<PAGE> 1
As filed with the Securities and Exchange Commission on June 30, 1999
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. 23 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 25 /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)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) 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
- - Tax-Exempt Money Market Fund
- - Small Cap Growth Fund
Prospectus dated September ____, 1999
An investment in a Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. An investment in a Fund involves investment risks, including possible
loss of principal.
Although the Tax-Exempt Money Market Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Tax-Exempt Money Market Fund.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
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CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
RISK/RETURN SUMMARY - Tax-Exempt Money Market Fund 5
Information about the objectives, principal - Small Cap Growth Fund 7
strategies and risk characteristics of each Fund
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PRINCIPAL INVESTMENT RISKS 8
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FUND PERFORMANCE 9
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FUND FEES AND EXPENSES 10
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MANAGEMENT OF THE FUNDS INVESTMENT ADVISER 11
Details that apply to the Funds as a group
ADVISORY FEES 11
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FUND MANAGEMENT 12
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OTHER FUND SERVICES 12
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ABOUT YOUR ACCOUNT PURCHASING AND SELLING SHARES
How to open, maintain and close an account - Purchasing Shares 12
- Opening an Account 12
- Selling Shares 14
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ACCOUNT POLICIES AND OTHER INFORMATION
- Calculating Share Price 16
- Timing of Tax-Exempt Money Market Fund
Purchase Requests 16
- Timing of Small Cap Growth Fund
Purchase Requests 17
- Social Security/Tax Identification
Number 17
- In-Kind Purchases and Redemptions 17
- Miscellaneous Purchase Information 17
- Timing of Redemption and Exchange
Requests 17
- Payment of Tax-Exempt Money Market Fund
Redemption Proceeds 18
- Payment of Small Cap Growth Fund
Redemption Proceeds 18
- Miscellaneous Redemption Information 18
- Exchange Privileges 18
- Telephone Transactions 19
- Making Changes to Your Account
Information 19
- Signature Guarantees 19
- Business Day 19
- Early Closings 19
- Authorized Intermediaries 19
- Service Organizations 20
</TABLE>
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<TABLE>
<CAPTION>
PAGE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- Shareholder Reports 20
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DIVIDENDS AND DISTRIBUTIONS 21
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TAX CONSIDERATIONS 21
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TAX TABLE 22
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YEAR 2000 ISSUES 23
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APPENDIX APPENDIX A
- Special Risks and Other Considerations 24
- Additional Description of Securities and
Common Investment Techniques 25
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FOR MORE INFORMATION Annual/Semiannual Report 35
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Statement of Additional Information 35
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</TABLE>
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NORTHERN FUNDS IS A FAMILY OF NO-LOAD MUTUAL FUNDS THAT OFFERS A SELECTION OF
FUNDS TO INVESTORS, EACH WITH A DISTINCT INVESTMENT OBJECTIVE AND RISK/REWARD
PROFILE.
This Prospectus describes the Tax-Exempt Money Market Fund and Small Cap Growth
Fund. Descriptions of the five money market, twelve fixed income and ten equity
funds (the "Funds") that make up the remainder of the Northern Funds family can
be found in a separate prospectus.
In addition to the instruments described on the pages below, each Fund may use
various investment techniques in seeking its investment objective. You can learn
more about these techniques and their related risks by reading Appendix A to
this Prospectus and the Statement of Additional Information.
Please keep in mind that no Fund can guarantee it will meet its investment
objective, and no Fund should be relied upon as a complete investment program.
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TAX-EXEMPT MONEY MARKET FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide, to the extent consistent with the preservation of
capital and prescribed portfolio standards, a high level of income exempt from
regular Federal income tax by investing primarily in municipal instruments.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to achieve its objective by investing primarily in high-quality
short-term municipal instruments. Municipal instruments are debt instruments,
the interest on which is, in the opinion of bond counsel or counsel for the
issuers, exempt from regular Federal income tax ("municipal instruments"). These
may include:
- Fixed and variable rate notes and similar debt instruments;
- Tax-exempt commercial paper;
- Municipal bonds, notes, paper or other instruments; and
- Municipal bonds and notes which are guaranteed as to principal
and interest or backed by the U.S. government or its agencies
or instrumentalities.
Under normal market conditions, at least 80% of the Fund's annual gross income
will be derived from municipal instruments. Interest earned by the Fund on AMT
obligations the interest on which may be treated as an item of tax preference to
shareholders under the Federal alternative minimum tax, will not be deemed to
have been derived from municipal instruments for the purposes of determining
whether the Fund meets this policy. To the extent the Fund invests in AMT
obligations, some portion of the Fund's dividends may be subject to the
alternative minimum tax.
Under normal market conditions, investments in AMT obligations and taxable
instruments will not exceed 20% of the value of the total assets of the Fund;
during temporary defensive periods, however, all or any portion of the Fund's
assets may be invested in such instruments.
Taxable investments will normally consist of U.S. dollar-denominated obligations
of U.S. banks, foreign commercial banks and securities issued or guaranteed by
foreign governments; high quality commercial paper; other obligations; high
quality corporate bonds and notes; asset-backed securities; securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
custodial receipts with respect thereto; and repurchase agreements relating to
the above instruments.
ADDITIONAL INFORMATION
The Fund seeks to maintain a stable net asset value of $1.00 per share.
Consistent with this policy, the Fund:
- - Limits its dollar-weighted average portfolio maturity to 90 days or
less;
- - Buys securities with remaining maturities of 397 days or less (except
for certain variable and floating rate instruments); and
- - Invests only in U.S. dollar-denominated securities that represent
minimal credit risks.
In addition, the Fund limits its investments to "Eligible Securities" as defined
by the Securities and Exchange Commission ("SEC"). Eligible Securities include,
generally, securities that either (a) have short-term debt ratings at the time
of purchase in the two highest rating categories or (b) are issued or guaranteed
by, or otherwise allow the Fund to demand payment from, an issuer with those
ratings. Securities that are unrated (including securities of issuers that have
long-term but not short-term ratings) may be deemed to be Eligible Securities if
determined to be of comparable quality by The Northern Trust Company ("Northern
Trust") under the direction of the Board of
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Trustees. Securities in which the Fund may invest may not earn as high a level
of income as long-term or lower quality securities, which generally have greater
market risk and more fluctuation in market value.
In accordance with current SEC regulations, the Fund will not invest more than
5% of the value of its total assets at the time of purchase in the securities of
any single issuer. However, the Fund may invest up to 25% of its total assets in
the securities of a single issuer for up to three Business Days. These
limitations do not apply to cash, certain repurchase agreements, U.S. government
securities or securities of other investment companies. In addition, securities
subject to certain unconditional guarantees and securities that are not "First
Tier Securities" as defined by the SEC are subject to different diversification
requirements as described in the Statement of Additional Information.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
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SMALL CAP GROWTH FUND
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation. Any income received is
incidental to this objective.
PRINCIPAL INVESTMENT STRATEGIES
In seeking long-term capital appreciation, the Fund will invest, under normal
market conditions, at least 65% of its total assets in the equity securities of
companies with market capitalizations that are, at the time of purchase, within
the range of the Russell 2000 Small Stock Index ("Russell 2000 Index").
Using fundamental research and quantitative analysis, the investment management
team selects stocks of small companies that it believes have demonstrated above
average sales and earnings growth and return on equity relative to their peers.
In doing so, the investment management team considers factors such as a
company's:
- Financial condition;
- Market share and product leadership;
- Earnings growth relative to relevant competitors;
- Market valuation in comparison to other stocks and the stock's
own historical norms; Price trends; and
- Other investment criteria.
As of August 1, 1999, the approximate market capitalization range of the
companies included in the Russell 2000 Index was between $_________ million and
$____________ billion. The stocks in which the Fund invests may or may not be
included in the Russell 2000 Index.
Although the Fund primarily invests in the stocks of U.S. companies, it may
invest a portion of its assets in the securities of foreign issuers.
Russell does not endorse any stock in the Index. It is not a sponsor of the
Small Cap Growth Fund and is not affiliated with the Fund in any way.
More information on the Fund's investment strategies and techniques is provided
in Appendix A to this Prospectus.
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PRINCIPAL INVESTMENT RISKS
All investments carry some degree of risk which will affect the value of a
Fund's investments, its investment performance and the price of its shares. As a
result, loss of money is a risk of investing in each Fund.
AN INVESTMENT IN A FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. ALTHOUGH THE TAX-EXEMPT MONEY MARKET FUND SEEKS TO PRESERVE THE VALUE OF
YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE TAX-EXEMPT MONEY MARKET FUND.
The following summarizes the principal risks that apply to the Funds and may
result in a loss of your investment.
RISKS THAT APPLY TO BOTH FUNDS
- - MARKET RISK is the risk that the value of the securities in which a
Fund invests may go up or down in response to the prospects of
individual companies and/or general economic conditions. Price changes
may be temporary or last for extended periods.
- - MANAGEMENT RISK is the risk that a strategy used by the investment
management team may fail to produce the intended results.
- - LIQUIDITY RISK is the risk that a Fund will not be able to pay
redemption proceeds within the time periods described in this
prospectus because of unusual market conditions, an unusually high
volume of redemption requests or other reasons.
- - YEAR 2000 RISK is the risk that a Fund's operations or value will be
adversely affected by the "Year 2000 Problem." This risk may be of
greater significance with respect to a Fund's investments in the
securities of foreign issuers. (For more information, please see "Year
2000 Issues" on page __.)
RISKS THAT APPLY PRIMARILY TO THE TAX-EXEMPT MONEY MARKET FUND
- - MONEY MARKET RISK is the risk that the Fund will not be able to
maintain a net asset value per share of $1.00 at all times.
- - INTEREST RATE/MATURITY RISK is the risk that during periods of rising
interest rates, the Fund's yield (and the market value of its
securities) will tend to be lower than prevailing market rates; in
periods of falling interest rates, the Fund's yield (and the market
value of its securities) will tend to be higher.
- - CREDIT (OR DEFAULT) RISK is the risk that an issuer of fixed income
securities held by the Fund may default on its obligation to pay
interest and repay principal. High quality securities are generally
believed to have a relatively low degree of credit risk.
- - PREPAYMENT (OR CALL) RISK is the risk that an issuer will exercise its
right to pay principal on an obligation held by the Fund (such as a
mortgage-backed security) earlier than expected. This may happen during
a period of declining interest rates. Under these circumstances, the
Fund may be unable to recoup all of its initial investment and will
suffer from having to reinvest in lower yielding securities.
- - EXTENSION RISK is the risk that an issuer will exercise its right to
pay principal on an obligation held by the Fund (such as a
mortgage-backed security) later than expected. This may happen during a
period of rising interest rates. Under these circumstances, the value
of the obligation will decrease and the Fund will suffer from the
inability to invest in higher yielding securities.
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- - CREDIT ENHANCEMENT RISK is the risk that changes in credit quality of a
U.S. or foreign bank, insurance company or other financial institution
could cause the Fund's investments in securities backed by letters of
credit, insurance or other credit enhancements issued by such bank or
institution to decline in value.
- - CONCENTRATION RISK is the risk that the Fund may be more sensitive to
an adverse economic, business or political development if it invests
more than 25% of its assets in the municipal instruments of issuers in
the same state, in municipal instruments the interest upon which is
paid solely from revenues of similar projects, or in industrial
development bonds.
- - TAX RISK is the risk that future legislative or administrative changes
or court decisions may materially affect the ability of the Fund to pay
tax-exempt dividends.
RISKS THAT APPLY PRIMARILY TO THE SMALL CAP GROWTH FUND
- - STOCK RISK is the risk that stock prices have historically risen and
fallen in periodic cycles. As of the date of this Prospectus, U.S.
stock markets and certain foreign stock markets were trading at or
close to record high levels. There is no guarantee that such levels
will continue.
- - SMALL CAP STOCK RISK is the risk that stocks of smaller companies may
be subject to more abrupt or erratic market movements than stocks of
larger, more established companies. Small companies may have limited
product lines or financial resources, or may be dependent upon a small
or inexperienced management group. In addition, small cap stocks
typically are traded in lower volume, and their issuers typically are
subject to greater degrees of changes in their earnings and prospects.
More information about the risks of investing in the Funds is provided in
Appendix A to this Prospectus. You should carefully consider the risks discussed
in this section and Appendix A before investing in a Fund.
FUND PERFORMANCE
Since these Funds have less than one calendar year of performance, no
performance information is provided.
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FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds. Please note that the following information does not reflect
any charges which may be imposed by The Northern Trust Company, its affiliates,
correspondent banks and other institutions on their customers. For more
information, please see "Account Policies and Other Information" on page ___.
<TABLE>
<CAPTION>
Tax-Exempt Small Cap
Money Market Growth
Fund Fund
---- ----
<S> <C> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases.................. None None
Deferred Sales Charge (Load).............................. None None
Sales Charge (Load) Imposed on Reinvested
Distributions........................................... None None
Redemption Fees(1)........................................ None None
Exchange Fees............................................. None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fees........................................... 0.60% 1.20%
Distribution (12b-1) Fees(2).............................. 0.00% 0.00%
Other Expenses(3)......................................... 0.31% 0.80%
Total Annual Fund Operating Expenses*..................... 0.91% 2.00%
==== ====
</TABLE>
*As a result of current voluntary fee reductions, waivers and reimbursements,
"Management Fees," "Other Expenses" and "Total Fund Operating Expenses" which
are actually incurred by the Funds are set forth below. The voluntary fee
reductions, waivers and reimbursements may be terminated at any time at the
option of the Investment Adviser. If this occurs, "Management Fees," "Other
Expenses" and "Total Fund Operating Expenses" may increase without shareholder
approval.
<TABLE>
<CAPTION>
Tax-Exempt Small Cap
Money Market Growth
Fund Fund
---- ----
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
From Fund assets)
Management Fees........................................... 0.40% 1.00%
Distribution (12b-1) Fees(2).............................. 0.00% 0.00%
Other Expenses(3)......................................... 0.15% 0.25%
Total Annual Fund Operating Expenses...................... 0.55% 1.25%
==== ====
</TABLE>
- ---------------------------------
(1) A fee of $15.00 may be applicable for each wire redemption.
(2) The Funds do not expect to pay any 12b-1 fees during the current fiscal
year. The maximum distribution fee is 0.25% of each Fund's average net
assets under Northern Funds' Distribution and Service Plan.
(3) These expenses include custodian, transfer agency and administration
expenses as well as other customary Fund expenses. The administrator is
entitled to an administration fee of 0.15%, a portion of which is
currently being waived voluntarily. "Other Expenses" is based on
estimated amounts the Funds expect to pay during the current fiscal
year.
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EXAMPLE
The following Example is intended to help you compare the cost of investing in a
Fund (without fee waivers and expense reimbursements) with the cost of investing
in other mutual funds.
The Example assumes that you invest $10,000 in a Fund for the time periods
indicated (with reinvestment of all dividends and distributions) and then redeem
all of your shares at the end of those periods. The Example also assumes that
your investment has a 5% return each year and that a Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<CAPTION>
One Year 3 Years
-------- -------
<S> <C> <C>
Tax-Exempt Money Market Fund $ 93 $291
Small Cap Growth Fund 205 633
</TABLE>
INVESTMENT ADVISER
Northern Trust, an Illinois state-chartered bank and member of the Federal
Reserve System, serves as investment adviser for the Funds.
Northern Trust is referred to as the "Investment Adviser." The Investment
Adviser is located at 50 S. LaSalle Street, Chicago, IL 60675 and is a
wholly-owned subsidiary of Northern Trust Corporation, a bank holding company.
As of March 31, 1999, Northern Trust Corporation and its subsidiaries had
approximately $27.6 billion in assets, $16.6 billion in deposits and employed
over 8,150 persons.
Northern Trust and its affiliates administered in various capacities (including
as master trustee, investment manager or custodian) approximately $1.3 trillion
of assets as of March 31, 1999, including approximately $242.7 billion of assets
for which Northern Trust and its affiliates had investment management
responsibility.
Under its Advisory Agreement with Northern Funds, the Investment Adviser,
subject to the general supervision of Northern Funds' Board of Trustees, is
responsible for making investment decisions for the Funds for which it serves as
adviser and for placing purchase and sale orders for portfolio securities.
ADVISORY FEES
As compensation for its advisory services and its assumption of related
expenses, the Investment Adviser is entitled to an advisory fee, computed daily
and payable monthly, at annual rates set forth in the table below (expressed as
a percentage of each Fund's respective average daily net assets).
<TABLE>
<CAPTION>
CONTRACTUAL
FUND RATE
- ---- ----
<S> <C>
Tax-Exempt Money Market 0.60%
Small Cap Growth 1.20%
</TABLE>
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The difference, if any, between the contractual advisory fees and the actual
advisory fees paid by the Funds reflects that the Investment Adviser did not
charge the full amount of the advisory fees to which it would have been
entitled. The Investment Adviser may discontinue or modify its voluntary
limitations in the future at its discretion.
FUND MANAGEMENT
The Investment Adviser employs a team approach to the investment management of
the Funds, relying upon investment professionals under the leadership of James
M. Snyder, Chief Investment Officer and Executive Vice President of Northern
Trust.
The management team leader for the Small Cap Growth Fund is David H. Burshtan,
Vice President of Northern Trust. Mr. Burshtan has had such responsibility since
the Fund commenced operations in September 1999. Prior to joining Northern
Trust, Mr. Burshtan was a Portfolio Manager with Scudder Kemper Investments,
Inc. for the Kemper Small Capitalization Equity Fund.
OTHER FUND SERVICES
Northern Trust also serves as transfer agent ("Transfer Agent") and custodian
for each Fund. As Transfer Agent, Northern Trust performs various administrative
servicing functions, and any shareholder inquiries should be directed to it. The
fees that Northern Trust receives for its services in those capacities are
described in the Statement of Additional Information. Sunstone Financial Group,
Inc. acts as administrator for Northern Funds. Northern Funds Distributors, LLC
(an affiliate of Sunstone Financial Group, Inc.) serves as the Funds'
distributor. The fee that Sunstone Financial Group, Inc. receives for its
administrative services is described on page ___ under "Fund Fees and Expenses."
Northern Funds Distributors, LLC does not receive any compensation from Northern
Funds for its distribution services.
It is expected that on or after October 1, 1999, Northern Trust and First Data
Investor Services Group, Inc. ("First Data Investor Services"), a wholly-owned
subsidiary of First Data Corporation, will replace Sunstone Financial Group,
Inc. to serve as the Funds' co-administrators, at substantially the same cost to
the Funds. It is also expected that on or after such date, the Funds will be
distributed by a subsidiary of First Data Investor Services, either through
First Data Investor Services' formation of a newly-formed subsidiary or
acquisition of the Funds' current distributor, Northern Funds Distributors, LLC.
PURCHASING AND SELLING SHARES
PURCHASING SHARES
You may purchase shares directly from Northern Funds or, if you maintain certain
accounts, through Northern Trust and certain other institutions. If you have any
questions or need assistance in opening an investment account or purchasing
shares, call 1-800-595-9111.
OPENING AN ACCOUNT
DIRECTLY FROM THE FUNDS. You may open a shareholder account and purchase shares
directly from the Funds with a minimum initial investment per Fund of $2,500
($500 for an IRA; $250 under the Automatic Investment Plan; and $500 for
employees of Northern Trust and its affiliates). The minimum subsequent
investment is $50 (except for reinvestments of distributions for which there is
no minimum). The Funds reserve the right to waive these minimums.
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For your convenience, there are a number of ways to invest directly in the
Funds:
BY MAIL
- Read this prospectus carefully
- Complete and sign the Purchase Application
- Enclose a check or money order payable to Northern Funds
- If you are investing on behalf of a corporation or other entity,
your Purchase Application must be accompanied by a certified
corporate resolution (or other acceptable evidence of authority).
- Mail your check, corporate resolution (if needed) and completed
Purchase Application to:
Northern Funds
P.O. Box 75986
Chicago, Illinois 60690-6319
- For overnight delivery use the following address:
801 South Canal Street
Chicago, Illinois 60607
Attn: Northern Funds
- For 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
All checks must be payable in U.S. dollars and drawn on a bank located in
the United States. Cash and third party checks are not acceptable.
BY WIRE
- To open a new account:
- Call 1-800-595-9111 for instructions
- Complete a Purchase Application and send it to:
- Northern Funds
P.O. Box 75986
Chicago, IL 60690-6319
- To add to an existing account:
- Have your bank wire Federal funds to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152
(Reference 10 Digit Fund Account No.)
(Reference Shareholder's Name)
BY DIRECT DEPOSIT
- To purchase additional shares:
- Determine if your employer has direct deposit capabilities
through the Automated Clearing House ("ACH")
- Have your employer send payments to:
ABA Routing No. 0710-00152
(Reference 10 Digit Fund Account No.)
(Reference Shareholder's Name)
- The minimum periodic investment for direct deposit is $50
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BY AUTOMATIC INVESTMENT
- To open a new account
- Complete a Purchase Application, including the Automatic
Investment section
- Send it to:
- Northern Funds
P.O. Box 75986
Chicago, IL 60690-6319
- The minimum initial investment is $250; $50 for monthly
minimum additions
- To add to an account:
- Call 1-800-595-9111 to obtain an Automatic Investment
Plan Application
- The minimum for automatic investment additions is $50
If you discontinue participation in the plan, the Funds reserve the right to
redeem the investor's account involuntarily, upon 30 days written notice, if the
account's net asset value is $1,000 or less. Involuntary redemptions will not be
made if the value of shares in an account falls below the minimum amount solely
because of a decline in the Fund's net asset value.
BY DIRECTED REINVESTMENT
You may elect to have your income dividends and capital gains
distributions automatically invested in another Northern Fund.
- Complete the Distribution Options section on the Purchase
Application
- Reinvestments can only be directed to an existing Northern
Funds account (which must meet the minimum investment
requirement)
BY EXCHANGE
You may open a new account or add to an existing account by exchanging
shares of one Fund for shares of any other Fund offered by Northern
Funds. See "Selling Shares - By Exchange."
THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
If you have an account with Northern Trust, you may purchase Northern Funds
shares through Northern Trust. You may also purchase shares through other
institutions (together with Northern Trust, "Service Organizations") that have
entered into agreements with Northern Funds. To determine whether you may
purchase shares through your institution, contact your institution directly or
call 1-800-595-9111. Northern Trust or another Service Organization may impose
charges against your account which will reduce the net return on an investment
in a Fund. These charges may include asset allocation fees, account maintenance
fees, sweep fees, compensating balance requirements or other charges based upon
account transactions, assets or income.
SELLING SHARES
REDEEMING AND EXCHANGING DIRECTLY FROM THE FUNDS
If you purchased Northern Funds directly or, if you purchased 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 redeem all or
part of your shares using one of the methods described below.
BY MAIL
- Send a written request to:
Northern Funds
P.O. Box 75986
Chicago, Illinois 60690-6319
- The redemption request must include:
- The number of shares or the dollar amount to be redeemed
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- The Fund account number
- A signature guarantee is also required if:
- The proceeds are to be sent elsewhere than the address of
record, or
- The redemption amount is greater than $50,000
BY WIRE
If you authorize wire redemptions on your Purchase Application, you can
redeem shares and have 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
- Call the Transfer Agent at 1-800-595-9111 for instructions
- The minimum amount that may be redeemed by this method is $250
BY CHECK
If you authorize the checkwriting privilege on your Purchase Application,
you may redeem shares of the Tax-Exempt Money Market Fund by check in
amounts of $250 or more. If your account is already open:
- Call 1-800-595-9111 for the appropriate form
- The application must be signed by each person whose name appears
on the account and must be accompanied by a signature guarantee
- Dividends are earned until the check clears the Transfer Agent
- Checks you write will not be returned to you, although copies are
available upon request
- A fee of $20 will be charged to the account if there are
insufficient funds to cover the amount of your redemption by
check
- To place a stop payment request, call 1-800-595-9111. A $20 fee
will be charged to the account
- You may not use checks to close an account or redeem shares
purchased within the past fifteen days
BY SYSTEMATIC WITHDRAWAL
If you own shares of a Fund with a minimum value of $10,000, you may elect
to have a fixed sum redeemed at regular intervals and distributed in cash
or reinvested in one or more other Northern Funds.
- Call 1-800-595-9111 for an application form and additional
information
- The minimum amount is $250 per withdrawal
BY EXCHANGE
Northern Funds offers you the ability to exchange shares of one Northern
Fund for another Fund in the Northern Funds family.
- When opening an account, complete the Exchange Privilege section
of the Purchase Application or, if your account is already
opened, send a written request to:
Northern Funds
P.O. Box 75986
Chicago, IL 60690-6319
- Shares being exchanged must have a value of at least $1,000
($2,500 if a new account is being established by the exchange)
- Call 1-800-595-9111 for more information
BY TELEPHONE
If you authorize the telephone privilege on your Purchase Application, you
may redeem Northern Funds shares by phone.
- If your account is already opened, send a written request to:
Northern Funds
P.O. Box 75986
Chicago, IL 60690-6319
- The request must be signed by each owner of the account and must
be accompanied by signature guarantees
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<PAGE> 17
- Call 1-800-595-9111 to use the telephone privilege
- During periods of unusual economic or market activity, telephone
redemptions may be difficult to implement. In such event,
shareholders should follow the procedures outlined above under
"Selling Shares -- By Mail"
REDEEMING AND EXCHANGING THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
If you purchased your Northern Funds shares through an account at Northern Trust
or another Service Organization, you may redeem or exchange your shares
according to the instructions pertaining to that account.
- Although Northern Funds imposes no charges when you redeem, when
shares are purchased through Northern Trust or another Service
Organization, a fee may be charged by those institutions for
providing services in connection with your account
- Contact your account representative at Northern Trust or other
Service Organization for more information about redemptions or
exchanges
ACCOUNT POLICIES AND OTHER INFORMATION
CALCULATING SHARE PRICE. Northern Funds issues shares and redeems shares at net
asset value ("NAV"). The NAV for each Fund is calculated by dividing the value
of the Fund's net assets by the number of the Fund's outstanding shares. The NAV
is calculated on each Business Day as of 3:00 p.m., Chicago time, for the Small
Cap Growth Fund and as of 1:00 p.m., Chicago time, for the Tax-Exempt Money
Market Fund. The NAV used in determining the price of your shares is the one
calculated after your purchase, exchange or redemption order is received and
accepted as described below.
