Person to repay amounts so paid to the Trust
if it is ultimately determined that indemnification of such
expenses is not authorized under this Article VI and either
(b) such Covered Person provides security for such
undertaking, (c) the Trust is insured against losses arising
by reason of such payment, or (d) a majority of a quorum of
disinterested, non-party Trustees, or independent legal
counsel in a written opinion,
-6-
<PAGE> 112
determines, based on a review of readily available facts, that
there is reason to believe that such Covered Person ultimately
will be found entitled to indemnification.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to Trustees, officers and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a Trustee, officer or controlling person of Registrant in
the successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The Northern Trust Company, Registrant's investment adviser,
is a full service commercial bank and also provides a full range of trust and
fiduciary services. Set forth below is a list of all of the directors, senior
officers and those officers primarily responsible for Registrant's affairs of
The Northern Trust Company and, with respect to each such person, the name and
business address of the company (if any) with which such person has been
connected at any time since December 1, 1995, as well as the capacity in which
such person was connected.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Gregg D. Behrens
Executive Vice President None
J. David Brock
Executive Vice President None
Duane L. Burnham Abbott Laboratories Chairman and Chief
Director 100 Abbott Park Road Executive Officer
Abbott Park, IL 60064-3500
Northern Trust Corporation Director
50 S. LaSalle Street
Chicago, IL 60675
Dr. Dolores E. Cross Northern Trust Corporation Director
Director 50 S. LaSalle Street
Chicago, IL 60675
GE Fund President
General Electric Company
3135 Easton Turnpike
Fairfield, CT 06432
Susan Crown Henry Crown & Co. Vice President
Director 222 North LaSalle Street
Suite 2000
Chicago, IL 60601
</TABLE>
-7-
<PAGE> 113
<TABLE>
<CAPTION>
NAME AND POSITION
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Robert S. Hamada The University of Chicago Dean, Edward Eagle Brown
Director Graduate School of Business Distinguished Service
1101 East 58th Street Professor of Finance
Chicago, IL 60637
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
A.M. Castle & Co. Director
3400 North Wolf Road
Franklin Park, IL 60131
Chicago Board of Trade Director
141 West Jackson Boulevard
Chicago, IL 60604
Barry G. Hastings Northern Trust Corporation President and Chief
President, Chief 50 South LaSalle Street Operating Officer
Operating Officer Chicago, IL 60675 and Director
and Director and Former
Vice Chairman and Senior
Executive Vice
President
Northern Trust Securities, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Northern Trust of California Director
Corporation
355 South Grand Avenue
Los Angeles, CA 90017
Northern Trust of Florida Vice Chairman of the
Corporation Board and Director
700 Brickell Avenue
Miami, FL 33131
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Robert A. Helman Mayer, Brown & Platt Partner
Director 190 South LaSalle Street
Chicago, IL 60603
Northern Trust Corporation Director
50 South LaSalle Street, 38th Fl.
Chicago, IL 60675
The Horsham Corporation Director
24 Hazelton Avenue
Toronto, Ontario, Canada
M5R 2E2
Brambles USA, Inc. Director
400 North Michigan Avenue
Chicago, IL 60611
</TABLE>
-8-
<PAGE> 114
<TABLE>
<CAPTION>
NAME AND POSITION
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Chicago Stock Exchange Governor
One Financial Plaza
440 South LaSalle Street
Chicago, IL 60605
Alberta Natural Gas Director
Company Ltd.
2900, 240 Fourth Avenue, NW
Calgary, Alberta, Canada
T2P4L7
Arthur L. Kelly KEL Enterprises L.P. Managing Partner
Director Two First National Plaza
20 S. Clark St., Suite 2222
Chicago, IL 60603
Bayerische Motoren Werke (BMW) A.G. Director
BMW Haus
Petuelring 130
Postfach 40 02 40
D-8000
Munich 40 Germany
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198
Snap-on Incorporated Director
2801 80th Street
Kenosha, WI 53140
Tejas Gas Corporation Director
1301 McKinney Street
Houston, TX 77010
Deere & Company Director
John Deere Road
Moline, IL 61265
Frederick A. Krehbiel Molex Incorporated Chairman and Chief
Director 2222 Wellington Court Executive Officer
Lisle, IL 60532-1682 and Former Vice
Chairman
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198
Tellabs, Inc. Director
4951 Indiana Avenue
Lisle, IL 60532
</TABLE>
-9-
<PAGE> 115
<TABLE>
<CAPTION>
NAME AND POSITION
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
John V.N. McClure None
Executive Vice President
James J. Mitchell, III The Northern Trust Company Director
Executive Vice President of New York
40 Broad Street
8th Floor
New York, NY 10004
Northern Trust Corporation Executive Vice
50 South LaSalle Street President
Chicago, IL 60675
William G. Mitchell Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Northern Trust Corporation Executive Vice Director
50 South LaSalle Street
Chicago, IL 60675
The Interlake Corporation Director
7701 Harger Road
Oak Brook, IL 60521-1488
Peoples Energy Corporation Director
122 South Michigan Avenue
Chicago, IL 60603
The Sherwin-Williams Company Director
101 Prospect Avenue, N.W.
Cleveland, OH 44115-1075
Edward J. Mooney Nalco Chemical Company Chairman, Chief
Director One Nalco Center Executive Officer,
Naperville, IL 60563-1198 President and
Director
Morton International, Inc. Director
100 North Riverside Plaza
Chicago, IL 60606
J. Terrance Murray None
Executive Vice President
William A. Osborn Northern Trust Corporation Director
Chairman and Chief 50 South LaSalle Street
Executive Officer, Chicago, IL 60675
Former President
and Chief
Operating Officer, Nortrust Realty Management, Inc. Director
Former Senior Executive 50 South LaSalle Street
Vice President Chicago, IL 60675
Northern Trust of Director and Former
California Corporation Chairman of the Board
355 South Grand Avenue
Los Angeles, CA 90017
</TABLE>
-10-
<PAGE> 116
<TABLE>
<CAPTION>
NAME AND POSITION
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Northern Trust Bank Former Chairman
of California of the Board
355 South Grand Avenue
Los Angeles, CA 90017
Northern Futures Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Sheila A. Penrose Northern Trust Global Director
Executive Vice President Advisors, Inc.
29 Federal Street
Stamford, CT 06901
Northern Trust Corporation Executive Vice
50 South LaSalle Street President
Chicago, IL 60675
Perry R. Pero Northern Futures Corporation Director
Senior Executive Vice 50 South LaSalle Street
President and Chief Chicago, IL 60675
Financial Officer
Northern Trust Corporation Senior Executive
50 South LaSalle Street Vice President and
Chicago, IL 60675 Chief Financial
Officer
Northern Investment Corporation President and,
50 South LaSalle Street Director and
Chicago IL 60675 Former Chairman
and Treasurer
Northern Trust Global Director
Advisors, Inc.
29 Federal Street
Stamford, CT 06901
Northern Trust Securities, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
</TABLE>
-11-
<PAGE> 117
<TABLE>
<CAPTION>
NAME AND POSITION
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Peter L. Rossiter Schiff, Hardin & Waite Former Partner
Executive Vice President and 7200 Sears Tower
General Counsel Chicago, IL 60606
Tanglewood Bancshares Inc. Former Vice President
600 Bering Drive and Director
Houston, TX 77057
Consolidated Communications, Inc. Director
Illinois Consolidated Telephone
Company
121 South 17th Street
Mattoon, IL 61938
Northern Trust Corporation Executive Vice
50 South LaSalle Street President
Chicago, IL 60675 and General Counsel
Lee Selander None
Executive Vice President
Jean Sheridan None
Executive Vice President
Harold B. Smith Illinois Tool Works Inc. Chairman of the
Director 3600 West Lake Avenue Executive Committee
Glenview, IL 60025-5811
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
W. W. Grainger, Inc. Director
5500 West Howard Street
Skokie, IL 60077
Northwestern Mutual Life Trustee
Insurance Co.
720 East Wisconsin Avenue
Milwaukee, WI 53202
William D. Smithburg The Quaker Oats Company Retired Chairman
Director 321 North Clark Street
Chicago, IL 60610
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Abbott Laboratories Director
One Abbott Park Road
Abbott Park, IL 60064-3500
Corning Incorporated Director
Corning, NY 14831
Prime Capital Corporation Director
P.O. Box 8460
Rolling Meadows, IL 60008
</TABLE>
-12-
<PAGE> 118
<TABLE>
<CAPTION>
NAME AND POSITION
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
James M. Snyder None
Executive Vice President
Mark Stevens None
Executive Vice President
Bide L. Thomas Commonwealth Edison Company Former President and a
Director One First National Plaza Former Director
Chicago, IL 60603
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
R. R. Donnelley & Sons Company Director
77 West Wacker Drive
Chicago, IL 60601
MYR Group Inc. Director
*(formerly L.E. Myers Company)
2550 West Golf Road
Rolling Meadows, IL 60008
* Name change
William S. Trukenbrod None
Executive Vice President
Frederick Waddell None
Executive Vice President
Jeffrey H. Wessel None
Executive Vice President
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITER
(a) Sunstone Distribution Services, LLC currently serves as
distributor of the shares of The Haven Capital Management Trust, The Marsico
Investment Fund, Green Century Funds and First Omaha Funds, Inc.
(b) To the best of Registrant's knowledge, the directors and
executive officers of Sunstone Distribution Services, LLC, distributor for
Registrant, are as follows:
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH POSITIONS AND
NAME AND PRINCIPAL SUNSTONE DISTRIBUTION OFFICES WITH
BUSINESS ADDRESS SERVICES, LLC REGISTRANT
- ---------------- ------------- ----------
<S> <C> <C>
Miriam M. Allison President and Member Vice President
207 E. Buffalo Street and Treasurer
Suite 400
Milwaukee, WI 53202
</TABLE>
-13-
<PAGE> 119
<TABLE>
<S> <C> <C>
Daniel S. Allison Secretary None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
Mary M. Tenwinkel Vice President Vice President
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
</TABLE>
(c) None.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The Agreement and Declaration of Trust, By-laws and minute
books of the Registrant are in the physical possession of Drinker Biddle & Reath
LLP, 1100 Philadelphia National Bank Building, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107. Records relating to Sunstone Financial Group,
Inc.'s functions as administrator, and Sunstone Distribution Services, LLC's
functions as distributor, for the Registrant are located at 207 E. Buffalo
Street, Suite 400, Milwaukee, Wisconsin 53202. All other accounts, books and
other documents required to be maintained under Section 31(a) of the Investment
Company Act of 1940 and the Rules promulgated thereunder are in the physical
possession of The Northern Trust Company, 50 S. LaSalle Street, Chicago,
Illinois 60675 or 801 S. Canal Street, Chicago, Illinois 60607 (relating to
transfer agent).