The Tax-Exempt Money Market Fund seeks to maintain an NAV of $1.00 per share by
valuing the obligations held by the Fund at amortized cost in accordance with
SEC regulations. Amortized cost will normally approximate market value.
U.S. and foreign securities held by the Small Cap Growth Fund generally are
valued at their market prices. Shares of an investment company held by the Small
Cap Growth Fund are valued at their NAV. Any securities, including restricted
securities, for which market prices are not readily available are valued at fair
value as determined by the Investment Adviser. Short-term obligations held by
the Fund are valued at their amortized cost which, according to the Investment
Adviser, approximates market value.
The Small Cap Growth Fund may hold foreign securities that trade on weekends or
other days when the Fund does not price its shares. Therefore, the value of such
securities may change on days when shareholders will not be able to purchase or
redeem shares.
TIMING OF TAX-EXEMPT MONEY MARKET FUND PURCHASE REQUESTS. Requests accepted by
the Transfer Agent or other authorized intermediary by 1:00 p.m., Chicago time,
on any Business Day will be executed the same day, at that day's closing share
price provided that either:
- The order is in proper form and payment in immediately available
funds has been received by the Transfer Agent;
- The order is placed by Northern Trust or a Service Organization
and payment in Federal or other immediately available funds is to
be made by the close of the same Business Day; or
- The order is accepted by an authorized intermediary and payment
in Federal or other immediately available funds is to be made by
the close the same Business Day in accordance with procedures
acceptable to Northern Funds.
Orders received by the Transfer Agent that are accompanied by payment in any
form other than immediately available funds will not be executed until payment
is converted to Federal funds, which normally occurs within two Business Days
after receipt.
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<PAGE> 18
TIMING OF SMALL CAP GROWTH FUND PURCHASE REQUESTS. Requests accepted by the
Transfer Agent or other authorized intermediary by 3:00 p.m., Chicago time, on
any Business Day will be executed the same day, at that day's closing share
price provided that either:
- The order is in proper form and accompanied by payment of the
purchase price;
- The order is placed by Northern Trust or a Service Organization
and payment in Federal or other immediately available funds is to
be made on the next Business Day; or
- The order is accepted by an authorized intermediary and payment
is to be made on the next Business Day in accordance with
procedures acceptable to Northern Funds.
Orders received by the Transfer Agent or other authorized intermediary on a
non-Business Day or after 3:00 p.m. on a Business Day will be executed on the
next Business Day, at that day's closing share price, provided that payment is
made as noted above.
SOCIAL SECURITY/TAX IDENTIFICATION NUMBER. Federal regulations require you to
provide a Social Security or other certified taxpayer identification number when
you open or reopen an account. Purchase Applications without such a number or an
indication that a number has been applied for will not be accepted. If you have
applied for a number, the number must be provided and certified within 60 days
of the date of the Purchase Application.
IN-KIND PURCHASES AND REDEMPTIONS. Northern Funds reserves the right to accept
payment for shares in the form of securities that are permissible investments
for a Fund. Northern Funds also reserves the right to pay redemptions by a
distribution "in-kind" of securities (instead of cash) from a Fund. See the
Statement of Additional Information for further information about the terms of
these purchases and redemptions.
MISCELLANEOUS PURCHASE INFORMATION.
- - You will be responsible for all losses and expenses of a Fund in the event
of any failure to make payment according to the procedures outlined in this
Prospectus. Northern Trust may redeem shares from any account it maintains
to protect the Funds and Northern Trust against loss. In addition, a $20
charge will be imposed if a check does not clear.
- - You may initiate transactions between Northern Trust banking and Northern
Funds accounts by using Northern Trust Private Passport. For additional
details, please visit our website www.northerntrust.com/privatepassport/ or
contact your relationship manager.
- - Northern Funds reserves the right to reject any purchase order. The Funds
also reserves the right to change or discontinue any of its purchase
procedures.
- - In certain circumstances, Northern Funds may advance the time by which
purchase orders must be received. See "Early Closings" on page ____.
- - Northern Funds may reproduce this Prospectus in an electronic format which
may be available on the Internet. If you have received this Prospectus in
its electronic format you, or your representative, may contact the Transfer
Agent for a free paper copy of this Prospectus by writing to the Northern
Funds Center at P.O. Box 75986, Chicago, IL 60690-6319, calling
1-800-595-9111 or sending an e-mail to: northernfunds@ execpc.com.
TIMING OF REDEMPTION AND EXCHANGE REQUESTS. Redemption and exchange requests
received in good order by the Transfer Agent or other authorized intermediary on
a Business Day by 3:00 p.m., Chicago time, with respect to the Small Cap Growth
Fund, or by 1:00 p.m., Chicago time, with respect to the Tax-Exempt Money Market
Fund, will be executed on the same day. The redemption or exchange will be
effected at that day's closing share price.
Good order means that the request must include the following information:
- The account number and Fund name
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<PAGE> 19
- The amount of the transaction, in dollar amount or number of
shares
- The signature of all account owners exactly as they are
registered on the account (except for telephone and wire
redemptions)
- Required signature guarantees, if applicable
- 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 more information about documentation that
may be required of these entities
In certain circumstances, Northern Funds may advance the time by which
redemption and exchange orders must be received. See "Early Closings" on page
___.
PAYMENT OF TAX-EXEMPT MONEY MARKET FUND REDEMPTION PROCEEDS. If a Tax-Exempt
Money Market Fund redemption request is received by the Transfer Agent in good
order by 1:00 p.m., Chicago time, on a Business Day, the proceeds will normally
be sent on the next Business Day, unless payment in immediately available funds
on the same Business Day is requested. Proceeds for redemption orders received
on a non-Business Day will normally be sent on the second Business Day after
receipt in good order. However, if any portion of the shares to be redeemed
represents an investment made by check, the Fund may delay the payment of the
redemption proceeds until the check has cleared and collected. This may take up
to fifteen days from the purchase date. Northern Funds reserves the right to
defer crediting, sending or wiring redemption proceeds for up to seven days (or
such longer period permitted by the SEC) after receiving the redemption order
if, in its judgment, an earlier payment could adversely affect a Fund.
PAYMENT OF SMALL CAP GROWTH FUND REDEMPTION PROCEEDS. The Small Cap Growth Fund
will make payment for redeemed shares typically within one or two Business Days,
but no later than the seventh day after a redemption request is received in good
order by the Transfer Agent or an authorized intermediary (or such longer period
permitted by 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 check has cleared and collected. This may take up
to fifteen days from the purchase date.
MISCELLANEOUS REDEMPTION INFORMATION. All redemption proceeds will be sent by
check unless the Transfer Agent is directed otherwise. Redemption proceeds may
also be wired. A redemption request may not be processed if a shareholder has
failed to submit a completed and properly executed Purchase Application.
- - Northern Funds reserves the right, to redeem shares held by any shareholder
who provides incorrect or incomplete account information or when such
involuntary redemptions are necessary to avoid adverse consequences to the
Fund and its shareholders.
- - Northern Funds may require any information reasonably necessary to ensure
that a redemption has been duly authorized.
- - Northern Funds reserves the right, on 60 days' written notice, to redeem
the shares held in any account, if at the time of redemption, the net asset
value of the remaining shares in the account falls below $1,000.
Involuntary redemptions will not be made if the value of shares in an
account falls below the minimum solely because of a decline in a Fund's net
asset value.
- - You may initiate transactions between Northern Trust banking and Northern
Funds accounts by using Northern Trust Private Passport. For additional
details, please visit our website at www.northerntrust.com/
privatepassport/ or contact your relationship manager.
- - Northern Funds reserves the right to change or discontinue any of its
redemption procedures.
EXCHANGE PRIVILEGES. You may exchange shares of one Northern Fund for another
only if the registration of both accounts is identical. An exchange is a
redemption of shares of one Fund and the purchase of shares of another
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<PAGE> 20
Fund. It is considered a taxable event and may result in a gain or loss.
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. Northern Trust may also modify or terminate the exchange privilege with
respect to any or all shareholders, and may reject any exchange request.
Exchanges are only available in states where an exchange can legally be made.
Before making an exchange you should read the prospectus for the shares you are
acquiring.
TELEPHONE TRANSACTIONS. For your protection, telephone requests are recorded in
order to verify their accuracy. In addition, the Transfer Agent has adopted
procedures in an effort to establish reasonable safeguards against fraudulent
telephone transactions. If reasonable measures are taken to verify that
telephone instructions are genuine, Northern Funds and its service providers
will not be responsible for any loss resulting from fraudulent or unauthorized
instructions received over the telephone. In these circumstances, shareholders
will bear the risk of loss. During periods of unusual market activity, you may
have trouble placing a request by telephone. In this event, consider sending
your request in writing.
The proceeds of redemption orders received by telephone will be sent by check,
wire or transfer according to proper instructions. All checks will be made
payable to the shareholder of record and mailed only to the shareholder's
address of record.
Northern Funds reserves the right to refuse a telephone redemption.
MAKING CHANGES TO YOUR ACCOUNT INFORMATION. You may make changes to wiring
instructions, address of record or other account information only in writing.
These instructions must be accompanied by a signature guarantee from an
institution participating in the Stock Transfer Agency Medallion Program
("STAMP"), or other acceptable evidence of authority. Additional requirements
may be imposed. In accordance with SEC regulations, the Funds and Transfer Agent
may charge a shareholder reasonable costs in locating a shareholder's current
address.
SIGNATURE GUARANTEES. If a signature guarantee is required, it must be from an
institution participating in STAMP, or other acceptable evidence of authority
must be provided. Additional requirements may be imposed by Northern Funds. In
addition to the situations described in this Prospectus, Northern Funds may
require signature guarantees in other circumstances based on the amount of a
redemption request or other factors.
BUSINESS DAY. A "Business Day" with respect to the Small Cap Growth Fund is each
Monday through Friday when the New York Stock Exchange (the "Exchange") is open
for business. A "Business Day" with respect to the Tax-Exempt Money Market Fund
is each Monday through Friday when Northern Trust or the New York Stock Exchange
is open for business. In 1999, a "Business Day" does not include a holiday
observed by Northern Trust and the Exchange. In 1999 these holidays are: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving, Christmas Day and, for the Non-Money
Market Funds, Good Friday.
EARLY CLOSINGS. Northern Funds reserve the right to cease, or to advance the
time for, accepting purchase, redemption or exchange orders for same Business
Day credit when Northern Trust or the Exchange closes early as a result of
unusual weather or other conditions. They also reserve this right when The Bond
Market Association recommends that securities markets close or close early.
AUTHORIZED INTERMEDIARIES. Northern Funds may authorize certain financial
intermediaries (including banks, trust companies, brokers and investment
advisers), which provide recordkeeping, reporting and processing services, to
accept purchase, redemption and exchange orders from their customers on behalf
of the Funds. They may also designate other intermediaries to accept such
orders, if approved by the Funds. Authorized intermediaries are responsible for
transmitting orders and delivering funds on a timely basis. A Fund will be
deemed to have received an order when the order is accepted by the authorized
intermediary on a Business Day, and the order will be priced at the Fund's per
share NAV next determined.
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<PAGE> 21
SERVICE ORGANIZATIONS. Northern Funds may enter into agreements with Service
Organizations such as banks, corporations, broker/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 may include:
- - support services such as assisting investors in processing purchase,
exchange and redemption requests;
- - processing dividend and distribution payments from the Funds;
- - providing information to customers showing their positions in the Funds;
and
- - providing subaccounting with respect to Fund shares beneficially owned by
customers or the information necessary for subaccounting.
In addition, Service Organizations may provide assistance, such as the
forwarding of sales literature and advertising to their customers, in connection
with the distribution of Fund shares.
For their services, Service Organizations may receive fees from a Fund at annual
rates of up to 0.25% of the average daily net asset value of the shares covered
by their agreements. Because these fees are paid out of the Funds' assets on an
on-going basis, they will increase the cost of your investment in the Funds. In
addition, Northern Trust may provide compensation to certain dealers and other
financial intermediaries who provide services to their customers who invest in
Northern Funds or whose customers purchase significant amounts of a Fund's
shares. The amount of such compensation may be made on a one-time and/or
periodic basis, and may represent all or a portion of the annual fees earned by
Northern Trust as Investment Adviser (after adjustments). This additional
compensation will be paid by Northern Trust or its affiliates and will not
represent an additional expense to Northern Funds or its shareholders.
Service Organizations may also charge their customers fees for providing
administrative services in connection with investments in a Fund. Investors
should contact their Service Organization with respect to these fees and the
particular Service Organization's procedures for purchasing and redeeming
shares. It is the responsibility of Service Organizations to transmit purchase
and redemption orders and record those orders on a timely basis in accordance
with their agreements with their customers.
Conflict-of-interest restrictions may apply to the receipt of compensation paid
by Northern Funds in connection with the investment of fiduciary funds in Fund
shares. 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.
State securities laws regarding the registration of dealers may differ from
Federal law. As a result, Service Organizations investing in the Funds on behalf
of their customers may be required to register as dealers.
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.
SHAREHOLDER REPORTS. Shareholders of record will be provided each year with a
semi-annual report showing portfolio investments and other information as of
September 30, and, after the close of the Funds' fiscal year March 31, with an
annual report containing audited financial statements. To eliminate unnecessary
duplication, only one copy of shareholder reports will be sent to shareholders
with the same mailing address. Shareholders who desire a duplicate copy of
shareholder reports to be mailed to their residence should call 1-800-595-9111
or send an email to: [email protected].
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<PAGE> 22
DIVIDENDS AND DISTRIBUTIONS
Dividends and capital gain distributions of each Fund are automatically
reinvested in additional shares of the same Fund without any sales charge or
additional purchase price amount.
You may, however, elect to have dividends or capital gain distributions (or
both) paid in cash or reinvested in shares of another Northern Fund at their net
asset value per share. If you would like to receive dividends or distributions
in cash or have them reinvested in another Northern Fund, you must notify the
Transfer Agent in writing. This election will become effective for distributions
paid two days after its receipt by the Transfer Agent. Dividends and
distributions may only be reinvested in a Northern Fund in which you maintain an
account.
TAX-EXEMPT MONEY MARKET FUND. The Tax-Exempt Money Market Fund's net investment
income is declared as a dividend on each Business Day and paid monthly.
Dividends will also be paid promptly upon a total redemption of shares in an
account not subject to a standing order for the purchase of additional shares.
Net investment income includes interest accrued on the Fund's assets less the
Fund's estimated expenses. Net realized short-term capital gains may be
distributed from time to time during Northern Funds' fiscal year (but not less
frequently than annually). The Tax-Exempt Money Market Fund does not expect to
realize net long-term capital gains. Money market shares begin earning dividends
on the day an order is executed if payment in immediately available funds is
received by Northern Funds by the time designated under "Purchasing and Selling
Shares." Otherwise, shares begin earning dividends on the day payment is
received.
SMALL CAP GROWTH FUND. The Small Cap Growth Fund's net investment income is
declared and paid as a dividend annually. Net realized capital gains may be
distributed from time to time during Northern Funds' fiscal year (but not less
frequently than annually).
TAX CONSIDERATIONS
Each Fund contemplates declaring as dividends each year all or substantially all
of its taxable income, including its net capital gain (excess of long-term
capital gain over short-term capital loss). Distributions attributable to the
net capital gain of a Fund will be taxable to you as long-term capital gain,
regardless of how long you have held your shares. Other Fund distributions will
generally be taxable as ordinary income, except as discussed below. You will be
subject to income tax on Fund distributions regardless of whether they are paid
in cash or reinvested in additional shares. You will be notified annually of the
tax status of distributions to you.
In the case of the Small Cap Growth Fund, you should note that if you purchase
shares just before a distribution, the purchase price will reflect the amount of
the upcoming distribution, but you will be taxed on the entire amount of the
distribution received, even though, as an economic matter, the distribution
simply constitutes a return of capital. This is known as "buying into a
dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.
Any loss realized on 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 were
received on the shares.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
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<PAGE> 23
If you (a) have provided either an incorrect Social Security Number or Taxpayer
Identification Number or no number at all, (b) are subject to withholding by the
Internal Revenue Service for prior failure to properly include on your return
payments of interest or dividends, or (c) have failed to certify to Northern
Funds, when required to do so, that you are not subject to backup withholding or
are an "exempt recipient," then 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 you.
There are certain tax requirements that the Funds must follow in order to avoid
Federal taxation. In their efforts to adhere to these requirements, the Funds
may have to limit their investment activity in some types of instruments.
The Tax-Exempt Money Market Fund. The Tax-Exempt Money Market Fund expects to
- --------------------------------
pay "exempt-interest dividends" that are generally exempt from regular Federal
income tax. However, a portion of the exempt-interest dividends paid by the
Tax-Exempt Money Market Fund may be an item of tax preference for purposes of
determining Federal alternative minimum tax liability. Exempt-interest dividends
will also be considered along with other adjusted gross income in determining
whether any Social Security or railroad retirement payments received by you are
subject to Federal income taxes.
Generally speaking, you may be subject to state and local taxes on Fund
distributions and redemptions. State income taxes may not apply, however, to the
portions of each Fund's distributions, if any, that are attributable to interest
on certain types of Federal securities or interest on securities issued by the
particular state or municipalities within the state.
In all cases, distributions, if any, derived from net long-term capital gains
will generally be taxable to you as long-term capital gains, and any dividends
derived from short-term capital gains and taxable interest income will be
taxable to you as ordinary income.
If you receive an exempt-interest dividend with respect to any share and the
share is held for six months or less, any loss on the sale or exchange of the
share will be disallowed to the extent of the dividend amount. Interest on
indebtedness incurred by a shareholder to purchase or carry shares of the
Tax-Exempt Money Market Fund generally will not be deductible for federal income
tax purposes.
Consult Your Tax Professional. Your investment in the Funds could have
- -----------------------------
additional tax consequences. You should consult your tax professional for
information regarding all tax consequences applicable to your investments in the
Funds. More tax information is provided in the Statement of Additional
Information. This short summary is not intended as a substitute for careful tax
planning.
TAX TABLE
You may find it particularly useful to compare the tax-free yields of
the Tax-Exempt Money Market Fund to the equivalent yields from taxable
investments. For an investor in a low tax bracket, it may not be helpful to
invest in a tax-exempt investment if a higher after-tax yield can be achieved
from a taxable instrument.
The table below illustrates the difference between hypothetical
tax-free yields and tax-equivalent yields for different tax brackets. You should
be aware, however, that tax brackets can change over time and that your tax
adviser should be consulted for specific yield calculations.
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
FEDERAL
MARGINAL TAX-EXEMPT YIELDS
TAXABLE INCOME TAX RATE 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00%
- ---------------------------------------------------------------------------------------------------------------------------------
SINGLE RETURN JOINT RETURN EQUIVALENT TAXABLE YIELDS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $ 25,750 $ 0 - $ 43,050 15% 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
- ---------------------------------------------------------------------------------------------------------------------------------
$ 25,751 - $ 62,450 $ 43,051 - $104,050 28% 2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11%
- ---------------------------------------------------------------------------------------------------------------------------------
$ 62,451 - $130,250 $104,051 - $158,550 31% 2.90% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59%
- ---------------------------------------------------------------------------------------------------------------------------------
$130,251 - $283,150 $158,551 - $283,150 36% 3.13% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50%
- ---------------------------------------------------------------------------------------------------------------------------------
Over $283,151 Over $283,151 39.6% 3.31% 4.97% 6.62% 8.28% 9.93% 11.59% 13.25%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax-exempt yields used here are hypothetical and no assurance can be made
that the Funds will attain any particular yield. A Fund's yield fluctuates as
market conditions change. The tax brackets and related yield calculations are
based on the 1999 Federal marginal tax rates indicated in the table. The table
does not reflect the phase out of personal exemptions and itemized deductions
which will apply to certain higher income taxpayers.
YEAR 2000 ISSUES
Like every other business dependent upon computerized information processing,
Northern Trust Corporation must deal with "Year 2000" issues.
Many computer systems use two digits rather than four to identify the year.
Unless adapted, these systems may not be able to correctly distinguish the Year
2000 from the Year 1900. As the Year 2000 approaches, many systems may be unable
to accurately process certain date-based information, which could cause a
variety of operational problems for businesses. This could have a negative
effect on the companies in which the Funds invest, thus hurting the Funds'
investment returns.
Northern Trust Corporation has implemented steps to prepare its critical
computer systems and processes for Year 2000 processing. It has established a
dedicated Year 2000 Project Team whose members have significant systems
development and maintenance experience. Northern Trust Corporation's Year 2000
project includes a comprehensive testing plan of its critical systems. Northern
Trust Corporation has advised Northern Funds that it has substantially completed
work on its critical systems and that testing with outside parties will be
conducted during 1999.
Northern Trust Corporation also will have a program to monitor and assess the
efforts of other parties, such as other service providers to the Fund. However,
it cannot control the success of those other parties' efforts. Contingency plans
are being established to provide Northern Trust Corporation with alternatives in
case these entities experience significant Year 2000 difficulties that impact
Northern Trust Corporation.
Furthermore, even if the actions taken by Northern Trust Corporation are
successful, the normal operations of the Funds may, in any event, be disrupted
significantly by the failure of communications and public utility companies,
governmental entities, financial processors or others to perform their services
as a result of Year 2000 problems.
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APPENDIX A
ADDITIONAL INFORMATION ON FUND RISKS,
SECURITIES AND TECHNIQUES
This Appendix takes a closer look at some of the risks that are presented by the
types of securities in which the Funds may invest. It also explores the various
investment techniques that the investment management team may, but is not
required to, use. The Funds may invest in other securities and are subject to
further restrictions and risks which are described in the Statement of
Additional Information. You should note that a Fund's investment objective may
be changed by Northern Funds' Board of Trustees without shareholder approval.
Shareholders will, however, be notified of any changes. Any such change may
result in a Fund having an investment objective different from the objective
which the shareholder considered appropriate at the time of investment in the
Fund.
SPECIAL RISKS AND OTHER CONSIDERATIONS
DERIVATIVE RISK. The Funds may purchase certain "derivative" instruments. A
derivative is a financial instrument whose value is derived from---or based
upon---the performance of underlying assets, interest or currency exchange rates
or indices. Many types of instruments representing a wide range of potential
risks and rewards are derivatives, including futures contracts, options, equity
swaps, structured securities, forward currency contracts and structured debt
obligations (including collateralized mortgage obligations and other types of
asset-backed securities, "stripped" securities and various floating rate
instruments.
INVESTMENT STRATEGY. A Fund will invest in derivatives only if the
potential risks and rewards are consistent with the Fund's objective,
strategies and overall risk profile. A Fund may use derivatives for
hedging purposes to offset a potential loss in one position by
establishing an interest in an opposite position. The Small Cap Growth
Fund may also use derivatives for speculative purposes to invest for
potential income or capital gain.
SPECIAL RISKS. Engaging in derivative transactions involves special
risks, including (a) market risk that the Fund's derivatives position
will lose value; (b) credit risk that the counterparty to the
transaction will default; (c) leveraging risk that the value of the
derivative instrument will decline more than the value of the assets on
which it is based; (d) illiquidity risk that a Fund will be unable to
sell its position because of lack of market depth or disruption; (e)
pricing risk that the value of a derivative instrument will be
difficult to determine; and (f) operations risk that loss will occur as
a result of inadequate systems or human error. Many types of
derivatives have been recently developed and have not been tested over
complete market cycles. For these reasons, a Fund may suffer a loss
whether or not the analysis of the investment management team is
accurate.
PORTFOLIO TURNOVER RISK. The investment management team will not consider the
Fund turnover rate a limiting factor in making investment decisions for a Fund.
A high portfolio turnover rate (100% or more) involves correspondingly greater
expenses which must be borne by a Fund and its shareholders. It may also result
in higher short-term capital gains that are taxable to shareholders. Northern
Funds expects that the annual turnover rate of the Small Cap Growth Fund will
generally not exceed 400%.
SMALL CAP RISKS. Investments in small capitalization companies involve greater
risk and portfolio price volatility than investments in larger capitalization
stocks. Among the reasons for the greater price volatility of these investments
are the less certain growth prospects of smaller firms and the lower degree of
liquidity in the markets for such securities. Small capitalization companies may
be thinly traded and may have to be sold at a discount from current market
prices or in small lots over an extended period of time. Because of the lack of
sufficient market liquidity, a Fund may incur losses because it will be required
to effect sales at a disadvantageous time and only then at a substantial drip in
price. Small capitalization companies include "unseasoned" issuers that do not
have an established financial history; often have limited product lines, markets
or financial resources; may depend on or use a few key personnel for management;
and may be susceptible to losses and risks of bankruptcy. Transaction costs for
these investments are often higher than those of larger capitalization
companies. Investments in small
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capitalization companies may be more difficult to price precisely than other
types of securities because of their characteristics and lower trading volumes.
TEMPORARY INVESTMENT RISK. Short-term obligations refer to U.S. government
securities, high-quality money market instruments (including commercial paper
and obligations of foreign and domestic banks such as certificates of deposit,
bank and deposit notes, bankers' acceptances and fixed time deposits) and
repurchase agreements with maturities of 13 months or less. Generally, these
obligations are purchased to provide stability and liquidity to a Fund.
INVESTMENT STRATEGY. The Small Cap Growth Fund may invest all or any
portion of its assets in short-term obligations pending investment, to
meet anticipated redemption requests or as a temporary defensive
measure in response to adverse market or economic conditions.
SPECIAL RISKS. The Small Cap Growth Fund may not achieve its investment
objective when its assets are invested in short-term obligations.
ADDITIONAL DESCRIPTION OF SECURITIES AND COMMON INVESTMENT TECHNIQUES.