ITEM 31. MANAGEMENT SERVICES
(a) Not Applicable.
ITEM 32. UNDERTAKINGS
(a) (i) Registrant hereby undertakes to file a
Post-Effective Amendment, using financial statements which need not be
certified, within four to six months from the effective date of Registrant's
Post-Effective Amendment No. 14 for the Short-Intermediate U.S. Government Fund,
California Intermediate Tax-Exempt Fund and Arizona Tax-Exempt Fund.
(ii) Registrant hereby undertakes to file a
Post-Effective Amendment, using financial statements which need not be
certified, within four to six months from the effective date of Registrant's
Post-Effective Amendment No. 15 for the Small Cap Index Fund.
(iii) Registrant hereby undertakes to file a
Post-Effective Amendment, using financial statements which need not be
certified, within four to six months from the effective date of Registrant's
Post-Effective Amendment No. 18 for the Mid-Cap Growth Equity Fund.
(b) Registrant undertakes to provide its Annual
Report to Shareholders upon request without charge to any recipient of a
Prospectus for the U.S. Government Fund, Short-Intermediate U.S. Government
Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Florida Intermediate
Tax-Exempt Fund, California Intermediate Tax-Exempt Fund, Tax-Exempt Fund,
Arizona Tax-Exempt Fund, California Tax-Exempt Fund, International Fixed Income
Fund, Income Equity Fund, Stock Index Fund, Growth Equity Fund, Select Equity
Fund, Small Cap Fund, International Growth Equity Fund, International Select
Equity Fund, Technology Fund, Small Cap Index Fund and Mid-Cap Growth Fund.
-14-
<PAGE> 120
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has caused this
Post-Effective Amendment No. 18 to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Milwaukee and State of Wisconsin on the 16th day of January, 1998.
NORTHERN FUNDS
By: /s/ Miriam M. Allison
---------------------
Miriam M. Allison
Treasurer
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment No. 18 to Registrants' Registration Statement has
been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/*/ Silas S. Cathcart* Trustee and January 16, 1998
- --------------------------------
Silas S. Cathcart President (Chief
Executive Officer)
/s/ Miriam M. Allison Treasurer January 16, 1998
- --------------------------------
Miriam M. Allison (Chief Financial
and Accounting
Officer)
/*/ James W. Cozad* Trustee January 16, 1998
- --------------------------------
James W. Cozad
/*/ Wesley M. Dixon, Jr.* Trustee January 16, 1998
- --------------------------------
Wesley M. Dixon, Jr.
/*/ William J. Dolan, Jr.* Trustee January 16, 1998
- --------------------------------
William J. Dolan, Jr.
/*/ Raymond E. George, Jr.* Trustee January 16, 1998
- --------------------------------
Raymond E. George, Jr.
*By: /s/ Miriam M. Allison January 16, 1998
----------------------------
Miriam M. Allison,
Attorney-in-fact
</TABLE>
<PAGE> 121
NORTHERN FUNDS
(A Massachusetts Business Trust)
CERTIFICATE OF SECRETARY
The foregoing resolution was duly adopted by the Board of Trustees
of Northern Funds at a Meeting of the Board of Trustees held on November 18,
1997, and remains in effect on the date hereof:
RESOLVED, that the trustees and officers of Northern Funds who may
be required to execute any amendment to the Registration Statement of
Northern Funds be, and each of them hereby is, authorized to execute a
Power of Attorney appointing Jeffrey A. Dalke and Miriam M. Allison, and
either of them, their true and lawful attorney or attorneys, to execute in
their name, place and stead, in their capacity as trustee or officer, or
both, of Northern Funds, any and all amendments to said Registration
Statement, and all instruments necessary or incidental in connection
therewith, and to file the same with the Securities and Exchange
Commission; and either of said attorneys shall have full power and
authority to do in the name and on behalf of said trustees and officers,
or any or all of them, in any and all capacities, every act whatsoever
requisite or necessary to be done in the premises, as fully and to all
intents and purposes as each of said trustees or officers, or any or all
of them, might or could do in person, said acts of said attorneys, or
either of them, being hereby ratified and approved.
IN WITNESS WHEREOF, I have hereunto set my hand this 16th day of
January 16, 1998.
/s/ Jeffrey A. Dalke
---------------------------
Jeffrey A. Dalke
Secretary
<PAGE> 122
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Miriam M.
Allison, hereby constitutes and appoints Jeffrey A. Dalke her true and lawful
attorney, to execute in her name, place, and stead, in her capacity as officer
of the Trust, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and said attorney shall have
full power of substitution and resubstitution; and said attorney shall have full
power and authority to do and perform in her name and on her behalf, in any and
all capacities, every act whatsoever requisite or necessary to be done, as fully
and to all intents and purposes as she might or could do in person, said acts of
said attorney being hereby ratified and approved.
DATED: March 7, 1994
/s/ Miriam M. Allison
- ----------------------------
Miriam M. Allison
<PAGE> 123
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Silas S.
Cathcart, hereby constitutes and appoints Jeffrey A. Dalke and Miriam M. Allison
and either of them, his true and lawful attorney, to execute in his name, place,
and stead, in his capacity as Trustee or officer, or both, of the Trust, the
Registration Statement and any amendments thereto and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission; and each of said attorneys shall have full power of
substitution and resubstitution; and each of said attorneys shall have full
power and authority to do and perform in his name and on his behalf, in any and
all capacities, every act whatsoever requisite or necessary to be done, as fully
and to all intents and purposes as he might or could do in person, said acts of
each of the said attorneys being hereby ratified and approved.
DATED: October 13, 1993
/s/ Silas S. Cathcart
- -----------------------------
Silas S. Cathcart
<PAGE> 124
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, James W.
Cozad, hereby constitutes and appoints Jeffrey A. Dalke and Miriam M. Allison
and either of them, his true and lawful attorney, to execute in his name, place,
and stead, in his capacity as Trustee or officer, or both, of the Trust, the
Registration Statement and any amendments thereto and all instruments necessary
or incidental in connection therewith, and to file the same with the Securities
and Exchange Commission; and each of said attorneys shall have full power of
substitution and resubstitution; and each of said attorneys shall have full
power and authority to do and perform in his name and on his behalf, in any and
all capacities, every act whatsoever requisite or necessary to be done, as fully
and to all intents and purposes as he might or could do in person, said acts of
each of the said attorneys being hereby ratified and approved.
DATED: October 13, 1993
/s/ James W. Cozad
- -----------------------------
James W. Cozad
<PAGE> 125
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Wesley M.
Dixon, Jr., hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and each of said attorneys shall have full
power of substitution and resubstitution; and each of said attorneys shall have
full power and authority to do and perform in his name and on his behalf, in any
and all capacities, every act whatsoever requisite or necessary to be done, as
fully and to all intents and purposes as he might or could do in person, said
acts of each of the said attorneys being hereby ratified and approved.
DATED: February 24, 1994
/s/ Wesley M. Dixon, Jr.
- -----------------------------
Wesley M. Dixon, Jr.
<PAGE> 126
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, William J.
Dolan, Jr., hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and each of said attorneys shall have full
power of substitution and resubstitution; and each of said attorneys shall have
full power and authority to do and perform in his name and on his behalf, in any
and all capacities, every act whatsoever requisite or necessary to be done, as
fully and to all intents and purposes as he might or could do in person, said
acts of each of the said attorneys being hereby ratified and approved.
DATED: February 28, 1994
/s/ William J. Dolan, Jr.
- -----------------------------
William J. Dolan, Jr.
<PAGE> 127
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Raymond E.
George, Jr., hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and each of said attorneys shall have full
power of substitution and resubstitution; and each of said attorneys shall have
full power and authority to do and perform in his name and on his behalf, in any
and all capacities, every act whatsoever requisite or necessary to be done, as
fully and to all intents and purposes as he might or could do in person, said
acts of each of the said attorneys being hereby ratified and approved.
DATED: February 23, 1994
/s/ Raymond E. George, Jr.
- ------------------------------------
Raymond E. George, Jr.
<PAGE> 128
NORTHERN FUNDS
EXHIBIT INDEX
EXHIBITS
1(k) - Amendment No. 10 to Agreement and Declaration of Trust.
5(f) - Form of Amendment No. 6 to the Investment Advisory
Agreement.
6(c) - Form of Amended and Restated Schedule A to the Distribution
Agreement.
8(o) - Form of Addendum No. 7 to the Custodian Agreement.
8(p) - Form of Addendum No. 1 to the Foreign Custody Agreement.
8(q) - Form of Addendum No. 6 to the Transfer Agency Agreement.
9(e) - Form of Amended and Restated Schedule A to the
Administration Agreement.
10 - Opinion of Hale & Dorr LLP.
11 - Consent of Drinker Biddle & Reath LLP.
<PAGE> 1
Exhibit 1(k)
[FORM]
NORTHERN FUNDS
AMENDMENT NO. 10 TO AGREEMENT AND DECLARATION OF TRUST
WHEREAS, Section 4.1 of the Agreement and Declaration of Trust dated
October 12, 1993 (the "Declaration") of Northern Funds (the "Trust") provides
that the Declaration may be amended to establish and designate new Series or
Classes of Shares by an instrument in writing executed by a majority of the
Trustees of the Trust and setting forth such establishment and designation and
the relative rights and preferences of such Series or Classes;
NOW THEREFORE, the undersigned, being a majority of the Trustees of
the Trust, hereby:
(1) amend the Declaration by designating and establishing an
additional Series and Class of Shares to be known as the Initial Class of
the "Mid-Cap Growth Fund," such Additional Series and Class to have the
relative rights and preferences set forth in Section 4.2(a) through (m) of
the Declaration; and
(2) determine that pursuant to Section 7.3 of the Declaration the
foregoing amendment shall be effective as of the date set forth below.
WITNESS our hands as of this ____ day of __________, 1998.
- ------------------------------ ------------------------------
Silas S. Cathcart Wesley M. Dixon, Jr.
- ------------------------------ ------------------------------
James W. Cozad William J. Dolan, Jr.
- ------------------------------
Raymond E. George, Jr.
<PAGE> 1
Exhibit 5(f)
[FORM]
NORTHERN FUNDS
ADDENDUM NO. 6 TO THE INVESTMENT ADVISORY AGREEMENT
This Addendum, dated as of the _____ day of __________, 1998, is
entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business
trust, and THE NORTHERN TRUST COMPANY (the "Investment Adviser"), an Illinois
state bank.