ASSET-BACKED SECURITIES. Asset-backed securities are sponsored by entities such
as government agencies, banks, financial companies and commercial or industrial
companies. They represent interests in pools of mortgages or other cash-flow
producing assets such as automobile loans, credit card receivables and other
financial assets. In effect, these securities "pass through" the monthly
payments that individual borrowers make on their mortgages or other assets net
of any fees paid to the issuers. Examples of these include guaranteed mortgage
pass-through certificates, collateralized mortgage obligations ("CMOs") and real
estate mortgage investment conduits ("REMICs").
INVESTMENT STRATEGY. The Funds may purchase various types of
asset-backed securities. The Tax-Exempt Money Market Fund will invest
in asset-backed securities that are "Eligible Securities" for money
market funds as defined by the SEC. The Small Cap Growth Fund will
invest in asset-backed securities rated investment grade (rated BBB or
better by S&P, Duff or Fitch, or Baa or better by Moody's) at the time
of purchase. The Small Cap Growth Fund may also invest in unrated
mortgage-backed securities which the Investment Adviser believes are of
comparable quality.
SPECIAL RISKS. In addition to credit and market risk, asset-backed
securities involve prepayment risk because the underlying assets
(loans) may be prepaid at any time. The value of these securities may
also change because of actual or perceived changes in the
creditworthiness of the originator, the servicing agent, the financial
institution providing the credit support or the counterparty. 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. In addition, non-mortgage asset-backed securities involve
certain risks 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. Automobile receivables are
subject to the risk that the trustee for the holders of the automobile
receivables may not have an effective security interest in all of the
obligations backing the receivables.
BORROWINGS AND REVERSE REPURCHASE AGREEMENTS. The Funds can borrow money from
banks and enter into reverse repurchase agreements with banks and other
financial institutions. Reverse repurchase agreements involve the sale of
securities held by a Fund subject to the Fund's agreement to repurchase them at
a mutually agreed upon date and price (including interest).
INVESTMENT STRATEGY. Each Fund may borrow in amounts not exceeding
one-third of its total assets (including the amount borrowed). These
transactions may be entered into as a temporary measure for
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emergency purposes or to meet redemption requests. The Small Cap Growth
Fund may utilize reverse repurchase agreements when the investment
management team expects that the interest income to be earned from the
investment of the transaction proceeds will be greater than the related
interest expense. A Fund's reverse repurchase agreements, together with
any other borrowings, will not exceed, in the aggregate, 33 1/3% of the
value of its total assets. In addition, whenever borrowings exceed 5%
of the Fund's total assets, the Fund will not make any investments.
SPECIAL RISKS. Borrowings and reverse repurchase agreements involve
leveraging. If the securities held by a Fund decline in value while
these transactions are outstanding, the net asset value of a Fund's
outstanding shares will decline in value by proportionately more than
the decline in value of the securities. In addition, reverse repurchase
agreements involve the risks that the interest income earned by a Fund
(from the investment of the proceeds) will be less than the interest
expense of the transaction, that the market value of the securities
sold by a Fund will decline below the price the Fund is obligated to
pay to repurchase the securities, and that the securities may not be
returned to the Fund.
CONVERTIBLE SECURITIES. A convertible security is a bond or preferred stock that
may be converted (exchanged) into the common stock of the issuing company within
a specified time period for a specified number of shares. They offer the Small
Cap Growth Fund a way to participate in 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.
INVESTMENT STRATEGY. The Small Cap Growth Fund may acquire convertible
securities. These securities are subject to the same rating
requirements as fixed income securities held by the Fund.
CUSTODIAL RECEIPTS FOR TREASURY SECURITIES. Custodial receipts are
participations in trusts that hold U.S. Treasury securities and are sold under
names such as TIGRs and CATS. Like other stripped obligations, they entitle the
holder to future interest or principal payments on the U.S. Treasury securities.
INVESTMENT STRATEGY. To the extent consistent with their respective
investment objectives, the Funds may invest a portion of their total
assets in custodial receipts.
SPECIAL RISKS. Like other stripped obligations, custodial receipts may
be subject to greater price volatility than ordinary debt obligations
because of the way in which their principal and interest are returned
to investors.
EQUITY SWAPS. Equity swaps allow the parties to the swap agreement to exchange
components of return on one equity investment (e.g., a basket of equity
securities or an index) for a component of return on another non-equity or
equity investment, including an exchange of differential rates of return.
INVESTMENT STRATEGY. The Small Cap Growth Fund may invest in equity
swaps. Equity swaps may be used to invest in a market without owning or
taking physical custody of securities in circumstances where direct
investment may be restricted for legal reasons or is otherwise
impractical. Equity swaps may also be used for other purposes, such as
hedging or seeking to increase total return.
SPECIAL RISKS. Equity swaps are derivative instruments and their values
can be very volatile. To the extent that the investment management team
does not accurately analyze and predict the potential relative
fluctuation on the components swapped with the other party, a Fund may
suffer a loss. The value of some components of an equity swap (such as
the dividends on a common stock) may also be sensitive to changes in
interest rates. Furthermore, during the period a swap is outstanding,
the Fund may suffer a loss if the counterparty defaults.
FIXED INCOME SECURITIES. Fixed income securities include bonds, debentures and
mortgage and other asset-related securities.
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INVESTMENT STRATEGY. Subject to its investment policy to invest, under
normal market conditions, at least 65% of its total assets in equity
securities, the Small Cap Growth Fund may acquire fixed income
securities. The quality of these securities will normally be investment
grade. The Fund may, however, invest up to 15% of total assets in
non-investment grade securities, including convertible securities, when
the investment management team determines that such securities are
desirable in light of the Fund's investment objectives and portfolio
mix. Such securities may be purchased as long as they are rated B or
higher at the time of purchase by at least one major rating agency (or,
if unrated, they are of comparable quality as determined by Northern
Trust).
SPECIAL RISKS. Non-investment grade securities (sometimes referred to
as "junk bonds") are considered predominantly speculative by
traditional investment standards. The market value of these low-rated
securities tends to be more sensitive to individual corporate
developments and changes in interest rates and economic conditions than
higher-rated securities. In addition, they generally present a higher
degree of credit risk. Issuers of low-rated securities are often highly
leveraged, so their ability to repay their debt during an economic
downturn or periods of rising interest rates may be impaired. The risk
of loss due to default by these issuers is also greater because
low-rated securities generally are unsecured and are often subordinated
to the rights of other creditors of the issuers of such securities.
Investment by the Fund in defaulted securities poses additional risk of
loss should nonpayment of principal and interest continue in respect of
such securities. Even if such securities are held to maturity, recovery
by the Fund of its initial investment and any anticipated income or
appreciation will be uncertain. The Fund may also incur additional
expenses in seeking recovery on defaulted securities.
The secondary market for lower quality securities is concentrated in
relatively few market markers and is dominated by institutional
investors. Accordingly, the secondary market for such securities is not
as liquid as, and is more volatile than, the secondary market for
higher quality securities. In addition, market trading volume for these
securities is generally lower and the secondary market for such
securities could contract under adverse market or economic conditions,
independent of any specific adverse changes in the condition of a
particular issuer. These factors may have an adverse effect on the
market price and the Fund's ability to dispose of particular portfolio
investments. A less developed secondary market may also make it more
difficult for the Fund to obtain precise valuations of the high yield
securities in its portfolio.
Investments in lower quality securities, whether rated or unrated, will
be more dependent on Northern Trust's credit analysis than would be the
case with investments in higher quality securities.
FOREIGN SECURITIES. Foreign securities include direct investments in non-U.S.
dollar-denominated securities traded outside of the United States and
dollar-denominated securities of foreign issuers. Foreign securities also
include indirect investments such as American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs").
ADRs are U.S. dollar-denominated receipts representing shares of foreign-based
corporations. ADRs are issued by U.S. banks or trust companies, and entitle the
holder to all dividends and capital gains that are paid out on the underlying
foreign shares. EDRs and GDRs are receipts issued by non-U.S. financial
institutions that often trade on foreign exchanges. They represent ownership in
an underlying foreign or U.S. security and are generally denominated in a
foreign currency.
INVESTMENT STRATEGY. The Small Cap Growth Fund may invest up to 25% of
its total assets in foreign securities.
SPECIAL RISKS. Foreign securities involve special risks and costs.
Foreign securities, and in particular foreign debt securities, are
sensitive to changes in interest rates. In addition, investment in the
securities of foreign governments involves the risk that foreign
governments may default on their obligations or may otherwise not
respect the integrity of their debt. The performance of investments in
securities denominated in a foreign currency will also depend, in part,
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 results in an increase in value of
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a foreign currency-denominated security in terms of U.S. dollars. A
decline in the value of the foreign currency relative to the U.S.
dollar generally results in a decrease in value of a foreign
currency-denominated security.
Investment in foreign securities may involve 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 may 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 freezes on the
convertibility of currency, or the adoption of other governmental
restrictions might adversely affect an investment in foreign
securities. Additionally, foreign banks and foreign branches of
domestic banks may be subject to less stringent reserve requirements,
and to different accounting, auditing and recordkeeping requirements.
Additional risks are involved when investing in countries with emerging
economies or securities markets. These countries are located in the
Asia/Pacific region, Eastern Europe, Latin and South America and
Africa. In general, the securities markets of these countries are less
liquid, are subject to greater price volatility, have smaller market
capitalizations and have problems with securities registration and
custody. In addition, because the securities settlement procedures are
less developed in these countries, a Fund may be required to deliver
securities receiving payment and may also be unable to complete
transactions during market disruptions. As a result of these and other
risks, investments in these countries generally present a greater risk
of loss to the Fund.
While the Small Cap Growth Fund's investments may, as permitted, be
denominated in foreign currencies, the portfolio securities and other
assets held by the Fund are valued in U.S. dollars. Currency exchange
rates may fluctuate significantly over short periods of time causing
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 is invested in foreign securities while also
maintaining currency positions, it may be exposed to greater combined
risk. The Fund's net currency positions may expose it to risks
independent of its securities positions.
FORWARD CURRENCY EXCHANGE CONTRACTS. A forward currency exchange contract is an
obligation to exchange one currency for another on a future date at a specified
exchange rate.
INVESTMENT STRATEGY. The Small Cap Growth Fund may enter into forward
currency exchange contracts for hedging purposes and to help reduce the
risks and volatility caused by changes in foreign currency exchange
rates. Foreign currency exchange contracts will be used at the
discretion of the investment management team, and the Fund is not
required to hedge its foreign currency positions.
SPECIAL RISKS. Forward foreign currency contracts are privately
negotiated transactions, and can have substantial price volatility. As
a result, they offer less protection against default by the other party
than is available for instruments traded on an exchange. When used for
hedging purposes, they tend to limit any potential gain that may be
realized if the value of the Fund's foreign holdings increases because
of currency fluctuations. When used for speculative purposes, forward
currency exchange contracts may result in additional losses that would
not otherwise be incurred.
FUTURES CONTRACTS AND RELATED OPTIONS. A futures contract is a type of
derivative instrument that obligates the holder to buy or sell an asset in the
future at an agreed upon price. For example, a futures contract may obligate a
Fund, at maturity, to take or make delivery of certain domestic or foreign
securities, the cash value of a securities index or a stated quantity of a
foreign currency. When a Fund purchases an option on a futures contract, it has
the right to assume a position as a purchaser or seller of a futures contract at
a specified exercise price during the option
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period. When a Fund sells an option on a futures contract, it becomes obligated
to purchase or sell a futures contract if the option is exercised.
INVESTMENT STRATEGY. To the extent consistent with its investment
objective, the Small Cap Growth Fund may invest in futures contracts
and options on futures contacts on domestic or foreign exchanges or
boards of trade. They may be used for hedging purposes, to increase
total return or to maintain liquidity to meet potential shareholder
redemptions, invest cash balances or dividends or minimize trading
costs.
The value of the Fund's futures contacts may equal up to 100% of its
total assets. However, the Fund will not purchase or sell a futures
contract unless, after the transaction, the sum of the aggregate amount
of margin deposits on its existing futures positions and the amount of
premiums paid for related options used for non-hedging purposes is 5%
or less of its total assets.
SPECIAL RISKS. Futures contracts and options present the following
risks: imperfect correlation between the change in market value of a
Fund's securities and the price of futures contracts and options; the
possible inability to close a futures contract when desired; losses due
to unanticipated market movements which are potentially unlimited; and
the possible inability of the investment management team to correctly
predict the direction of securities prices, interest rates, currency
exchange rates and other economic factors. Foreign exchanges or boards
of trade generally do not offer the same protections as U.S. exchanges.
ILLIQUID OR RESTRICTED SECURITIES. Illiquid securities include repurchase
agreements and time deposits with notice/termination dates of more than seven
days, certain variable amount master demand notes that cannot be called within
seven days, certain insurance funding agreements (see below), certain unlisted
over-the-counter options and other securities that are traded in the U.S. but
are subject to trading restrictions because they are not registered under the
Securities Act of 1933, as amended (the "1933 Act").
INVESTMENT STRATEGY. The Tax-Exempt Money Market Fund may invest up to
10%, and the Small Cap Growth Fund may invest up to 15%, of their
respective net assets in securities that are illiquid. If otherwise
consistent with their investment objectives and policies, the Funds may
purchase commercial paper issued pursuant to Section 4(2) of the 1933
Act and domestically traded 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 ("Rule 144A Securities").
These securities will not be considered illiquid so long as the
Investment Adviser determines, under guidelines approved by Northern
Funds' Board of Trustees, that an adequate trading market exists.
SPECIAL RISKS. Because illiquid and restricted securities may be
difficult to sell at an acceptable price, they may be subject to
greater volatility and may result in a loss to a Fund. The practice of
investing in Rule 144A Securities could increase the level of a Fund's
illiquidity during any period that qualified institutional buyers
become uninterested in purchasing these securities.
INSURANCE FUNDING AGREEMENTS. An insurance funding agreement ("IFA") is an
agreement that requires a Fund to make cash contributions to a deposit fund of
an insurance company's general account. The insurance company then credits
interest to the Fund for a set time period.
INVESTMENT STRATEGY. The Small Cap Growth Fund may invest in IFAs
issued by insurance companies that meet quality and credit standards
established by the Investment Adviser.
SPECIAL RISKS. IFAs are not insured by a government agency--they are
backed only by the insurance company that issues them. As a result,
they are subject to default risk. In addition, an active secondary
market in IFAs does not currently exist. This means that it may be
difficult to sell an IFA at an appropriate price.
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INVESTMENT COMPANIES. To the extent consistent with their respective investment
objectives and policies, the Funds may invest in securities issued by other
investment companies, including money market funds and, with respect to the
Small Cap Growth Fund, index funds, "country funds" (i.e., funds that invest
primarily in issuers located in a specific foreign country or region), S&P's
Depository Receipts ("SPDRs") and similar securities of other issuers.
INVESTMENT STRATEGY. Investments by a Fund in other investment
companies will be subject to the limitations of the 1940 Act.
SPECIAL RISKS. As a shareholder of another investment company, a Fund
would be subject to the same risks as any other investor in that
company. In addition, it would bear a proportionate share of any fees
and expenses paid by that company. These would be in addition to the
advisory and other fees paid directly by the Fund.
MUNICIPAL AND RELATED INSTRUMENTS. Municipal instruments include debt
obligations issued by or on behalf of states, territories and possessions of the
United States and their political subdivisions, agencies, authorities and
instrumentalities.
Municipal instruments include both "general" and "revenue" bonds and may be
issued to obtain funds for various public purposes. General obligations are
secured by the issuer's pledge of its full faith, credit and taxing power.
Revenue obligations are payable only from the revenues derived from a particular
facility or class of facilities. In some cases, revenue bonds are also payable
from the proceeds of a special excise or other specific revenue source such as
lease payments from the user of a facility being financed.
Municipal instruments also include "moral obligation" bonds, municipal leases,
certificates of participation and custodial receipts. Moral obligation bonds are
supported by a moral commitment but not a legal obligation of a state or
municipality. Municipal leases and participation certificates present the risk
that the state or municipality involved will not appropriate the monies to meet
scheduled payments on an annual basis. Custodial receipts and certificates of
participation that represent interests in municipal instruments held by a
trustee.
The Tax-Exempt Money Market Fund may acquire "stand-by commitments" relating to
the municipal instruments it holds. Under a stand-by commitment, a dealer agrees
to purchase, at the Fund's option, specified municipal instruments at a
specified price. A stand-by commitment may increase the cost, and thereby reduce
the yield, of the municipal instruments to which the commitment relates. The
Fund will acquire stand-by commitments solely to facilitate portfolio liquidity
and does not intend to exercise its rights for trading purposes.
INVESTMENT STRATEGY. In connection with its investments in municipal
instruments, the Tax-Exempt Money Market Fund may invest more than 25%
of its total assets in (a) municipal instruments the interest upon
which is paid solely from revenues of similar projects, and (b)
industrial development obligations. However, the Fund does not intend
to invest more than 25% of the value of their total assets in
industrial development bonds or similar obligations where the
non-governmental entities supplying the revenues to be paid are in the
same industry.
SPECIAL RISKS. Municipal instruments purchased by the Tax-Exempt Money
Market Fund may be backed by letters of credit, insurance or other
forms of credit enhancement issued by foreign (as well as domestic)
banks and other financial institutions. If the credit quality of these
banks, insurance companies and financial institutions declines, a Fund
could suffer a loss to the extent that the Fund is relying upon this
credit support. Risks relating to foreign banks and financial
institutions are described on page ___ under "Foreign Investment Risk."
In addition, when a substantial portion of a Fund's assets is invested
in instruments which are used to finance facilities involving a
particular industry, whose issuers are in the same state or which are
otherwise related, there is a possibility that an economic, business or
political development affecting one instrument would likewise affect
the related instrument.
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OPTIONS. An option is a type of derivative instrument that gives the holder the
right (but not the obligation) to buy (a "call") or sell (a "put") an asset in
the future at an agreed upon price prior to the expiration date of the option.
INVESTMENT STRATEGY. To the extent consistent with its investment
objective, the Small Cap Growth Fund may write (sell) covered call
options, buy put options, buy call options and write secured put
options for hedging purposes or to earn additional income. Options may
relate to particular securities, foreign or domestic securities
indices, financial instruments and foreign currencies. The Fund will
not purchase put and call options in an amount that exceeds 5% of its
net assets at the time of purchase. The total value of the Fund's
assets subject to options written by the Fund will not be greater than
25% of its net assets at the time the option is written. The Fund may
"cover" a call option by owning the security underlying the option or
through other means. Put options written by the Fund are "secured" if
the Fund maintains liquid assets in a segregated account in an amount
at least equal to the exercise price of the option up until the
expiration date.
SPECIAL RISKS. Options trading is a highly specialized activity that
involves investment techniques and risks different from those
associated with ordinary Fund securities transactions. The value of
options can be highly volatile, and their use can result in loss if the
investment management team is incorrect in its expectation of price
fluctuations. The successful use of options for hedging purposes also
depends in part on the ability of the investment management team to
predict future price fluctuations and the degree of correlation between
the options and securities markets.
The Small Cap Growth Fund will invest and trade in unlisted
over-the-counter options only with firms deemed creditworthy by the
Investment Adviser. However, unlisted options are not subject to the
protections afforded purchasers of listed options by the Options
Clearing Corporation, which performs the obligations of its members
which fail to perform them in connection with the purchase or sale of
options.
REAL ESTATE INVESTMENT TRUSTS (REITS). REITs are pooled investment vehicles that
invest primarily in either real estate or real estate related loans.
INVESTMENT STRATEGY. The Small Cap Growth Fund may invest in REITs.
SPECIAL RISKS. The value of a REIT is affected by changes in the value
of the properties owned by the REIT or securing mortgage loans held by
the REIT. REITs are dependent upon cash flow from their investments to
repay financing costs and the ability of a REIT's manager. REITs are
also subject to risks generally associated with investments in real
estate. The Fund will indirectly bear its proportionate share of any
expenses, including management fees, paid by a REIT in which it
invests.
REPURCHASE AGREEMENTS. Repurchase agreements involve the purchase of securities
by a Fund subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price.
INVESTMENT STRATEGY. Each Fund may enter into repurchase agreements
with financial institutions such as banks and broker-dealers that are
deemed to be creditworthy by the Investment Adviser. Although the
securities subject to a repurchase agreement may have maturities
exceeding one year, settlement of the agreement will never occur more
than one year after a Fund acquires the securities.
SPECIAL RISKS. In the event of a default, a Fund will suffer a loss to
the extent that the proceeds from the sale of the underlying securities
and other collateral are less than the repurchase price and the Fund's
costs associated with delay and enforcement of the repurchase
agreement. In addition, in the event of bankruptcy, a Fund could suffer
additional losses if a court determines that the Fund's interest in the
collateral is not enforceable.
SECURITIES LENDING. In order to generate additional income, the Funds may lend
securities on a short-term basis to banks, brokers-dealers or other qualified
institutions. In exchange, the Funds will receive collateral equal to at least
100% of the value of the securities loaned.
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INVESTMENT STRATEGY. Securities lending may represent no more than
one-third the value of a Fund's total assets (including the loan
collateral). Any cash collateral received by a Fund in connection with
these loans may be invested in U.S. government securities and other
liquid high-grade debt obligations.
SPECIAL RISKS. The main risk when lending portfolio securities is that
the borrower might become insolvent or refuse to honor its obligation
to return the securities. In this event, a Fund could experience delays
in recovering its securities and may incur a capital loss. In addition,
a Fund may incur a loss in reinvesting the cash collateral it receives.
STRIPPED OBLIGATIONS. These securities are issued by the U.S. government (or
agency or instrumentality), foreign governments, banks and other issuers. They
entitle the holder to receive either interest payments or principal payments
that have been "stripped" from a debt obligation. These obligations include
stripped mortgage-backed securities, which are derivative multi-class mortgage
securities.
INVESTMENT STRATEGY. To the extent consistent with their respective
investment objectives, the Funds may purchase stripped securities.
SPECIAL RISKS. Stripped securities are very sensitive to changes in
interest rates and to the rate of principal prepayments. A rapid or
unexpected change in prepayments could severely depress the price of
certain stripped securities and adversely affect a Fund's total
returns.
STRUCTURED SECURITIES. The value of the principal of and/or interest on such
securities is determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The interest
rate or the principal amount payable upon maturity or redemption may be
increased or decreased depending upon changes in the applicable Reference.
INVESTMENT STRATEGY. Each Fund may invest in structured securities to
the extent consistent with its investment objective.
SPECIAL RISKS. The terms of some structured securities may provide that
in certain circumstances no principal is due at maturity and,
therefore, a Fund could suffer a total loss of its investment.
Structured securities may be positively or negatively indexed, so that
appreciation of the Reference may produce an increase or decrease in
the interest rate or value of the security at maturity. In addition,
changes in the interest rates or the value of the security at maturity
may be a multiple of changes in the value of the Reference.
Consequently, structured securities may entail a greater degree of
market risk than other types of securities. Structured securities may
also be more volatile, less liquid and more difficult to accurately
price than less complex securities due to their derivative nature.
UNITED STATES GOVERNMENT OBLIGATIONS. These include U.S. Treasury obligations,
such as bills, notes and bonds, which generally differ only in terms of their
interest rates, maturities and time of issuance. These also include obligations
issued or guaranteed by the U.S. government or its agencies and
instrumentalities. 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.
INVESTMENT STRATEGY. To the extent consistent with its investment
objective, each Fund may invest in a variety of U.S. Treasury
obligations and also may invest in obligations issued or guaranteed by
the U.S. government or its agencies and instrumentalities.
SPECIAL RISKS. Not all U.S. government obligations carry the same
guarantees. Some, such as those of the Government National Mortgage
Association ("GNMA"), are supported by the full faith and credit of the
United States Treasury. Other obligations, such as those of the Federal
Home Loan Banks, are supported
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<PAGE> 34
by the right of the issuer to borrow from the United States Treasury;
and others, such as those issued by 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
are supported only by the credit of the instrumentality. 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. There is no assurance that these commitments will be undertaken or
complied with in the future. In addition, the secondary market for
certain participations in loans made to foreign governments or their
agencies may be limited.
VARIABLE AND FLOATING RATE INSTRUMENTS. Variable and floating rate instruments
have interest rates that are periodically adjusted either at set intervals or
that float at a margin above a generally recognized index rate. These
instruments include long-term variable and floating rate bonds (sometimes
referred to as "Put Bonds") where the Fund obtains at the time of purchase the
right to put the bond back to the issuer or a third party at par at a specified
date.
INVESTMENT STRATEGY. Each Fund may invest in rated and unrated variable
and floating rate instruments to the extent consistent with its
investment objective. Unrated instruments may be purchased by a Fund if
they are determined by the Investment Adviser to be of comparable
quality to rated instruments eligible for purchase by the Fund.
SPECIAL RISKS. Variable and floating rate instruments are subject to
the same risks as fixed income investments, particularly interest rate
and credit risk. The market values of inverse floaters are subject to
greater volatility than other variable and floating rate instruments
due to their higher degree of leverage. Because there is no active
secondary market for certain variable and floating rate instruments,
they may be more difficult to sell if the issuer defaults on its
payment obligations or during periods when the Funds are not entitled
to exercise their demand rights. As a result, the Funds could suffer a
loss with respect to these instruments.
WARRANTS. A warrant represents the right to purchase a security at a
predetermined price for a specified period of time.
INVESTMENT STRATEGY. The Small Cap Growth Fund may invest up to 5% of
its net assets at the time of purchase in warrants and similar rights.
The Small Cap Growth Fund may also purchase bonds that are issued in
tandem with warrants.
SPECIAL RISKS. Warrants are derivative instruments that present risks
similar to options.
WHEN-ISSUED SECURITIES, DELAYED DELIVERY TRANSACTIONS AND FORWARD COMMITMENTS. A
purchase of "when-issued" securities refers to a transaction made conditionally
because the securities, although authorized, have not yet been issued. A delayed
delivery or forward commitment transaction involves a contract to purchase or
sell securities for a fixed price at a future date beyond the customary
settlement period.
INVESTMENT STRATEGY. Each Fund may purchase or sell securities on a
when-issued, delayed delivery or forward commitment basis. Although the
Funds would generally purchase securities in these transactions with
the intention of acquiring the securities, the Funds may dispose of
such securities prior to settlement if the investment management team
deems it appropriate to do so.
SPECIAL RISKS. Purchasing securities on a when-issued, delayed delivery
or forward commitment basis involves the risk that the value of the
securities may decrease by the time they are actually issued or
delivered. Conversely, selling securities in these transactions
involves the risk that the value of the securities may increase by the
time they are actually issued or delivered. These transactions also
involve the risk that the seller may fail to deliver the security or
cash on the settlement date.
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<PAGE> 35
ZERO COUPON, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS. These are securities
issued at a discount from their face value because interest payments are
typically postponed until maturity. Interest payments on pay-in-kind securities
are payable by the delivery of additional securities. The amount of the discount
rate varies depending on factors such as the time remaining until maturity,
prevailing interest rates, a security's liquidity and the issuer's credit
quality. These securities also may take the form of debt securities that have
been stripped of their interest payments.
INVESTMENT STRATEGY. Each Fund may invest in zero coupon, pay-in-kind
and capital appreciation bonds to the extent consistent with its
investment objective.
SPECIAL RISKS. The market prices of zero coupon, pay-in-kind and
capital appreciation bonds generally are more volatile than the market
prices of interest-bearing securities and are likely to respond to a
greater degree to changes in interest rates than interest-bearing
securities having similar maturities and credit quality. A Fund's
investments in zero coupon, pay-in-kind and capital appreciation bonds
may require the Fund to sell some of its Fund securities to generate
sufficient cash to satisfy certain income distribution requirements.
Northern Trust is sometimes referred to as "The Northern Trust Bank" in
advertisements and other sales literature.
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<PAGE> 36
FOR MORE INFORMATION
ANNUAL/SEMIANNUAL REPORT
Additional information about the Funds' investments will be available in the
Funds' annual and semiannual reports to shareholders. In the Funds' annual
reports, you will find a discussion of the market conditions and investment
strategies that significantly affected the Funds' performance during their last
fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Funds and their policies is also available in
the Funds' Statement of Additional Information ("SAI"). The SAI is incorporated
by reference into this Prospectus (is legally considered part of this
Prospectus).
The Funds' annual and semiannual reports, and the SAI, are available free upon
request by calling The Northern Funds Center at 1-800-595-9111.
TO OBTAIN OTHER INFORMATION AND FOR SHAREHOLDER INQUIRIES:
BY TELEPHONE - Call 1-800-595-9111
BY MAIL - Northern Funds
P.O. Box 75986
Chicago, IL 60690-6319
ON THE INTERNET - Text-only versions of the Funds' documents are available:
- On the SEC's website at http://www.sec.gov.
- On Northern Funds' website at http://www.northernfunds.com.
You may review and obtain copies of Northern Funds' documents by visiting the
SEC's Public Reference Room in Washington, D.C. You may also obtain copies of
Northern Funds' documents by sending your request and a duplicating fee to the
SEC's Public Reference Section, Washington, D.C. 20549-6009. Information on the
operation of the public reference room may be obtained by calling the SEC at
1-800-SEC-0330.
[LOGO]
811-8236
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<PAGE> 37
33-73404
811-8236
PART B
STATEMENT OF ADDITIONAL INFORMATION
TAX-EXEMPT MONEY MARKET FUND
SMALL CAP GROWTH FUND
NORTHERN FUNDS
(THE "TRUST")
This Statement of Additional Information dated September ___, 1999 (the
"Additional Statement") is not a prospectus. This Additional Statement should be
read in conjunction with the Prospectus dated September ___, 1999, as amended or
supplemented from time to time, for the Tax-Exempt Money Market Fund and Small
Cap Growth Fund (the "Funds") of Northern Funds (the "Prospectus"). Copies of
the Prospectus may be obtained without charge from the Transfer Agent by writing
to the Northern Funds Center, P.O. Box 75986, Chicago, Illinois 60690-9069 or by
calling 1-800-595-9111. Capitalized terms not otherwise defined have the same
meaning as in the Prospectus.
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.
An investment in a Fund is not a deposit of any bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any government
agency. An investment in a Fund involves investment risks, including possible
loss or principal. Although the Tax-Exempt Money Market Fund seeks to preserve
the value of your investment at $1.00 per share, it is possible to lose money by
investing in the Fund.
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<PAGE> 38
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL INVESTMENT INFORMATION ..................................... 3
Investment Objectives and Policies ........................... 3
Investment Restrictions ...................................... 24
ADDITIONAL TRUST INFORMATION .......................................... 27
Classification and History ................................... 27
Trustees and Officers ........................................ 27
Investment Adviser, Transfer Agent and Custodian ............. 30
Administrator and Distributor ................................ 36
Service Organizations ........................................ 37
Counsel and Auditors ......................................... 38
In-Kind Purchases and Redemptions ............................ 38
Automatic Investing Plan ..................................... 38
Directed Reinvestments ....................................... 39
Redemptions and Exchanges .................................... 39
Retirement Plans ............................................. 39
Expenses ..................................................... 40
PERFORMANCE INFORMATION ............................................... 40
Tax-Exempt Money Market Fund ................................. 40
Small Cap Growth Fund ........................................ 41
General Information .......................................... 43
NET ASSET VALUE ....................................................... 45
TAXES ................................................................. 46
Federal - General Information ................................ 47
Federal-Tax-Exempt Information ............................... 48
Taxation of Certain Financial Instruments .................... 49
DESCRIPTION OF SHARES ................................................. 50
OTHER INFORMATION ..................................................... 53
APPENDIX A ............................................................ A-1
APPENDIX B ............................................................ B-1
</TABLE>
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<PAGE> 39
ADDITIONAL INVESTMENT INFORMATION
INVESTMENT OBJECTIVES AND POLICIES
The following supplements the investment objectives, strategies and
risks of the Funds as set forth in the Prospectus. Except as expressly noted
below, each Fund's investment objective and policies may be changed without
shareholder approval. In addition to the instruments discussed below and in the
Prospectus, each Fund may purchase other types of financial instruments, however
designated, whose investment and credit quality characteristics are determined
by the Investment Adviser to be substantially similar to those of any other
investment otherwise permitted by the Funds' investment policies.
Tax-Exempt Money Market Fund seeks to provide, to the
extent consistent with the preservation of capital
and prescribed portfolio standards, a high level of
income exempt from regular Federal income tax by
investing primarily in municipal instruments.
Small Cap Growth Fund seeks long-term capital
appreciation by investing primarily in equity
securities of companies with market capitalizations
that are within the capitalization range of the
Russell 2000 Small Stock Index ("Russell 2000
Index").
COMMERCIAL PAPER, BANKERS' ACCEPTANCES, CERTIFICATES OF DEPOSIT, TIME
DEPOSITS AND BANK NOTES. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by banks or bank holding companies,
corporations and finance companies. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers' acceptances are
negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time
deposits may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties that vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party. 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.
A Fund may invest a portion of its net assets in the obligations of
foreign banks and foreign branches of domestic banks. Such obligations include
Eurodollar Certificates of Deposit ("ECDs"), which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic
- 3 -
<PAGE> 40
banks located outside the United States; Eurodollar Time Deposits ("ETDs"),
which are U.S. dollar-denominated deposits in a foreign branch of a U.S. bank or
a foreign bank; Canadian Time Deposits ("CTDs"), which are essentially the same
as ETDs except they are issued by Canadian offices of major Canadian banks;
Schedule Bs, which are obligations issued by Canadian branches of foreign or
domestic banks; Yankee Certificates of Deposit ("Yankee Cds"), which are U.S.
dollar-denominated certificates of deposit issued by a U.S. branch of a foreign
bank and held in the United States; and Yankee Bankers' Acceptances ("Yankee
Bas"), which are U.S. dollar-denominated bankers' acceptances issued by a U.S.
branch of a foreign bank and held in the United States.
INSURANCE FUNDING AGREEMENTS. An insurance funding agreement ("IFA") is
normally a general obligation of the issuing insurance company and not a
separate account. The purchase price paid for an IFA becomes part of the general
assets of the insurance company, and the contract is paid from the company's
general assets. Generally, IFAs are not assignable or transferable without the
permission of the issuing insurance companies, and an active secondary market in
IFAs may not exist. Therefore, IFAs will be subject to a Fund's limitation on
illiquid investments when the Fund may not demand payment of the principal
amount within seven days and a reliable trading market is absent.
ZERO COUPON, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS. To the extent
consistent with their respective investment objectives, each Fund may invest in
zero coupon bonds, capital appreciation bonds and pay-in-kind ("PIK")
securities. Zero coupon and capital appreciation bonds are debt securities
issued or sold at a discount from their face value and which do not entitle the
holder to any periodic payment of interest prior to maturity or a specified
date. The original issue discount varies depending on the time remaining until
maturity or cash payment date, prevailing interest rates, the liquidity of the
security and the perceived credit quality of the issuer. These securities also
may take the form of debt securities that have been stripped of their unmatured
interest coupons, the coupons themselves or receipts or certificates
representing interests in such stripped debt obligations or coupons. The market
prices of zero coupon bonds, capital appreciation bonds and PIK securities
generally are more volatile than the market prices of interest bearing
securities and are likely to respond to a greater degree to changes in interest
rates than interest bearing securities having similar maturities and credit
quality.
PIK securities may be debt obligations or preferred shares that provide
the issuer with the option of paying interest or dividends on such obligations
in cash or in the form of additional securities rather than cash. Similar to
zero coupon bonds, PIK securities are designed to give an issuer flexibility in
managing cash flow. PIK securities that are debt securities can either be senior
or subordinated debt and generally trade flat (i.e., without accrued interest).
The trading price of PIK debt securities generally reflects the market value of
the underlying debt plus an amount representing accrued interest since the last
interest payment.
Zero coupon bonds, capital appreciation bonds and PIK securities
involve the additional risk that, unlike securities that periodically pay
interest to maturity, a Fund will realize no cash until a specified future
payment date unless a portion of such securities is sold and, if the issuer of
such securities defaults, a Fund may obtain no return at all on its investment.
In addition, even though such securities do not provide for the payment of
current interest in cash, the Funds are nonetheless
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<PAGE> 41
required to accrue income on such investments for each taxable year and
generally are required to distribute such accrued amounts (net of deductible
expenses, if any) to avoid being subject to tax. Because no cash is generally
received at the time of the accrual, a Fund may be required to liquidate other
portfolio securities to obtain sufficient cash to satisfy federal tax
distribution requirements applicable to the Fund.
REPURCHASE AGREEMENTS. Each Fund may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Repurchase agreements are considered to be loans under the
Investment Company Act of 1940 (the "1940 Act"). Although the securities subject
to a repurchase agreement may bear maturities exceeding one year, settlement for
the repurchase agreement will never be more than one year after a Fund's
acquisition of the securities and normally will be within a shorter period of
time. Securities subject to repurchase agreements are held either by Northern
Funds' custodian or subcustodian (if any), or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement in an amount
exceeding the repurchase price (including accrued interest). Default by the
seller would, however, expose a Fund to possible loss because of adverse market
action or delay in connection with the disposition of the underlying
obligations.
REVERSE REPURCHASE AGREEMENTS. A Fund may borrow funds by selling
portfolio securities to financial institutions such as banks and broker/dealers
and agreeing to repurchase them at a mutually specified date and price ("reverse
repurchase agreements"). The Funds may use the proceeds of reverse repurchase
agreements to purchase other securities either maturing, or under an agreement
to resell, on a date simultaneous with or prior to the expiration of the reverse
repurchase agreement. Reverse repurchase agreements are considered to be
borrowings under the 1940 Act. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
repurchase price. A Fund will pay interest on amounts obtained pursuant to a
reverse repurchase agreement. While reverse repurchase agreements are
outstanding, a Fund will segregate 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 Funds as described in
the Prospectus, the Investment Adviser 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 adjustment or the time a 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 a Fund, the issuer's obligation to pay the principal of the instrument will
be backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend.
The Funds may deem the maturity of variable and floating rate
instruments to be less than their stated maturities based on their variable and
floating rate features and/or their put features.
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<PAGE> 42
Unrated variable and floating rate instruments will be determined by the
Investment Adviser to be of comparable quality at the time of purchase to rated
instruments which may be purchased by the Funds.
Variable and floating rate instruments including inverse floaters held
by a Fund 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 absent
a reliable trading market.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY
TRANSACTIONS. Each Fund may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment (sometimes called delayed
delivery) basis. These transactions involve a commitment by the Fund to purchase
or sell securities at a future date. The price of the underlying securities
(usually expressed in terms of yield) and the date when the securities will be
delivered and paid for (the settlement date) are fixed at the time the
transaction is negotiated. When-issued purchases and forward commitment
transactions are normally negotiated directly with the other party.
A Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or negotiate a commitment after entering into it. A Fund also may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date.
When a Fund purchases securities on a when-issued, delayed-delivery or
forward commitment basis, the Fund will segregate liquid assets having a value
(determined daily) at least equal to the amount of the Fund's purchase
commitments until three days prior to the settlement date, or will otherwise
cover its position. These procedures are designed to ensure that the Fund will
maintain sufficient assets at all times to cover its obligations under
when-issued purchases, forward commitments and delayed-delivery transactions.
For purposes of determining a Fund's average dollar-weighted maturity, the
maturity of when-issued, delayed-delivery or forward commitment securities will
be calculated from the commitment date.
UNITED STATES GOVERNMENT OBLIGATIONS. Examples of the types of U.S.
Government obligations that may be acquired by the Funds include U.S. Treasury
Bills, Treasury Notes and Treasury Bonds and the obligations of Federal Home
Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Federal National Mortgage Association
("FNMA"), Government National Mortgage Association ("GNMA"), General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal Intermediate Credit Banks and Maritime
Administration.
SUPRANATIONAL BANK OBLIGATIONS. A Fund may invest in obligations of
supranational banks. Supranational banks are international banking institutions
designed or supported by national governments to promote economic
reconstruction, development or trade among nations (e.g., the International Bank
for Reconstruction and Development). Obligations of supranational banks may
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<PAGE> 43
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 Funds may purchase securities registered in the STRIPS program.
Under the STRIPS program, the Funds are able to have their beneficial ownership
of zero coupon securities recorded directly in the book-entry record-keeping
system in lieu of having to hold certificates or other evidences of ownership of
the underlying U.S. Treasury securities.
In addition, the Funds may acquire U.S. Government obligations and
their unmatured interest coupons that have been separated ("stripped") by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury
Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The underlying
U.S. Treasury bonds and notes themselves are held in book-entry form at the
Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are ostensibly owned by the bearer or holder), in trust on
behalf of the owners. Counsel to the underwriters of these certificates or other
evidences of ownership of U.S. Treasury securities have stated that, in their
opinion, purchasers of the stripped securities most likely will be deemed the
beneficial holders of the underlying U.S. Government obligations for federal tax
purposes. Northern Funds is unaware of any binding legislative, judicial or
administrative authority on this issue.
The Prospectus discusses other types of stripped securities that may be
purchased by the Funds, including stripped mortgage-backed securities ("SMBS").
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 instances, 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, a Fund may fail to fully recoup its
initial investment in these securities. The market value of the class consisting
entirely of principal payments generally is 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 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 the Trust's Board of
Trustees if they can be disposed of promptly in the
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<PAGE> 44
ordinary course of business at a value reasonably close to that used in the
calculation of the net asset value per share.
ASSET-BACKED SECURITIES. To the extent described in the Prospectus, the
Funds may purchase asset-backed securities, which are securities backed by
mortgages, installment contracts, credit card receivables or other assets.
Asset-backed securities represent interests in "pools" of assets in which
payments of both interest and principal on the securities are made 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.
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 a Fund's average weighted maturity, the maturity of asset-backed
securities will be based on estimates of average life.
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.
Asset-backed securities acquired by the Funds may include
collateralized mortgage obligations ("CMOs") issued by private companies. CMOs
provide the holder with a specified interest in the cash flow of a pool of
underlying mortgages or other mortgage-backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways. The Funds will not purchase "residual" CMO interests,
which normally exhibit greater price volatility.
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
- 8 -
<PAGE> 45
"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 the Federal Home Loan Mortgage Corporation
("FHLMC") include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress, which is owned entirely by
Federal Home Loan Banks. Freddie Macs are not guaranteed and do not constitute a
debt or obligation of the United States or of any Federal Home Loan Bank.
Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
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.
MUNICIPAL INSTRUMENTS. Opinions relating to the validity of municipal
instruments and to federal and state tax issues relating to these securities are
rendered by counsel to the respective issuing authorities at the time of
issuance. Such opinions may contain various assumptions, qualifications or
exceptions that are reasonably acceptable to Northern Trust. Neither Northern
Funds nor Northern Trust will review the proceedings relating to the issuance of
municipal instruments or the bases for such opinions.
Municipal instruments include both "general" and "revenue" obligations.
General obligations are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue obligations
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source such as lease revenue payments from the user of
the facility being financed. Industrial development bonds are in most cases
revenue securities and are not payable from the unrestricted revenues of the
issuer. Consequently, the credit quality of an industrial revenue bond is
usually directly related to the credit standing of the private user of the
facility involved.
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The Tax-Exempt Money Market Fund may also invest in "moral obligation"
bonds, which are normally issued by special purpose public authorities. If the
issuer of a moral obligation bond is unable to meet its debt service obligations
from current revenues, it may draw on a reserve fund (if such a fund has been
established), the restoration of which is a moral commitment but not a legal
obligation of the state or municipality which created the issuer.
Within the principal classifications of municipal instruments described
above there are a variety of categories, including municipal bonds, municipal
notes, municipal leases, custodial receipts and participation certificates.
Municipal notes include tax, revenue and bond anticipation notes of short
maturity, generally less than three years, which are issued to obtain temporary
funds for various public purposes. Municipal leases and participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. Participation
certificates may represent participations in a lease, an installment purchase
contract, or a conditional sales contract. Certain municipal lease obligations
(and related participation certificates) may include "non-appropriation" clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities.
An issuer's obligations under its municipal instruments are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on and principal of its municipal instruments may be materially
adversely affected by litigation or other conditions.
From time to time proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal instruments. For example, under the Tax Reform Act of 1986
interest on certain private activity bonds must be included in an investor's
federal alternative minimum taxable income, and corporate investors must include
all tax-exempt interest in their federal alternative minimum taxable income.
Northern Funds cannot predict what legislation, if any, may be proposed in the
future in Congress as regards the federal income tax status of interest on
municipal instruments or which proposals, if any, might be enacted. Such
proposals, if enacted, might materially and adversely affect the availability of
municipal instruments for investment by the Tax-Exempt Money Market Fund and the
Fund's liquidity and value. In such an event the Board of Trustees would
reevaluate the Fund's investment objective and policies and consider changes in
its structure or possible dissolution.
Certain of the municipal instruments held by a Fund may be insured as
to the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of the Municipal Instrument at the time of its
original issuance. In the event that the issuer defaults on an interest or
principal payment, the insurer will be notified and will be required to make
payment to the bondholders. There is, however, no guarantee that the insurer
will meet its obligations. In
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<PAGE> 47
addition, such insurance will not protect against market fluctuations caused by
changes in interest rates and other factors. A Fund may invest more than 25% of
its total assets in municipal instruments covered by insurance policies.
Interest earned by the Tax-Exempt Money Market Fund on private activity
bonds (if any) that is treated as a specific tax preference item under the
federal alternative minimum tax will not be deemed to have been derived from
municipal instruments for purposes of determining whether that Fund meets its
fundamental policy that at least 80% of its annual gross income be derived from
municipal instruments.
The Tax-Exempt Money Market Fund may invest in municipal leases, which
may be considered liquid under guidelines established by Northern Funds' Board
of Trustees. The guidelines will provide for determination of the liquidity of a
municipal lease obligation based on factors including the following: (1) the
frequency of trades and quotes for the obligation; (2) the number of dealers
willing to purchase or sell the security and the number of other potential
buyers; (3) the willingness of dealers to undertake to make a market in the
security; and (4) the nature of the marketplace trades, including the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of transfer. Northern Trust, under the supervision of Northern Funds'
Board of Trustees, will also consider the continued marketability of a municipal
lease obligation based upon an analysis of the general credit quality of the
municipality issuing the obligation and the essentiality to the municipality of
the property covered by the lease.
STANDBY COMMITMENTS. The Tax-Exempt Money Market Fund may enter into
standby commitments with respect to municipal instruments it holds. Under a
standby commitment, a dealer agrees to purchase at a Fund's option a specified
Municipal Instrument. Standby commitments may be exercisable by a Fund at any
time before the maturity of the underlying municipal instruments and may be
sold, transferred or assigned only with the instruments involved.
The Fund expects that standby commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for a standby commitment either
separately in cash or by paying a higher price for municipal instruments which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding standby commitments held by a Fund will not exceed 1/2 of
1% of the value of the Fund's total assets calculated immediately after each
standby commitment is acquired.
The Fund intends to enter into standby commitments only with dealers,
banks and broker-dealers which, in Northern Trust's opinion, present minimal
credit risks. The Fund will acquire standby commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. The acquisition of a standby commitment will not affect the
valuation of the underlying municipal instrument. The actual standby commitment
will be valued at zero in determining net asset value. Accordingly, where the
Fund pays directly or indirectly for a standby commitment, its cost will be
reflected as an unrealized loss for the period during which the commitment is
held by the Fund and will be reflected in realized gain or loss when the
commitment is exercised or expires.
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WARRANTS. The Small Cap Growth 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 prices of warrants do not
necessarily correlate with the prices of the underlying shares. The purchase of
warrants involves the risk that a Fund could lose the purchase value of a
warrant if the right to subscribe to additional shares is not exercised prior to
the warrant's expiration. Also, the purchase of warrants involves the risk that
the effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security.
FOREIGN SECURITIES. The Small Cap Growth Fund may invest a portion of
its assets in the securities of foreign issuers, 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 a Fund that invests in foreign stocks. The holdings of
a Fund that invests in fixed income securities 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
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.
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<PAGE> 49
The Small Cap Growth 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.
To the extent consistent with its investment objective, the Fund may
also invest in obligations of the International Bank for Reconstruction and
Development (also known as the World Bank) which 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.
The end of the Cold War, the reunification of Germany, the accession of
new Western European members to the European Economic and Monetary Union and the
aspirations of Eastern European states to join and other political and social
events in Europe have caused considerable economic, social and political
dislocation. In addition, events in the Japanese economy, as well as social and
political developments there have affected Japanese securities and currency
markets, and have disrupted the relationship of the Japanese yen with other
currencies and with the U.S. dollar. Future political, economic and social
developments in Japan and in the Asia/Pacific regional context can be expected
to produce continuing effects on securities and currency markets.
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 reduce the net return to the shareholders. See "Taxes."
AMERICAN DEPOSITORY RECEIPTS. The Small Cap Growth 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.
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<PAGE> 50
EUROPEAN DEPOSITORY RECEIPTS. The Small Cap Growth 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.
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 Small Cap Growth 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.
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 the Investment Adviser 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 approximating the
short position. The Fund's net long and short foreign currency exposure will not
exceed its total asset value. With respect to any forward foreign currency
contract, it will not generally be possible to match precisely the amount
covered by that contract and the value of the securities involved due to the
changes in the values of such securities resulting from market movements between
the date the forward contract is entered into and the date it matures. While
forward contracts may offer protection from losses resulting from declines or
appreciation in the value of a particular foreign currency, they also limit
potential gains which might result from changes in the value of such currency. A
Fund will also incur costs in connection with forward foreign currency exchange
contracts and conversions of foreign currencies and U.S. dollars.
Liquid assets equal to the amount of a Fund's assets that could be
required to consummate forward contracts will be segregated except to the extent
the contracts are otherwise "covered." The segregated assets will be valued at
market or fair value. If the market or fair value of such assets declines,
additional liquid assets will be segregated daily so that the value of the
segregated assets will equal the amount of such commitments by the Fund. A
forward contract to sell a foreign currency is "covered" if a Fund owns the
currency (or securities denominated in the currency) underlying the contract, or
holds a forward contract (or call option) permitting the Fund to buy the same
currency at a price 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
Fund segregates liquid assets in the amount
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of the difference. A forward contract to buy a foreign currency is "covered" if
a 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 Fund segregates liquid assets in the amount of the difference.
OPTIONS. The Small Cap Growth 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. 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. With respect to yield curve options, the
amount of the settlement will equal the difference between the yields of
designated securities.
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.
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 a
Fund owns the instrument underlying the call or has an absolute and immediate
right to acquire that instrument without additional cash consideration (or, if
additional cash consideration is required, liquid assets in such amount are
segregated) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if a Fund maintains with its
custodian securities comprising the index or liquid assets equal to the contract
value. A call option is also covered if a Fund holds a call on the same
instrument or index as the call written where the exercise price of the call
held is (i) equal to or less than the exercise price of the call written, or
(ii) greater than the exercise price of the call written provided the Fund
segregates liquid assets in the amount of the difference. The Fund will write
put options only if they are "secured" by segregated liquid assets 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
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effected to realize a profit on an outstanding option, to prevent an underlying
instrument from being called, to permit the sale of the underlying instrument or
to permit the writing of a new option containing different terms on such
underlying instrument. The cost of such a liquidation purchase plus transaction
costs may be greater than the premium received upon the original option, in
which event the Fund will have incurred a loss in the transaction. There is no
assurance that a liquid secondary market will exist for any particular option.
An option writer, unable to effect a closing purchase transaction, will not be
able to sell the underlying instrument (in the case of a covered call option) or
liquidate the segregated assets (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 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.