WHEREAS, the Trust and the Investment Adviser have entered into an
Investment Advisory and Ancillary Services Agreement dated as of April 1, 1994
as amended by Addendum No. 1 dated November 29, 1994, by Addendum No. 2 dated
March 29, 1996, by Addendum No. 3 dated August 7, 1996, by Addendum No. 4 dated
March 24, 1997 and by Addednum No. 5 dated _________ __, 199_ (the "Advisory
Agreement") pursuant to which the Trust has appointed the Investment Adviser to
act as investment adviser to the Trust for the Money Market Fund, U.S.
Government Money Market Fund, Municipal Money Market Fund, U.S. Government
Select Money Market Fund, California Municipal Money Market Fund, U.S.
Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Tax-Exempt
Fund, International Fixed Income Fund, Income Equity Fund, Growth Equity Fund,
Select Equity Fund, Small Cap Fund, International Growth Equity Fund,
International Select Equity Fund, Technology Fund, Stock Index Fund,
Short-Intermediate U.S. Government Fund, California Intermediate Tax-Exempt
Fund, Arizona Tax-Exempt Fund, California Tax-Exempt Fund, Florida Intermediate
Tax-Exempt Fund and the Small Cap Index Fund; and
WHEREAS, Section 1(b) of the Advisory Agreement provides that in the
event the Trust establishes one or more additional investment portfolios with
respect to which it desires to retain the Investment Adviser to act as
investment adviser under the Advisory Agreement, the Trust shall so notify the
Investment Adviser in writing and if the Investment Adviser is willing to render
such services it shall notify the Trust in writing, and the compensation to be
paid to the Investment Adviser shall be that which is agreed to in writing by
the Trust and the Investment Adviser; and
WHEREAS, pursuant to Section 1(b) of the Advisory Agreement, the
Trust has notified the Investment Adviser that it is establishing the Mid-Cap
Growth Fund (the "Fund"), and that it desires to retain the Investment Adviser
to act as the investment adviser for the Fund, and the Investment Adviser has
notified the Trust that it is willing to serve as investment adviser for the
Fund;
<PAGE> 2
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints the Investment Adviser to
act as investment adviser to the Trust for the Fund in accordance with the terms
set forth in the Advisory Agreement. The Investment Adviser hereby accepts such
appointment and agrees to render the services set forth in the Advisory
Agreement for the compensation herein provided.
2. Compensation. For the services provided and the expenses assumed
pursuant to the Advisory Agreement regarding each Fund, the Trust will pay the
Investment Adviser, and the Investment Adviser will accept as full compensation
therefor from the Trust, a fee at the annual rate of 1.00% of the Fund's average
net assets.
3. Capitalized Terms. From and after the date hereof, the term
"Current Funds" as used in the Advisory Agreement shall be deemed to include the
Fund. Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to them in the Advisory Agreement.
4. Miscellaneous. The initial term of the Advisory Agreement with
respect to the Fund shall continue, unless sooner terminated in accordance with
the Advisory Agreement, until March 31, 1999. Except to the extent supplemented
hereby, the Advisory Agreement shall remain unchanged and in full force and
effect, and is hereby ratified and confirmed in all respects as supplemented
hereby.
All signatures need not appear on the same copy of this Addendum.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as
of the date and year first above written.
NORTHERN FUNDS
Attest:__________________ By:________________________________
Title:_____________________________
THE NORTHERN TRUST COMPANY
Attest:__________________ By:________________________________
Title:_____________________________
<PAGE> 1
Exhibit 6(c)
[FORM]
AMENDED AND RESTATED
SCHEDULE A
TO THE
DISTRIBUTION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
SUNSTONE DISTRIBUTION SERVICES, LLC
DATED _______________, 1998
Intending to be legally bound, the undersigned hereby amend and restate Schedule
A to the aforesaid Agreement to include the following investment portfolios:
<TABLE>
<S> <C>
Growth Equity Fund Tax-Exempt Fund
Income Equity Fund Money Market Fund
Small Cap Fund U.S. Government Money Market Fund
Select Equity Fund International Fixed Income Fund
International Growth Equity Fund California Municipal Money Market Fund
International Select Equity Fund Stock Index Fund
Technology Fund Florida Intermediate Tax-Exempt Fund
Municipal Money Market Fund Arizona Tax-Exempt Fund
U.S. Government Select Money Market Fund California Intermediate Tax-Exempt Fund
Fixed Income Fund California Tax-Exempt Fund
U.S. Government Fund Short-Intermediate U.S. Government Fund
Intermediate Tax-Exempt Fund Small Cap Index Fund
Mid-Cap Growth Fund
</TABLE>
All signatures need not appear on the same copy of this Amended and
Restated Schedule A.
NORTHERN FUNDS
By:
Title: ____________________________
Date: ____________________________
SUNSTONE DISTRIBUTION SERVICES, LLC
By:
Title: _____________________________
Date: _____________________________
<PAGE> 1
EXHIBIT 8(o)
[FORM]
NORTHERN FUNDS
ADDENDUM NO. 7 TO THE CUSTODIAN AGREEMENT
This Addendum, dated as of the ___ day of __________, 1998, is entered
into between NORTHERN FUNDS (the "Trust"), a Massachusetts business trust, and
THE NORTHERN TRUST COMPANY, an Illinois state bank ("Northern").