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FUTURES CONTRACTS AND RELATED OPTIONS. The Small Cap Growth Fund may
purchase and sell futures contracts and may purchase and sell call and put
options on futures contracts for hedging purposes, for speculative purposes (to
seek to increase total return), or for liquidity management purposes. When used
as a hedge, the Fund may sell a futures contract in order to offset a decrease
in the market value of its portfolio securities that might otherwise result from
a market decline or currency exchange fluctuations. The Fund may do so either to
hedge the value of its portfolio of securities as 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 portfolio
holdings. For a detailed description of futures contracts and related options,
see Appendix B to this Additional Statement.
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, a 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.
In connection with the Fund's position in a futures contract or related
option, the Fund will segregate liquid assets or will otherwise cover its
position in accordance with applicable SEC requirements.
Northern Funds intends to comply with the regulations of the Commodity
Futures Trading Commission exempting the Fund from registration as a "commodity
pool operator."
REAL ESTATE INVESTMENT TRUSTS. The Small Cap Growth Fund may invest in
equity real estate investment trusts ("REITs"). REITs pool investors' funds for
investment primarily in commercial real estate properties. Investments in REITs
may subject the Fund to certain risks. REITs may be affected by changes in the
value of the underlying property owned by the trusts. REITs are dependent upon
specialized management skill, may not be diversified and are subject to the
risks of financing projects. REITs are also subject to heavy cash flow
dependency, defaults by
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<PAGE> 54
borrowers, self liquidation and the possibility of failing to qualify for the
beneficial tax treatment available to REITs under the Internal Revenue Code of
1986, as amended, and to maintain exemption from the 1940 Act. As a shareholder
in a REIT, the Fund would bear, along with other shareholders, its pro rata
portion of the REIT's operating expenses. These expenses would be in addition to
the advisory and other expenses the Fund bears directly in connection with its
own operations.
SECURITIES LENDING. Collateral for loans of portfolio securities made
by a Fund may consist of cash, cash equivalents, 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 a
Fund lends its securities, it continues to receive dividends and interest on the
securities loaned and may simultaneously earn interest on the investment of the
cash collateral. Although voting rights, or rights to consent, attendant to
securities on loan pass to the borrower, such loans will be called so that the
securities may be voted by a Fund if a material event affecting the investment
is to occur.
EQUITY SWAPS. The Small Cap Growth Fund may enter into equity swap
contracts to invest in a market without owning or taking physical custody of
securities in circumstances in which direct investment is restricted for legal
reasons or is otherwise impracticable. Equity swaps may also be used for hedging
purposes or to seek to increase total return. The counterparty to an equity swap
contract will typically be a bank, investment banking firm or broker/dealer.
Equity swap contracts may be structured in different ways. For example, a
counterparty may agree to pay the Fund the amount, if any, by which the notional
amount of the equity swap contract would have increased in value had it been
invested in particular stocks (or an index of stocks), plus the dividends that
would have been received on those stocks. In these cases, the Fund may agree to
pay to the counterparty the amount, if any, by which that notional amount would
have decreased in value had it been invested in the stocks. Therefore, the
return to the Fund on any equity swap contract should be the gain or loss on the
notional amount plus dividends on the stocks less the interest paid by the Fund
on the notional amount. In other cases, the counterparty and the Fund may each
agree to pay the other the difference between the relative investment
performances that would have been achieved if the notional amount of the equity
swap contract had been invested in different stocks (or indices of stocks).
The Fund will enter into equity swaps only on a net basis, which means
that the two payment streams are netted out, with the Fund receiving or paying,
as the case may be, only the net amount of the two payments. Payments may be
made at the conclusion of an equity swap contract or periodically during its
term. Equity swaps do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to equity swaps is limited to
the net amount of payments that the Fund is contractually obligated to make. If
the other party to an equity swap defaults, the Fund's risk of loss consists of
the net amount of payments that the Fund is contractually entitled to receive,
if any. Inasmuch as these transactions are entered into for hedging purposes or
are offset by segregated cash or liquid assets to cover the Fund's potential
exposure, the Fund and the Investment Adviser believe that transactions do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to the Fund's borrowing restrictions.
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<PAGE> 55
The Fund will not enter into any equity swap transactions unless the
unsecured commercial paper, senior debt or claims-paying ability of the other
party is rated either A or A-1 or better by Standard & Poor's, Duff & Phelps or
Fitch IBCA, or A or P-1 or better by Moody's Investors Service. If there is a
default by the other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transaction.
The use of equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Investment Adviser is incorrect in its
forecasts of market values, the investment performance of a Fund would be less
favorable than it would have been if this investment technique were not used.
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, the Investment Adviser will
consider, among other factors: an 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> 56
Capital appreciation for a Fund may result from an improvement in the
credit standing of an issuer whose securities are held in the Fund or from a
general lowering of interest rates, or a combination of both. Conversely, a
reduction in the credit standing of an issuer whose securities are held by a
Fund or a general increase in interest rates may be expected to result in
capital depreciation to the Fund.
In general, investments in lower quality 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 quality fixed-income securities. Such lower quality securities
generally tend to reflect short-term corporate and market developments to a
greater extent than higher quality securities, which react more to fluctuations
in the general level of interest rates. A Fund will generally reduce risk to the
investor by diversification, credit analysis and attention to current
developments in trends of both the economy and financial markets. However, while
diversification reduces the effect on a Fund of any single investment, it does
not reduce the overall risk of investing in lower quality securities.
RISKS RELATED TO SMALL COMPANY SECURITIES. While the Investment Adviser
believes that smaller companies can provide greater growth potential than
larger, more mature firms, investing in the securities of such companies also
involves greater risk, portfolio price volatility and cost. Historically, small
capitalization stocks, which will be the Small Cap Growth Fund's primary
investments, and stocks of recently organized companies, in which the Small Cap
Growth Fund may also invest, have been more volatile in price than the larger
capitalization stocks included in the S&P 500 Index. Among the reasons for this
greater price volatility are the lower degree of market liquidity (the
securities of companies with small stock market capitalizations may trade less
frequently and in limited volume) and the greater sensitivity of small companies
to changing economic conditions. For example, these companies are associated
with higher investment risk due to the greater business risks of small size and
limited product lines, markets, distribution channels and financial and
managerial resources.
The values of small company stocks will frequently fluctuate
independently of the values of larger company stocks. Small company stocks may
decline in price as large company stock prices rise, or rise in price as large
company stock prices decline. You should, therefore, expect that the net asset
value of the Fund's shares will be more volatile than, and may fluctuate
independently of, broad stock market indices such as the S&P 500 Index.
The additional costs associated with the acquisition of small company
stocks include brokerage costs, market impact costs (that is, the increase in
market prices which may result when a Fund purchases thinly traded stock) and
the effect of the "bid-ask" spread in small company stocks. These costs will be
borne by all shareholders and may negatively impact investment performance.
RISKS RELATED TO MEDIUM AND LOWER QUALITY SECURITIES. Investments in
medium and lower quality securities present special risk considerations. Medium
quality securities, although considered investment grade, are also considered to
have speculative characteristics. Lower quality securities are considered
predominately speculative by traditional investment standards. In some
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<PAGE> 57
cases, these obligations may be highly speculative and have poor prospects for
reaching investment grade standard. While any investment carries some risk,
certain risks associated with lower quality securities are different from those
for investment-grade securities. The risk of loss through default is greater
because lower quality securities are usually unsecured and are often subordinate
to an issuer's other obligations. Additionally, the issuers of these securities
frequently have high debt levels and are thus more sensitive to difficult
economic conditions, individual corporate developments and rising interest
rates. Consequently, the market price of these securities may be quite volatile
and may result in wider fluctuations of a Fund's net asset value per share.
There remains some uncertainty about the performance level of the
market for lower quality 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 quality securities (resulting in a
greater number of bond defaults) and the value of lower quality securities held
in a portfolio of investments.
The economy and interest rates can affect lower quality securities
differently than other securities. For example, the prices of lower quality
securities are more sensitive to adverse economic changes or individual
corporate developments than are the prices of higher quality investments. In
addition, during an economic downturn or period in which interest rates are
rising significantly, highly leveraged issuers may experience financial
difficulties, which, in turn, would adversely affect their ability to service
their principal and interest payment obligations, meet projected business goals
and obtain additional financing.
The market value of lower quality securities tends to reflect
individual corporate developments to a greater extent than that of higher
quality securities which react primarily to fluctuations in the general level of
interest rates. Lower quality securities are often issued in connection with a
corporate reorganization or restructuring or as a part of a merger, acquisition,
takeover or similar event. They are also issued by less established companies
seeking to expand. Such issuers are often highly leveraged, may not have
available to them more traditional methods of financing and are generally less
able than more established or less leveraged entities to make scheduled payments
of principal and interest in the event of adverse economic developments or
business conditions.
A holder's risk of loss from default is significantly greater for lower
quality securities than is the case for holders of other debt securities because
such securities are generally unsecured and are often subordinated to the rights
of other creditors of the issuers of such securities. Investment by a Fund in
defaulted securities poses additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by a Fund of its initial investment
and any anticipated income or appreciation will be uncertain. A Fund may also
incur additional expenses in seeking recovering on defaulted securities. If an
issuer of a security defaults, a Fund may incur additional expenses to seek
recovery. In addition, periods of economic uncertainty would likely result in
increased volatility for the market prices of lower quality securities as well
as a Fund's net asset value. In general, both the prices and yields of lower
quality securities will fluctuate.
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<PAGE> 58
The secondary market for lower quality securities is concentrated in
relatively few market makers and is dominated by institutional investors,
including mutual funds, insurance companies and other financial institutions.
Accordingly, the secondary market for such securities is not as liquid as, and
is more volatile than, the secondary market for higher quality securities. In
addition, market trading volume for high yield fixed income securities is
generally lower and the secondary market for such securities could contract
under adverse market or economic conditions, independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the market price and a Fund's ability to dispose of particular
portfolio investments. A less developed secondary market may also make it more
difficult for a Fund to obtain precise valuations of the high yield securities
in its portfolio.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower quality
convertible securities held by a Fund, especially in a thinly traded market.
Illiquid or restricted securities held by a Fund may involve special
registration responsibilities, liabilities and costs, and could involve other
liquidity and valuation difficulties.
The credit ratings assigned by a rating agency evaluate the safety of a
rated security's principal and interest payments, but do not address market
value risk and, therefore, may not fully reflect the true risks of an
investment. 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, the Investment Adviser performs its own analysis of the
issuers whose lower quality securities a Fund holds. Because of this, a Fund's
performance may depend more on its Investment Adviser's credit analysis than is
the case of mutual funds investing in higher quality securities.
INVESTMENT COMPANIES. With respect to the investments of the Funds in
the securities of other investment companies, such investments will be limited
so that, as determined after a purchase is made, either (a) not more than 3% of
the total outstanding stock of such investment company will be owned by a Fund,
Northern Funds as a whole and their affiliated persons (as defined in the 1940
Act) or (b) (i) not more than 5% of the value of the total assets of a Fund will
be invested in the securities of any one investment company; (ii) not more than
10% of the value of its total assets will be invested in the aggregate in
securities of investment companies as a group; and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Fund.
Certain investment companies whose securities are purchased by the
Funds may not be 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, a 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. If required by the 1940 Act, each 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 Funds invest, are dependent on a variety
of factors, including general
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<PAGE> 59
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. For a more complete discussion of ratings, see Appendix A to this
Additional Statement.
Subject to the limitations stated in the Prospectus, if a security held
by a Fund undergoes a rating revision, the Fund may continue to hold the
security if the Investment Adviser determines such retention is warranted.
STOCK INDICES. The Russell 2000 Small Stock Index is a market
value-weighted index composed of the stocks of the smallest 2000 companies in
the Russell 3000 Index, which is composed of the stocks of 3000 large U.S.
domiciled companies (based on market capitalization) that represent
approximately 98% of the investable U.S. equity markets. Because of its emphasis
on the smallest 2000 companies, the Russell Index represents approximately 10%
of the total market capitalization of the Russell 3000 Index. As of
____________, 1999, the average market capitalization of the companies included
in the Russell Index was approximately $_____ million. The Russell Index is
reconstituted annually to reflect changes in market capitalization. The primary
criteria used by Frank Russell & Company ("Russell") to determine the initial
list of securities eligible for inclusion in the Russell 3000 Index (and
accordingly, the Russell Index) is total market capitalization adjusted for
large private holdings and cross-ownership. However, companies are not selected
by Russell for inclusion in the Russell Index because they are expected to have
superior stock price performance relative to the market in general or other
stocks in particular. Russell makes no representation or warranty, implied or
express, to purchasers of Small Cap Growth Fund shares or any member of the
public regarding the advisability of investing in the Fund or the ability of the
Russell Index to track general market performance of small capitalization
stocks.
CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio turnover rate for
the Funds is calculated by dividing the lesser of purchases or sales of
portfolio investments for the reporting period by the monthly average value of
the portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Portfolio turnover may vary
greatly from year to year as well as within a particular year, and may be
affected by, changes in the holdings of specific issuers, changes in country and
currency weightings, cash requirements for redemption of shares and by
requirements which enable the Funds to receive favorable tax treatment. The
Tax-Exempt Money Market and Small Cap Growth Funds had not commenced operations
during the fiscal year ended March 31, 1999. The Funds are not restricted by
policy with regard to portfolio turnover and will make changes in their
investment portfolio from time to time as business and economic conditions as
well as market prices may dictate.
MISCELLANEOUS. Securities may be purchased on margin only to obtain
such short-term credits as are necessary for the clearance of purchases and
sales of securities. The Funds will not engage in selling securities short. The
Funds may, however, make short sales against the box
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<PAGE> 60
although the Funds have no current intention to do so in the coming year.
"Selling short against the box" involves selling a security that a Fund owns for
delivery at a specified date in the future.
INVESTMENT RESTRICTIONS
The Funds are subject to the fundamental investment restrictions
enumerated below which may be changed with respect to a particular Fund only by
a vote of the holders of a majority of such Fund's outstanding shares.
No Fund may:
(1) Make loans, except (a) through the purchase of debt
obligations in accordance with the Fund's investment objective and
policies, (b) through repurchase agreements with banks, brokers,
dealers and other financial institutions, and (c) loans of securities.
(2) Mortgage, pledge or hypothecate any assets (other than
pursuant to reverse repurchase agreements) except to secure permitted
borrowings.
(3) Purchase or sell real estate or real estate limited
partnerships, but this restriction shall not prevent a Fund from
investing directly or indirectly in portfolio instruments secured by
real estate or interests therein or acquiring securities of real estate
investment trusts or other issuers that deal in real estate.
(4) Purchase or sell commodities or commodity contracts or oil
or gas or other mineral exploration or development programs or leases,
except that each Fund may, to the extent appropriate to its investment
policies, purchase securities of companies engaging in whole or in part
in such activities, and (other than the Tax-Exempt Money Market Fund)
may enter into futures contracts and related options and forward
currency exchange contracts in accordance with its investment objective
and policies.
(5) Invest in companies for the purpose of exercising control.
(6) Act as underwriter of securities, except as a Fund may be
deemed to be an underwriter under the Securities Act of 1933 (the "1933
Act") in connection with the purchase and sale of portfolio instruments
in accordance with its investment objective and portfolio management
policies.
(7) Purchase the securities of any issuer if such purchase
would cause more than 10% of the voting securities of such issuer to be
held by the Fund, except that up to 25% of the value of its total
assets may be invested without regard to this 10% limitation.
(Investments by the Tax-Exempt Money Market Fund and Small Cap Growth
Fund in the securities of other investment companies are not subject to
this investment restriction.)
(8) Purchase securities (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements
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<PAGE> 61
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, provided that
with respect to the Tax-Exempt Money Market Fund there is no
limitation, and the Tax-Exempt Money Market Fund reserves freedom of
action, when otherwise consistent with its investment policies, to
concentrate its investments in obligations (other than commercial
paper) issued or guaranteed by U.S. banks (including foreign branches
of U.S. banks) and U.S. branches of foreign banks and repurchase
agreements and securities loans collateralized by such bank
obligations. For the purposes of this restriction, state and municipal
governments and their agencies and authorities are not deemed to be
industries; as to utility companies, the gas, electric, water and
telephone businesses are considered separate industries; personal
credit finance companies and business credit finance companies are
deemed to be separate industries; and wholly-owned finance companies
are considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their
parents. (Investments by the Tax-Exempt Money Market Fund and Small Cap
Growth Fund in the securities of other investment companies are not
subject to this investment restriction.)
(9) Borrow money (other than pursuant to reverse repurchase
agreements), except (a) as a temporary measure, and then only in
amounts not exceeding 5% of the value of a Fund's total assets or (b)
from banks, provided that immediately after any such borrowing all
borrowings of the Fund do not exceed one-third of the Fund's total
assets. The exceptions in (a) and (b) to this restriction are not for
investment leverage purposes but are solely for extraordinary or
emergency purposes or to facilitate management of a Fund by enabling
Northern Funds to meet redemption requests when the liquidation of
portfolio instruments is deemed to be disadvantageous or not possible.
If due to market fluctuations or other reasons the total assets of a
Fund fall below 300% of its borrowings, Northern Funds will reduce the
borrowings of such Fund in accordance with the 1940 Act. In addition,
as a matter of fundamental policy, the Funds may not enter into reverse
repurchase agreements exceeding in the aggregate one-third of their
respective total assets.
(10) Purchase the securities of any one issuer, other than
obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, if immediately after such purchase more than 5%
of the value of such Fund's total assets would be invested in such
issuer, except that: (a) up to 25% of the value of the total assets of
each Fund may be invested in any securities without regard to this 5%
limitation; and (b) such 5% limitation shall not apply to repurchase
agreements collateralized by obligations of the U.S. Government, its
agencies or instrumentalities. (Investments by the Tax-Exempt Money
Market Fund and Small Cap Growth Fund in the securities of other
investment companies are also not subject to this investment
restriction.)
In addition, as a matter of fundamental policy, the Funds will not
issue senior securities except as stated in the Prospectus or this Additional
Statement.
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<PAGE> 62
Also, as a matter of fundamental policy, changeable only with the
approval of the holders of a majority of the outstanding shares of the
Tax-Exempt Money Market Fund, at least 80% of the annual gross income of the
Tax-Exempt Money Market Fund will be derived from municipal instruments, (as
defined in the Prospectus), except in extraordinary circumstances such as when
Northern Trust believes that market conditions indicate that the Fund should
adopt a temporary defensive posture by holding uninvested cash or investing in
taxable securities. Interest earned by the Tax-Exempt Money Market Fund on
"private activity bonds" (if any) that is treated as an item of tax preference
under the federal alternative minimum tax will not be deemed to have been
derived from municipal instruments for purposes of determining whether the Fund
meets this fundamental policy.
Except as otherwise provided in Investment Restriction (8), for the
purpose of such restriction in determining industry classification, Northern
Funds intends to use the industry classification titles in the Standard
Industrial Classification Manual. The freedom of action reserved in Investment
Restriction (8) above with respect to U.S. branches of foreign banks is subject
to the requirement that they are subject to the same regulation as domestic
branches of U.S. banks, and such freedom with respect to foreign branches of
U.S. banks is subject to the requirement that the domestic parent be
unconditionally liable in the event that a foreign branch fails to pay on its
instruments for any reason. Securities held in escrow or separate accounts in
connection with the Funds' investment practices described in this Additional
Statement and in the Prospectus are not deemed to be mortgaged, pledged or
hypothecated for purposes of the foregoing Investment Restrictions.
A security is considered to be issued by the entity, or entities, whose
assets and revenues back the security. A guarantee of a security is not deemed
to be a security issued by the guarantor when the value of all securities issued
and guaranteed by the guarantor, and owned by a Fund, does not exceed 10% of the
value of the Fund's total assets.
The Tax-Exempt Money Market Fund intends, as a non-fundamental policy,
to diversify its investments in accordance with current SEC regulations.
Investments in the securities of any single issuer (excluding cash, cash items,
certain repurchase agreements, U.S. Government securities and securities of
other investment companies) will be limited to not more than 5% of the value of
a Fund's total assets at the time of purchase, except that 25% of the value of
the total assets of the Tax-Exempt Money Market Fund may be invested in the
securities of any one issuer for a period of up to three Business Days. A
security that has an unconditional guarantee meeting special SEC requirements (a
"Guarantee") does not need to satisfy the foregoing issuer diversification
requirements that would otherwise apply, but the Guarantee is instead subject to
the following diversification requirements: Immediately after the acquisition of
the security, a Fund may not have invested more than 10% of its total assets in
securities issued by or subject to Guarantees from the same person, except that
a Fund, subject to certain conditions, may invest up to 25% of its total assets
in securities issued or subject to Guarantees of the same persons. This
percentage is 100% if the Guarantee is issued by the U.S. Government or an
agency thereof. In addition, the Tax-Exempt Money Market Fund will limit its
investments in certain conduit securities that are not rated in the highest
short-term rating category as determined by two nationally recognized
statistical rating organizations (each an "NRSRO") (or one NRSRO if the security
is rated by only one NRSRO) or, if unrated, are not of comparable quality to
First Tier Securities ("Second Tier
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<PAGE> 63
Securities"), to 5% of its total assets, with investments in any one such issuer
being limited to no more than 1% of the Fund's total assets or $1 million,
whichever is greater, measured at the time of purchase. Conduit securities
subject to this limitation are municipal instruments that are not subject to a
Guarantee and involve an arrangement whereunder a person, other than a municipal
issuer, provides for or secures repayment of the security and are not: (i) fully
and unconditionally guaranteed by a municipal issuer; or (ii) payable from the
general revenues of the municipal issuer or other municipal issuers; or (iii)
related to a project owned and operated by a municipal issuer; or (iv) related
to a facility leased to and under the control of an industrial or commercial
enterprise that is part of a public project which, as a whole, is owned and
under the control of a municipal issuer.
In addition to the foregoing, the Tax-Exempt Money Market Fund is
subject to additional diversification requirements imposed by SEC regulations on
the acquisition of securities subject to other types of demand features and puts
whereunder a Fund has the right to sell the securities to third parties.
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 involved 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.
Although the foregoing Investment Restrictions would permit the
Tax-Exempt Money Market Fund to acquire options, enter into forward currency
contracts and engage in short sales and interest rate and currency swaps, it is
not currently permitted to engage in these transactions under SEC regulations.
ADDITIONAL TRUST INFORMATION
CLASSIFICATION AND HISTORY
Northern Funds is an open-end, management investment company. Each Fund
is classified as diversified under the 1940 Act and is a series of the Trust
which was formed as a Massachusetts business trust on October 12, 1993 under an
Agreement and Declaration of Trust.
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 73 222 Wisconsin Avenue, Suite 305, Lake Forest, Illinois 60045. Chairman of
Kidder Peabody Inc. from May 1987 until his retirement in December 1989.
Director of General Electric Co., Baxter International, Inc. (worldwide
development, distribution and manufacture of health care products,
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<PAGE> 64
systems and services), The Quaker Oats Co., Montgomery Ward, American Academics,
Inc., and Allegiance Corporation (healthcare products, systems and services).
Retired Director and Trustee of Illinois Tool Works, Inc., and Bradley Trust,
respectively.
Mr. James W. Cozad, Trustee, Age 72, 12094 Lost Tree Way,
North Palm Beach, Florida 33408. Vice Chairman of Amoco Corporation from
September 1983 to December 1989 and Chairman and CEO of Whitman Corporation
(holding company for Pepsi-Cola General Bottlers, Inc.), Midas International
Corporation (automotive services) and Hussmann Corporation (refrigeration
systems and equipment) from January 1990 until his retirement in May 1992.
Retired Director of Whitman Corporation, Eli Lilly and Company (life science
products), Inland Steel Company, Inland Steel Industries, Inc., Sears, Roebuck &
Company and GATX Corporation (transportation, distribution and warehousing).
Mr. Wesley M. Dixon, Jr.,* Trustee, Age 71, 400 Skokie Blvd.,
Suite 300, 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 67, 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 and 1997, Director of Household
Bank, Federal Savings Bank since May 1995, and Director of First Central
National Life Insurance Company since July 1998.
Mr. Raymond E. George, Jr.,** Trustee, Age 69, 703 Prospect
Avenue, Winnetka, Illinois 60093. Senior Vice President and Senior Fiduciary
Officer of The Northern Trust Company from 1990 until his retirement in October
1993.
Mr. Michael E. Murphy,** Trustee, Age 62, Suite 2222, 20 South
Clark Street, Chicago, Illinois, 60603. President of Sara Lee Foundation since
November 1997. Vice Chairman and Chief Administrative Officer of Sara Lee
Corporation (consumer products) from November 1994 to October 1997. Vice
Chairman and Chief Financial and Administrative Officer of Sara Lee Corporation
from July 1993 to November 1994. Executive Vice President and Chief Financial
and Administrative Officer of Sara Lee Corporation from June 1979 to June 1993.
Director of Payless Shoe Source, Inc., True North Communications, Inc., American
General Corporation, GATX Corporation, and Bassett Furniture Industries, Inc.
Mary Jacobs Skinner, Esquire,** Trustee, Age 41, One First
National Plaza, Chicago, Illinois 60603. Partner in the law firm of Sidley &
Austin.
- ----------
* Messrs. Cathcart and Dixon are first cousins.
** Messrs. Cathcart, George and Murphy, and Ms. Skinner are considered to
be "interested persons" of Northern Funds as defined in the 1940 Act.
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<PAGE> 65
Miriam M. Allison, Vice President and Treasurer, Age 52, 207
E. Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. President and Director
of Sunstone Financial Group, Inc. since 1990, President and Treasurer of
Sunstone Distribution Services, LLC since October 1996, President of Northern
Funds Distributors, LLC since August 1998 and Vice President of Firstar Trust
Company prior thereto.
Mary M. Tenwinkel, Vice President, Age 51, 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 from
October 1996 to July 1998, and First Vice President and head of Personal
Services Group at Firstar Trust Company prior thereto.
Anita M. Zagrodnik, Assistant Treasurer, Age 39, 207 E.
Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. Vice President of
Sunstone Financial Group, Inc. since 1994. Client Services Manager of Sunstone
Financial Group, Inc. from 1990 to 1994.
Jeffrey A. Dalke, Secretary, Age 48, 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 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.
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For the fiscal year ended March 31, 1999, the Trustees received the
following compensation:
<TABLE>
<CAPTION>
Pension or
Retirement Total
Aggregate Benefits Accrued Compensation
Compensation from as Part of Trust from the Trust
Name of Trustee the Trust Expense Complex*
--------------- --------- ------- --------
<S> <C> <C> <C>
Silas S. Cathcart $35,000 None $35,000
James W. Cozad $30,000 None $30,000
Wesley M. Dixon, Jr. $27,500 None $27,500
William J. Dolan, Jr. $30,000 None $30,000
Raymond E. George, Jr. $30,000 None $30,000
Michael E. Murphy $30,000 None $30,000
Mary Jacobs Skinner(1) $22,500 None $22,500
</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.
(1) Ms. Skinner was appointed to the Board of Trustees on September 18, 1998.
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern Trust is a wholly-owned subsidiary of The Northern Trust
Corporation, a Chicago-based multi-bank holding company with subsidiaries in
Colorado, Illinois, Florida, Michigan, New York, Arizona, Georgia, California
and Texas. Northern Trust has for more than 100 years managed the assets of
individuals, charitable organizations, foundations and large corporate
investors. One of the nation's leading providers of trust and investment
management services, Northern Trust first entered the mutual fund business in
1983 by offering money market funds to institutional clients. As part of its
investment advisory services, Northern Trust offers extensive research services
to its clients. As of the date of this Additional Statement, nearly 300
financial institutions nationwide purchase Northern Trust's economic advisory
services. As of March 31, 1999, Northern Trust Corporation and its subsidiaries
had approximately $27.6 billion in assets and $16.6 billion in deposits.
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 Funds through a team of professionals,
led by portfolio managers who follow a
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<PAGE> 67
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. As of March 31, 1999, the Investment Adviser and its affiliates
administered approximately $1.3 trillion in assets, including $242.7 billion for
which the Investment Adviser had investment management responsibility, for
clients including public and private retirement funds, endowments, foundations,
trusts, corporations, other investment companies and individuals.
Subject to the general supervision of the Board of Trustees, Northern
Trust makes decisions with respect to and places orders for all purchases and
sales of portfolio securities for the Funds, and also provides certain ancillary
services. The Investment Adviser is also responsible for monitoring and
preserving the records required to be maintained under the regulations of the
SEC (with certain exceptions unrelated to its activities for Northern Funds). In
making investment recommendations for the Funds, investment advisory personnel
may not inquire or take into consideration whether issuers of securities
proposed for purchase or sale for the Funds' accounts are customers of Northern
Trust's commercial banking department. These requirements are designed to
prevent investment advisory personnel for the Funds from knowing which companies
have commercial business with Northern Trust and from purchasing securities
where they know the proceeds will be used to repay loans to the bank.
Northern Funds' Investment Advisory and Ancillary Services Agreement
with Northern Trust (the "Advisory Agreement") 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, the Investment Adviser shall use its best judgment to obtain
the best overall terms available, and (b) with respect to other securities, the
Investment Adviser 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, the
Investment Adviser 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, the
Investment Adviser may consider the brokerage and research services provided to
the Funds and/or other accounts over which the Investment Adviser or an
affiliate of the Investment Adviser exercises investment discretion. A broker or
dealer providing brokerage and/or research services may receive a higher
commission than another broker or dealer would receive for the same transaction.
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 the Investment Adviser and
does not reduce the advisory fees payable
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<PAGE> 68
to the Investment Adviser by the Funds. The Trustees will periodically review
the commissions paid by the Funds to consider whether the commissions paid over
representative periods of time appear to be reasonable in relation to the
benefits inuring to the Funds. It is possible that certain of the supplemental
research or other services received will primarily benefit one or more other
investment companies or other accounts for which investment discretion is
exercised. Conversely, a 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, the Investment Adviser 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 Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Funds will engage in this practice, however, only when the Investment
Adviser believes such practice to be in the Funds' interests.
Northern Trust's investment advisory duties for Northern Funds are
carried out through its Trust Department. On occasions when the Investment
Adviser deems the purchase or sale of a security to be in the best interests of
a Fund as well as other fiduciary or agency accounts managed by it (including
any other portfolio, investment company or account for which the Investment
Adviser acts as adviser), the Agreement provides that the Investment Adviser, to
the extent permitted by applicable laws and regulations, may aggregate the
securities to be sold or purchased for such Fund with those to be sold or
purchased for such other accounts in order to obtain the best overall terms
available with respect to common and preferred stocks and the best net price and
execution with respect to other securities. In such event, allocation of the
securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Investment Adviser 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 the Investment Adviser, at its
discretion but subject to applicable law, to select the executing broker or
dealer on the basis of the Investment Adviser's opinion of the reliability and
quality of the broker or dealer.
The Advisory Agreement provides that the Investment Adviser 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 the Investment Adviser against certain liabilities (including
liabilities under the federal securities laws relating to untrue statements
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<PAGE> 69
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, the Investment Adviser may voluntarily waive a
portion or all of its fees otherwise payable to it with respect to the Funds.
Under its Transfer Agency Agreement with Northern Funds, Northern Trust
has undertaken, among other things, to perform the following services: (1)
answer shareholder inquiries and respond to requests for information regarding
Northern Funds; (2) process purchase and redemption transactions; (3) establish
and maintain shareholder accounts and subaccounts; (4) furnish confirmations in
accordance with applicable law, and provide periodic account statements to each
shareholder; (5) furnish proxy statements and proxies, annual and semi-annual
financial statements, and dividend, distribution and tax notices to
shareholders; (6) act as income disbursing agent; and (7) maintain appropriate
records relating to its services. Northern Trust may appoint one or more
sub-transfer agents in the performance of its services.
As compensation for the services rendered by Northern Trust under the
Transfer Agency Agreement and the assumption by Northern Trust of related
expenses, Northern Trust is entitled to a fee from Northern Funds, payable
monthly, at an annual rate of .10% of the average daily net asset value of each
of the Funds.
Northern Trust maintains custody of the assets of the Funds pursuant to
the terms of its Custodian Agreement with Northern Funds. Under this agreement,
Northern Trust (l) holds each Fund's cash and securities, (2) maintains such
cash and securities in separate accounts in the name of the Fund, (3) makes
receipts and 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,
subject to certain monitoring responsibilities, 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 each Fund under the
Custodian Agreement, and the assumption by Northern Trust of certain related
expenses, Northern Trust is entitled to payment from each of the Funds as
follows: (a) a basic custodial fee of (i) $18,000 annually for each Fund, plus
(ii) 1/100th of 1% annually of each Fund's average daily net assets to the
extent they exceed $100 million, plus (b) a basic accounting fee of (i) $25,000
annually for each Fund, plus (ii) 1/100th of 1% annually of each Fund's average
daily net assets to the extent they exceed $50 million, plus (c) a fixed dollar
fee for each trade in portfolio securities, plus (d) a fixed dollar fee for each
time that Northern Trust as Custodian receives or transmits funds via wire, plus
(e) reimbursement of expenses incurred by Northern Trust as Custodian for
telephone, postage, courier fees, office supplies and duplicating. The fees
referred to in clauses (c) and (d) are subject to annual
- 33 -
<PAGE> 70
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.
Northern's fees under the Custodian Agreement and Foreign Custody
Agreement are subject to reduction based on the Funds' daily uninvested cash
balances (if any).
[End of Page.]
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<PAGE> 71
Unless sooner terminated, Northern Funds' Advisory Agreement, Transfer
Agency Agreement and Custodian Agreement will continue in effect with respect to
a particular Fund until March 31, 2000, 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 their agreements with Northern Funds without violation of such
banking laws or regulations, which are applicable to them. 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 any Fund or result in a financial loss to any shareholder. Moreover, if
current restrictions preventing a bank from legally sponsoring, organizing,
controlling or distributing shares of an open-end investment company were
relaxed, Northern Funds expects that Northern Trust and its affiliates 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 and its affiliates might offer to provide services for consideration by
the Trustees.
Northern Trust is active as an underwriter of municipal instruments.
Under the 1940 Act, the Funds are precluded, subject to certain exceptions, from
purchasing in the primary market those municipal instruments with respect to
which Northern Trust is serving as a principal underwriter. In the opinion of
Northern Trust, this limitation will not significantly affect the ability of the
Funds to pursue their respective investment objectives.
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
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<PAGE> 72
itself the right to grant the non-exclusive right to use the name "Northern" to
any other person. The Advisory Agreement provides that at such time as the
Agreement is no longer in effect, Northern Funds will cease using the name
"Northern."
ADMINISTRATOR AND DISTRIBUTOR
Under its Administration Agreement, Sunstone has agreed, subject to the
direction and control of Northern Funds' Board of Trustees and utilizing
information provided by Northern Funds and its agents, to (1) provide office
space, facilities, equipment and personnel to carry out its services; (2)
compile data for and prepare with respect to the Funds timely Notices to the SEC
required pursuant to Rule 24f-2 under the 1940 Act and Semi-Annual Reports on
Form N-SAR; (3) prepare for execution by Northern Funds and file all federal
income and excise tax returns and state income tax returns (and such other
required tax filings as may be agreed to by the parties) other than those
required to be made by Northern Funds' custodian and transfer agent; (4) prepare
compliance filings relating to the registration of the securities of the Funds
pursuant to state securities laws with the advice of Northern Funds' counsel;
(5) assist the Fund accountants with preparing the Annual and Semi-Annual
Reports required pursuant to Section 30(d) under the 1940 Act; (6) assist to the
extent requested by Northern Funds with the preparation of the Registration
Statement for the Funds (on Form N-1A or any replacement therefor) and any
amendments thereto, and proxy materials; (7) prepare and monitor each Fund's
expense accruals and cause all appropriate expenses to be paid from Fund assets
on proper authorization from the Fund; (8) assist in the acquisition of the
Funds' fidelity bond required by the 1940 Act, monitor the amount of the bond
and make the necessary SEC filings related thereto; (9) from time to time as
Northern Funds may reasonably request or as Sunstone deems appropriate, check
each Fund's compliance with the policies and limitations relating to portfolio
investments as set forth in the Prospectus, Additional Statement and Declaration
of Trust and monitor each Fund's status as a regulated investment company under
Subchapter M of the Internal Revenue Code, as amended (but this function shall
not relieve the Fund's Investment Adviser of its 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 each Fund's administrative operations. In addition, Sunstone has agreed to
monitor Northern Funds' arrangements with respect to services provided by
Service Organizations. Under the Administration Agreement, Sunstone is not
liable for any error of judgment or mistake of law or for any loss suffered by
the Funds in connection with the performance of the Administration Agreement,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the part of Sunstone in the performance of its duties or from its reckless
disregard of its duties and obligations under the Agreement.
For its administrative services, Sunstone is entitled to an
administration fee, computed daily and payable monthly, at the annual rate of
0.15% of the Funds' average aggregate daily net assets.
Northern Funds has also entered into a Distribution Agreement under
which Northern Funds Distributors, LLC, as agent, sells shares of each Fund on a
continuous basis. Northern Funds Distributors, 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 Northern
Funds
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<PAGE> 73
Distributors, LLC for such distribution services. Northern Funds Distributors,
LLC is an affiliate of Sunstone. Miriam M. Allison, Vice President and Treasurer
of Northern Funds is President of Northern Funds Distributors, LLC.
The Administration Agreement and the Distribution Agreement provide
that Sunstone and Northern Funds Distributors, 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 Northern
Funds Distributors, 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.
Under a Service Mark License Agreement with Northern Funds
Distributors, LLC, Northern Trust Corporation agrees that the name "Northern
Funds" may be used in connection with Northern Funds' business on a royalty-free
basis. Northern Trust Corporation has reserved to itself the right to grant the
non-exclusive right to use the name "Northern Funds" to any other person. The
Agreement provides that at such time as the Agreement is no longer in effect,
Northern Funds Distributors, LLC will cease using the name "Northern Funds."
SERVICE ORGANIZATIONS
As stated in the Funds' Prospectus, the Funds may enter into agreements
from time to time with Service Organizations providing for support and/or
distribution services to customers of the Service Organizations who are the
beneficial owners of Fund shares. Under the agreements, the Funds may pay
Service Organizations up to .25% (on an annualized basis) of the average daily
net asset value of the shares beneficially owned by their customers. Support
services provided by Service Organizations under their agreements may include:
(a) processing dividend and distribution payments from a Fund; (b) providing
information periodically to customers showing their share positions; (c)
arranging for bank wires; (d) responding to customer inquiries; (e) providing
subaccounting with respect to shares beneficially owned by customers or the
information necessary for subaccounting; (f) forwarding shareholder
communications; (g) assisting in processing share purchase, exchange and
redemption requests from customers; (h) assisting customers in changing dividend
options, account designations and addresses; and (i) other similar services
requested by the Funds. In addition, Service Organizations may provide
assistance (such as the forwarding of sales literature and advertising to their
customers) in connection with the distribution of Fund shares.
The Funds' arrangements with Service Organizations under the agreements
are governed by two Plans (a Service Plan and a Distribution and Service Plan),
which have been adopted by the Board of Trustees. Because the Distribution and
Service Plan contemplates the provision of services related to the distribution
of Fund shares (in addition to support services), that Plan has been adopted in
accordance with Rule 12b-1 under the 1940 Act. In accordance with the Plans, the
Board of Trustees reviews, at least quarterly, a written report of the amounts
expended in connection with the Funds' arrangements with Service Organizations
and the purposes for which the expenditures were made. In addition, the Funds'
arrangements with Service Organizations must be approved annually by a majority
of the Trustees, including a majority of the Trustees who are
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<PAGE> 74
not "interested persons" of the Funds as defined in the 1940 Act and have no
direct or indirect financial interest in such arrangements (the "Disinterested
Trustees").
The Board of Trustees believes that there is a reasonable likelihood
that their arrangements with Service Organizations will benefit each Fund and
its shareholders. Any material amendment to the arrangements with Service
Organizations under the agreements must be approved by a majority of the Board
of Trustees (including a majority of the Disinterested Trustees), and any
amendment to increase materially the costs under the Distribution and Service
Plan with respect to a Fund must be approved by the holders of a majority of the
outstanding shares of the Fund involved. So long as the Distribution and Service
Plan is in effect, the selection and nomination of the members of the Board of
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Northern Funds will be committed to the discretion of such disinterested
Trustees.
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 AND REDEMPTIONS
Payment for shares of a Fund may, in the discretion of Northern Trust,
be made in the form of securities that are permissible investments for the Fund
as described in the Prospectus. For further information about this form of
payment, contact the Transfer Agent. In connection with an in-kind securities
payment, a Fund will require, among other things, that the securities be valued
on the day of purchase in accordance with the pricing methods used by the Fund
and that the Fund receive satisfactory assurances that it will have good and
marketable title to the securities received by it; that the securities be in
proper form for transfer to the Fund; and that adequate information be provided
concerning the basis and other tax matters relating to the securities.
Although each Fund generally will redeem shares in cash, each Fund
reserves the right to pay redemptions by a distribution in kind of securities
(instead of cash) from such Fund. The securities distributed in kind would be
readily marketable and would be valued for this purpose using the same method
employed in calculating the Fund's net asset value per share. If a shareholder
receives redemption proceeds in kind, the shareholder should expect to incur
transaction costs upon the disposition of the securities received in the
redemption.
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
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<PAGE> 75
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.
DIRECTED REINVESTMENTS
In addition to having your income dividends and/or capital gains
distributions reinvested in shares of the Fund from which such distributions are
paid, you may elect the directed reinvestment option and have dividends and
capital gains distributions automatically invested in another Northern Fund.
Reinvestments can only be directed to an existing Northern Funds account (which
must meet the minimum investment requirement). Directed reinvestments may be
used to invest funds from a regular account to another regular account, from a
qualified plan account to another qualified plan account, or from a qualified
plan account to a regular account. Directed reinvestments from a qualified plan
account to a regular account may have adverse tax consequences including
imposition of a penalty tax and, therefore, you should consult your own tax
adviser before commencing these transactions.
REDEMPTIONS AND EXCHANGES
Exchange requests received on a Business Day prior to the time shares
of the Funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the Fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new Fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share next determined coincident to or after the time of
redemption. Exchange requests received on a Business Day after the time shares
of the Funds involved in the request are priced will be processed on the next
Business Day in the manner described above.
Northern Funds may redeem shares involuntarily to reimburse a 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 Funds' Prospectus from time to
time. Northern Funds may also redeem shares involuntarily if the redemption is
appropriate to carry out Northern Funds' responsibilities under the 1940 Act
(see, e.g., "Amortized Cost Valuation").
----
RETIREMENT PLANS
Shares of the Funds may be purchased in connection with certain
tax-sheltered retirement plans, including profit-sharing plans, 401(k) plans,
money purchase pension plans, target benefit plans and individual retirement
accounts. Further information about how to participate in these plans, the fees
charged and the limits on contributions can be obtained from Northern Trust. To
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<PAGE> 76
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.
EXPENSES
Except as set forth above and in this Additional Statement, each Fund
is responsible for the payment of its expenses. These expenses include, without
limitation, the fees and expenses payable to Northern Trust and Sunstone,
brokerage fees and commissions, fees for the registration or qualification of
Fund shares under federal or state securities laws, expenses of the organization
of Northern Funds, taxes, interest, costs of liability insurance, fidelity
bonds, indemnification or contribution, any costs, expenses or losses arising
out of any liability of, or claim for damages or other relief asserted against
Northern Funds for violation of any law, legal, tax and auditing fees and
expenses, expenses of preparing and printing prospectuses, statements of
additional information, proxy materials, reports and notices and the printing
and distributing of the same to the Funds' shareholders and regulatory
authorities, compensation and expenses of its Trustees, payments to Service
Organizations, fees of industry organizations such as the Investment Company
Institute, and miscellaneous and extraordinary expenses incurred by Northern
Funds.
Northern Trust and Sunstone intend to voluntarily reimburse a portion
of the Funds' expenses and/or reduce their advisory and administrative fees from
the Funds during the current fiscal year. The result of these reimbursements and
fee reductions will be to increase the performance of the Funds during the
periods for which the reductions and reimbursements are made.
PERFORMANCE INFORMATION
TAX-EXEMPT MONEY MARKET FUND
From time to time Northern Funds may advertise quotations of "yields",
"effective yields", "tax-equivalent yields" and "tax-equivalent effective
yields" with respect to the Tax-Exempt Money Market Fund. These yield figures
will fluctuate, are based on historical earnings and are not intended to
indicate future performance. "Yield" refers to the net investment income
generated by an investment in the Fund over a seven-day period identified in the
advertisement. This net investment income is then "annualized." That is, the
amount of net investment income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment.
In arriving at quotations as to "yield," Northern Funds first
determines the net change during the period in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period, then divides such net change by the value of the account at the
beginning of the period to obtain the base period return, and then multiplies
the base period return by 365/7.
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<PAGE> 77
"Effective yield" is calculated similarly but, when annualized, the net
investment income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment. The "effective
yield" with respect to the shares of a Money Market Fund is computed by adding 1
to the base period return (calculated as above), raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result.
The "tax-equivalent yield" demonstrates the level of taxable yield
necessary to produce an after-tax yield equivalent to a Fund's tax-free yield.
It is calculated by taking that portion of the seven-day "yield" which is
tax-exempt and adjusting it to reflect the tax savings associated with a stated
tax rate. The "tax-equivalent current yield" will always be higher than the
Fund's yield.
"Tax-equivalent yield" is computed by dividing the tax-exempt portion
of the yield by 1 minus a stated income tax rate and then adding the quotient to
the taxable portion of the yield, if any. There may be more than one
tax-equivalent yield if more than one stated income tax rate is used.
The "tax-equivalent effective yield" demonstrates the level of taxable
yield necessary to produce an after-tax yield equivalent to a Fund's tax-free
effective yield. It is calculated by taking that portion of the seven-day
"effective yield" which is tax-exempt and adjusting it to reflect the tax
savings associated with a stated tax rate. The "tax-equivalent effective yield"
will always be higher than the Fund's effective yield.
"Tax-equivalent effective yield" is computed by dividing the tax-exempt
portion of the effective yield by 1 minus a stated income tax-rate, and then
adding the quotient to the taxable portion of the effective yield, if any. There
may be more than one tax-equivalent effective yield, if more than one stated
income tax rate is used.
The Tax-Exempt Money Market Fund may also quote, from time to time,
total return information using the formula described in the following section.
SMALL CAP GROWTH FUND
The Small Cap Growth Fund calculates its total return on an "average
annual total return" basis for various periods. Average annual total return
reflects the average annual percentage change in value of an investment in the
Fund over the measuring period. Total return for the Fund 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 shares
and assume that any dividends and capital gain distributions made by the Fund
during the period are reinvested in the shares of the Fund. When considering
average total return figures for periods longer than one year, it is important
to note that the annual total return of a Fund for any one year in the period
might have been more or less than the average for the entire period. The Fund
may also advertise from time to time the total return on a year-by-year or other
basis for various specific periods by means of quotations, charts, graphs or
schedules.
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The Fund calculates its "average annual total return" by determining
the average annual compounded rate of return during specified periods that
equates the initial amount invested to the ending redeemable value of such
investment according to the following formula:
T = (ERV/P) to the power of 1/n - 1
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year (or other) periods at the end
of the applicable period (or a fractional
portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed
in years.
The Fund calculates its "aggregate total return" by determining the
aggregate compounded rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
Aggregate Total Return = T = [(ERV/P)] - 1
The yield of the Fund is computed based on the Fund's net income during
a specified 30-day (or one month) period. More specifically, the Fund's yield is
computed by dividing the per share net income during the relevant period by the
net asset value per share on the last day of the period and annualizing the
result on a semi-annual basis.
The Fund calculates its 30-day (or one month) standard yield in
accordance with the method prescribed by the SEC for mutual funds:
Yield = 2[(a-b/cd + 1) to the power of 6 - 1]
Where: a = dividends and interest earned during the
period;
b = expenses accrued for the period (net of
reimbursements);
c = average daily number of shares outstanding
during the period entitled to receive
dividends; and
d = net asset value per share on the last day of
the period.
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GENERAL INFORMATION
Any fees imposed by Northern Trust or other Service Organizations on
their customers in connection with investments in the Funds are not reflected in
Northern Funds' calculations of performance for the Funds.
Each Fund's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates, portfolio
expenses and other factors. Performance is one basis investors may use to
analyze a Fund as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and differences in the methods
used in valuing their portfolio instruments, computing net asset value and
determining performance.
The performance of each Fund may be compared to those of other mutual
funds with similar investment objectives and to stock, bond and other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the performance of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc. or the Consumer Price Index or, with respect to the Small Cap
Growth Fund, to the Russell 2000 Small Stock Index or the Dow Jones Industrial
Average. Performance data as reported in national financial publications such as
Money, Forbes, Barron's, The Wall Street Journal and The New York Times, or in
publications of a local or regional nature, may also be used in comparing the
performance of a Fund. From time to time, the Funds may also quote the mutual
fund ratings of Morningstar, Inc. and other services in their advertising
materials.
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 Funds 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 Funds. The Funds may also compare performance to that of other
compilations or indices that may be developed and made available in the future.
The Funds 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 a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original investment in the Fund, but also of the additional Fund shares
received through reinvestment.
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The Funds 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 a 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 a Fund), as well as the views of
Northern Trust as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund. In addition, selected
indices may be used to illustrate historic performance of selected asset
classes. The Funds 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 a 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 a 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 numbers of the Funds and may illustrate
how to find the listings of the Funds in newspapers and periodicals. Materials
may also include discussions of other Funds, products, and services.
The Funds may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Funds 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 Funds 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 a 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.
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<PAGE> 81
A Fund may advertise its current interest rate sensitivity, duration,
weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a Fund may include
information regarding the background and experience of its portfolio managers.
NET ASSET VALUE
As stated in the Prospectus, the Tax-Exempt Money Market Fund seeks to
maintain a net asset value of $1.00 per share and, in this connection, values
its instruments on the basis of amortized cost pursuant to Rule 2a-7 under the
1940 Act. This method values a security at its cost on the date of purchase and
thereafter assumes a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price a Fund would receive if the Fund sold the
instrument. During such periods the yield to investors in the Fund may differ
somewhat from that obtained in a similar entity which uses available indications
as to market value to value its portfolio instruments. For example, if the use
of amortized cost resulted in a lower (higher) aggregate Fund value on a
particular day, a prospective investor in the Fund would be able to obtain a
somewhat higher (lower) yield and ownership interest than would result from
investment in such similar entity and existing investors would receive less
(more) investment income and ownership interest. However, Northern Funds expects
that the procedures and limitations referred to in the following paragraphs of
this section will tend to minimize the differences referred to above.
Under Rule 2a-7, Northern Funds' Board of Trustees, in supervising the
Funds' operations and delegating special responsibilities involving portfolio
management to Northern Trust, has established procedures that are intended,
taking into account current market conditions and the Funds' investment
objectives, to stabilize the net asset value of the Tax-Exempt Money Market
Fund, as computed for the purposes of purchases and redemptions, at $1.00 per
share. The Trustees' procedures include periodic monitoring of the difference
(the "Market Value Difference") between the amortized cost value per share and
the net asset value per share based upon available indications of market value.
Available indications of market value consist of actual market quotations or
appropriate substitutes which reflect current market conditions and include (a)
quotations or estimates of market value for individual portfolio instruments
and/or (b) values for individual portfolio instruments derived from market
quotations relating to varying maturities of a class of money market
instruments. In the event the Market Value Difference exceeds 1/2 of 1%, the
Trustees' procedures provide that the Trustees will take such steps as they
consider appropriate (e.g., selling portfolio instruments to shorten average
portfolio maturity or to realize capital gains or losses, reducing or suspending
shareholder income accruals, redeeming shares in kind, or utilizing a net asset
value per share based upon available indications of market value which under
such circumstances would vary from $1.00) to eliminate or reduce to the extent
reasonably practicable any material dilution or other unfair results to
investors or existing shareholders which might arise from Market Value
Differences. In particular, if losses were sustained by a Fund, the number of
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<PAGE> 82
outstanding shares might be reduced in order to maintain a net asset value per
share of $1.00. Such reduction would be effected by having each shareholder
proportionately contribute to the Fund's capital the necessary shares to restore
such net asset value per share. Each shareholder will be deemed to have agreed
to such contribution in these circumstances by investing in the Fund.