WHEREAS, the Trust and Northern have entered into a Custodian Agreement
dated as of April 1, 1994 as amended by Addendum No. 1 dated November 29, 1994,
by Addendum No. 2 dated March 29, 1996, by Addendum No. 3 dated August 7, 1996,
by Addendum No. 4 dated August 6, 1996, by Addendum No. 5 dated March 24, 1997
and by Addendum No. 6 dated _________ __, 199_ (the "Custodian Agreement")
pursuant to which the Trust has appointed Northern to act as custodian to the
Trust for the Money Market Fund, U.S. Government Money Market Fund, Municipal
Money Market Fund, U.S. Government Select Money Market Fund, California
Municipal Money Market Fund, U.S. Government Fund, Fixed Income Fund,
Intermediate Tax-Exempt Fund, Tax-Exempt Fund, Income Equity Fund, Growth Equity
Fund, Select Equity Fund, Small Cap Fund, Technology Fund, Stock Index Fund,
Florida Intermediate Tax-Exempt Fund, Short-Intermediate U.S. Government Fund,
California Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund, California
Tax-Exempt Fund and the Small Cap Index Fund;
WHEREAS, the Trust is establishing the Mid-Cap Growth Fund, and the
Trust desires to retain Northern under the terms of the Custodian Agreement to
act as the custodian for the Mid-Cap Growth Fund, and Northern is willing to so
act; and
WHEREAS, the Trust and Northern desire to enter into this Addendum No.
7 to provide compensation for each Fund for uninvested cash balances maintained
with Northern under the Custodian Agreement;
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints Northern custodian to
the Trust for the Mid-Cap Growth Fund in accordance with the
terms set forth in the Custodian Agreement. Northern hereby
accepts such appointment and agrees to render the services set
forth in the Custodian Agreement for the compensation therein
provided.
<PAGE> 2
2. Capitalized Terms. From and after the date hereof, the term
"Funds" as used in the Custodian Agreement shall be deemed to
include the Mid-Cap Growth Fund. Capitalized terms used herein
and not otherwise defined shall have the meanings ascribed to
them in the Custodian Agreement.
3. Cash Balance Compensation. Northern shall compensate each Fund
for uninvested cash balances maintained with Northern at the
end of each day ("Cash Balance Compensation") in accordance
with this paragraph. Cash Balance Compensation with respect to
each Fund's uninvested cash balance shall be determined at the
end of each day based on an annual rate equal to 96% of the
previous calendar month's average 90-day Treasury bill
interest rate. The amount of each Fund's accumulated Cash
Balance Compensation shall be paid monthly in the form of
reductions to the custody fees otherwise allocable to the Fund
under the Custodian Agreement for such month. In the event
that a Fund's Cash Balance Compensation for any month exceeds
the custody fees payable by the Fund under the Custodian
Agreement for such month, the Fund's excess Cash Balance
Compensation may be carried forward and credited against
future custody fees, provided that no excess Cash Balance
Compensation may be carried forward beyond the end of any
fiscal year.
4. Miscellaneous. The initial term of the Custodian Agreement
with respect to the Mid-Cap Growth Fund shall continue, unless
sooner terminated in accordance with the Custodian Agreement,
until March 31, 1999. Except to the extent supplemented
hereby, the Custodian Agreement shall remain unchanged and in
full force and effect, and is hereby ratified and confirmed in
all respects as supplemented hereby.
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
All signatures need not appear on the same copy of this Addendum.
NORTHERN FUNDS
Attest:__________________ By:________________________________
Title:_____________________________
THE NORTHERN TRUST COMPANY
Attest:__________________ By:________________________________
Title:_____________________________
<PAGE> 1
EXHIBIT 8(p)
[FORM]
NORTHERN FUNDS
ADDENDUM NO. 1 TO THE FOREIGN CUSTODY AGREEMENT
This Addendum No. 1, dated as of the ___ day of _________, 1998, is
entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business
trust, and THE NORTHERN TRUST COMPANY, an Illinois state bank ("Northern").
WHEREAS, the Trust and Northern have entered into a Foreign Custody
Agreement dated April 1, 1994 (the "Agreement"), pursuant to which the Trust has
appointed Northern to act as custodian to the Trust for its International Growth
Equity, International Select Equity and International Fixed Income Funds
(collectively, the "Funds"); and
WHEREAS, the Trust and Northern desire to enter into this Addendum No.
1 to provide compensation for each Fund for uninvested cash balances maintained
with Northern under the Agreement;
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Cash Balance Compensation. Northern shall compensate each Fund
for uninvested cash balances maintained with Northern at the
end of each day ("Cash Balance Compensation") in accordance
with this paragraph. Cash Balance Compensation with respect to
each Fund's uninvested cash balance shall be determined at the
end of each day based on an annual rate equal to 96% of the
previous calendar month's average 90-day Treasury bill
interest rate. The amount of each Fund's accumulated Cash
Balance Compensation shall be paid monthly in the form of
reductions to the custody fees otherwise allocable to the Fund
under the Agreement for such month. In the event that a Fund's
Cash Balance Compensation for any month exceeds the custody
fees payable by the Fund under the Agreement for such month,
the Fund's excess Cash Balance Compensation may be carried
forward and credited against future custody fees, provided
that no excess Cash Balance Compensation may be carried
forward beyond the end of any fiscal year.