Rule 2a-7 requires that the Tax-Exempt Money Market Fund limit its
investments to instruments which Northern Trust determines to present minimal
credit risks and which are "Eligible Securities" as defined by the SEC and
described in the Prospectus. The Rule also requires that the Tax-Exempt Money
Market Fund maintain a dollar-weighted average portfolio maturity (not more than
90 days) appropriate to its policy of maintaining a stable net asset value per
share and precludes the purchase of any instrument deemed under the Rule to have
a remaining maturity of more than 397 days. Should the disposition of a
portfolio security result in a dollar-weighted average portfolio maturity of
more than 90 days, the Rule requires a Money Market Fund to invest its available
cash in such a manner as to reduce such maturity to the prescribed limit as soon
as reasonably practicable.
Securities held by the Small Cap Growth 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.
Northern Trust is not required to calculate the net asset value of a
Fund on days during which no shares are tendered to a Fund for redemption and no
orders to purchase or sell shares are received by a Fund, or on days on which
there is an insufficient degree of trading in the Fund's portfolio securities
for changes in the value of such securities to affect materially the net asset
value per share.
TAXES
The following summarizes certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussions here and in
the Prospectus are not intended as a substitute for careful tax planning.
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<PAGE> 83
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
Each Fund intends to qualify as a regulated investment company under
Part I of Subchapter M of Subtitle A, Chapter 1 of the Internal Revenue Code of
1986, as amended (the "Code"). As a regulated investment company, each Fund is
generally exempt from federal income tax on its net investment income and
realized capital gains which it distributes to shareholders, provided that it
distributes an amount equal to at least the sum of 90% of its tax-exempt income
and 90% of its investment company taxable income (net investment income and the
excess of net short-term capital gain over net long-term capital loss), if any,
for the year (the "Distribution Requirement") and satisfies certain other
requirements of the Code that are described below.
In addition to satisfaction of the Distribution Requirement, each Fund
must derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement").
In addition to the foregoing requirements, at the close of each quarter
of its taxable year, at least 50% of the value of each Fund's assets must
consist of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to which a
Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Fund does not hold more than 10% of
the outstanding voting securities of such issuer), and no more than 25% of the
value of each Fund's total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which such Fund controls and
which are engaged in the same or similar trades or businesses.
Each Fund intends to distribute to shareholders any excess of net
long-term capital gain over net short-term capital loss ("net capital gain") for
each taxable year. Such gain is distributed as a capital gain dividend and is
taxable to shareholders as long-term capital gain, regardless of the length of
time the shareholder has held the shares, whether such gain was recognized by
the Fund prior to the date on which a shareholder acquired shares of the Fund
and whether the distribution was paid in cash or reinvested in shares. In
addition, investors should be aware that any loss realized upon the sale,
exchange or redemption of shares held for six months or less will be treated as
a long-term capital loss to the extent of any capital gain dividends that have
been paid with respect to such shares.
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<PAGE> 84
Dividends and distributions from each Fund will generally be taxable to
you in the tax year in which they are paid, with one exception. Dividends and
distributions declared by a Fund in October, November or December and paid in
January are taxed as though they were paid by December 31.
In the case of corporate shareholders, distributions of a Fund for any
taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" from domestic corporations
received by the Fund for the year. A dividend usually will be treated as a
"qualifying dividend" if it has been received from a domestic corporation. A
portion of the dividends paid by the Small Cap Growth Fund may constitute
"qualifying dividends." The Tax-Exempt Money Market Fund, however, is not
expected to pay qualifying dividends.
If for any taxable year any Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders. In such
event, all distributions (whether or not derived from exempt-interest income)
would be taxable as ordinary income to the extent of such Fund's current and
accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders.
The Code imposes a non-deductible 4% excise tax on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, each Fund
may be subject to the tax laws of such states or localities.
FEDERAL-TAX-EXEMPT INFORMATION
As described in the Prospectus, the Tax-Exempt Money Market Fund is
designed to provide investors with federally tax-exempt interest income. The
Fund is not intended to constitute a balanced investment program and is not
designed for investors seeking capital appreciation or maximum tax-exempt income
irrespective of fluctuations in principal. Shares of the Fund would not be
suitable for tax-exempt institutions or for retirement plans qualified under
Section 401 of the Code, H.R.10 plans and individual retirement accounts because
such plans and accounts are generally tax-exempt and, therefore, would not gain
any additional benefit from the Fund's dividends being tax-exempt. In addition,
the Fund may not be an appropriate investment for persons or entities that are
"substantial users" of facilities financed by private activity bonds or "related
persons" thereof. "Substantial user" is defined under U.S. Treasury Regulations
to include a non-exempt person which regularly uses a part of such facilities in
its trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, or
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<PAGE> 85
which occupies more than 5% of the usable area of such facilities or for which
such facilities or a part thereof were specifically constructed, reconstructed
or acquired. "Related persons" include certain related natural persons,
affiliated corporations, partnerships and its partners and an S corporation and
its shareholders.
In order for the Tax-Exempt Money Market Fund to pay Federal
exempt-interest dividends for any taxable year, at the close of each taxable
quarter at least 50% of the aggregate value of the Fund must consist of
tax-exempt obligations. An exempt-interest dividend is any dividend or part
thereof (other than a capital gain dividend) paid by a Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders not later
than 60 days after the close of the Fund's taxable year. However, the aggregate
amount of dividends so designated by a Fund cannot exceed the excess of the
amount of interest exempt from tax under Section 103 of the Code received by the
Fund during the taxable year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. The percentage of total dividends paid
by a Fund with respect to any taxable year which qualifies as federal
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Fund with respect to such year.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of a tax exempt Fund generally is not deductible for federal income tax
purposes to the extent attributable to exempt-interest-dividends. If a
shareholder holds Fund shares for six months or less, any loss on the sale or
exchange of those shares will be disallowed to the extent of the amount of
exempt-interest dividends earned with respect to the shares. The Treasury
Department, however, is authorized to issue regulations reducing the six-month
holding requirement to a period of not less than the greater of 31 days or the
period between regular distributions for investment companies that regularly
distribute at least 90% of its net tax-exempt interest. No such regulations had
been issued as of the date of this Additional Statement.
Corporate taxpayers will be required to take into account all
exempt-interest dividends from the Tax-Exempt Money Market Fund in determining
certain adjustments for alternative minimum tax purposes.
The Tax-Exempt Money Market Fund will determine annually the percentage
of its net investment income which is exempt from tax, which constitute an item
of tax preference for purposes of the federal alternative minimum tax, and which
is fully taxable, and will apply these percentages uniformly to all dividends
declared from net investment income during that year. These percentages may
differ significantly from the actual percentages for any particular day.
Shareholders will be advised annually as to the federal income tax
consequences of distributions made by the Tax-Exempt Money Market Fund.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
The tax principles applicable to transactions in financial instruments
and futures contacts and options that may be engaged in by a Fund, and
investments in passive foreign investment companies ("PFICs"), are complex and,
in some cases, uncertain. Such transactions and investments may cause a Fund to
recognize taxable income prior to the receipt of cash, thereby
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<PAGE> 86
requiring the Fund to liquidate other positions, or to borrow money, so as to
make sufficient distributions to shareholders to avoid corporate-level tax.
Moreover, some or all of the taxable income recognized may be ordinary income or
short-term capital gain, so that the distributions may be taxable to
shareholders as ordinary income.
In addition, in the case of any shares of a PFIC in which a Fund
invests, the Fund may be liable for corporate-level tax on any ultimate gain or
distributions on the shares if the Fund fails to make an election to recognize
income annually during the period of its ownership of the shares.
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-nine portfolios, two
of which are discussed in this Additional Statement. Under the terms of the
Trust Agreement, each share of each Fund has a par value of $.0001, represents a
proportionate interest in the particular Fund with each other share of its class
and is entitled to such dividends and distributions out of the income belonging
to the Fund as are declared by the Trustees. Upon any liquidation of a Fund,
shareholders of each class of a Fund are entitled to share pro rata in the net
assets belonging to that class available for distribution. Shares do not have
any preemptive or conversion rights. The right of redemption is described under
"Redeeming and Exchanging Shares" in the Prospectus. Pursuant to the terms of
the 1940 Act, the right of a shareholder to redeem shares and the date of
payment by a Fund may be suspended for more than seven days (a) for any period
during which the New York Stock Exchange is closed, other than the customary
weekends or holidays, or trading in the markets the Fund normally utilizes is
closed or is restricted as determined by the SEC, (b) during any emergency, as
determined by the SEC, as a result of which it is not reasonably practicable for
the Fund to dispose of instruments owned by it or fairly to determine the value
of its net assets, or (c) for such other period as the SEC may by order permit
for the protection of the shareholders of the Fund. Northern Funds may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions. In addition, Northern Funds
reserves the right to adopt, by action of the Trustees, a policy pursuant to
which it may, without shareholder approval, redeem upon not less than 30 days'
notice all of a Fund's shares if such shares have an aggregate value below a
designated amount and if the Trustees determine that it is not practical,
efficient or advisable to continue the operation of such Fund and that any
applicable requirements of the 1940 Act have been met. Shares when issued as
described in the Prospectus are validly issued, fully paid and nonassessable,
except as stated below. In the interests of economy and convenience,
certificates representing shares of the Funds are not issued.
The proceeds received by each Fund for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Fund. The underlying assets of
each Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to that Fund and with a share of the general
liabilities of Northern Funds. Expenses with respect to the portfolios of
Northern Funds are normally allocated in
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proportion to the net asset value of the respective portfolios except where
allocations of direct expenses can otherwise be fairly made.
Shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held. Each Fund entitled to
vote on a matter will vote in the aggregate and not by Fund, except as required
by law or when the matter to be voted on affects only the interests of
shareholders of a particular Fund.
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 are
exempt from the separate voting requirements stated above.
The term "majority of the outstanding shares" of either Northern Funds
or a particular Fund or investment portfolio means, with respect to the approval
of an investment advisory agreement, a distribution plan or a change in a
fundamental investment policy, the vote of the lesser of (i) 67% or more of the
shares of Northern Funds or such Fund or portfolio present at a meeting, if the
holders of more than 50% of the outstanding shares of Northern Funds or such
Fund or portfolio are present or represented by proxy, or (ii) more than 50% of
the outstanding shares of Northern Funds or such Fund or portfolio.
As of May 19, 1999 Northern and its affiliates held of record
substantially all of the outstanding shares of the Non-Money Market Funds as
agent, custodian, trustee or investment adviser on behalf of their customers. At
such date, The Northern Trust Company, 50 S. LaSalle Street, Chicago, Illinois
60675, and its affiliate banks held as beneficial owner five percent or more of
the outstanding shares of the Non-Money Market Funds because they possessed sole
or shared voting or investment power with respect to such shares. As of May 19,
1999 the names and share ownership of the entities or individuals which held of
record or beneficially more than 5% of the outstanding shares of any Fund were
as follows: Money Market Fund: Northern Trust Bank - Miami on behalf of its
-----------------
customers, 17.09%, Short Term Investment Fund, 20.83%, Northern Trust Bank - M&I
Sweep Account, 5.22%; U.S. Government Money Market Fund: Sahara Enterprises,
---------------------------------
Inc. Fixed Income Portfolio, 10.09%, Northern Trust Bank - M&I Sweep Account,
11.98%; Municipal Money Market Fund: Northern Trust Bank - Miami on behalf of
---------------------------
its customers, 28.96% and Northern Trust Bank - M&I Sweep Account, 5.47%; U.S.
----
Government Select Money Market Fund: Northern Trust Bank - Miami on behalf of
- -----------------------------------
its customers, 31.12%; Florida Intermediate Tax-Exempt Fund: Abraham General
------------------------------------
Partnership, 5.59%, Donaldson, Lufkin & Jenrette, 11.78% and
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<PAGE> 88
John C. Schumann, Jr., 7.40%; California Municipal Money Market Fund: Northern
--------------------------------------
Trust Bank - M&I Sweep Account, 12.03%; Stock Index Fund: Donaldson, Lufkin &
----------------
Jenrette, 7.75%; Select Equity Fund: Donaldson, Lufkin & Jenrette, 11.65%;
------------------
International Select Equity Fund: James L. Knight, 6.56%; California Tax-Exempt
- -------------------------------- ---------------------
Fund: Julius Epstein Residuary T/U/W, 5.93%; Technology Fund: Donaldson, Lufkin
- ---- ---------------
& Jenrette, 6.40%. The address of all of the above persons is c/o The Northern
Trust Bank, 50 S. LaSalle Street, Chicago, Illinois 60675.
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.
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.
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 willful 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
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<PAGE> 89
Northern Funds will indemnify Trustees and officers of Northern Funds against
liabilities and expenses incurred in connection with litigation and other
proceedings in which they may be involved (or with which they may be threatened)
by reason of their positions with Northern Funds, except that no Trustee or
officer will be indemnified against any liability to Northern Funds or its
shareholders to which he would otherwise be subject by reason of disabling
conduct.
The Trust Agreement provides that each shareholder, by virtue of
becoming such, will be held to have expressly assented and agreed to the terms
of the Trust Agreement and to have become a party thereto.
OTHER INFORMATION
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by Northern Funds' Prospectus.
Certain portions of the Registration Statement have been omitted from the
Prospectus and this Additional Statement pursuant to the rules and regulations
of the SEC. The Registration Statement, including the exhibits filed 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.
- 53 -
<PAGE> 90
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's ("S&P") commercial paper rating is a
current assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category
indicating that the obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and
are dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
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 supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be
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evidenced by many of the following characteristics: leading market positions in
well-established industries; high rates of return on funds employed;
conservative capitalization structure with moderate reliance on debt and ample
asset protection; broad margins in earnings 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 supporting institutions) have a strong
ability for repayment of senior short-term debt 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 alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect 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 may require 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 the 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 issues as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is expected.
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<PAGE> 92
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure 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 IBCA short-term ratings apply to debt obligations that
have time horizons of less than 12 months for most obligations, or up to three
years for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This
designation indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality. This
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that default is a real possibility and that the capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
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<PAGE> 93
"TBW-3" - This designation represents Thomson BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's
lowest rating category and indicates that the obligation 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" - An obligation rated "AAA" has the highest rating
assigned by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded
as having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to
nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment
than obligations rated "BB," but the obligor currently has the capacity to meet
its financial commitment on the
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<PAGE> 94
obligation. Adverse business, financial or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable
to nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D"
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The "D" rating also
will be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This symbol is attached to the ratings of instruments
with significant noncredit risks. It highlights risks to principal or volatility
of expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
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
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<PAGE> 95
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risk appear somewhat larger than
the "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 general lack of characteristics
of desirable investment; "Caa" are of 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 operating 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.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from "Aa" through "Caa". The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.
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 to be 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 in periods of greater economic
stress.
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<PAGE> 96
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of credit
risk and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of credit risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high
credit quality. These ratings denote a low expectation of credit risk and
indicate strong capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity.
"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
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<PAGE> 97
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC", "CC" and "C" - Bonds have high default risk. Default is
a real possibility, and capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic developments. "CC"
ratings indicate that default of some kind appears probable, and "C" ratings
signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved and "D"
represents the lowest potential for recovery.
To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "B" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within these
major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents the lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC" - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
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<PAGE> 98
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality.
There is present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with
margins of protection that are ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
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<PAGE> 99
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt
instruments in this category lack of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
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APPENDIX B
To the extent stated in the Prospectus, the Small Cap Growth
Fund may enter into certain futures transactions. Such transactions are
described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are
--------------------------------------
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes. As
described below, this would include the use of futures contract sales to protect
against expected increases in interest rates and futures contract purchases to
offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that
which it hopes to achieve through the use of futures contracts by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market,
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by a Fund, by using futures
contracts.
Interest rate future contracts can also be used by a 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 a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
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
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<PAGE> 101
the price of the offsetting purchase, the Fund is immediately paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges -- principally, the Chicago Board
of Trade, the Chicago Mercantile Exchange and the New York Futures Exchange.
Each exchange guarantees performance under contract provisions through a
clearing corporation, a nonprofit organization managed by the exchange
membership.
A public market now exists in futures contracts covering
various financial instruments including long-term U.S. Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities; three-month U.S. Treasury Bills; and ninety-day commercial
paper. The Funds may trade in any interest rate futures contracts for which
there exists a public market, including, without limitation, the foregoing
instruments.
II. Index Futures Contracts
-----------------------
General. A stock or bond index assigns relative values to the
-------
stocks or bonds included in the index, which fluctuates with changes in the
market values of the stocks or bonds included. Some stock index futures
contracts are based on broad market indexes, such as Standard & Poor's 500 or
the New York Stock Exchange Composite Index. In contrast, certain exchanges
offer futures contracts on narrower market indexes, such as the Standard &
Poor's 100 or indexes based on an industry or market indexes, such as Standard &
Poor's 100 or indexes based on an industry or market segment, such as oil and
gas stocks. Futures contracts are traded on organized exchanges regulated by the
Commodity Futures Trading Commission. Transactions on such exchanges are cleared
through a clearing corporation, which guarantees the performance of the parties
to each contract. To the extent consistent with its investment objective, a Fund
may also engage in transactions, from time to time, in foreign stock index
futures such as the ALL-ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the
FTSE-100 (United Kingdom).
A Fund may sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. A Fund may do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, a Fund
will purchase index futures contracts in anticipation of purchases of
securities. A long futures position may be terminated without a corresponding
purchase of securities.
In addition, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index
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comprised of securities of a particular industry group. A Fund may also sell
futures contracts in connection with this strategy, in order to protect against
the possibility that the value of the securities to be sold as part of the
restructuring of the portfolio will decline prior to the time of sale.
Index futures contracts may also be used by a 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 a Fund to
hedge against exposure to fluctuations in exchange rates between the U.S. dollar
and other currencies arising from multinational transactions.
IV. Margin Payments
---------------
Unlike purchases or sales of portfolio securities, no price is
paid or received by a Fund upon the purchase or sale of a futures contract.
Initially, a Fund will be required to deposit with the broker or in a segregated
account with 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 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-market." For example, when a particular 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 a 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
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future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the instruments
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the instruments being hedged has moved in an unfavorable
direction, the Fund would be in a better position than if it had not hedged at
all. If the price of the instruments being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the futures.
If the price of the futures moves more than the price of the hedged instruments,
the Fund involved will experience either a loss or gain on the futures which
will not be completely offset by movements in the price of the instruments which
are the subject of the hedge. To compensate for the imperfect correlation of
movements in the price of instruments being hedged and movements in the price of
futures contracts, a Fund may buy or sell futures contracts in a greater dollar
amount than the dollar amount of instruments being hedged if the volatility over
a particular time period of the prices of such instruments has been greater than
the volatility over such time period of the futures, or if otherwise deemed to
be appropriate by the Investment Adviser. Conversely, a Fund may buy or sell
fewer futures contracts if the volatility over a particular time period of the
prices of the instruments being hedged is less than the volatility over such
time period of the futures contract being used, or if otherwise deemed to be
appropriate by the Investment Adviser. It is also possible that, where a Fund
has sold futures to hedge its portfolio against a decline in the market, the
market may advance and the value of instruments held in the Fund may decline. If
this occurred, the Fund would lose money on the futures and also experience a
decline in value in its portfolio securities.
When futures are purchased to hedge against a possible
increase in the price of securities or a currency before a Fund is able to
invest its cash (or cash equivalents) in an orderly fashion, it is possible that
the market may decline instead; if the Fund then concludes not to invest its
cash at that time because of concern as to possible further market decline or
for other reasons, the Fund will realize a loss on the futures contract that is
not offset by a reduction in the price of the instruments that were to be
purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Investment Adviser may
still not result in a successful hedging transaction over a short time frame.
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Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Funds intend to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, a Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as 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 trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Successful use of futures by a Fund is also subject to the
Investment Adviser's ability to predict correctly movements in the direction of
the market. For example, if a particular Fund has hedged against the possibility
of a decline in the market adversely affecting securities held by it and
securities prices increase instead, the Fund will lose part or all of the
benefit to the increased value of its securities which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market. A
Fund may have to sell securities at a time when it may be disadvantageous to do
so.
VI. Options on Futures Contracts
----------------------------
A Fund may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above.
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Net option premiums received will be included as initial margin deposits. As an
example, in anticipation of a decline in interest rates, a Fund may purchase
call options on futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of securities which
the Fund intends to purchase. Similarly, if the value of the securities held by
a Fund is expected to decline as a result of an increase in interest rates, the
Fund might purchase put options or sell call options on futures contracts rather
than sell futures contracts.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not correspond to changes
in the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar to
those risks relating to the sale of futures contracts.
VII. Other Matters
-------------
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
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PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
--------
The following exhibits are incorporated herein by reference:
(a) (1) 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").
(2) Amendment No. 1 to Agreement and Declaration of Trust
filed as Exhibit 1(b) to PEA No. 11.
(3) Amendment No. 2 to Agreement and Declaration of Trust
filed as Exhibit 1(c) to PEA No. 11.
(4) Amendment No. 3 to Agreement and Declaration of Trust
filed as Exhibit 1(d) to PEA No. 11.
(5) Amendment No. 4 to Agreement and Declaration of Trust
filed as Exhibit 1(e) to PEA No. 11.
(6) 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").
(7) 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").
(8) Amendment No. 7 to Agreement and Declaration of Trust
dated August 6, 1996 filed as Exhibit 1(h) to PEA No.
12.
(9) 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").
(10) 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
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Registrant's Registration Statement on Form N-1A,
filed on July 31, 1997 ("PEA No. 16").
(11) Amendment No. 10 to Agreement and Declaration of
Trust dated November 18, 1997 filed as Exhibit 1(k)
to Post-Effective Amendment No. 19 to Registrant's
Registration Statement on Form N-1A, filed on March
20, 1998 ("PEA No. 19").
(12) Amendment No. 11 to Agreement and Declaration of
Trust dated September 18, 1998 filed as Exhibit
(a)(12) to Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form N-1A,
filed on May 28, 1999 ("PEA No. 22").
(13) Amendment No. 12 to Agreement and Declaration of
Trust dated November 18, 1998 filed as Exhibit
(a)(13) to PEA No. 22.
(b) (1) By-Laws filed as Exhibit 2 to PEA No. 11.
(2) Amendment to the By-Laws dated August 4, 1994 filed
as Exhibit 2(a) to PEA No. 11.
(3) Amendment No. 2 to the By-Laws dated May 22, 1997
filed as Exhibit 2(b) to PEA No. 16.
(c) None.
(d) (1) 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.
(2) Addendum No. 1 to the Investment Advisory Agreement
dated November 29, 1994 filed as Exhibit 5(a) to PEA
No. 11.
(3) Addendum No. 2 to the Investment Advisory Agreement
dated March 29, 1996 filed as Exhibit 5(b) to PEA No.
9.
(4) Addendum No. 3 to the Investment Advisory Agreement
dated August 7, 1996 filed as Exhibit 5(c) to PEA No.
12.
(5) Addendum No. 4 to the Investment Advisory Agreement
dated March 24, 1997 filed as Exhibit 5(d) to PEA No.
16.
(6) Addendum No. 5 to the Investment Advisory Agreement
dated February 12, 1997 filed as Exhibit 5(e) to PEA
No. 19.
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(7) Addendum No. 6 to the Investment Advisory Agreement
dated November 18, 1997 filed as Exhibit 5(f) to PEA
No. 19.
(8) Assumption Agreement between The Northern Trust
Company and Northern Trust Quantitative Advisors,
Inc. dated April 1, 1998 filed as exhibit 5(g) to
Post-Effective Amendment No. 20 to Registrant's
Registration Statement on Form N-1A, filed on July
31, 1998 ("PEA No. 20").
(9) Addendum No. 7 to the Investment Advisory Agreement
dated December 21, 1998 filed as Exhibit (d)(9) to
PEA No. 22.
(e) Distribution Agreement between Registrant and
Northern Funds Distributors, LLC dated March 31, 1999
filed as Exhibit (e)(4) to PEA No. 22.
(f) None.
(g) (1) Custodian Agreement between Registrant and The
Northern Trust Company dated April 1, 1994
("Custodian Agreement") filed as Exhibit 8(a) to PEA
No. 11.
(2) Addendum No. 1 to the Custodian Agreement dated
November 29, 1994 filed as Exhibit 8(d) to PEA No.
11.
(3) Addendum No. 2 to the Custodian Agreement dated March
29, 1996 filed as Exhibit 8(f) to PEA No. 9.
(4) Foreign Custody Agreement between the Registrant and
The Northern Trust Company dated April 1, 1994 filed
as Exhibit 8(g) to PEA No. 11.
(5) Addendum No. 3 to the Custodian Agreement dated
August 7, 1996 filed as Exhibit 8(i) to PEA No. 12.
(6) Addendum No. 4 to the Custodian Agreement dated
August 7, 1996 filed as Exhibit 8(j) to PEA No. 12.
(7) Addendum No. 5 to the Custodian Agreement dated March
24, 1997 filed as Exhibit 8(n) to PEA No. 16.
(8) Addendum No. 6 to the Custodian Agreement dated
February 12, 1997 filed as Exhibit 8(l) to PEA No.
19.
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(9) Addendum No. 7 to the Custodian Agreement dated
November 18, 1997 filed as Exhibit 8(o) to PEA No.
19.
(10) Addendum No. 1 to the Foreign Custody Agreement dated
April 1, 1998 filed as Exhibit 8(p) to PEA No. 19.
(11) Foreign Custody Monitoring Agreement between the
Registrant and The Northern Trust Company dated
February 18, 1998 filed as exhibit 8(r) to PEA No.
20.
(12) Addendum No. 8 to the Custodian Agreement dated
December 21, 1998 filed as Exhibit (g)(12) to PEA No.
22.
(h) (1) 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.
(2) Addendum No. 1 to the Transfer Agency Agreement dated
November 29, 1994 filed as Exhibit 8(c) to PEA No.
11.
(3) Addendum No. 2 to the Transfer Agency Agreement dated
March 29, 1996 filed as Exhibit 8(e) to PEA No. 9.
(4) Addendum No. 3 to the Transfer Agency Agreement dated
August 7, 1996 filed as Exhibit 8(h) to PEA No. 12.
(5) Addendum No. 4 to the Transfer Agency Agreement dated
March 24, 1997 filed as Exhibit 8(m) to PEA No. 16.
(6) Addendum No. 5 to the Transfer Agency Agreement dated
February 12, 1997 filed as Exhibit 8(k) to PEA No.
19.
(7) Addendum No. 6 to the Transfer Agency Agreement dated
November 18, 1997 filed as Exhibit 8(q) to PEA No.
19.
(8) 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) Service Plan and Related Agreement filed as Exhibit
9(b) to PEA No. 9.
(10) Amended and Restated Schedule A to the Administration
Agreement dated November 18, 1997 filed as Exhibit
9(c) to PEA No. 19.
(11) Addendum No. 7 to the Transfer Agency Agreement dated
December 21, 1998 filed as Exhibit (h)(11) to PEA No.
22.
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(12) Amended and Restated Schedule A to the Administration
Agreement dated December 21, 1998 filed as Exhibit
(h)(12) to PEA No. 22.
(i) Opinion of Hale & Dorr LLP filed as Exhibit 10 to PEA
No. 18.
(k) None.
(l) (1) Purchase Agreement between Registrant and The
Northern Trust Company dated March 31, 1994 filed as
Exhibit 13(a) to PEA No. 11.
(2) Purchase Agreement between Registrant and Miriam M.
Allison dated March 14, 1994 filed as Exhibit 13(b)
to PEA No. 11.
(3) Purchase Agreement between Registrant and Miriam M.
Allison dated March 31, 1998 for shares of the Mid
Cap Growth Fund filed as Exhibit (l)(3) to PEA No.
22.
(4) Purchase Agreement between Registrant and Miriam M.
Allison dated December 31, 1998 for shares of the
High Yield Fixed Income Fund filed as Exhibit (l)(4)
to PEA No. 22.
(5) Purchase Agreement between Registrant and Miriam M.
Allison dated December 31, 1998 for shares of the
High Yield Municipal Fund filed as Exhibit (l)(5) to
PEA No. 22.
(m) Amended and Restated Distribution and Service Plan,
adopted April 11, 1994, as revised May 20, 1999, and
Related Agreement filed as Exhibit (m) to PEA No. 22.
(n) None
(o) None.
The following exhibits to the Registration Statement are filed herewith
electronically pursuant to EDGAR rules:
(a) (14) Form of Amendment No. 13 to Agreement and Declaration
of Trust dated _________, 1999.
(d) (10) Form of Addendum No. 8 to the Investment Advisory
Agreement dated _________, 1999.
(e) (2) Form of Amended and Restated Schedule A to the
Distribution Agreement dated _________, 1999.
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(g) (13) Form of Addendum No. 9 to the Custodian Agreement
dated _________, 1999.
(h) (13) Form of Addendum No. 8 to the Transfer Agency
Agreement dated _________, 1999.
(14) Form of Amended and Restated Schedule A to the
Administration Agreement dated _________, 1999.
(j) (1) Consent of Drinker Biddle & Reath LLP.
(2) Consent of Independent Public Accountants.
(l) (6) Form of Purchase Agreement between Registrant and
Miriam M. Allison dated ___________, 1999 for shares
of the Tax-Exempt Money Market Fund.
(7) Form of Purchase Agreement between Registrant and
Miriam M. Allison dated _______, 1999 for shares of
the Small Cap Growth Fund.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Trustees.
ITEM 25. 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 (d)(1).
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 (h)(8).
Section 2.8(a) of the Distribution Agreement between the
Registrant and Northern Funds Distributors, LLC provides for indemnification of
Northern Funds Distributors, LLC, an affiliate of Sunstone, in connection with
certain claims and liabilities to which Northern Funds Distributors, LLC, in its
capacity as Registrant's Distributor, may be subject. A copy of the Distribution
Agreement is filed herewith as Exhibit (e)(1).
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In addition, Section 6.3 of Registrant's Agreement and
Declaration of Trust, a copy of which is incorporated by reference herein as
Exhibit (a)(1), provides for indemnification of shareholders as follows:
6.3 Indemnification of Shareholders. No Shareholder shall be
subject to any personal liability whatsoever to any person in
connection with property of the Trust or the acts, obligations
or affairs of the Trust or any Series thereof. The Trust shall
indemnify and hold each Shareholder harmless from and against
all claims and liabilities, to which such Shareholder may
become subject by reason of his being or having been a
Shareholder, and shall reimburse such Shareholder or former
Shareholder (or his or her heirs, executors, administrators or
other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) out of
the property of the Trust for all legal and other expenses
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 (a)(1),
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
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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 willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office (such willful
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, 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.
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ITEM 26. 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 March 31, 1997, as well as the capacity in which
such person was connected.
C-9
<PAGE> 115
<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 Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Abbott Laboratories Chairman of the
150 Field Drive Board
Suite 160
Lake Forest, IL 60045
Sara Lee Corp. Director
Three First National Plaza
Chicago, IL 60602
Dr. Dolores E. Cross Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Morris Brown College President (6/99)
Administration Building, 2nd Floor President -
643 Martin Luther King Jr. Drive Elect (10/98)
Atlanta, GA 30314
Chicago State University Former President
95th Street at King Drive
Chicago, IL 60643
General Electric Company Former President
3135 Easton Turnpike GE Fund
Fairfield, CT 06432
The Graduate School and University Center GE Fund
The City University of New York Distinguished
33 W. 42nd Street, Room 1400 N Professor of
New York, NY 10036 Leadership and
Diversity
Susan Crown Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
</TABLE>
C-10
<PAGE> 116
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Susan Crown Henry Crown & Co. Vice President
(continued) 222 North LaSalle Street
Suite 2000
Chicago, IL 60601
Baxter International Director
One Baxter Parkway
Deerfield, IL 60015
Illinois Tool Works Director
3600 West Lake Ave
Glenview, IL 60025-5811
John R. Goodwin NTQA Director, Managing
Senior Vice President 50 South LaSalle Street Director, Chief
Chicago, IL 60675 Investment Officer
Robert S. Hamada Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
The University of Chicago Dean and Edward
Graduate School of Business Eagle Brown
1101 East 58th Street Distinguished
Chicago, IL 60637 Service Professor of
Finance
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
</TABLE>
C-11
<PAGE> 117
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Barry G. Hastings Northern Trust Corporation President and Chief
President and Chief 50 South LaSalle Street Operating Officer
Operating Officer Chicago, IL 60675 and Director
and Director
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 Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Mayer, Brown & Platt Partner
190 South LaSalle Street, 38th Fl.
Chicago, IL 60603
Zenith Electronics Director
1000 Milwaukee Ave.
Glenview, IL 60025
Brambles USA, Inc. Director
400 North Michigan Avenue
Chicago, IL 60611
Chicago Stock Exchange Governor
One Financial Plaza
440 South LaSalle Street
Chicago, IL 60605
Dreyer's Grand Ice Cream, Inc. Director
5929 College Ave.
Oakland, CA 94618
</TABLE>
C-12
<PAGE> 118
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Arthur L. Kelly Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
KEL Enterprises L.P. Managing Partner
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
Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198
Snap-on Incorporated Director
2801 80th Street
Kenosha, WI 53140
A.G Deere & Company Director
John Deere Road
Moline, IL 61265
Thyssen Industries AG
Am Thyssenhaus 1
45128 Essen
Germany
Frederick A. Krehbiel Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Molex Incorporated Chairman, CEO and
2222 Wellington Court Director
Lisle, IL 60532-1682
</TABLE>
C-13
<PAGE> 119
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Frederick A. Krehbiel Nalco Chemical Company Director
(continued) One Nalco Center
Naperville, IL 60563-1198
Tellabs, Inc. Director
4951 Indiana Avenue
Lisle, IL 60532
Devry, Inc. Director
One Tower Lane
Suite 1000
Oak Brook Terrace, IL 60181
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
William G. Mitchell Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
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 Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Nalco Chemical Company Chairman, Chief
One Nalco Center Executive Officer,
Naperville, IL 60563-1198 President and
Director
</TABLE>
C-14
<PAGE> 120
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Edward J. Mooney Morton International, Inc. Director
(continued) 100 North Riverside Plaza
Chicago, IL 60606
FMC Corp. Director
200 E. Randolph Drive
Chicago IL 60601
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
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Northern Futures Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Sheila A. Penrose Northern Trust Global Director
President - Advisors, Inc.
Corporate and Institutional 29 Federal Street
Services and Executive Stamford, CT 06901
Vice President
Northern Trust Retirement Manager
Consulting, L.L.C.
400 Perimeter Center Terrace
Suite 850
Atlanta, GA 30346
Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198
NTQA Director
50 South LaSalle Street
Chicago, IL 60675
</TABLE>
C-15
<PAGE> 121
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Perry R. Pero Northern Futures Corporation Director
Senior Executive Vice 50 South LaSalle Street
President and Chief Chicago, IL 60675
Financial Officer
Northern Investment Corporation President and,
50 South LaSalle Street Director
Chicago IL 60675
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
NTQA Director
50 South LaSalle Street
Chicago, IL 60675
Stephen N. Potter NTQA Director, Managing
Senior Vice President 50 South LaSalle Street Director
Chicago, IL 60675
Peter L. Rossiter None
Executive Vice President
and General Counsel
Lee Selander Northern Trust Retirement Manager
Executive Vice President Consulting, L.L.C.
400 Perimeter Center Terrace
Suite 850
Atlanta, GA 30346
Jean Sheridan None
Executive Vice President
</TABLE>
C-16
<PAGE> 122
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Harold B. Smith Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
Illinois Tool Works Inc. Chairman of the
3600 West Lake Avenue Executive Committee
Glenview, IL 60025-5811 and Director
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 Northern Trust Corporation Director
Chairman 50 South LaSalle Street
Director Chicago, IL 60675
The Quaker Oats Company Retired
321 North Clark Street Chairman,
Chicago, IL 60610 President and Chief
Executive Officer
Abbott Laboratories Director
One Abbott Park Road
Abbott Park, IL 60064-3500
Corning Incorporated Director
Corning, NY 14831
Prime Capital Corporation Director
10275 W. Higgins Road
Suite 200
Rosemont, IL 60018
</TABLE>
C-17
<PAGE> 123
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
James M. Snyder NTQA Chairman, CEO and
Executive Vice President 50 South LaSalle Street Director
Chicago, IL 60675
Northern Trust Global Advisors, Inc. Director
29 Federal Street
Stamford, CT 06901
Mark Stevens None
Executive Vice President
Bide L. Thomas Northern Trust Corporation Director
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
Stephen B. Timbers Northern Trust Global Director
President- Northern Trust Advisors, Inc.
Global Investments and 29 Federal Street
Executive Vice President Stamford, CT 06901
LTV Steel Co. Director
200 Public Square
Cleveland, OH 44114-2308
Zurich-Kemper Investments Former
222 S. Riverside Plaza President and
Chicago, IL 60606 Chief Executive Officer
(January 1996 -
December 1997)
</TABLE>
C-18
<PAGE> 124
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
NAME AND POSITION BUSINESS ADDRESS CONNECTION WITH
WITH INVESTMENT ADVISER OF OTHER COMPANY OTHER COMPANY
- ----------------------- ---------------- -------------
<S> <C> <C>
Stephen B. Timbers NTQA Director
(continued) 50 S. LaSalle Street
Chicago, IL 60675
William S. Trukenbrod None
Executive Vice President
Frederick Waddell None
Executive Vice President
Jeffrey H. Wessel NTQA President,
Executive Vice President 50 South LaSalle Street Director
Chicago, IL 60675
Northern Trust Retirement Manager
Consulting, L.L.C.
400 Perimeter Center Terrace
Suite 850
Atlanta, GA 30346
Northern Trust Global Advisors, Inc Director
29 Federal Street
Stamford, CT 06901
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITER
(a) None.
(b) To the best of Registrant's knowledge, the
executive officers of Northern Funds Distributors, LLC, distributor for
Registrant, are as follows:
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH POSITIONS AND
NAME AND PRINCIPAL NORTHERN FUNDS OFFICES WITH
BUSINESS ADDRESS DISTRIBUTORS, LLC REGISTRANT
- ---------------- ----------------- ----------
<S> <C> <C>
Miriam M. Allison President Vice President
207 E. Buffalo Street and Treasurer
Suite 400
Milwaukee, WI 53202
</TABLE>
C-19
<PAGE> 125
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH POSITIONS AND
NAME AND PRINCIPAL NORTHERN FUNDS OFFICES WITH
BUSINESS ADDRESS DISTRIBUTORS, LLC REGISTRANT
- ---------------- ----------------- ----------
<S> <C> <C>
Peter Hammond Secretary None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
Christine Mortensen Treasurer None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
Terry Ladwig Vice President None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
</TABLE>
(c) None
ITEM 28. 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 Northern Funds Distributors, 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 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
Not Applicable.
C-20
<PAGE> 126
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 23 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 30th day of June, 1999.
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. 23 to Registrant's 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 President June 30, 1999
- --------------------------- (Chief Executive Officer)
Silas S. Cathcart
/s/ Miriam M. Allison Treasurer June 30, 1999
- --------------------------- (Chief Financial
Miriam M. Allison and Accounting Officer)
/*/ James W. Cozad* Trustee June 30, 1999
- ---------------------------
James W. Cozad
/*/ Wesley M. Dixon, Jr.* Trustee June 30, 1999
- ---------------------------
Wesley M. Dixon, Jr.
/*/ William J. Dolan* Trustee June 30, 1999
- ---------------------------
William J. Dolan, Jr.
/*/ Raymond E. George, Jr.* Trustee June 30, 1999
- ---------------------------
Raymond E. George, Jr.
/*/ Michael E. Murphy* Trustee June 30, 1999
- ---------------------------
Michael E. Murphy
/*/ Mary Jacobs Skinner* Trustee June 30, 1999
- ---------------------------
Mary Jacobs Skinner
*By: /s/ Miriam M. Allison June 30, 1999
----------------------
Miriam M. Allison,
Attorney-in-fact
</TABLE>
C-21
<PAGE> 127
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 May 20,
1999, 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, or
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 30th day
of June, 1999.
/s/Jeffrey A. Dalke
-------------------
Jeffrey A. Dalke
Secretary
<PAGE> 128
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> 129
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 A. Allison
- ---------------------
Miriam A. Allison
-2-
<PAGE> 130
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
-3-
<PAGE> 131
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.
-4-
<PAGE> 132
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.
-5-
<PAGE> 133
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.
-6-
<PAGE> 134
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Michael
E. Murphy, 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 attorney 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 said attorney being hereby ratified and approved.
DATED: May 21, 1998
/s/ Michael E. Murphy
- ---------------------
Michael E. Murphy
-7-
<PAGE> 135
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Mary
Jacobs Skinner, hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, her true and lawful attorney, to execute in her
name, place, and stead, in her capacity as Trustee or officer, or both, of
Northern Funds (the "Trust"), the Registration Statement of the Trust and all
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 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: September 18, 1998
/s/ Mary Jacobs Skinner
- -----------------------
Mary Jacobs Skinner
-8-
<PAGE> 136
NORTHERN FUNDS
EXHIBIT INDEX
(a) (14) Form of Amendment No. 13 to Agreement and Declaration
of Trust dated _________, 1999.
(d) (10) Form of Addendum No. 8 to the Investment Advisory
Agreement dated _________, 1999.
(e) (2) Form of Amended and Restated Schedule A to the
Distribution Agreement dated _________, 1999.
(g) (13) Form of Addendum No. 9 to the Custodian Agreement
dated _________, 1999.
(h) (13) Form of Addendum No. 8 to the Transfer Agency
Agreement dated _________, 1999.
(14) Form of Amended and Restated Schedule A to the
Administration Agreement dated _________, 1999.
(j) (1) Consent of Drinker Biddle & Reath LLP.
(2) Consent of Independent Public Accountants.
(l) (6) Form of Purchase Agreement between Registrant and
Miriam M. Allison dated ___________, 1999 for shares
of the Tax-Exempt Money Market Fund.
(7) Form of Purchase Agreement between Registrant and
Miriam M. Allison dated _______, 1999 for shares of
the Small Cap Growth Fund.
<PAGE> 1
EXHIBIT (a)(14)
NORTHERN FUNDS
AMENDMENT NO. 13 TO AGREEMENT AND
DECLARATION OF TRUST
WHEREAS, Section 4.1 of the Agreement and Declaration of Trust
dated October 12, 1993 (the "Declaration") of Northern Funds (the "Trust")
provides that the Declaration may be amended to establish and designate new
Series or Classes of Shares by an instrument in writing executed by a majority
of the Trustees of the Trust and setting forth such establishment and
designation and the relative rights and preferences of such Series or Classes;
NOW, THEREFORE, the undersigned, being a majority of the
Trustees of the Trust, hereby:
(1) amend the Declaration by designating and establishing two
additional Series and Classes of Shares ("Additional Series and
Classes") to be known as the Initial Classes of the "Tax-Exempt Money
Market Fund" and the "Small Cap Growth Fund," each Additional Series
and Class to have the relative rights and preferences set forth in
Section 4.2(a) through (m) of the Declaration; and
(2) determine that, pursuant to Section 7.3 of the
Declaration, the foregoing amendment shall be effective as of the date
set forth below.
WITNESS our hands as of this day of , 1999.
---- ---------
- ------------------------------ ------------------------------
Silas S. Cathcart Raymond E. George, Jr.
- ------------------------------ ------------------------------
James W. Cozad Michael E. Murphy
- ------------------------------ ------------------------------
Wesley M. Dixon, Jr. Mary Jacobs Skinner
- ------------------------------
William J. Dolan, Jr.
<PAGE> 1
Exhibit (d)(10)
NORTHERN FUNDS
ADDENDUM NO. 8 TO THE INVESTMENT ADVISORY AGREEMENT
---------------------------------------------------
This Addendum, dated as of the ____ day of _____, 1999, 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, by Addendum No. 5 dated February 12, 1997, by Addendum No.
6 dated November 18, 1997 and by Addendum No. 7 dated December 21, 1998 (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, Small Cap Index Fund, Mid Cap Growth Fund, High Yield Municipal
Fund and the High Yield Fixed Income 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
Tax-Exempt Money Market and the Small Cap Growth Funds (the "Funds"), and that
it desires to retain the Investment Adviser to act as the investment adviser for
the Funds, and the Investment Adviser has notified the Trust that it is willing
to serve as investment adviser for the Funds;
<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 Funds 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 % of each
-----
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
Funds. 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 Funds shall continue, unless sooner terminated in accordance
with the Advisory Agreement, until March 31, 2000. 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 (e)(2)
AMENDED AND RESTATED
SCHEDULE A
TO THE
DISTRIBUTION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
NORTHERN FUNDS DISTRIBUTORS, LLC
DATED , 1999
-----------
Intending to be legally bound, the undersigned hereby amend and restate
Schedule A to the aforesaid Agreement to include the following
investment portfolios:
Growth Equity Fund
Income Equity Fund
Small Cap Fund
Select Equity Fund
International Growth Equity Fund
International Select Equity Fund
Technology Fund
Municipal Money Market Fund
U.S. Government Select Money Market Fund
Fixed Income Fund
U.S. Government Fund
Intermediate Tax-Exempt Fund
Tax-Exempt Fund
Money Market Fund
U.S. Government Money Market Fund
International Fixed Income Fund
California Municipal Money Market Fund
Stock Index Fund
Florida Intermediate Tax-Exempt Fund
Arizona Tax-Exempt Fund
California Intermediate Tax-Exempt Fund
California Tax-Exempt Fund
Short-Intermediate U.S. Government Fund
Small Cap Index Fund
Mid Cap Growth Fund
High Yield Municipal Fund
High Yield Fixed Income Fund
Tax-Exempt Money Market Fund
Small Cap Growth Fund
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 (g)(13)
NORTHERN FUNDS
ADDENDUM NO. 9 TO THE CUSTODIAN AGREEMENT
-----------------------------------------
This Addendum, dated as of the ____ day of _______, 1999, 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, by Addendum No. 6 dated February 12, 1997, by Addendum No. 7 dated
November 18, 1997 and by Addendum No. 8 dated December 21, 1998 (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, Small Cap Index Fund, Mid Cap Growth Fund, High Yield Municipal
Fund and the High Yield Fixed Income Fund;
WHEREAS, the Trust is establishing the Tax-Exempt Money Market
and the Small Cap Growth Funds (the "Funds"), and the Trust desires to retain
Northern under the terms of the Custodian Agreement to act as the custodian for
the Funds, and Northern is willing to so act; and
WHEREAS, the Trust and Northern desire to enter into this
Addendum No. 9 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 Funds 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 Funds. 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 Funds shall continue,
unless sooner terminated in accordance with the
Custodian Agreement, until March 31, 2000. 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 (h)(13)
NORTHERN FUNDS
ADDENDUM NO. 8 TO THE TRANSFER AGENCY AGREEMENT
-----------------------------------------------
This Addendum, dated as of the ____ day of ________, 1999, 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, by Addendum No. 5
dated February 12, 1997, by Addendum No. 6 dated November 18, 1997 and by
Addendum No. 7 dated December 21, 1998 (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, Small Cap Index Fund, Mid Cap
Growth Fund, High Yield Municipal Fund and the High Yield Fixed Income Fund; and
WHEREAS, the Trust is establishing the Tax-Exempt Money Market and the
Small Cap Growth Funds (the "Funds"), 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 Funds and the record
and/or beneficial owners of the Funds, 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 Funds 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.
<PAGE> 2
2. Capitalized Terms. From and after the date hereof, the term
-----------------
"Current Funds" as used in the Transfer Agency Agreement shall
be deemed to include the Funds. 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 Funds shall continue, unless
sooner terminated in accordance with the Transfer Agency
Agreement, until March 31, 2000. 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:
----------------------------
THE NORTHERN TRUST COMPANY
Attest: By:
---------------------------- -------------------------------
Title:
----------------------------
<PAGE> 1
EXHIBIT (h) (14)
AMENDED AND RESTATED
SCHEDULE A
TO THE
ADMINISTRATION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
DATED JUNE , 1999
---
Intending to be legally bound, the undersigned hereby amend and restate
Schedule A to the aforesaid Agreement to include the following
investment portfolios:
Growth Equity Fund
Income Equity Fund
Small Cap Fund
Select Equity Fund
International Growth Equity Fund
International Select Equity Fund
Technology Fund
Municipal Money Market Fund
U.S. Government Select Money Market Fund
Fixed Income Fund
U.S. Government Fund
Intermediate Tax-Exempt Fund
Tax-Exempt Fund
Money Market Fund
U.S. Government Money Market Fund
International Fixed Income Fund
California Municipal Money Market Fund
Stock Index Fund
Florida Intermediate Tax-Exempt Fund
Arizona Tax-Exempt Fund
California Intermediate Tax-Exempt Fund
California Tax-Exempt Fund
Short-Intermediate U.S. Government Fund
Small Cap Index Fund
Mid Cap Growth Fund
High Yield Municipal Fund
High Yield Fixed Income Fund
Tax-Exempt Money Market Fund
Small Cap Growth Fund
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 (j)(1)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
Firm under the caption "Counsel" in the Statement of Additional Information that
is included in Post-Effective Amendment No. 23 to the Registration Statement
(No. 33-73404/811-8236) on Form N-1A of Northern Funds, under the Securities Act
of 1933 and the Investment Company Act of 1940, respectively. 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
June 30, 1999
<PAGE> 1
EXHIBIT (j)(2)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to all references to our
Firm included in or made a part of this amendment to the registration statement
on Form N-1A of Northern Funds (a Massachusetts business trust).
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Chicago, Illinois
June 28, 1999
<PAGE> 1
EXHIBIT (l)(6)
PURCHASE AGREEMENT
Northern Funds (the "Trust"), a Massachusetts business trust, and
Miriam M. Allison hereby agree as follows:
1. The Trust hereby offers Miriam M. Allison, and Miriam M. Allison
hereby purchases, five shares of the Trust's Tax-Exempt Money Market Fund (the
"Shares") at $10 per Share. The Trust hereby acknowledges receipt from Miriam M.
Allison of funds in full payment for the foregoing Shares.
2. Miriam M. Allison represents and warrants to the Trust that the
foregoing Shares are being acquired for investment purposes and not with a view
to the distribution thereof.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the
parties hereto have executed this Agreement as of , 1999.
-------------
NORTHERN FUNDS
By:
--------------------------
MIRIAM M. ALLISON
------------------------------
<PAGE> 1
EXHIBIT (l)(7)
PURCHASE AGREEMENT
Northern Funds (the "Trust"), a Massachusetts business trust, and
Miriam M. Allison hereby agree as follows:
1. The Trust hereby offers Miriam M. Allison, and Miriam M. Allison
hereby purchases, five shares of the Trust's Small Cap Growth Fund (the
"Shares") at $10 per Share. The Trust hereby acknowledges receipt from Miriam M.
Allison of funds in full payment for the foregoing Shares.
2. Miriam M. Allison represents and warrants to the Trust that the
foregoing Shares are being acquired for investment purposes and not with a view
to the distribution thereof.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the
parties hereto have executed this Agreement as of , 1999.
--------------
NORTHERN FUNDS
By:
--------------------------
MIRIAM M. ALLISON
\ ------------------------------