<PAGE> 2
2. Miscellaneous. Except to the extent supplemented hereby, the
Agreement shall remain unchanged and in full force and effect,
and is hereby ratified and confirmed in all respects as
supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
NORTHERN FUNDS
Attest: By:
Name:
Title:
THE NORTHERN TRUST COMPANY
Attest: By:
Name:
Title:
<PAGE> 1
EXHIBIT 8(q)
[FORM]
NORTHERN FUNDS
ADDENDUM NO. 6 TO THE TRANSFER AGENCY AGREEMENT
This Addendum, dated as of the __th day of _________, 1998, is entered
into between NORTHERN FUNDS (the "Trust"), a Massachusetts business trust, and
THE NORTHERN TRUST COMPANY, an Illinois state bank (the "Transfer Agent").
WHEREAS, the Trust and the Transfer Agent have entered into a Transfer
Agency Agreement dated as of April 1, 1994 as amended by Addendum No. 1 dated
November 29, 1994, by Addendum No. 2 dated March 29, 1996, by Addendum No. 3
dated August 7, 1996, by Addendum No. 4 dated March 24, 1997 and by Addendum No.
5 dated __________, 199__ (the "Transfer Agency Agreement") pursuant to which
the Trust has appointed the Transfer Agent to act as transfer agent to the Trust
for the Money Market Fund, U.S. Government Money Market Fund, Municipal Money
Market Fund, U.S. Government Select Money Market Fund, California Municipal
Money Market Fund, U.S. Government Fund, Fixed Income Fund, Intermediate
Tax-Exempt Fund, Tax-Exempt Fund, International Fixed Income Fund, Income Equity
Fund, Growth Equity Fund, Select Equity Fund, Small Cap Fund, International
Growth Equity Fund, International Select Equity Fund, Technology Fund, Stock
Index Fund, Florida Intermediate Tax-Exempt Fund, Short-Intermediate U.S.
Government Fund, California Intermediate Tax-Exempt Fund, Arizona Tax-Exempt
Fund, California Tax-Exempt Fund and the Small Cap Index Fund; and
WHEREAS, the Trust is establishing the Mid-Cap Growth Fund (the
"Fund"), and the Trust desires to retain the Transfer Agent under the terms of
the Transfer Agency Agreement to render transfer agency and other services with
respect to the Fund and the record and/or beneficial owners of the Fund, and the
Transfer Agent is willing to render such services.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints the Transfer Agent as
transfer agent with respect to the Fund in accordance with the
terms set forth in the Transfer Agency Agreement. The Transfer
Agent hereby accepts such appointment and agrees to render the
services and perform the duties set forth in the Transfer
Agency Agreement for the compensation therein provided.
2. Capitalized Terms. From and after the date hereof, the term
"Current Funds" as used in the Transfer Agency
<PAGE> 2
Agreement shall be deemed to include the Fund. Capitalized
terms used herein and not otherwise defined shall have the
meanings ascribed to them in the Transfer Agency Agreement.
3. Miscellaneous. The initial term of the Transfer Agency
Agreement with respect to the Fund shall continue, unless
sooner terminated in accordance with the Transfer Agency
Agreement, until March 31, 1999. Except to the extent
supplemented hereby, the Transfer Agency Agreement shall
remain unchanged and in full force and effect, and is hereby
ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
All signatures need not appear on the same copy of this Addendum.
NORTHERN FUNDS
Attest:_____________________ By:
Title:__________________
Attest:_____________________ THE NORTHERN TRUST COMPANY
By:
Title:__________________
-2-
<PAGE> 1
EXHIBIT 9(e)
[FORM]
AMENDED AND RESTATED
SCHEDULE A
TO THE
ADMINISTRATION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
DATED ___________, 1998
Intending to be legally bound, the undersigned hereby amend and restate Schedule
A to the aforesaid Agreement to include the following investment portfolios:
<TABLE>
<CAPTION>
<S> <C>
Growth Equity Fund Tax-Exempt Fund
Income Equity Fund Money Market Fund
Small Cap Fund U.S. Government Money Market Fund
Select Equity Fund International Fixed Income Fund
International Growth Equity Fund California Municipal Money Market Fund
International Select Equity Fund Stock Index Fund
Technology Fund Florida Intermediate Tax-Exempt Fund
Municipal Money Market Fund Arizona Tax-Exempt Fund
U.S. Government Select Money Market Fund California Intermediate Tax-Exempt Fund
Fixed Income Fund California Tax-Exempt Fund
U.S. Government Fund Short-Intermediate U.S. Government Fund
Intermediate Tax-Exempt Fund Small Cap Index Fund
Mid-Cap Growth Fund
</TABLE>
All signatures need not appear on the same copy of this Amended and Restated
Schedule A.
NORTHERN FUNDS
By: _______________________________
Title: _____________________________
Date: _____________________________
SUNSTONE FINANCIAL GROUP, INC.
By: _______________________________
Title: _____________________________
Date: _____________________________
<PAGE> 1
EXHIBIT 10
HALE & DORR LLP
Counsellors at Law
60 State Street, Boston, Massachusetts 02109
617-526-6000 - fax 617-526-5000
January 15, 1998
Northern Funds
207 East Buffalo Street
Suite 400
Milwaukee, Wisconsin 53202
Ladies and Gentlemen:
Northern Funds (the "Trust") is a Massachusetts business trust created
under a written Agreement and Declaration of Trust dated, executed and delivered
in Boston, Massachusetts on October 12, 1993, as amended from time to time (as
so amended, the "Declaration of Trust"). The beneficial interests thereunder are
represented by transferable shares of beneficial interest, $.0001 par value per
share.
The Trustees have the powers set forth in the Declaration of Trust,
subject to the terms, provisions and conditions therein provided. Pursuant to
Article IV, Section 4.1 of the Declaration of Trust, the number of shares of
beneficial interest authorized to be issued under the Declaration of Trust is
unlimited and the Trustees are authorized to divide the shares into one or more
series of shares and one or more classes thereof as they deem necessary or
desirable. Pursuant to Article IV, Section 4.1 of the Declaration of Trust, the
Trustees are empowered in their discretion to issue shares of any series for
such consideration, whether cash or other property, and on such terms as the
Trustees may determine (or for no consideration if pursuant to a share dividend
or split-up), all without action or approval of the shareholders. Pursuant to
Article IV, Section 4.2 of the Declaration of Trust, the Trustees have
established twenty-five separate series of shares representing interests in each
investment portfolio referenced on Attachment A hereto.
The Trustees have voted to authorize the officers of the Trust to
determine the appropriate number of shares to be registered, to register with
the Securities and Exchange Commission, and to issue and sell to the public,
such shares.
We have examined the Declaration of Trust and By-Laws, each as amended
from time to time, of the Trust, resolutions of the Board of Trustees relating
to the authorization and issuance of shares of beneficial interest of the Trust,
and such other documents as we have deemed necessary or appropriate for the
purposes of this opinion, including, but not limited to, originals, or copies
certified or otherwise identified to our satisfaction, of such documents, Trust
records and other instruments. In our examination of the above
<PAGE> 2
Northern Funds
January 15, 1998
Page 2
documents, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted to us as originals and the conformity to original
documents of all documents submitted to us as certified of photostatic copies.
For purposes of this opinion letter, we have not made an independent
review of the laws of any state or jurisdiction other than The Commonwealth of
Massachusetts and express no opinion with respect to the laws of any
jurisdiction other than the laws of The Commonwealth of Massachusetts. Further,
we express no opinion as to compliance with any state or federal securities
laws, including the securities laws of The Commonwealth of Massachusetts.
Our opinion below, as it relates to the non-assessability of the shares of
the Trust, is qualified to the extent that under Massachusetts law, shareholders
of a Massachusetts business trust may be held personally liable for the
obligations of the Trust. In this regard, however, please be advised that the
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of such disclaimer be given in each note,
bond, contract, certificate or undertaking made or issued by the Trustees or
officers of the Trust. Also, the Declaration of Trust provides for
indemnification out of Trust property for all loss and expense of any
shareholder held personally liable for the obligations of the Trust.
We are of the opinion that all necessary Trust action precedent to the
issuance of the shares of beneficial interest of the Trust has been duly taken,
and that all such shares may legally and validly be issued for among other
things, cash, and when sold will be, fully paid and non-assessable by the Trust
upon receipt by the Trust or its agent of consideration therefor in accordance
with terms described in the Trust's Declaration of Trust, subject to compliance
with the Securities Act of 1933, as amended, the Investment Company Act of 1940,
as amended, and the applicable state laws regulating the sale of securities.
We consent to your filing this opinion with the Securities and Exchange
Commission as an exhibit to any of the Trust's filings with the Commission.
Except as provided in this paragraph, this opinion may not be relied upon by, or
filed with, any other parties or for any other purpose.
Very truly yours,
/s/Hale and Dorr LLP
Hale and Dorr LLP
<PAGE> 3
ATTACHMENT A
Money Market Fund
U.S. Government Money Market Fund
Municipal Money Market Fund
U.S. Government Select Money Market Fund
California Municipal Money Market Fund
U.S. Government Fund
Short-Intermediate U.S. Government Fund
Fixed Income Fund
Intermediate Tax-Exempt Fund
Florida Intermediate Tax-Exempt Fund
California Intermediate Tax-Exempt Fund
Tax-Exempt Fund
Arizona Tax-Exempt Fund
California Tax-Exempt Fund
International Fixed Income Fund
Income Equity Fund
Stock Index Fund
Growth Equity Fund
Select Equity Fund
Small Cap Index Fund
Small Cap Fund
International Growth Equity Fund
International Select Equity Fund
Technology Fund
Mid-Cap Growth Fund
<PAGE> 1
EXHIBIT 11
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the references to our
Firm under the caption "Additional Trust Information - Counsel and Auditors" in
the Statement of Additional Information included in Post-Effective Amendment
No. 18 to the Registration Statement (1933 Act No. 33-73404; 1940 Act No.
811-8236) on Form N-1A under the Securities Act of 1933, as amended, of
Northern Funds. This consent does not constitute a consent under section 7 of
the Securities Act of 1933, and in consenting to the use of our name and the
references to our Firm under such caption we have not certified any part of the
Registration Statement and do not otherwise come within the categories of
persons whose consent is required under said section 7 or the rules and
regulations of the Securities and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath LLP
------------------------------
Drinker Biddle & Reath LLP
Philadelphia, Pennsylvania
January 16, 1998
